TMI Blog2016 (5) TMI 472X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 indicate that the legal fiction has to be read when any capital expenditure is incurred. Thus whether any capital expenditure has been incurred is a question which has to be decided on the basis of facts of each case and relevant tests applicable. Explanation 1 cannot be read as to mean that when works mentioned therein are carried out by the assessee, it shall be treated as capital expenditure. Explanation 1 however shall be attracted when expenditure is treated as capital expenditure. The use of the word "any" before the capital expenditure emphasises that the provision is attracted when there is any capital expenditure. The Division Bench in its reference order in Joy Alukkas' case [2014 (6) TMI 80 - KERALA HIGH COURT ] is not correct in its assumption that by Explanation 1 to section 32(1) Parliament manifested its legislative intention to treat the expenditure incurred by the assessee on leasehold building as capital expenditure. Had the Legislature intended to provide that all such expenditure incurred by the assessee as referred to in Explanation 1 shall be treated as capital expenditure, the explanation would have used different phraseology. It is well settled principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han, CJ. 1. A Division Bench hearing these appeals entertained a doubt regarding the correctness of an earlier Division Bench judgment of this court in Joy Alukkas India Pvt. Ltd. v. Asst. CIT (I. T. A. No. 230 of 2013) (Ker) By reference order dated August 18, 2015 (Indus Motor Company P. Ltd. v. Deputy CIT [2015] 378 ITR 706 (Ker)), the Division Bench opined that the judgment in Joy Alukkas case (supra) requires reconsideration, consequently the Income-tax appeals have been placed before this Full Bench for consideration. 2. The brief facts giving rise to these appeals need to be noted for appreciating the issues which are up for consideration before us. These three appeals have been filed by the assessee (Indus Motor Company Pvt. Ltd) against the common order dated July 25, 2014 of the Income-tax Appellate Tribunal, Cochin Bench by which order the three Income-tax appeals filed by the Deputy Commissioner of Income-tax (Revenue) were decided. The three appeals arose out of different assessment years ; 2007-08, 2008-09 and 2009-10. It shall be sufficient to refer to the facts in I. T. A. No. 4 of 2015 arising out of assessment year 2007-08 for answering the reference. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other High Courts. The Tribunal after hearing the parties held that the case of the assessee very much falls within the ambit of section 32 of the 1961 Act. The Tribunal further held that construction activities carried out by the assessee if put on to the test of Explanation 1 would show that construction made by the assessee on the leased out premises would amount to capital expenditure. The appeals filed by the Revenue were allowed. Aggrieved by that order these three appeals have been filed by the assessee. 5. The appeals were admitted by this court on January 15, 2015 on the following questions of law : (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of ₹ 1,22,66,205 incurred on superstructures constructed by the appellant on leased land, as capital expenditure ? (2) Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the Appellate Tribunal that the sum of ₹ 1,22,66,205 incurred for construction of superstructures by the appellant on leased land is capital expenditure ? (3) Whether, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated August 18, 2015 is confined only to the question as to whether the law laid down by the Division Bench in Joy Alukkas' case requires reconsideration or not ? We thus have proceeded to examine the contention only in the above respect leaving all issues on facts of the case to be considered by appropriate Division Bench. Before we proceed to examine the respective contentions and relevant statutory provisions, it is necessary to note in some details, the facts of Division Bench case in Joy Alukkas. 10. The appeal in Joy Alukkas' case was admitted on following questions of law as has been extracted in the judgment (page 344) : 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of ₹ 6,48,70,634 incurred by the appellant in repairs and improvements works in leased premises ? 2. Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the Appellate Tribunal that the sum of ₹ 6,48,70,634 incurred by the appellant in repairs and improvements works in leased premises is capital expenses ? 3. Whether on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said structure or work is a building owned by the assessee.' Reading of the above provision would mean, whenever an assessee carries on business or profession in a building not owned by him, but over which he has a lease or right and if any capital expenditure is incurred by the assessee for the purpose of business on the construction of any structure or doing any work like renovation or extension or improvement, the provisions of the section shall apply to the case of the assessee as if said structure or work is a building owned by the assessee. According to learned senior standing counsel, the amounts spent on renovation or repairs on the premises taken by the assessee on lease would amount to capital gains, as the building has to be treated as the structure belonging to the assessee for the purpose of section 32 of the Income-tax Act, therefore, the advantage created has to be considered as asset in the hands of the assessee. Reading of the above provision definitely would not mean so. Whenever renovation or repair was made by the assessee and claims capital expenditure, it would only mean, whatever depreciation is allowable to the owner of the building would apply to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessees has to be rejected. It is made clear that the business expenditure irrespective of creating enduring benefit or advantage even if it is a profit earning effort unless at the end of the term of lease the items on which expenditure was spent could be retrieved by the appellants-assessees, it shall not amount to capital expenditure but it can be termed only as revenue expenditure. 13. The Division Bench in its reference order dated August 18, 2015, extracted paragraphs 29 and 30 of the judgment in Joy Alukkas' case. It was noticed in the reference order that the Division Bench in Joy Alukkas' case entered into a finding that merely because the buildings taken on lease are refurbished, no enduring benefit on the capital is enjoyed by the assessee and therefore the same cannot be treated as capital expenditure. In paragraphs 22 and 23 of the reference order the Division Bench expressed its reason for making the reference. The reasons given by the Division Bench as noted in paragraph 23 are as follows (page 717 of 378 ITR) : So far as the question regarding the expenditure incurred by the assessee for refurbishing the building taken on lease is concerned, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profession is carried on in a building not owned by the assessee but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession after the 31st day of March 1970, on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of section 34, be allowed- (i) such percentage on the written down value of the structure or work as may in any case or class of cases be prescribed ; (ii) in the case of any such structure or work which is sold, dis carded, demolished, destroyed or is surrendered as a result of the determination of the lease or other right of occupancy in respect of the building in the previous year (other than the previous year in which it is constructed or done) the amount by which the moneys payable in respect of such structure or work together with the amount of scrap value, if any, fall short of the written down value thereof : Prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. 18. Justice M. N. Venkatachaliah in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) has again reiterated that the question in each case would necessarily be whether the test relevant and significant in one set of circumstances are relevant and significant in the case on hand. After review of relevant English cases and judgment of the apex court, following was observed at pages 385 and 386 : In Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1966] AC 295, Lord Reid emphasised the futility of a strict application of and exclusive dependence on any single principle in the search f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a general rule. He invited our attention to paragraph 3 of the judgment, where it was held as follows : 'In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well-nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over exacting.' 20. Learned counsel for the assessee has placed reliance on the judgment of the apex court in CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468 (SC) ; [1998] 6 SCC 404. That was a case where expenditure was incurred to construct a building for business by the assessee which building did not belong to him. The question arose in the case was as to whether the expenditure is deductible expenditure. In paragraph 3 of the judgment the question was extracted, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade . . . If what is got rid of by a lump sum payment is an annual business expenses chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. (emphasis ours). In the facts of the said case it was held that the said expenditure should be treated as a revenue expenditure. As noted above, whether a particular expenditure is a capital expenditure or revenue expenditure depends on the facts of each case and relevant test applicable. 21. Another judgment relied on by learned counsel for the assessee is CIT v. TVS Lean Logi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT [1967] 64 ITR 63 (Ker). The above case arose out of Income-tax Act, 1922 in which section 10 came for consideration as to whether expenditure of ₹ 2,625 as capital expenditure was justified in law ? The Division Bench stated the following (page 64) : The amount admittedly has been expended for reclaiming a piece of land over which licence has been granted to the assessee to install a petrol pump by the Burmah Shell Oil Distributing Company. It cannot be said that the improvements that have been effected on the land consisting of filling up the ditches and raising the land and of constructing a wall are not of a capital nature. Even so, it is suggested that, because the assessee had only leave and licence over the land, the rule that expenses in the nature of capital expenditure should not be deducted in computing the assessable income should not be applied. We are unable to accept this contention. The changes effected were of an enduring nature and the conclusion reached by the assessing authorities that the money was expended for capital purposes is correct. We, therefore, answer the first question referred to us in the affirmative, that is, in favour of the Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure incurred by the assessee on leasehold building as capital expenditure. As noted above, the earlier provision which provided for giving depreciation was section 32(1A). However, the said provision confined the depreciation only to the buildings, whereas now section 32(1)(i) read with Explanation 1 extends the depreciation to machinery, plant and furniture. Explanation 1 also creates a legal fiction, i.e., as if the said structure or work is a building owned by the assessee . The Explanation contains thus a legal fiction, i.e., in the event of any capital expenditure incurred as referred to in explanation, it will be deemed that said structure or work is a building owned by the assessee. A deeming provision, i.e., legal fiction, is created by the legislature to attain a particular purpose. However, it has been held that the legal fiction is only for a definite purpose and is limited for the purpose for which it is created. The apex court in the case of CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC) ; [1973] 3 SCC 17 had laid down the following in paragraph 12 (relevant portion) (page 8) : 12. . . . As held by this court in CIT v. Amarchand N. Shroff [1963] 48 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place'. Section 41(2) of the Act does not, however, use the expression 'shall be deemed . . .' This, however, in our opinion would make no difference. Section 41(2) of the Act is a special provision whereby the amount received in excess of written down value becomes chargeable to Income-tax as income of the business or profession of the previous year in which the money payable for the building, machinery, plant or furniture becomes due. But for this specific provision, this amount would not have been taxed as income from business. Building, machinery, plant or furniture, on which depreciation has been allowed, would be the capital asset of the assessee. Any sum received in respect thereof would ordinarily represent a capital receipt. But section 41(2) regard this amount as income from business or profession and of the year in which the amount becomes due. Even though the word 'deemed' is not used in section 41(2) of the Act, as has been used in section 10(2)(vii) second proviso of 1922 Act, nevertheless this proviso creates a legal fiction whereby an amount received in excess of the written down value is firstly treated as income and secondly regarded as income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt in mind and should not be extended beyond the scope thereof or beyond the language by which it is created. Furthermore, it is well known that a deeming provision cannot be pushed too far so as to result in an anomalous or absurd position. The court must remind itself that the expressions like 'as if' are adopted in law for a limited purpose and there cannot be any justification to extend the same beyond the purpose for which the Legislature adopted it. 36. In a recent decision, the Constitution Bench of this court in K. Prabhakaran v. P. Jayarajan [2005] 1 SCC 754 opined : 'A legal fiction presupposes the existence of the state of facts which may not exist and then works out the consequences which flow from that state of facts. Such consequences have got to be worked out only to their logical extent having due regard to the purpose for which the legal fiction has been created. Stretching the con sequences beyond what logically flows amounts to an illegitimate extension of the purpose of the legal fiction.' 28. The plain reading of the language of Explanation 1 indicates that the legal fiction was created as if the said structure or work is the buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o what has been said as also to what has not been said. In Union of India v. Deoki Nandan Aggarwal [1992] Supp (1) SCC 323 a three-Judge Bench of this court held that it is not the duty of the court either to enlarge the scope of legislation or the intention of the Legislature, when the language of the provision is plain. The court cannot rewrite the legislation for the reason that it had no power to legislate. The power to legislate has not been conferred on the courts. The court cannot add words to a statute or read words into it which are not there. In State of Kerala v. Mathai Verghese [1986] 4 SCC 746 this court has reiterated the well-settled position that the court can merely interpret the section ; it cannot rewrite, recast or redesign the section. In interpreting the provision the exercise undertaken by the court is to make explicit the intention of the Legislature which enacted the legislation. It is not for the court to reframe the legislation for the very good reason that the powers to 'legislate' have not been conferred on the court. In Gwalior Rayons Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests [1990] Suppl SCC 785, the court r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terate that the observations and opinions expressed by the Division Bench in paragraphs 29 and 30 (Joy Alukkas' case) for holding that the expenditure incurred by the assessee in the above case was not a capital expenditure but revenue expenditure were observations based on facts of that case and relevant test applied by the Division Bench. The observation made by the Division Bench in paragraphs 29 and 30 has to confine to the facts of the above case. 33. As has been observed above, whether an expenditure incurred by the assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant tests. Explanation 1 to section 32(1)(i) does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, then such expenditure has to be mandatorily treated as capital expenditure. The Explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of section 32(1) shall ..... X X X X Extracts X X X X X X X X Extracts X X X X
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