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2016 (5) TMI 472 - KERALA HIGH COURT

2016 (5) TMI 472 - KERALA HIGH COURT - [2016] 382 ITR 503 - Expenditure for construction of superstructures by the appellant on leased land - determining the nature of expenditure - capital expenditure or revenue expenditure - Held that:- 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 building owned by the assessee. There is no warrant of reading Explanation 1 in a manner to read that when the assessee who h .....

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rried out, it shall be treated as structure or work owned by the assessee. The words "any capital expenditure" used in Explanation 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 .....

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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 principle of statutory interpretation that language of the statute should be read as it is. Thus Explanation 1 has to be read as it is. The above rule of statutory inter .....

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urred 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 ma .....

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her hold that whether an expenditure incurred by the assessee is a capital expenditure or revenue expenditure is to be decided on the facts of each case by applying the relevant tests.We make it clear that we have not expressed any opinion on the merits of the case. Let our answer be placed before the appropriate Division Bench to consider all issues and decide the appeals accordingly. - I. T. A. No. 4, 14 and 15 of 2015 - Dated:- 17-2-2016 - Ashok Bhushan (CJ), A. M. Shaffique And A. K. Jayasan .....

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15 (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 comm .....

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zuki and an authorised service centre for its vehicles. To carry on its business, the assessee has various show rooms/workshops in different Districts of Kerala and in the State of Tamil Nadu. The return of income for the year 2007-08 was filed on October 30, 2007 which was processed under section 143(1) of Income-tax Act, 1961 (hereinafter referred to as "1961 Act"). Subsequently, the case was selected for scrutiny and scrutiny assessment was completed on December 30, 2009 making cert .....

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xpenditure and placed reliance on a Division Bench judgment of Madras High Court in the case of CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad). The Commissioner of Income-tax (Appeals), Kozhikode, allowed the appeal directing deletion of addition of ₹ 3,12,34,772. 4. The Revenue, aggrieved by the order of the Commissioner of Income-tax (Appeals), filed Appeal No. 2012/2014. The Revenue before the Tribunal contended that the expenditure incurred by the assessee were all capital exp .....

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of providing partition, flooring, interior works, etc., for making the premises ready for functional use and no asset or benefits of enduring nature is achieved from such expenditure, hence that expenditure is only a revenue expenditure. Before the Tribunal both the parties placed reliance on different judgments of the apex court, this court 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 .....

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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 e .....

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ch as partitions on buildings taken on lease is not a revenue expense ?" 6. We have heard Shri Joseph Markos, senior advocate for the assessee and Shri P. K. Ravindranatha Menon for the Revenue. 7. The appeals came up for hearing before a Division Bench. The learned senior counsel appearing for the assessee apart from relying on various other judgments has placed reliance on the Division Bench judgment of this court in Joy Alukkas' case (supra). It was contended by learned counsel for t .....

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oduction of Explanation 1 to section 32(1)(i) of the 1961 Act. Learned senior counsel for the Revenue contended that in view of Explanation 1 the expenditure incurred by the assessee are capital expenditure and has rightly been so held by the Tribunal. The Division Bench noted the respective submissions of learned counsel for the parties, and after referring to various cases relied on by the respective parties expressed an opinion that by adding Explanation 1 to section 32(1)(i) Parliament has m .....

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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 ques .....

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by the appellant in repairs and improvements works in leased premises is capital expenses ? 3. Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in confirming the addition of ₹ 31,68,298 under transfer pricing adjustment ? 4. Whether on the facts and in the circumstances of the case, there is any evidence or material on record before the Appellate Tribunal to justify the addition of ₹ 31,68,298 under transfer pricing adjustment ?" 11. The .....

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pitalising the expenditure. So far as improvements made by spending money on flooring, plastering and painting the walls, electrical wiring, plumbing, sanitary facilities, they claimed as revenue expenditure. The Assessing Officer took a completely different view categorising the entire expenditure as capital expenditure. The first appellate authority also upheld the order of Assessing Officer on the basis of Explanation 1 to section 32(1) (i) of Act 1961. The Division Bench in Joy Alukkas' .....

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here the business or profession of the assessee is carried on in a building not owned by him 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 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, the provisions of this clause shall apply as if the said struct .....

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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. Whe .....

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ts. If the expenditure has to be treated as revenue expenditure in the hands of the owner, it would amount to revenue expenditure even in the hands of the assessee tenant. In other words, section 32(1)(i) of the Income-tax Act read with Explanation 1 thereto, would only mean, whatever the owner of the building is entitled so far as benefits of other depreciation will be applicable to the case of the assessee, who takes the building on lease." 12. The Division Bench in Joy Alukkas' case .....

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hieve good ambiance which may result in profits without changing the building itself in which the business is conducted. The outgoing expenditure though forms part of profit earning exercise, in the absence of acquiring any asset or a right of permanent nature, it cannot be considered as capital expenditure. There is no replacement of complete structure with the new process. The nature of business prior to expenditure in question and afterwards being the same without any change, except some impr .....

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nd of the revenue that the Tribunal was justified in rejecting the claim of the 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 .....

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s 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 are of the considered opinion that, after the introduction of Explanation 1 to section 32(1) of the Act, there is no scope left out at all for any interpretation, since by a legal fiction, the assessee is treated as the .....

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tting the building to use for business purpose. According to us by adding Explanation 1 to section 32(1), Parliament has manifested its legislative intention to treat expenditure incurred by the assessee on leasehold building as capital expenditure and therefore, Explanation 1 to section 32(1) cannot be subjected to any other interpretation. Further the language of Explanation 1 is very plain and clear and there was no scope for providing a different meaning for the words used and hence we are b .....

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the view expressed by the Division Bench in its reference order in paragraph 23 as noted above is based on correct interpretation of Explanation 1 ? 15. Explanation 1 to section 32(1) was inserted by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 with effect from April 1, 1988. Section 32 deals with depreciation. Prior to April 1, 1988, it was sub-section (1A) of section 32 which granted depreciation in respect of capital expenditure on building taken on lease or licence .....

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ure 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 surrend .....

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with effect from April 1, 1971, prior to which no depreciation was allowable in respect of capital expenditure incurred by the assessee on any asset belonging to a third party. Sub-section (1A), however, confined to buildings only and does not extend to plant, machinery or furniture. As per sub-section (1A) an asses see who carries on his business or profession in a building not owned by him but taken on lease or licence and who incurs any capital expenditure for the purposes of his business or .....

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t in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) had occasion to consider the provisions of section 10(2)(xv) of 1922 Act in the context of revenue expenditure or capital expenditure and noticed various tests laid down by different courts for determining what is the capital expenditure as distinguished from revenue expenditure. The Constitution Bench laid down the following at pages 45 and 46 (relevant portion) : "In cases where the expenditure is made for the initial outlay o .....

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ither for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which expenditure is incurred. If the expenditure 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 m .....

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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 fixed capital of the business it .....

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these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductable allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the Income-tax authorities on an application o .....

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is not enough because even a single insignificant detail may alter the entire aspect. After considering the earlier judgment of the apex court in Assam Bengal Cement Co. Ltd. (supra), following was observed in page 703 of 44 ITR : "What is attributable to capital and what to revenue has led to a long string of cases here and in the English Courts. The decisions of this court reported in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) and Pingle Industries v. CIT [1960] 40 ITR 67 ( .....

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ozo) 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 A .....

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tion of and exclusive dependence on any single principle in the search for the true position and pointed out the difficulty arising from taking too literally the general statements made in earlier cases and seeking to apply them to a different case which their authors certainly did not have in mind. The learned Lord also identified as another source of difficulty the tendency in some cases to treat someone criterion as paramount and to press it to its logical conclusion without proper regard to .....

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single legal principle.' The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors, it is truly said, are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. The non-determinative quality, by itself, of any particular test is highlighted in B. P. Australia Ltd. v. Commr. of Taxation of Commonwealth of Australi .....

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quot; (emphasis supplied). 19. The Division Bench in its reference order has made reference of another passage from Alembic Chemical Works Co. Ltd. (supra) has referred to in paragraph 17 of the order as follows (page 713 of 378 ITR) : "17. Taking us through the facts of the case in Alembic Chemical works Co. Ltd. also, learned counsel contended that the ratio laid down by the hon'ble apex court is that no definite principle can be formulated as a general rule. He invited our attention .....

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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. .....

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x court taking note of the earlier judgment of the apex court in Assam Bengal Cement Co. Ltd. (supra) and other cases, laid down the following (page 472 of 233 ITR) : "7. The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this court in, Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) ; AIR 1955 SC 89. It that case, the appellant company had acquired from the Government of Assam lease of certain lime stone quarries for a .....

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case of, Atherton (H. M. Inspector of Taxes) v. British Insulated and Helsby Cables, Ltd. [1925] 10 Tax Cas 155 (HL). It said : 'When an expenditure 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, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital' .....

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pment. 2. Expenditure may be treated as properly 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 footin .....

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bove, 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 Logistics Ltd. [2007] 293 ITR 432 (Mad) which was a case of construction of the building on leasehold land. The Madras High Court in the facts of the said case after considering Explanation 1 to section 32(1) laid down the following in paragraphs 8, 9 and 10 (pag .....

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up/constructed for the purpose of business or the profession of the assessee in a land taken on lease by the assessee. Because the assessee did not acquire a capital asset, viz., the land in the instant case, but has put up a construction of the building only for the business advantage, with the result the entire construction cost is admissible as the revenue expenditure. The apex court in L. H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 (SC) held that the construction of road .....

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nation 1 to section 32(1) of the Act is not attracted. Accordingly, these appeals are dismissed. Consequently, M. P. No. 1 of 2007 is also dismissed." The Madras High Court held that Explanation 1 to section 32(1) was not attracted. Again the above case was based on the facts of the said case and need to be considered when issue is to be considered determining as to whether in the present case it is revenue expenditure or capital expenditure. 22. Sri. P. K. Ravindranatha Menon, learned seni .....

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ed 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 n .....

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above terms. There will be no order as to costs." In the above case the amount expended was 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. In the facts of the said case the Division Bench held that the said expenditure is of capital nature. The above case was on its own facts which is not attracted in the facts of the present case, nor any such ratio has been laid down in the said jud .....

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and each case depends on its own facts. Thus to find out whether a particular expenditure incurred by the assessee is a capital expenditure or revenue expenditure, the facts of the particular case and all circumstances have to be taken into consideration in the light of the law laid down by the apex court as noted above. 24. The facts of each case have to furnish the answer to the query and the findings in one case based on few different factors may not be relevant for another case which may hav .....

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tion of Explanation 1 to section 32(1)(i) of the 1961 Act. Reading of paragraph 23 of the reference order gives an impression that the Division Bench opined that Explanation 1 manifests a legislative intention to treat 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 .....

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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 ITR (SC) 59 ; AIR 1963 SC 1448 legal fictions are only for a definite pur .....

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. Section 41(2) is quoted in paragraph 8 which is to the following effect : "41. (2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as doe .....

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g, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year." The apex court in paragraph 9 held that section 41(2) created a legal fiction. Following was laid down in paragraph 9 (page 432 of 230 ITR) : "It will be appropriate to first consider whether section 41(2) of the Act contains any legal fiction or not. The second proviso to section 10(2)(vii) of .....

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. 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 t .....

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income and secondly regarded as income from business or profession and thirdly it is considered to be the income of the previous year in which the money payable became due. That the section creates a legal fiction has been held by this court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) ; AIR 1978 SC 1099, where at page 93 of 113 ITR 84 : of the report it was observed as under : 'It is true that by a legal fiction created under section 41(2) a balancing charge a .....

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quot;. It was rightly pointed out by the learned Solicitor General that legal fictions are created only for a definite purpose and they should be limited to the purpose for which they are created and should not be extended beyond their legitimate field. But, as indicated earlier, the fiction under section 41(2) is created for the purpose of computation of assessable income of the assessee under the head "Business income" and under section 80E(1), in order to compute and allow the permi .....

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duction under section 80E(1) would amount to extending the legal fiction within the limits of the purpose for which the said fiction has been created.'" 27. In Maruti Udyog Ltd. v. Ram Lal [2005] 2 SCC 638 the apex court again reiterated the scope and ambit of purpose for which the deeming fiction is created. In paragraphs 35 and 36 following was stated : "35. In construing a legal fiction the purpose for which it is created should be kept in mind and should not be extended beyond .....

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ran 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.'" .....

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vement to the building, then the said expenditure has to be treated as capital expenditure. The legal fiction has not been created to treat the said "such work" as mentioned therein as capital expenditure rather, the fiction has been created that when such work is carried out, it shall be treated as structure or work owned by the assessee. The words "any capital expenditure" used in Explanation 1 indicate that the legal fiction has to be read when any capital expenditure is i .....

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rovision is attracted when there is any capital expenditure. 29. The Division Bench in its reference order 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 explanati .....

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e language used in the statute which means that attention should be paid to 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 t .....

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t 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 rightly observed that in seeking legislative intention judges not only listen to the voice of the Legislature but also listen attentively to what the Legislature does not say. The House of Lords in Pinner v. Evertt [1969] 3 All ER 257 (HL) ; [1969] .....

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ar expenditure is a capital expenditure or revenue expenditure is to be found out from the facts of each case and by applying the relevant tests in each case and when it is found that nature of such expenditure is capital expenditure, Explanation 1 shall automatically come into operation. 30. The ratio laid down in Joy Alukkas' case contained in paragraph 28 is as follows (page 358) : "Whenever renovation or repair was made by the assessee and claims capital expenditure, it would only m .....

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amount to revenue expenditure even in the hands of the assessee tenant. In other words, section 32(1)(i) of the Income-tax Act read with Explanation 1 thereto, would only mean, whatever the owner of the building is entitled so far as benefits of other depreciation will be applicable to the case of the assessee, who takes the building on lease." 31. We do not find that the ratio as laid down by the Division Bench in paragraph 28 is not in accordance with the ambit and scope of Explanation 1 .....

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