TMI Blog1998 (8) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the court was delivered by MRS. SUJATA V. MANOHAR J.--- The assessee is a limited company carrying on the business of sale of motor parts. Its head office is at Madras. It has a branch at Bangalore. Under an agreement of lease dated February 1, 1966, the assessee obtained from Hajira Comer and Mrs. Rabia Bai Razack a lease of premises Nos. 64 and 64/1 situated at Sri Narasimharaja Road, Bangalore, for a period of 39 years commencing from January 1, 1966. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its own expense the existing premises and appropriate to itself all the material thereof without paying to the lessors any compensation and construct a new building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Tribunal has held that the expenditure of the said two amounts for the construction of a new building is in the nature of business expenditure for proper carrying on of the business of the assessee. The Tribunal has, therefore, treated these amounts as revenue expenditure and allowed a deduction in that regard to the assessee. The claim of the Department that the expenditure was capital expenditure and was, therefore, not deductible, was negatived by the Tribunal. On the application of the Department, the Tribunal referred the following question to the High Court for its determination under section 256(1) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was constructed by the assessee at its own cost. In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage itself provides, this test would not apply if there are special circumstances pointing to the contrary. This court in the above case summarised the tests as follows : "1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point of view, therefore, the assessee got the benefit of reduced rent. The High Court has, therefore, rightly considered this as obtaining a business advantage. The expenditure is, therefore, to be treated as revenue expenditure. Although there are a number of cases dealing with this question, we will limit ourselves to examining a few cases where the assessee, by expending money, created an asset of an enduring nature. However, the asset so created did not belong to the assessee. In such a situation the courts have held that the expenditure was for better carrying on of the business of the assessee and could be allowed as a revenue expenditure, looking to the circumstances of each of those cases. Thus, in Lakshmiji Sugar Mills Co. P. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, revenue expenditure. In the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC), the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to the railway station. The amounts expended for these purposes were held to be revenue expenditure since the installations and accessories were the assets of the municipality and not of the assessee. The expenditure, therefore, did not result in cr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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