DCIT CIRCLE 1, TIRUPUR vs. EASTMAN EXPORTS GLOBAL CLOTHING (P) LIMITED, TIRUPUR

PER G.MANJUNATHA, AM: These two appeals filed by the Revenue are directed

against separate, but identical orders of the learned CIT (A)-3,

Coimbatore, both dated 21.05.2018 and pertain to assessment

years 2011-12 & 2012-13. Since, facts are identical and issues

are common, for the sake of convenience, these appeals were

heard together and are being disposed off, by this consolidated

order.

appeal for both assessment years, therefore, for the sake of

2 ITA Nos.2227 & 2228/Chny/2018

brevity, grounds of appeal filed in ITA No.2227/Chny/2018 for

assessment year 2011-12 are reproduced as under:-

I. The order of the learned Commissioner of Income tax(Appeals) is against the facts and circumstances of the case. 2. Whether the Ld. CIT(A) was right in treating the expenditure as Revenue when the contract itself is null and void,

a. as per contract act, “a void contract is illegitimate and unenforceable from the start because of the way it was drafted.” In the case of the assessee the lease period of 5 years extendable by 25 months is illegitimate and unenforceable because the construction period itself is 5 years extendable to 36 months leaving no time for the lease to operate.

b. from the above there is no lease period left since shadowed by construction period and hence the working of Revenue Saving by the id. CIT(A) is baseless.

3 ITA Nos.2227 & 2228/Chny/2018

company is engaged in the business of manufacture and

export of knitted and woven garments & generation and

sale of power through windmill, filed its return of income for

assessment year 2011-12 admitting total income of Rs.

24,21,36,760/-. The case has been subsequently selected

4 ITA Nos.2227 & 2228/Chny/2018

for scrutiny and assessment has been completed

u/s.143(3) of the Act, on 31.03.2014 determining total

income at Rs.49,20,77,183/- by making various additions

including additions towards disallowance of cost of

construction of building on leasehold land as capital in

nature. On appeal, the learned CIT(A) by relied upon the

decision of Hon’ble Jurisdictional High Court of Madras in

the case of M/s.TVS Lean Logistics Ltd., reported in 293

ITR 432 allowed appeal filed by the assessee. The

Department has filed further appeal before the Tribunal

against order of the learned CIT(A) and the ITAT.,

Chennai, vide its order in ITA No.101 to 103/Chny/2016

dated 21.09.2016 has remitted the issue to file of the

Assessing Officer to decide the issue afresh in light of

judgement of Hon’ble Jurisdictional High Court of Madras

in the case of M/s.TVS Lean Logistics Ltd. (293 ITR 432)

and the decision of Hon'ble Supreme Court in the case of

M/s. Madras Auto Service (P) Ltd., reported in 233 ITR

468, with a direction to the Assessing Officer to re-examine

the issue whether expenditure incurred on construction of

5 ITA Nos.2227 & 2228/Chny/2018

super structure on leasehold land resulted in savings of

any revenue expenditure in the form of monthly rent at

subsequent stage in future or not.

re-examination of the issue, consequent to the direction of

the Tribunal and called upon the assessee to justify its

case in light of findings of the Tribunal and decision of the

Hon'ble Supreme Court in the case of Madras Auto Service

P.Ltd. (supra) and to file evidences to prove that is there

any saving on account of future payment of rent on account

of construction of building on leasehold lands. The

Assessing Officer, after analyzing lease deed dated

02.05.2010 and also decisions of the Hon'ble Supreme

Court in the case of Madras Auto Service P.Ltd.(supra),

came to the conclusion that case laws relied upon by the

assessee has no application and distinguishable to the

facts of the assessee’s case, because in the assessee’s

case it had every right to retain ownership of super

structure, electrical and other installations, whereas in the

6 ITA Nos.2227 & 2228/Chny/2018

case before the Hon'ble Supreme Court, ownership of new

building vested with the land owner. The Assessing Officer

further noted that the assessee has failed to demonstrate

with evidences how expenditure incurred for construction

of building on leasehold land resulted in reduction of

revenue expenditure in form of rent in subsequent financial

years and hence, opined that expenditure incurred on

construction of building on leasehold land is in the nature of

capital expenditure, which cannot be allowed as deduction, accordingly, made addition towards

expenditure, however, allowed depreciation @10% as

allowed towards building under the Act. Thus, the AO has

made additions to balance amount to the total income of

the assessee.

assessee preferred an appeal before learned CIT(A).

Before the learned CIT(A), the assessee has reiterated its

arguments made before the Assessing Officer and submitted that the assessee has saved substantial amount

7 ITA Nos.2227 & 2228/Chny/2018

in form of rent payment in subsequent financial years,

when compared to amount incurred for construction of

building on leasehold land and thus, case of the assessee

is squarely covered by the decision of the Hon'ble Supreme

Court in the case of M/s. Madras Auto Service (P) Ltd.

(supra) and the decision of Hon'ble Jurisdictional High

Court of Madras in the case of TVS Lean Logistics Ltd.

(supra). The learned CIT(A), after considering relevant

submissions of the assessee and also by relied upon the

decision of Hon'ble Supreme Court in the case of M/s.

Madras Auto Service (P) Ltd. (supra) held that the

assessee’s case is not covered under Explanation (1) to

section 32(1) of the Act. The ld. CIT(A) further held that as

per the decision of Hon’ble Supreme Court in the case of

Mother Hospital (P) Ltd (Supra), it is only when the

assessee holds a lease right or other right of occupancy

and any capital expenditure is incurred for construction of

any structure or doing of any work in relation to and by way

of renovation or extension of or improvement to the

building and the expenditure on construction incurred by

8 ITA Nos.2227 & 2228/Chny/2018

the assessee, that assessee would be entitled to

depreciation to the extent of such expenditure incurred for

construction or improvement of building. In this case on

perusal of facts, case of the assessee is squarely covered

by the decision of the Hon'ble Supreme Court in the case

of M/s. Madras Auto Service (P) Ltd. (supra) and the

decision of Hon'ble Jurisdictional High Court of Madras in

the case of TVS Lean Logistics Ltd. (supra), where it was

clearly held that the assessee did not acquire capital

asset, but has put up construction of building only for

business advantage on leasehold land and hence, entire

cost of construction is admissible as revenue expenditure.

The learned CIT(A) has also recorded categorical finding

that assessee has paid nominal rent for land and thus,

saved substantial amount of rental income, which resulted

in monetary benefit. Therefore, he opined that the

Assessing Officer has erred in treating expenditure

incurred for construction of building on leasehold land as

capital in nature and accordingly, deleted additions made

9 ITA Nos.2227 & 2228/Chny/2018

towards cost of construction of building. Aggrieved by the

learned CIT(A) order, the Revenue is in appeal before us.

has erred in treating expenditure incurred for construction

of building on leasehold land as revenue expenditure, even

though contract between the parties itself is null and void,

because as per agreement between the parties, lease

period was five years and was further extendable by 25

months. However, construction period itself is five years

and further extendable to 36 months leaving no time for

lease to operate so as to get financial benefit. The DR

further submitted that the learned CIT(A) was not justified

in holding that case of the assessee is squarely covered in

favour of the assessee by the decision of Hon'ble

Supreme Court in the case of M/s. Madras Auto Service

(P) Ltd. (supra) and the decision of Hon'ble High Court of

Madras in the case of TVS Lean Logistics Ltd. (supra),

without appreciating facts in those two cases, the assessee

has derived clear benefit of savings in rent by constructing

super structure on land and under those facts, the Hon'ble

10 ITA Nos.2227 & 2228/Chny/2018

Supreme Court and the Hon’ble Madras High Court came

to the conclusion that cost of construction incurred on

leasehold land is revenue in nature, which is deductible

under the Act. The learned DR further referring to the

provisions of section 37 of the Income Tax Act, 1961 has

submitted that as per section 37 of the Act, if any

expenditure is in the nature of capital in nature, same

cannot be allowed as deduction. In this case, although, the

Assessing Officer has invoked provisions of Explanation (1)

to section 32(1) of the Act, but facts of the present case

warrants application of provisions of section 37 of the Act,

because agreement between the parties itself is void and

ab initio. He further referring to various judicial precedents,

including the decision of Hon’ble Gujarat High Court in the

case of CIT vs. Express Hotels Pvt.Ltd. reported in 281 ITR

160 argued that since the Tribunal is final fact finding

authority, it has to determine correct tax liability of the

assessee under the Act. If at all, the Assessing Officer has

not appraised facts in right perspective, then the Tribunal is

having every authority to apply provisions in right

11 ITA Nos.2227 & 2228/Chny/2018

perspective of law to determine correct tax liability of the

assessee. Since the Assessing Officer has by inadvertent

error not applied provisions of section 37 of the Act, even

though expenditure was capital in nature. Therefore, he

submitted that the Tribunal should apprise facts and

decide the issue within the framework of the provisions of

section 37 of the Act. In this regard, he has relied upon the

following judicial precedents:-

2.CIT Vs. Ice Suppliers Corporation (64 ITR 195(P&H)

3.CIT Vs. Indian Express (Madurai) (140 ITR 705)(Mad)

4.CITVs. Mahalakshmi Textile MillsLtd.(66 ITR 710)(SC)

strongly supporting order of the learned CIT(A) submitted

that the issue is squarely covered in favour of the assessee

by the decision of ITAT., Chennai in assessee’s own case

for assessment year 2013-14 & 2016-17, where the

Tribunal under identical set of facts and by following the

decision of the Hon'ble Supreme Court in the case of CIT

12 ITA Nos.2227 & 2228/Chny/2018

Vs. M/s. Madras Auto Service (P) Ltd. (supra), upheld

order of the learned CIT(A) in deleting additions made by

the Assessing Officer towards disallowance of cost of

construction of structure on leasehold land. The facts

being identical for the year under consideration, the

learned CIT(A) by following decision of the Tribunal in

assessee’s own case for the earlier years has deleted

additions made by the Assessing Officer and his order

should be upheld. As regards arguments of the learned

DR, in light of certain judicial precedents on application of

right provisions of the Act, the AR submitted that since

there is clear direction from the Tribunal on non-application

of Explanation (1) to section 32(1) of the Act, the question

whether section 37(1) is applicable or not is academic in

nature. Therefore, he submitted that there is no merit in

arguments of the learned DR that Tribunal has every right

to compute correct tax liability of the assessee in

accordance with law. He further submitted that no doubt,

the Tribunal being final fact finding authority is having right

to examine the issue which is subject matter of appeal

13 ITA Nos.2227 & 2228/Chny/2018

before the Tribunal, but it cannot improve order of the

Assessing Officer to bring into tax any income which is not

at all subject matter of appeal or the case of the Assessing

Officer. Therefore, cases laws relied upon by the learned

DR are not applicable to the facts of the present case and

needs to be rejected.

available on record and gone through orders of the

authorities below along with case laws cited by both sides.

The issue whether construction cost incurred on building

constructed on leasehold land is revenue or capital in

nature is no longer a res integra. The Tribunal in

assessee’s own case for assessment years 2013-14 &

2016-17 in ITA No.1676 & 1677 /Chny/2019 has

considered an identical issue in light of agreement

between the parties and held that assessee’s case is

squarely covered by the decision of the Hon'ble Supreme

Court in the case of in the case of CIT Vs. M/s. Madras

Auto Service (P) Ltd. (supra) and the decision of Hon'ble

14 ITA Nos.2227 & 2228/Chny/2018

Jurisdictional High Court of Madras in the case of CIT vs.

M/s.TVS Lean Logistics Ltd. (supra), and after considering

relevant facts deleted additions made by the Assessing

Officer towards disallowance of cost of construction

incurred on leasehold land. The relevant findings of the

Tribunal are as under:-

“5. We have considered the rival submissions on either side and perused the relevant material available on record. In the earlier round of litigation, this Tribunal in I.T.A. No.291/Mds/2017, examined this issue and remitted back the matter to the file of the Assessing Officer with a direction to re-examine the matter in the light of the judgment of Apex Court in Madras Auto Service (P.) Ltd. (supra) and the judgment of Madras High Court in TVS Lean Logistics Ltd. (supra). Now, the Assessing Officer has made a distinction between the cases before the Apex Court and Madras High Court on the one hand and the case of the assessee on the other hand. This distinction made by the Assessing Officer, according to the Ld. representative, is not correct. We have gone through the orders of the Assessing Officer and both the cases before the Apex Court and the High Court. In the case of the assessee before the High Court and Apex Court, the vacant property was taken on lease and the cost of construction was claimed by incurring heavy expenditure. In both the cases, the assessee was paying a nominal rate of rent when compared to the market rate of lease. We may say that the rent paid by the assessee may pertain to the land since the superstructure belongs to the assessee. After expiry of lease, the assessee has to demolish or may leave the construction as such and vacate the premises. In both the cases, the assessee has to lose the

ITA Nos.2227 & 2228/Chny/2018

investment made for construction. Therefore, as rightly submitted by the Ld. representative for the assessee, the distinction made by the Assessing Officer between the case of the assessee and the cases before the Apex Court and the Madras High Court is not correct. This Tribunal is of the considered opinion that the facts of the case are identical to that of the Madras High Court and Apex Court.

“6. 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 . In that case, the appellant- company had acquired from the Government of Assam lease of certain limestone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting licence for limestone. This court examined tests laid down in various cases for distinguishing between capital expenditure and revenue expenditure. One of the standard tests now in use was laid down in the case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155. It said (page 40 of 27 ITR) : “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.” 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 (page 44) : “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 properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an

ITA Nos.2227 & 2228/Chny/2018

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 expense 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.

Relying upon the second test enumerated above, learned counsel for the appellant had submitted that the assessee got enduring benefit of a capital nature by spending the amount because the assessee obtained a new building for a period of 39 years. The difficulty, however, in the present case, arises from the fact that this building was never to belong to the assessee. Right from inception, the building was of the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business 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.”

“7. Similarly, there should be a literal rule of interpretation of a statute, which is the first and foremost principle of interpretation and where the words of a statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule and even if the literal

17 ITA Nos.2227 & 2228/Chny/2018

interpretation results in hardship or inconvenience, it has to be followed. The language employed in a statute is the determinative factor of the legislative event and even assuming there is a defect or any omission in the words used in the legislation, the court cannot correct or make up the deficiency, especially when a literal reading thereof produces an intelligible result and any departure from the literal rule would really be amending the law in the garb of interpretation, which is not permissible and which would be destructive of judicial discipline, vide Raghunath Rai Bareja v. Punjab National Bank [2007] 135 Comp Cas 163 (SC) ; [2007] 2 SCC 230. 8. What constitutes a capital expenditure and what does not, to attract Explanation 1 to section 32(1) of the Act depends upon the construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to the building which is put up in a building taken on lease by him for carrying on his business and profession of the assessee, but not in a case of construction of any structure or doing any work or relation to where such building is put 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. 9. The apex court in L. H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 held that the construction of roads in the case of sugar mill is revenue expenditure. Similarly, contribution to the State Housing Board for construction of tenements for the workers was also held to be revenue expenditure by the apex court in the case of CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521.” 8. In view of the above judgment of Apex Court and the judgment of Madras High Court, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.”

fact that case of the assessee is squarely covered by the

18 ITA Nos.2227 & 2228/Chny/2018

decision of the Hon'ble Supreme Court in the case of M/s.

Madras Auto Service (P) Ltd. (supra) has held that when

the assessee constructs building on leasehold land without

ownership, then cost incurred for construction of building is

revenue expenditure which deductible. The said findings of

the learned CIT(A) is supported by the decision of the

Hon'ble Supreme Court in the case of M/s. Madras Auto

Service (P) Ltd. (supra) and the decision of Hon'ble High

Court of Madras in the case of TVS Lean Logistics Ltd.

(supra). The learned CIT(A) has also recorded categorical

finding of fact that the assessee has derived clear

advantage of saving in rent by incurring expenditure on

construction of building in lieu of rent. Further, there is clear

commercial advantage in terms of saving in rent payments

as narrated by the ld. CIT(A) in her order. Therefore, we

are of the considered view that there is no error in the

findings recorded by the learned CIT(A) in deleting

additions made by the Assessing Officer towards

disallowance of cost of construction on leasehold land.

19 ITA Nos.2227 & 2228/Chny/2018

Hence, we are inclined to uphold findings of the learned

CIT(A) and reject arguments of the revenue.

the decision of Hon'ble Supreme Court in the case of M/s.

Madras Auto Service (P) Ltd. (supra) and the decision of

Hon’ble Gujarat High Court in the case of Express Hotels

Pvt.Ltd (supra), that the Assessing Officer has applied

provisions of section 32(1) instead of provisions of section

37(1) of the Act and hence, the Tribunal being final fact finding authority shall compute correct tax liability of the

assessee in light of facts of the case by applying right

provisions of the Act, we find that since there is clear

direction from the Tribunal on non-application of

Explanation (1) to section 32(1) of the Act, the question

whether provision of section 37(1) is applicable or not is

academic in nature and hence, we are not inclined to go

into comment on arguments of the learned DR. We further

noted that case laws relied upon by the DR on the powers

of the Tribunal has no application to the facts of the present case, because the Tribunal being final fact finding authority

20 ITA Nos.2227 & 2228/Chny/2018

has every power to adjudicate the issue before it in light of

facts on record brought out by both the parties, but it does

not have any power to improve order of the Assessing

Officer. In this case, case of the Assessing Officer is that

Explanation (1) to section 32(1) of the Act is squarely

applicable to the instant case of the assessee, whereas the

Tribunal has given categorical finding in earlier assessment

years that Explanation (1) to section 32(1) of the Act has

no application. Further, it is not a case of the AO that

expenditure incurred by the assessee is non genuine or

which has not incurred for wholly and exclusively for the

purpose of business. In fact, the ld. AO had never disputed

genuineness of expenditure. The AO had also not disputed

fact that the assessee is having constructed building on

leasehold land has derived commercial advantage by

paying lesser rent. Therefore, we are of the considered

view that there is no scope for applying provisions of

section 37(1) to disallow expenditure as has not been

incurred wholly and exclusively for business purpose.

21 ITA Nos.2227 & 2228/Chny/2018

Therefore, we reject case laws relied upon by the learned

DR for revenue.

taken by the co-ordinate Bench of the Tribunal in

assessee’s own case for earlier assessment years, we are

of the considered view that there is no error in the findings

recorded by the learned CIT(A) to delete additions made by

the Assessing Officer towards cost of construction incurred

on leasehold land, hence, we are inclined to uphold order

of the learned CIT(A) and reject grounds taken by the

Revenue.

ITA No.2228/Chny/2018 (A.Y.2012-13):

identical to the facts and issues which we have already

considered in ITA No.2227/Chny/2018 for the assessment

year 2011-12. The reasons given by us in the preceding

22 ITA Nos.2227 & 2228/Chny/2018

paragraphs in ITA No.2227/Chny/2018 shall mutatis mutandis apply to this appeal as well. Therefore, for similar reasons, we are inclined to uphold order of the learned CIT(A) and dismiss appeal filed by the Revenue.

Order pronounced in the open court on 9th August, 2021

Sd/- Sd/- (महावीर �संह) (जी. मंजुनाथ) (Mahavir Singh) (G. Manjunatha ) उपा�य�/ Vice-President लेखा सद%य / Accountant Member चे'नई/Chennai, (दनांक/Dated 9th August, 2021 DS

आदेश क� ��त*ल+प अ,े+षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु-त (अपील)/CIT(A) 4. आयकर आयु-त/CIT 5. +वभागीय ��त�न1ध/DR 6. गाड� फाईल/GF.