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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH, VICE- & SHRI G. MANJUNATHA
order.
2. The Revenue has more or less filed common grounds of appeal for both assessment years, therefore, for the sake of brevity, grounds of appeal filed in 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. Whether the Ld. CIT(A) was justified in holding the expenditure to be Revenue when the entire agreement shows that it is only a device to avoid tax and not a genuine transaction as enunciated in various case laws and hence, corporate veil has to be lifted.
4. Whether the Ld. CIT(A) was justified in treating the expenditure as Revenue when the land owner will be left with land only since the assessee has every right to retain the ownership of superstructure, considering the scale of expenditure involved.
5. Whether the Ld. CIT(A) was justified in treating the expenditure as Revenue when the assessee will continue to enjoy the fruits of capital expenditure to eternity, since the lease agreement is silent on the issue of renewability of lease of superstructure.
6. Whether the Ld. CIT(A) was justified in allowing the appeal of the assessee when the question of savings of expenditure does not arise considering the peculiar nature of the facts of the case.
7. Whether the Ld. CIT(A) was justified in ignoring the facts. that the payment is for the purpose for creating an asset of enduring in nature and consequently is of a capital nature.
8. Whether the Ld. CIT(A) was justified in allowing the sum of Rs. 7,49,49,895/- on the ground that building construction on a lease hold land is Revenue in nature.
9. Whether the Ld. CIT(A) was justified in ignoring the fact that building construction on a lease hold land is nothing but creation of an asset of enduring benefit which is going to be useful for the assessee company on long term basis to be utilized over a period of time. Accordingly, the same is only capital in nature eligible for depreciation under the Income tax Act.
10. Whether the Ld. CIT(A) was justified in ignoring the fact that just because the building is constructed on a lease hold land the same cannot become revenue expenditure because the investment is towards construction of a building which has a life beyond the current financial year and accordingly nothing but a capital expenditure. 11. For these and other grounds that may be adduced at the time of hearing, the order of the CIT(A)-3, Coimbatore may be cancelled and that of the Assessing Officer may be restored.”
3. Brief facts of the case are that the assessee 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 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 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 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.
The Assessing Officer has taken up proceedings for 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 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.
Being aggrieved by the assessment order, the 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 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 (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 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 towards cost of construction of building. Aggrieved by the learned CIT(A) order, the Revenue is in appeal before us.
6. The learned DR submitted that the learned CIT(A) 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 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 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:-
CIT Vs.Express Hotels P.Ltd ( 281 ITR 160) (Guj)
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)
7. The learned AR for the assessee, on the other hand, 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 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 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.
We have heard both the parties, perused materials 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 & 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 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 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 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.
We have carefully gone through the judgment of Apex Court in the case of Madras Auto Service (P) Ltd. (supra). The Apex Court at para 6 of its judgment observed as follows:-
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.
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 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.
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.” (underlining ours)
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.”
We have gone through the judgment of Madras High Court in TVS Lean Logistics Ltd. (supra). The Madras High Court after considering Explanation 1 to Section 32(1) of the Act and the judgments of Apex Court in Nasiruddin v. Sita Ram Agarwal (2003) 2 SCC 577 and Raghunath Rai Bareja v. Punjab National Bank (2007) 2 SCC 230, found that similar expenditure is revenue in nature. In fact, the Madras High Court has observed as follows:-
“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 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.
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.”
9. In this case, the learned CIT(A), after considering the fact that 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) 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 (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.
Hence, we are inclined to uphold findings of the learned CIT(A) and reject arguments of the revenue.
As regards arguments of the learned DR in light of 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 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.
Therefore, we reject case laws relied upon by the learned DR for revenue.
In this view of the matter and consistent with view 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.
In the result, appeal filed by Revenue is dismissed.
The facts and issues involved in this appeal are identical to the facts and issues which we have already considered in for the assessment year 2011-12. The reasons given by us in the preceding 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.
In the result, appeals filed by the Revenue for both assessment years are dismissed.
Order pronounced in the open court on 9th August, 2021