Brief of the Case
ITAT Chennai held In the case of The Continental Enterprise vs. ITO that as per explanation 1 to sec.32, where any business or profession is carried on in a leased building and any capital expenditure incurred for business or profession on the construction of any structure or doing any work in or in relation to building, it will be treated that such structure /work is a building own by the assessee. In the instant case, it is an admitted fact that the assessee has taken land on lease for setting up of project for processing of coir. It is also undisputed that the assessee has constructed the new building at the leased premises. Thus the assessee has constructed super structure. These construction activities carried out by the assessee if put on to the test of Explanation 1 would show that the construction made by the assessee on the leased out premises would amount to capital expenditure.
Facts of the Case
The assessee is a manufacturer of coir products, which requires large space for processing. Hence, the assessee took on lease two plots of land one measuring about 14,536 sq.ft and the other measuring about14, 270 sq.ft. Each plot had a small shed of about 2,066 sq.ft as more covered space was required for processing the coir; the assessee constructed temporary sheds with metal sheet roofing and laid concrete flooring so that the material stored was not damaged due to rain water. As there was not fencing around the plot, the assessee also erected barbed fencing all around the plot. Thus, the following expenses incurred on leasehold land were charged as revenue expenditure.
The Assessing Officer disallowed the above expenses as capital in nature and allowed only depreciation. The Assessing Officer further observed that in respect of capital expenditure incurred by the assessee on lease hold premises, only depreciation is admissible. There is no ‘response’ that the fencing, temporary shed, compound etc were constructed on leasehold premises. It is pertinent to note that by incurring the said expenditure, the assessee has acquired an asset which in turn increases the enduring capacity to the assessee in the business. In this context, the assessee contention that the expenditure incurred thereon should be allowed as revenue expenditure is not justified. Hence, the Assessing Officer disallowed the revenue expenditure claimed after allowing due depreciation.
Contention of the Assessee
The ld counsel of the assessee submitted that in this case, the assessee has taken land on leasehold and the assessee had put temporary fencing and temporary shed with metal sheet roofing and laid concrete flooring and the assessee also erected barbed fencing all around the plot. On land taken on lease, there were no buildings or super structures. He further submitted that after taking the land on lease, the assessee had constructed buildings/super structures on it. Such super structures are owned by the owners of the land and the assessee had only the right of possession over a limited period.
He further submitted that the assessee had not acquired any asset or advantage of an enduring nature. The assessee is not the owner of these facilities, but had only a right of possession for a limited period. These structures were put up for the business purposes and had to be demolished/removed after the period of lease and hence are not of permanent nature.
He further submitted that the assessee had also taken on lease land and building for its business purposes. But for making it functional the assessee had to incur revenue expenditure in the nature of making temporary partitions, floorings etc. Such expenses were treated as revenue expenditure for the reason that no asset or advantage of an enduring nature was acquired out of such expenses. He submitted that as can be seen from the details of expenditure incurred at each location and nature of facilities created, these facilities are not of a permanent nature and no civil structure has been created. The expenses were only to make the structure useful to the assessee during the tenure of the lease period which was for a short period. The assessee relied on the following judicial precedents – ACIT vs. M/s Sundaram Asset Management Co. Ltd. in ITA No. 1241 & 1154/ Mds/2014 dated 22nd Aug. 2014, CIT vs. Ayesha Hospitals ( P ) Ltd , 292 ITR 0266 and CIT vs. TVS Lean Logistics Ltd, 293 ITR 0432.
Contention of Revenue
The ld counsel of the revenue strongly oppose the order of the CIT(A) on this issue and submitted that the provisions of section 32(1) are applicable to the facts of the present case and by no stretch of imagination, the expenditure incurred on construction of superstructure on leasehold land can be considered as revenue expenditure. He submitted that reliance placed by the CIT (A) on the decision of the High Court of Madras in the case of CIT vs. TVS Lean Logistics 293 ITR 0432 is totally misplaced. More so, he submitted that the order of the Tribunal in the case of ABT Ltd vs. ACIT 21 ITR (Trib) 634 is also not on the same facts.
Held by CIT (A)
The CIT (A) observed that the disallowance of Rs.18,98,962/- being lease hold Land expenses claimed by the appellant as revenue expenditure, the Assessing Officer treated the expenditure as capital and held that only depreciation admissible. By incurring the said expenditure such as fencinq, constructing temporary shed and compound wall even though constructed on lease hold premises which helps the assessee to increase the enduring capacity of the assessee in the business the Assessing Officer has rejected the claim of the assessee that it is only a revenue expenditure and treated the same as capital in nature and allowed a depreciation. Since the department has filed SLP on the decision of the jurisdictional High Court in the case TVS Lean Logistics Ltd., 293 ITR 432 and also the revenue has filed appeal in RMKV & Sons, Tirunelvelli before the Tribunal on similar issues and also taking into account in the case of M/s. Remington (India) Limited wherein it was held that ‘’if the expenditure has becomes an integral part of the leased property, then the same should be allowed as deferred expenditure over the period of lease. In case the expenditure is incurred for bringing up a new asset in the nature of expenditure is incurred for bringing up a new asset in the nature of furniture and machinery, which do not form on become an integral part of the leased premises, the same cannot be treated as ‘revenue expenditure’’. The additions made by the Assessing Officer at Rs.17,09,066/- after allowing depreciation, is confirmed, and the grounds of appeal filed by the assessee is dismissed.
Held by ITAT
ITAT held that this is clear that the assessee has taken land on lease for setting up of project for processing of coir. It is also undisputed that the assessee has constructed the building at the leased premises. Thus the assessee has constructed super structure. These construction activities carried out by the assessee if put on to the test of Explanation 1 to sec. 32(1) would show that the construction made by the assessee on the leased out premises would amount to capital expenditure. The assessee in order to support his case has relied on the judgment of the Madras High Court in the case of TVS Lean Logistics Ltd. 293 ITR 432. In the said case, the assessee had constructed a building on the leased land for the business advantage. The Court held that the entire cost of construction is admissible as revenue expenditure. Explanation1 categorically states that the business or profession is carried on in a leased building and not on land. In the above case, the assessee has taken land on lease and made certain construction. It is the case that the assessee has constructed a new building on the leased land. The High Court has further held in the aforesaid case that 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 Legislature, the Court cannot correct or make up the deficiency, especially when a literal reading thereof produces an intelligible result an 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.
The Supreme Court of India in the case of Madras Auto Service (P) Ltd., 233 ITR 468 while dealing with a similar controversy has Observed that “ 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 reconstruction? 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 a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee therefore could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure.”
From the above judgment, we can conclude that it is essential that the expenditure incurred on the construction of any structure on the leased premises should result in enduring benefit. In our considered opinion, the case of the assessee very much falls within the ambit of Explanation 1 of section 32(1) and in view of Supreme Court judgment in the case of Madras Auto Service 233 ITR 468, we are not considering the various judgments cited by the ld counsel of the AR. In view of the above, we find no merit in the arguments of the assessee’s counsel on this issue. Hence, this ground of the assessee is dismissed.
Accordingly appeals of the assessee dismissed.