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IN THE ITAT CHENNAI BENCH ‘B’
Assistant Commissioner of Income-tax,
IT APPEAL NOS. 1557, 1558, 1633 & 1705 (MDS.) OF 2011
[ASSESSMENT YEARS 2005-06 & 2008-09]
JANUARY 3, 2013
Vikas Awasthy, Judicial Member – The assessee has filed ITA Nos.1557 & 1558/Mds/2011 relevant to the assessment years 2005-06 and 2008-09 respectively impugning the orders of the CIT(A)-I, Coimbatore dated 12.7.2011. The Revenue has also assailed the orders of the CIT(A) dated12.07.2011 for the assessment years 2005-06 and 2008-09 in ITA Nos.1705 & 1633/Mds/2011 respectively.
2. The brief facts of the case are that the assessee is a company registered under the provisions of the Companies Act and is engaged in the business of parcel service, Maruti dealership and service station, petrol bunk, wind energy and fettling. The assessee company for the purpose of setting up Maruti service station had taken various premises on lease throughout the State of Tamil Nadu. To make the building suitable according to its requirements, the assessee had carried out renovations, interior decoration, new construction and repairs of the buildings taken on leasehold basis. The assessee claimed the entire expenditure incurred on leased premises as revenue expenditure. For the assessment year 2005-06, the assessee claimed expenditure to the tune of Rs. 75,11,775/- towards construction/renovation of leased buildings as revenue expenditure. Similarly, for the assessment year 2008-09 the assessee had claimed Rs. 65,53,204/- as revenue expenditure towards construction/renovation of building on leased premises. The Assessing Officer disallowed the expenditure as revenue and capitalized the same. The Assessing Officer allowed depreciation @ 10% treating the expenditure as capital. Apart from the above addition, the Assessing Officer inter-alia made additions on the following counts for assessment year 2008-09:-
(i) Excess depreciation claimed by the assessee on windmills;
(ii) Expenditure incurred for earning exempted income; &
(iii) Unexplained fixed deposits under section 68 of the Act.
Aggrieved against the assessment order for the respective assessment years, the assessee preferred appeals before the CIT(A). For the assessment year 2005-06, the CIT(A) vide order dated 12.7.2011 partly allowed the appeal of the assessee. The CIT(A) held that the amount spent on construction of overhead tank, washing ramp, oil change, final inspection & wheel pit and extension of shed from existing workshop for front office is capital in nature. The CIT(A) allowed the remaining expenditure to the tune of Rs. 3.82 lakhs incurred on dismantling of RCC well, demolition of wall, electrical works, interlocking, renovation of existing shed etc. as revenue in nature.
3. For the assessment year 2008-09, the CIT(A) partly allowed the appeal of the assessee on the issue of expenditure incurred by the assessee on construction/renovation of leased building for the aforementioned reasons. As regards the claim of the assessee with regard to higher rate of depreciation on windmills and unexplained cash credit under section 68 of the Income Tax Act, the CIT(A) allowed the appeal of the assessee.
Aggrieved against the orders of the CIT(A) for the respective assessment years, both the Revenue and the assessee have come in second appeal before the Tribunal. Since common issues are involved in these appeals, they are taken up together for disposal.
4. Shri Vikram Vijayaraghavan appearing on behalf of the assessee submitted that the expenditure incurred by the assessee on the leased premises should be allowed as revenue expenditure as the assessee has spent amount to make the leased premises suitable for conducting business. The counsel for the assessee submitted that Explanation 1 to Section 32(1) will not apply in the present case. In order to support his contentions, the counsel for the assessee relied on the judgement of the Hon’ble Madras High Court in the case of CIT v. TVS Lean Logistics Ltd.  293 ITR 432 and another judgement of the jurisdictional High Court in Tax Case (Appeal ) No. 197 of 2005 titledThiru Arooran Sugars Ltd. v. Dy. CIT decided on 26.07.2011 and stated that expenditure incurred on temporary structure such as false ceiling and office renovation does not amount to capital expenditure. The counsel for the assessee further submitted that the assessee had taken several premises on lease throughout the State of Tamil Nadu for setting up of service stations. The details of some of the premises could not be supplied to the lower authorities as they were not fully compiled at that time. Now compilation has been done, the details of expenditure can now be supplied.
5. On the other hand, Dr. S. Moharana representing the department submitted that the CIT(A) has wrongly allowed amount of Rs. 28,66,775/- out of Rs. 75,11,775/- for the assessment year 2005-06 incurred by the assessee towards construction/renovation expenses as revenue expenditure. The amount has been spent by the assessee on the leasehold premises to make it suitable to carry out business in the showrooms and service centres. The assessee has failed to show any benefit of enduring nature derived from the renovation/reconstruction on the leased out premises. The DR contended that in view of Explanation I to Section 32(1) of the Act which clearly states that any expenditure incurred by the assessee on the leased premises has to be capitalized. The expenditure incurred by the assessee for the construction of new structures, repairs, renovation of existing building has to be capitalized. In order to support his contentions, the DR relied on the judgement of the Hon’ble Supreme Court of India in the case of CIT v. Madras Auto Service (P) Ltd.  233 ITR 468, the judgement of the Hon’ble Madras High Court in the case of TVS Lean Logistics Ltd. (supra) and the judgement of the Hon’ble Delhi High Court in the case of Bigjo’s India Ltd. v. CIT  293 ITR 170.
6. The DR submitted that as regards the issues taken up by the Revenue in appeal for the assessment year 2008-09 are concerned, the first issue relates to higher rate of depreciation on windmills. The case of the assessee is covered by the order of the Chennai Bench of the Tribunal in the case of K. Ravi v. Asstt. CIT  2 ITR (Trib) 752. On the issue of unexplained cash credit made under section 68 of the Act, the DR submitted that the assessee could not furnish details to substantiate genuineness of the transactions. The DR strongly supported the orders of the Assessing Officer on this issue.
7. We have heard the submissions made by both the parties. We have perused the orders passed by the authorities below and the judgements/orders referred to by the representatives of both the sides. The issue relating to nature of expenditure incurred by the assessee on leasehold premises arises in ITA No. 1557 & 1558/Mds/2011 filed by the assessee as well as in ITA No. 1705/Mds/2011 filed by the Revenue. In ITA No. 1557/Mds/2011 the assessee has also impugned the reopening of the assessment, since the issue was not pressed by the assessee before the CIT(A), therefore, the same cannot be subject matter of adjudication before the Tribunal as well. Confronted with the situation, the counsel for the assessee made a statement that he is not pressing the issue of reopening before the Tribunal.
8. Explanation 1 to section 32(1) which was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1.4.1988 deals with the situation where the expenditure has been incurred by the assessee on construction of any structure on leasehold premises. The Explanation 1 is reproduced herein below:-
“[Explanation 1. – Where 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 structure or work is a building owned by the assessee.”
9. To fall within the ambit of Explanation 1 questions which are to be answered are :
(i) Whether the assessee is carrying on business or profession in a leased building or other rights of occupancy?
(ii) Whether the assessee has incurred any capital expenditure for the purpose of business on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement in the building.
If the answer to the aforementioned questions is in affirmative, the assessee falls within the purview of Explanation 1 to section 32(1). In the instant case, it is an admitted fact that the assessee has taken several buildings on lease for setting up of service stations. It is also undisputed that the assessee has carried out renovation, repair including flooring, false ceiling, sanitary works, partition, wall paneling, doors, cupboards etc. at the leased premises. The assessee has made certain changes/additions in the existing structures viz., construction of washing ramps, oil change & wheel alignment pit, extension of workshop shed for additional space, overhead tank, electrical works, demolition of walls and partitions, construction and sewage connection and renovation of shed to suit the norms of Maruti Udyog Ltd. All these construction and renovation activities carried out by the assessee if put on to the test of Explanation 1 would show that renovation/repair/addition 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 judgement of the Hon’ble Madras High Court in the case of TVS Lean Logistics Ltd. (supra). In the said case, the assessee had constructed a building on the leased land for the business advantage. The Hon’ble Court held that the entire cost of construction is admissible as revenue expenditure. Explanation 1 categorically states that the business or profession is carried on in a leased building and not on land. The Hon’ble High Court in para 4.4 of the judgement further held as under:-
“4.4 What constitutes a capital expenditure and what does not, to attract Expln.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.”
Thus, it is clear that the ratio laid down by the Hon’ble Madras High Court in the said judgement does not support the case of the assessee.
10. In the present case, the assessee has taken building on lease and made certain additions in the existing structure. It is not the case of the assessee where the assessee has constructed a new building on the leased land. The Hon’ble 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 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.
11. The counsel for the assessee has relied on another judgement of the jurisdictional High Court in the case of Thiru Arooran Sugars Ltd.(supra). In the said case, the Hon’ble High Court has referred to the construction of temporary structure by means of false ceiling and office renovation, which was held to be revenue in nature.
12. The Hon’ble Supreme Court of India in the case of Madras Auto Service (P.) Ltd. (supra) while dealing with a similar controversy has observed as under:-
“5. 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 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.”
Thereafter, the Hon’ble Apex Court referring to several cases decided held as under:-
“11. All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.”
13. From the above judgement, we can conclude that it is essential that the expenditure incurred on the construction of any structure on the leased premises should result in saving of the revenue expenditure at the subsequent stage. In the present case, from the pleadings of both the sides, it cannot be ascertained whether the assessee is getting enduring benefit of revenue nature from the additional structure or renovation/repairs undertaken by the assessee on the leased out premises. In our considered opinion, the case of the assessee very much falls within the ambit of Explanation 1 of section 32(1) of the Act. Therefore, both the appeals of the assessee are dismissed being devoid of merit.
14. The Revenue in ITA No. 1705/Mds/2011 for the assessment year 2005-06 has assailed the order of CIT(A) on the ground that an amount of Rs. 28,66,775/- has been allowed by the CIT(A) as revenue expenditure, whereas the said amount has been incurred by the assessee on reconstruction/renovation of the old buildings taken on lease. The CIT(A) has bifurcated the expenditure incurred by the assessee as capital and revenue. The expenditure on new construction/addition was held to be capital whereas expenditure on dismantling, demolition, electrical work, interlocking, sewage connection and renovation of existing shed was held to be revenue. We are of the considered opinion that renovation of existing shed and new electrical fittings are capital in nature. The expenditure on demolition, dismantling etc. can only be allowed as revenue. We therefore, modify the order of CIT(A) to exclude expenditure incurred on renovation of existing shed and electrical fittings from revenue and consider the same to be capital in nature. Thus, the appeal of the Revenue for the assessment year 2005-06 is partly allowed.
15. The Revenue in its appeal No.1633/Mds/2011 relevant to the assessment year 2008-09 has assailed the order of the CIT(A) on the ground that CIT(A) has erred in granting higher rate of depreciation on the windmill to the assessee. The DR has fairly conceded that the case of the assessee is squarely covered by the order of the Tribunal in the case of K. Ravi (supra). The CIT(A) in his order has referred to the said order of the Tribunal. Therefore, this ground of appeal of the Revenue is dismissed.
16. The second ground of appeal of the Revenue is with regard to addition made under section 68 of the Act on account of unexplained cash credit. A perusal of para 13 of the order of the CIT(A) shows that during the course of appellate proceedings, the assessee was able to produce documents and the details of repayment made through cheque. Even the bank confirmations were filed by the assessee before the CIT(A) showing that the cheques issued by the assessee were encashed by the respective parties. The assessee had also furnished identity of persons with complete details of addresses and the FD applications showing details. After satisfying himself with the documents, the CIT(A) has allowed the ground of appeal of the assessee. The DR could not controvert the findings of the CIT(A) on this issue. We, therefore, do not see any reason to interfere with the findings of the CIT(A) on this issue. No other issue has been raised in this appeal of the Revenue. Since both the issues are decided against the Revenue, the appeal of the Revenue for the assessment year 2008-09 is dismissed being devoid of merit.
17. In the result, both the appeals of the assessee i.e. ITA Nos. 1557 & 1558/Mds/2011 are dismissed. The appeal of the Revenue in ITA No.1705/Mds/2011 is partly allowed whereas in ITA No.1633/Mds/2011 for the assessment year 2008-09 is dismissed.