Case Law Details
RELEVANT PARAGRAPH
10. We have heard the rival submission and perused the relevant material on record in the light of precedents relied upon. The factual position has been elaborately noted in the foregoing paragraphs. To sum up the facts, it is noted that Shri Kulwant Singh Kohli was the original owner of the three shops which were given on rent to Shri Gurbaxish Singh Kohli and Gunjan Kaur Kohli.
These two persons are closely related to Shri Kuhvanl Singh Kohli as his son and daughter-in- law. The Id counsel for the assessee has fairly admittedly that no tenancy agreement order was executed between Sh Kulwant Singh Kohli on one hand and SI: Oubraxish Singh Kohli and Smt Gunjan Kaur on the other. In January, 1999 these two tenants had given the premi- s to PHPL on sub-lease. The Id counsel of the assessee admitted that no business was carried on by PHPL. In September. 2002, the assessee firm came into existence and acquired three shops from PHPL for carry on CCD on sub-lease. The assessee paid compensation of Rs. 10 lacs and divided into two parts viz Rs. 4 lacs in lieu of shop acquired from Sh Gurbaxish Singh Kohli and Rs. 6 lacs in lieu of two shops acquired from Smt Gunjan Kaur. The said compensation was paid to PHPL and as per terms of agreement, it was towards obtaining vacant and peaceful possession of the said shops. We are at loss to appreciate as to how there can be any question of paying compensation . towards vacant and peaceful possession of shops for the reasons that the giver and taker both are related to each other and even the directors of PHPL and the partners of the assessee firm are the same persons along with the other family members. The company receiving compensation of Rs. 10 lacs has the original owner S. Kulwant Singh and the first tenant Sh. Gurbaxish Singh as its directors. Then the assessee firm acquiring the possession from PHPL is constituted by the second original tenant along with other members of the family. The entire arrangement was solely between the *anuly member: and their respective concerns. There is no ioto of evidence which could show that any dispute was going on between these parties as a result of which the payment of compensation was necessitated for taking the peaceful possession. Naturally it could not have been so because of the close relationship between the family members and related concerns and all of them joining each other in one form or the other with other relatives. We, therefore, approve the findings of the Id C1T(A) by which he has accepted the AO’s stand in not concurring with the payment being made towards obtaining peaceful possession of the premises.
11. Now, turning to the main submissions or- which the Id CIT(A) has deleted the addition and the Id counsel of the assessee has focussed his submission being the payment of a sum of Rs. 10 lacs towards renovation to the rented premises carried out by PHPL, we note from the final accounts of PHPL that they had incurred capital expenditure of around Rs. 20 lacs. A case has been made out that any capital expenditure incurred by the assessee in respect of premises for which it does not have any ownership right be construed as revenue expenditure. In support of this submission, the Id counsel for the assessee has relied on the judgement of the Honourable Supreme Court in the case of Madras Auto Services (supra) which has been followed by the Honourable Bombay High Court in the case of Mcde Consultancy Pvt. Ltd. (supra). On going through the facts of the Honourable Apex court case, it is noted that the assessee obtained certain premises for 39 years under agreement of lease. As per the terms of the lease, the assessee had to spent some expenditure in the existing premises and then appropriate to itself of the material thereof without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business. The assessee constructed a new building on the said land and claimed deduction. The AO did not accept the contention of the assessee that as a result of incurring expenditure it had acquired premises at lower rate of rent. When the matter finally travelled to the Honourable Supreme Court, it was held that right from inception, the building was of the ownership of the lessor and by spending this money the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending money was that it got the lease of a new building at lower rent. The expenditure so incurred was, therefore, held to be revenue in nature. The Hon*ble Bombay High Court has followed the judgement of the Honourable Supreme Court.
12. We observe that the Taxation Law (Amendment and Miscellaneous Provisions) Act, 1986 has inserted Explanation I to sec. 32 w.e.f. 1.4.88, which reads as under:
“Where the business or profession of the assessee is curried 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. *
13. On going through the above Explanation, it became explicitly clear that where the assessee carries out repairs on certain premises taken on lease or other right of occupancy and any capital expenditure is incurred by way of renovation or extension and improvement 10 the building, then sec. 32 shall apply as if the said structure or the building is owned by the assessee. The effect of this insertion is that any capital expenditure incurred by the assessee on any premises acquired otherwise than on Ownership basis, has to be treated as a building owned by such person and depreciation is allowable on it under section 32 as if it is building Owned by him. There is no dispute on the (act and the id. AR has forcefully contend* that the expenditure incurred by PHPL was capital in nature and had been capitalised in the accounts. Even if we accept the contention of the lc AR for a moment, that the terms of the tripartite agreements are to b regarded as not happily drafted and the intention was to make payment ii lieu of the renovation work carried out by HIPL to the premises, against position remains the same in so far as the deductibility of the expenditure Rs. 10.00 lacs in the hands of the assessee is concerned. If the payment was not towards the acquisition of the premises, in which case, it is no deductible but was towards the partial reimbursement of the capital expenditure incurred by PHPL on the complete renovation of the premise as stated on behalf of the assessee, the amounts continues to assume character of capital expenditure, which is not deductible in terms of Explanation 1 to sec. 32. Moreover there is one very significant factor which was prevalent in the case of Madras Auto Service (supra) but is missing ii our case, being the payment resulting in to lower rent becoming payable b; the assessee. It has not been the case of the assessee at any stage proceedings starting from the AO that by paying the compensation is acquired the premises at a lower rent. It is obviously so because the tripartite agreements talks of making the payment of compensation of obtaining the vacant and peaceful possession of the premises. Our view in; fortified by the judgement of the Honourable Delhi High Court in Bigjo’s India Ltd. Vs. CIT (2007) 293 ITR 170 (Del) in which the capital expenditure incurred on the licenses premises was held to be capital in nature and not deductible as revenue. Whether we go by the terms of agreement as per which the payment was for obtaining the vacant and peaceful possession or by treating it as a payment for the renovation of the premises acquired on lease, the amount paid as compensation cannot be allowed as revenue expenditure. In view of the above legal position, we are satisfied that the Id CIT(A) erred in allowing deduction of Rs. 10 lacs by treating the amount as revenue in nature.
