High Court Of Bombay
CIT, Central-II, Mumbai vs. Talathi and Panthaky Associated (P.) Ltd.
Assessment Year : 2003-04
Section ; 30, 32
M.S. Sanklecha And Dr. D.Y. Chandrachud, JJ.
IT Appeal No. 4208 Of 2009
January 30, 2012
JUDGMENT
1. This appeal by the Revenue raises the following substantial question of law :
“(a ) Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that cost of repair/reconstruction of the tenanted premises is revenue in nature and allowable as deduction u/s. 30(a)(1) and thereby erred in deleting the disallowance made by the A.O. treating the same as capital in nature?”
2. The appeal is accordingly admitted on the aforesaid question and is taken up for hearing and final disposal by consent.
3. The assessee in the present case was a tenant in a building by the name of Shriniketan at Worli and was in the occupation of an area admeasuring 5,000 sq. ft. The building was declared by the Municipal Corporation to be unsafe for occupation and an eviction notice was served on the occupants. A suit was instituted on the Original Side of this Court in a partition dispute between the owners of the property. On 13 February 1978 the Court Receiver was appointed as Receiver and the assessee being a tenant in the building continued to pay rent to the Receiver. On 12 March 1999 Consent Terms were arrived at in the suit. A developer came to be impleaded as a party Respondent and was a party to the Consent Terms. Under the Consent Terms the developer agreed to repair and reconstruct the building at his costs. The developer agreed to handover a certain area in the newly constructed and renovated building to the co-owners. Under Clause 8 of the Consent Terms the developer assumed the obligation of negotiating and settling with the tenants and occupants of the building and to either offer them alternate accommodation or to relocate them in the repaired building. The Court Receiver was to execute a conveyance or a long term lease of the property in favour of the co-operative society of the owners and/or tenants of the building. The Consent Terms contemplate that either a co-operative society, a limited company or a condominium comprising of the tenants, occupants and co-owners shall be formed. On 6 April 1999 terms were arrived at between the developer and the assessee, recorded in a communication which was signed by both the parties. Under the agreement the tenancy of the assessee in respect of the sixth floor presently in its possession was confirmed; and the assessee assumed an obligation to contribute a sum of Rs. 1.50 Crores for the work of repair and restoration of the structure. The agreement envisages that there would be no increase in the rent payable by the assessee which continued to be Rs. 11,300/- per month.
4. In respect of the assessment proceedings for Assessment Year 2003-04 an order of assessment was passed by the Assessing Officer on 29 December 2005. The Assessing Officer held that the assessee secured rights for an area of 5,000 sq. ft. on payment of a sum of Rs. 1.50 Crores and the assessee was to become a member of a society or company. This according to the Assessing Officer would constitute deemed ownership of the premises. The Assessing Officer came to the conclusion that the expenditure of Rs. 1.50 Crores was of a capital nature and had to be disallowed. In appeal, the CIT (Appeals) reversed the view of the Assessing Officer and following inter alia the judgment of the Supreme Court in CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468 / 99 Taxman 575 held that the assessee had not acquired any capital asset and the expenditure was allowable as revenue in nature. This view has been affirmed by the Tribunal by its impugned decision rendered on 9 April 2009. The Tribunal has followed a decision of its Delhi Bench in another case, besides adverting to the judgment of the Supreme Court in Madras Auto (supra ).
5. Counsel appearing on behalf of the Revenue submits that –
(i )The assessee has obtained a benefit of an enduring nature upon the reconstruction of the building in which the assessee became entitled to possession of premises of an equivalent area on a tenancy basis;
(ii ) The assessee was and continues to be a statutory tenant and there was no reason for the assessee to make a payment of Rs. 1.50 Crores otherwise than to secure an asset of an enduring nature;
(ii ) The assessee would be entitled to become a member of the cooperative housing society to whom the title would be transferred by the erstwhile co-owner.
6. On the other hand, counsel appearing on behalf of the assessee submitted that in the present case –
(i ) The ownership of the structure or any part thereof does not stand transferred to the assessee and the assessee continues to be the tenant of the premises on the same monthly rent of Rs. 11,300/- for an area admeasuring 5,000 sq. ft. as before;
(ii ) The assessee by making a contribution of Rs. 1.50 Crores for the cost of renovation obtained a commercial revenue advantage of a right to continue in premises of an equivalent area on the same rent of Rs. 11,300/- per month which would work out to approximately to Rs. 2.26 per sq. ft.;
(ii ) Under the agreement which was arrived at between the assessee and the developer the assessee does not acquire title to the premises, but continues to remain a tenant in the new structure. The case of the assessee would be governed by the decision of the Supreme Court in Madras Auto. Service (P.) Ltd. (supra ).
7. The issue as to whether expenditure incurred by an assessee is of a revenue or capital nature has fallen for determination in various contexts, but in all decisions particularly of the Supreme Court what has been emphasised is that the matter has to be looked at from a commercial point of view. In Madras Auto Service (P.) Ltd. (supra ) the assessee obtained certain premises under an agreement of lease for a period of thirty nine years. Under the terms of the agreement, the assessee had a right to demolish the existing premises and to construct a new building thereon for the purposes of its business. The lease deed stipulated that the new construction shall continue to be the property of the lessor and the assessee as the lessee would only have a right to be a tenant for a period of thirty nine years subject to the payment of rent and the observance of other conditions. The Supreme Court noted that the advantage which the assessee obtained by constructing a building which belonged to someone else was the benefit of a long lease on a concessional rate at a lower rent. The saving in expenditure was the saving in revenue expenditure in the form of rent. In defining as to whether the character of the expenditure is of a revenue or capital nature the Supreme Court emphasised (following its earlier decision in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 that expenditure may be treated as properly attributable to capital when it is made not only once for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If a lump sum payment gets rid of an annual business expense chargeable against revenue, the lump sum payment should be regarded as a business expense. Contrariwise if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. The Supreme Court noted that by expending money for the purposes of construction, the assessee did not acquire any capital asset and the only advantage which it had obtained was the lease of a new building at low rent. After adverting to the earlier judgments of the Court in Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1971] 82 ITR 376 (SC), L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293/ 4 Taxman 5 (SC) and CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 /38 Taxman 110A (SC) the Supreme Court observed as follows :
“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.”
8. In Madras Auto Service (P.) Ltd. (supra ) the assessee had in fact incurred the entire cost of construction of a new building but obtained no title to the new construction. The benefit which the assessee obtained was a long lease of thirty nine years on low rent. The Supreme Court held that the asset which was created belonged to someone else. The assessee was held to have obtained an enduring business advantage for the purpose of conducting the business profitably and more successfully, thus saving a considerable amount of revenue expenditure over the term of the lease. In the present case, there is a concurrent finding of fact both by the CIT (Appeals) and affirmed by the Tribunal that the assessee was and continues to be a tenant. The character of the occupation of the assessee has not been altered. The assessee by contributing an amount of Rs. 1.50 Crores to the reconstruction of the building has obtained an enduring advantage but nonetheless of a commercial nature of securing an equivalent area on the same rent of Rs. 11,300/- in the new structure. The ownership of the new structure has not been transferred to the assessee nor has the assessee acquired any capital asset. The case, therefore, cannot be distinguished from the situation which arose before the Supreme Court for its decision in Madras Auto Service (P.) Ltd. (supra ) on any principled basis.
9. The judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra ) has been followed by a Division Bench of this Court in CIT v. Hede Consultancy (P.) Ltd. [2002] 258 ITR 380/[2003] 127 Taxman 597 .
10. At this stage, it would be necessary to note that the decision of the Supreme Court in Madras Auto Service (P.) Ltd. (supra ) arose in relation to Assessment Year 1968-69 which was prior to the insertion of Explanation I to Section 32 of the Income Tax Act 1961. Explanation I has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1 April 1988. Explanation I stipulates that 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 the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation I is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation , an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32, if the stipulations and conditions set out in the Explanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasised is that the explanation operates in a situation where capital expenditure is incurred by the assessee. Unless the expenditure is of a capital nature, there would be no occasion to apply the deeming fiction that is carved out by Explanation I. In the present case, for the reasons that we have already indicated and following the judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra ), we have arrived at the conclusion that the assessee had not incurred any expenditure of a capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises. By contributing an amount of Rs. 1.50 Crores towards the reconstruction or as the case may be renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature.
11. Counsel appearing on behalf of the assessee submitted that in the event that this Court were to hold that the expenditure is of a capital nature, in that event the assessee would have submitted in the alternative that the assessee would be entitled to the benefit of Section 30(a)(i) since the period to which the appeal relates is prior to the insertion of the Explanation to Section 30 by the Finance Act of 2003 with effect from 1 April 2004. In the view which we have taken we have arrived at the conclusion that the expenditure was of a revenue nature. The decision of the Tribunal, which confirms the view taken by the CIT (Appeals) that the expenditure was of a revenue nature does not fall for any interference in this appeal. For the aforesaid reasons, we answer the question of law by holding that the cost of repair/reconstruction of the tenanted premises was of a revenue nature and was legitimately allowable as and by way of deduction. We do not find any error in the judgment of the Tribunal. The question of law is accordingly answered in the aforesaid terms.
There shall be no order as to costs.
[Citation : 343 ITR 309]
