High Court Of Bombay : Panaji Bench
CIT vs. Hede Consultancy (P) Ltd. & Anr.
Sections 37(1)
Asst. Year 1988-89
V.C. Daga & P.V. Hardas, JJ.
Tax Appeal No. 3 of 2002
10th June, 2002
Counsel Appeared
S.R. Rivonkar, for the Appellant : M.S. Sonak, for the Respondent
JUDGMENT
V. C. Daga, J. :
This tax appeal has been filed at the instance of the Revenue setting out certain questions of law. For the sake of brevity, we reframed and modified the question reading, as under : “Whether, on the facts and in thecircumstances of the case, the expenditure incurred by the assessee in converting the godown taken on lease into office premises could be termed as revenue expenditure or capital expenditure ?”
Facts in brief
2. The brief facts pertaining to the case are as under : The assessee is a private limited company carrying on a business at various places, inter alia, at Mumbai. The assessment year involved is 1988-89. The assessee filed its return on 30th June, 1988, declaring taxable income of Rs. 20,267. The assessee spent Rs. 9,20,436 for converting the godown premises into office by renovating it, incurring expenses on interior decoration, which resulted in replacement of existing roof with that of cement sheets, replacement of floor with that of marble, plastering of walls and construction of bathrooms and W.C., etc. The assessee claimed the said expenditure of Rs. 9,20,436 as revenue expenditure and thereby refused to treat it as capital expenditure, since in his belief it was towards repairs and maintenance of the said premises taken on rent by the assessee. In response to the notice under ss. 142(1) and 143(2) of the IT Act, 1961 (hereinafter referred to as the “IT Act”), the assessee furnished variousdetails.However, the AO disallowed the claim and allowed depreciation on the said amount under s. 32 of the IT Act holding the said expenditure to be of capital in nature. The appeal was carried at the instance of the assessee to the Commissioner of Income-tax (Appeals), [“the CIT(A)” for short]. The CIT(A) by order dt. 31st Oct., 1991, allowed 1/6th of the rental value as the maximum possible amount attributable towards repairs and the balance of the amount was treated as capital expenditure. Being aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal [the “Tribunal” for short]. The Tribunal by order dt. 28th Sept., 2001, deleted the additions made by the AO, holding that the expenditure incurred on the rented building for the renovation or alteration is, ordinarily, of a revenue in nature. Being aggrieved by the aforesaid order of the Tribunal, the Revenue is in appeal before us under s. 260A of the IT Act and has raised the question of law set out hereinabove.
Submissions
3. Learned counsel appearing on behalf of the Revenue has contended that looking to the nature and extent of the expenditure incurred, it could not be said to be of revenue in nature. He submits that looking to the items of expenditure, it can be seen that the assessee has converted a godown into a well-furnished decorated costly looking office providing facilities of W.C. and bathroom, using marble and other costly items so as to provide other modern facilities. Thus, in his submission, the expenditure incurred cannot be termed, in any case, as revenue in nature, because the assessee has created new office premises, though in a rented building. The expenses mentioned in the bills cannot be taken as recurring, but they are expected to work-for a long period, as such, he submitted that the entire expenditure is of capital nature and by no stretch of imagination it could be treated as of a revenue-nature.
4. Per contra, learned counsel appearing for the assessee submitted that deletion made under s. 37(3A) was rightly made by the Tribunal. In his submission, the Tribunal rightly appreciated that the amount spent by the assessee on alteration and addition is allowable as revenue expenditure. He relied on the decision of the Bombay High Court in the case of Nila Products Ltd. vs. CIT (1983) 36 CTR (Bom) 405 : (1984) 148 ITR 99 (Bom) and also placed heavy reliance on the judgment of the apex Court in the case of CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC). He also contended that renovation of office premises and cost of panelling walls with plywood is revenue expenditure as held in CIT vs. J. K. Industries (P) Ltd. (1980) 125 ITR 218 (Cal). Alternatively, he submitted that even if such repairs are assumed to be of capital nature, even then the same are deductible as held in the cases of Instalment Supply (P) Ltd. vs. CIT (1984) 40 CTR (Del) 313 : (1984) 149 ITR 52 (Del) and Allied Metal Products vs. CIT (1981) 25 CTR (P&H) 371 : (1982) 137 ITR 689 (P&H). He prayed for rejection of the appeal with costs.
Consideration
5. In computing the income chargeable under the head “Profits and gains of business or profession”, s. 37 of the IT Act, enables the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid out for the purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure. In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well-nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants ; but as masters they tend to be over-exacting. One of the early pronouncements which serves to indicate a broad area of distinction is City of London Contract Corporation Ltd. vs. Styles (1887) 2 Tax Cases 239 (CA), where Bowen L.J. indicated that the outlay on “acquisition of the concern” would be capital while an outlay in “carrying on the concern” is revenue. In Vallambrosa Rubber Co. Ltd. vs. Farmer (Surveyor of Taxes) (1910) 5 Tax Cases 529 (C. Sess), Lord Dunedin suggested as “not a bad criterion” the test that if the expenditure is “once for all”, it is capital and if it is “going to recur every year”, it is revenue.
6. In Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC), the apex Court observed: “If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure . . . The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure.”
7. The apex Court in the case of CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) had an occasion to deal with an identical question on similar facts. In that case, the assessee was a company carrying on the business of sale of motor parts. Its head office was at Madras. It had a branch at Bangalore. Under the agreement of lease the assessee obtained certain premises for a period of thirty-nine years at Bangalore. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its own expense the existing premises and appropriate to itself all the material, thereof, without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business as per the plan approved by the lessors. Under cl. 2 of the lease deed, the lessee was required to pay a rent of Rs. 1,000 per month for the first fifteen years, Rs. 1,500 per month for the next ten years, Rs. 1,650 per month for the next ten years and Rs. 2,000 per month for the remaining years. The lease deed further provided that the new construction shall, right from the commencement of the work, be the property of the lessors and upon completion of the work of construction the lessee would have only the right to be a tenant for a period of 39 years under the existing lease, subject to the payment of rent and observation of other terms and conditions of the lease. The lessee would not be entitled under any circumstances to any compensation whatsoever on account of its putting up the new construction in place of the old. Acting under the lease agreement, the assessee invested a sum of Rs. 1,62,835 in the previous year relevant to the asst. yr. 1968-69 and Rs. 50,937 during the succeeding year in constructing a new building on the said land. The assessee claimed before the ITO the expenditure of the said sums of Rs. 1,62,835 and Rs. 50,937 in the relevant assessment years as capital loss. In the alternative, the assessee claimed deduction of the payments as business expenditure or as extra rent for the lease. Ultimately, the Tribunal held that the expenditure of the said two amounts for the construction of a new building was in the nature of business expenditure for proper carrying on of the business of the assessee. The Tribunal had, therefore, treated these amounts as revenue expenditure. This was upheld by the High Court. On appeal to the Supreme Court, while dismissing the appeal, the apex Court held that right from inception, the building was of the ownership of the lessor. 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 expenditure was, therefore, treated as revenue expenditure. The apex Court while dealing with the said question also laid down the general principles applicable in determining whether expenditure is capital or revenue expenditure. They are as under : “The general principles applicable in determining whether a particular expenditure is capital or revenue expenditure are as follows : (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; (2) 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; (3) 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.” The apex Court while dealing with this question relied on the following cases : (i) Lakshmiji Sugar Mills Co. (P) Ltd. vs. CIT (1971) 82 ITR 376 (SC), wherein the assesseecompany was carrying on the business of manufacture and sale of sugar. It paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane-producing centres and the sugar factories of the assessee. The roads remained the property of the Government. The apex Court held that the expenditure was not of capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee’s business. The expenditure was incurred for the purpose of facilitating the running of the assessee’s motor vehicles and other means employed for transportation of sugarcane to its factories. (ii) In the case of L H. Sugar Factory and Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC), the assessee was carrying on the business of manufacture and sale of sugar. It had its factory in U.P. The assessee paid a contribution towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme. The question was whether this amount was deductible in computing the assessee’s profits.
The apex Court held that it was, because although the advantage secured was of long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee; nor was there any profit to or expansion of the profit-making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, held to be expenditure of revenue nature. (iii) In another case CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC), the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to the railway station. The amounts expended for these purposes were held to be revenue expenditure since the installation and accessories were the assets of the municipality and not of the assessee. The expenditure, therefore, was held to be not of capital nature. The advantage secured by the respondent was immunity from liability to pay municipal rates and taxes for a period of 15 years. The apex Court said that had these liabilities been paid the payment would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capital. (iv) In the case of CIT vs. Bombay Dyeing and Manufacturing Co. Ltd. (1996) 132 CTR (SC) 217 : (1996) 219 ITR 521 (SC), the company contributed to the State Housing Board certain amounts for construction of tenements for its workers. The tenements remained the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, constituted legitimate business expenditure. As the assessee-company acquired no ownership rights in the tenements, the apex Court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contented labour force. 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. As in the present case also since the assets created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern business premises at a low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure. No fault can be found with the findings recorded by the Tribunal. In the result, the appeal is dismissed, with no order as to costs.
[Citation : 258 ITR 380]
