Karnataka H.C : Any expenditure incurred for civil work by a lessee in respect of leased premises, without any further proof, cannot be said to be a capital expenditure or revenue expenditure; it is necessary to find out nature of construction put up

High Court Of Karnataka

CIT vs. H.P. Global Soft Ltd.

Section : 37(1)

N. Kumar And Ravi Malimath, JJ.

I T Appeal No. 805 Of 2006

August 2, 2011

JUDGMENT

N. Kumar, J. -This appeal is by the Revenue challenging the order passed by the Tribunal which held that the expenditure incurred by the assessee by way of electrical work, civil work and interior decoration is in the nature of the revenue expenditure and therefore directed the Assessing Officer to allow the entire expenditure under this head as revenue as claimed by the assessee.

2. The assessee is a listed public company and engaged in the manufacture, sale and service of various kinds of computer, development sale and export of computer software, etc. They incurred certain expenditure like electrical works, civil works, air conditioning, wooden partition and fixtures on the leasehold properties and claimed it as revenue expenditure. The Assessing Officer called for the details and justifications for the claim of such expenditure. The assessee furnished the details called for. After furnishing the particulars, the assessee contended that the expenditure incurred are in respect of leased properties and they do not give to the assessee the benefit of enduring nature and the amount spent was for business purpose and not for acquisition of the capital asset. The particulars given by the assessee reads as under:

Sl. No. Party’s Name Nature of work Amount
1. Vinod Interior Decorators Civil Work 1,82,342
2. Gopinath & Katakam Architect Tees 14,786
3. Power System Need Civil Work 21,998
4. Micron Electrical Electrical Work 59,770
5. Calcutta 32,401
6. Varun/Vinod Interiors Wooden Partings 17,798
7. Da Civil Work 37,665
8. Accent Vertical Blinds 45,991
9. Vinod Interior Decorators Civil Work 2,33,441
10. Sahyadri Construction Civil Work 95,715
11. Paramhamsa Electricals Electrical 2,69,284
12. Sahyadri Constructions Civil Work 3,46,538
13. Sahyadri Constructions Civil Work 2,32,422
14. Salian Nagrath Certification Work 11,059
15. Paramhamsa Electricals Electrical 4,11,649

The Assessing Officer on consideration of the aforesaid material, held that the expenditure is certainly of enduring nature and it should have been treated as capital expenditure. He relied on the judgment of the Karnataka High Court in the case of Veeraghaven v. CIT [1967] 65 ITR 63 and rejected the claim of the assessee. In fact, for the assessment year 1992-93 also, almost identical and similar view was taken by the Department and therefore he held that the said expenditure is not a revenue expenditure but capital expenditure. Aggrieved by the same, the assessee preferred an appeal. The appellate Commissioner on reconsideration of the aforesaid material was of the view that as no material was brought on record either by the assessing officer or the assessee to show that the expenses incurred were in the nature of replacement expenses i.e., electrical installation and civil work were carried out with the purpose of making repairs to the existence units, upheld the order of the assessing authority. He also took note of the copies of the bills and pointed out that the said bills show that expenses of electrical installation and civil works were for the purpose of the office premises at Bangalore and therefore after taking note of the various judgments, he was of the view that expenses incurred were on account of the new office premises on the leasehold property of the assessee and such expenses brought into existence a new asset which gave an enduring benefit to the assessee and therefore he upheld the order of the assessing authority. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal accepted the case of the assessee. In view of the fact that the expenditure was incurred on redesigning and restructuring the leasehold property by providing better fittings, electrical work, civil works, etc., to make the premises suitable for business needs and for carrying on the business more profitably and efficiently, the Tribunal was of the opinion that the nature of repairs are revenue expenditure and does not bring any benefit of enduring nature to the assessee and the advantage obtained by the assessee is in the commercial sense, i.e., for the purpose of business and not for the acquisition of capital assets. According to the Tribunal, the issue was covered by the decision of the Delhi High Court reported in 149 ITR 52 and therefore set aside the order of the assessing authority as well as the appellate Commissioner and held that it amounts to a revenue expenditure and the assessee is entitled to the benefit of deduction. Aggrieved by the same, revenue is before this Court.

3. This appeal came to be admitted on 10-08-2007 to consider the following substantial question of law:

“Whether the Tribunal is right in holding that a sum of Rs. 22,23,057/- claimed by the assessee as a revenue expenditure for improving the leasehold building spent on electrical work, civil work, air conditioning, architect fee etc., cannot be treated as capital in nature as held by the Assessing Officer, but should be allowed as a revenue expenses as it was incurred for business purpose?”

4. Learned counsel for the Revenue assailing the impugned order contended that having regard to the amount involved and the nature of work, there is an improvement to the leasehold premises, which is enduring in nature. Therefore, the Assessing Officer was justified in treating it as Capital Expenditure. The Tribunal without properly appreciating the material on record, erred in holding that the said expenditure is in the nature of revenue expenditure and therefore, he submits that, a case for interference is made out.

5. Per contra, the learned Senior Counsel appearing for the Assessee contended that the entire expenditure is incurred in respect of leased premises of which the assessee is not the owner. These expenditures were incurred for making the lease premises fit for carrying on business, which is in the nature of civil works, electrical work, interior decoration etc., it amounts to revenue expenditure and therefore, no case for interference is made out.

6. In support of their contentions, the learned counsel for both the parties have relied on several judgments.

7. The Apex Court in the case of Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 dealing with the aforesaid question held that, ‘the authorities both in this country and in England have pointed-out the difficulties in formulating precise rules for distinguishing capital expenditure from revenue expenditure. The line of demarcation has been found to be very thin. Certain broad tests have, however, been laid down, and of them the test suggested by Viscount Cave L.C. in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155 (HL) appears to have been largely accepted in this country and their Lordships have quoted few lines from Viscount Cave’s Judgment, which are as under:

“When an expenditure is made….. with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.”

8. The Apex Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 explaining the distinction between the Capital Expenditure and Revenue Expenditure held as under:-

“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. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business, it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure.”

Ultimately, the Court held that:

“Each case turns on its own facts”.

9. The Supreme Court in the Assam Bengal Cement Co. Ltd. (supra) at Para-5 has held as under:-

“5. This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. 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. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the IT Act. The question has all along been considered to be a question of fact to be determined by the IT authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles.

The expression “once and for all” used by Lord Dunedin has created some difficulty and it has been contended, that where the payment is not in lump sum but in instalments, it cannot satisfy the test. Whether a payment be in a lump sum or by instalments, what, has got to be looked to is the character of the payment. A lump sum payment can as well be made for liquidating certain recurring claims which are clearly of a revenue nature, and on the other hand payment for purchasing a concern which is prima facie an expenditure of a capital nature may as well be spread over a number of years and yet retain its character as a capital expenditure (per Mukherjee, J., in CIT v. Piggot Chabman & Co. [1949] 17 ITR 317 (Cal). The character of the payment can be deternubed by looking at what is the true nature of she asset which has been acquired and not by the fact whether it is a payment in a lump sum or by instalments. As was otherwise put by Lord Greene, M.R., in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1942] 2 KB 184: [1943] 11 ITR (Supp) 10 (CA):

“The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is short lived. A payment of this character appears of a lease, which is admittedly not deductible”.

The case of Tata Hydro-Electric Agencies Ltd. v. CIT (supra), affords another illustration of this principle. It was observed there:

“If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business”.

The expression “once and for all” is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses.

The expression “enduring benefit” also has been judicially interpreted. Romer, L.J., in Anglo-Persian Oil Co. Ltd. v. Dale (supra ) agreed with Rowlatt J., that by enduring benefit is meant enduring in the way that fixed capital endures.

“An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date”.

Latham, C.J., observed in Sun Newspapers Ltd. & Associated Newspapers Ltd. v. Federal Commr. of Taxation (supra):

“When the words ‘permanent’ or ‘enduring’ are used in this connection it is not meant that the advantage which will be obtained will last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole”…e.g… “enlargement of the goodwill company”-: permanent improvement in the material or immaterial assets of the concern.”

To the same effect are the observations of Lord I Greene, M.R., in Henriksen (H.M. Inspector of I Taxes) v. Grafton Hotel Ltd. above referred to.”

10. The Apex Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 /3 Taxman 69 held as under:-

“There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”

11. The Apex Court in the case of CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468 / 99 Taxman 575 has laid down the general principles applicable in determining whether particular expenditure is capital or revenue expenditure. The Court in the above case has approved the standard tests laid down in the Atherton v. British Insulated & Helsby Cables Ltd. (supra) referred to supra, which was summarized as under:-

“(i) 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.

(ii) 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.

(iii) 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.”

12. The Delhi High Court in the case of Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 52 / 17 Taxman 172 has held as under:-

‘In our opinion, the Legislature has used different languages in the provisions of S.30(a)(i) and 30(a)(ii). A tenant is entitled to the deduction of the amount spent on account of the cost of the repairs to the premises when he has undertaken to bear the cost of the repairs. If the amount is spent by the assessee otherwise than as a tenant, the amount paid by him on account of only “current repairs” is allowable. The latter provision applies to the assessee occupying the premises otherwise than as a tenant, as an owner or mortgagee in possession, and in those cases the deduction is restricted in respect of the “current repairs” to the premises. So far as a tenant is concerned, it is the “repairs” to the premises and if the assessee had undertaken to bear the cost of the repairs to the premises, then those repairs may be even in the nature of a capital expenditure. Such an expenditure incurred by the assessee if it is in relation to the commercial activity would be in the nature of revenue expenditure’.

13. Again the Delhi High Court in the case of CIT v. Hi Line Pens (P.) Ltd. [2008] 306 ITR 182/ 175 Taxman 132 at para 16 has held as under:-

‘There is a clear distinction between the expression “repairs” and the expression “current repairs”. It is obvious that the word “repairs” is much wider than the expression “current repairs”. This fact has also been taken note of by the Supreme Court in the case of Saravana Spinning Mills (P.) Ltd. [(2007) 293 ITR 201 ]. The expression “current repairs” is much more restricted than the word ‘repairs” because the latter is qualified by the word “current”. What the assessee has done in the present case has been construed to be repairs by the Tribunal as a finding of fact. It has not brought about any new asset and more importantly it was not the intention of the assessee to bring about any new capital asset. The expenses that were incurred by the assessee were towards repairing the premises taken on lease so as to make it more conducive to its business activity. Such expenses would clearly fall within the expression of repairs to the premises as appearing in section 30(a)(i). The Legislature has made a distinction between expenses incurred by a tenant for “repairs” of the premises and expenses incurred by a person who is not a tenant towards “current repairs” to the premises. This distinction has to be given meaning. Perhaps the logic behind the distinction was that a tenant would, by the very nature of his status as a tenant not undertake expenditure as would endure beyond his likely period of tenancy or create a new asset whereas, an owner may undertake expenditures so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs. The deduction was therefore, limited to expenditure on “current repairs” only. It follows, therefore, that the cost of repairs that have been incurred by a tenant in respect of such premises would have to be allowed under section 30(a)(i). The question of disallowing such an expenditure and relegating the assessee to claim depreciation under section 32 does not arise. The assessee has not claimed depreciation. It has claimed deduction under section 30(a)(i). Once the assessee’s claim falls within that provision there is no question of considering the question of applicability of section 32.’

14. The Delhi High Court in the case of CIT v. Escorts Finance Ltd. [2006] 155 taxman 559 has held at Para-4 as under: –

“We consider that the amount spent on providing wooden partition, painting of leased premises, carrying out repairs so as to make the premises workable, to replace glasses etc. has to be considered as revenue expenditure. It is for the businessman to see as to in what manner the leased premises is to be maintained and what are the necessary repairs which are required to be done. We consider that all such expenditures which were incurred on painting, polishing of the floor providing wooden panelling etc. is revenue expenditure and the nature of repairs is not of an enduring character so as to characterise as capital expenditure”.

15. The authorities both in this country and in England have pointed out the difficulties in formulating precise rules for distinguishing capital expenditure from revenue expenditure. The line of demarcation has been found to be very thin. Certain broad tests have, however, been laid down. Each case turns on its own facts. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. When an expenditure is made for acquiring or bringing into existence an asset or an advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. In cases where the expenditure is made for the initial outlay, or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. 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. 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. Enduring benefit is meant enduring in the way that fixed capital endures. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Similarly, where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment, such expenditure would be revenue expenditure. If for running the business or working it with a view to produce the profits, expenditure is incurred, it is a revenue expenditure. The Legislature has made a distinction between expenses incurred by a tenant for “repairs” of the premises and expenses incurred by a person who is not a tenant towards “current repairs” to the premises. This distinction has to be given a meaning. Perhaps the logic behind the distinction was that a tenant would, by the very nature of his status as a tenant, not undertake expenditure as would endure beyond his likely period of tenancy or create a new asset whereas, an owner may undertake expenditures so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs. It follows, therefore, that the cost of repairs that have been incurred by a tenant in respect of such premises would have to be allowed under Section 30(a)(i). The question of disallowing such an expenditure and relegating the assessee to claim depreciation under section 32 does not arise. The amount spent on providing wooden partition, painting of leased premises, carrying out repairs so as to make the premises workable, to replace glasses etc. has to be considered as revenue expenditure. It is for the businessman to see as to in what manner the leased premises is to be maintained and what are the necessary repairs which are required to be done. All such expenditures which were incurred on painting, polishing of the floor, providing wooden panelling etc. is revenue expenditure and the nature of repairs is not of an enduring character so as to characterise as capital expenditure.

16. In the instant case, the expenditure incurred by the lessee can be broadly categorised as expenditure incurred towards civil works, electrical works and interior decoration. If a tenant or lessee incurs expenditure by way of civil work in respect of a property which he does not own, that by itself would not render the said expenditure as a revenue expenditure. In fact, Explanation I to section 32 throws some light on this aspect, which reads as under:-

Explanation I – 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 his 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 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.”

17. Where 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 or improvement of the building, then the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Therefore, for the purpose of section 32, which provides for depreciation, if the condition No. 1 is satisfied by a legal fiction, the lessee becomes the owner of the structure constructed on lease premises. Therefore any expenditure incurred for civil work by a lessee in respect of the lease premises, without any further proof cannot be said to be a capital expenditure or revenue expenditure. In order to find out the nature of expenditure, it is necessary to find out the nature of construction put-up, the purpose of construction and the use to which the said construction is put-up and also if it is a case of repair, replacement, addition or improvement has to be gone into. It is only on the aforesaid material, then keeping in mind the principles enunciated in the aforesaid judgments by the Apex Court and keeping in mind section 37 and section 32 of the Act, one has to determine whether the said expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. In fact, in this case, such an exercise has not been done even though the Assessing Authority called upon the assessee to produce material to show the nature of civil work, electrical work, and interior decoration. Except producing the bills showing the purchase of materials no other information was placed for consideration. The assessee has not stated the nature of civil works constructed, the nature of interior decoration made to the leasehold premises and also the nature of electrical work undertaken. In the absence of that material and without proper application of mind, the Assessing Authority proceeds on the footing that the said expenditure constitutes a capital expenditure and therefore, the assessee is not entitled to the benefit of deduction and the assessee is only entitled to the benefit of depreciation under section 32 of the Act. At the same time, the Tribunal without going into the question as to the nature of civil work, electrical work and interior decoration done to the lease premises has proceeded on the assumption that it constitutes a revenue expenditure. Therefore, both the authorities have come to opposite conclusions without applying their minds to the facts of the case. Therefore, both the findings are unsustainable. The findings recorded by all the three authorities on this aspect require to be set aside and the matter is to be remanded to the assessing authority to go into the matter afresh in the light of the observations made above and also in the light of the materials to be furnished by the assessee before him after notice. That would meet the ends of justice. Hence, we pass the following order.

18. The order passed by the Assessing Officer, Appellate Commissioner and the Tribunal insofar as the expenditure incurred by the assessee in a sum of Rs. 22,33,057/- is hereby set aside and the matter is remanded to the assessing authority to consider whether the said expenditure is revenue expenditure or capital expenditure and then grant such relief to the assessee to which he is entitled to in law. In view of the same, the substantial question of law framed in this appeal is not answered. The parties to bear their own costs.

[Citation : 349 ITR 462]

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