Commissioner of Income Tax v. M/s. TVS Lean Logistics Ltd.7

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 27.6.2007CORAMTHE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJAT.C.(A) Nos.876 & 877 of 2007 Commissioner of Income TaxAppellant in Chennai...both appealsVs.M/s. TVS Lean Logistics Ltd.7B, West Veli StreetRespondent in Madurai 625 001...both appeals-----Appeals under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal, Madras 'C'Bench dated 31.10.2006 in ITA Nos.2692 & 2693/Mds/2005 for theassessment years 2001-02 and 2002-03 against the order of the Commissioner of Income Tax (Appeals I) Madurai dated 21.9.2005 inITA NO. 40 and 243/2004-05 for the Assessment year 2001-02 and2002-03 respectively and assessment order in PA NO. AABCT 2536QDATED 29.3.2004 and 7.2.2005.-----For Appellant: Mrs. Pushya Sitaraman, Sr.S.C.-----J U D G M E N T(Delivered by P.D.DINAKARAN,J.)The Revenue has preferred these appeals on a vexedsubstantial question of law as to whether the expenditure onconstruction of building in a leasehold premises would amount torevenue expenditure, contrary to the clear provisions of Explanation 1 to Section 32(1) of the Income Tax Act, under thefollowing facts and circumstances of the case.2.

The relevant assessment years are 2001-02 and 2002-03respectively. The assessee claimed the expenditure incurred by iton construction of a building, concededly on leasehold land, as https://hcservices.ecourts.gov.in/hcservices/ revenue in nature. But, the Assessing Officer treated it ascapital expenditure by orders dated 23.3.2004 and 7.2.2005respectively. Against the said orders, the assessee preferredappeals, which were, by common order dated 21.9.2005 dismissed bythe Commissioner, upholding the order of the Assessing Officer. 2.

Contending that Explanation 1 to Section 32(1) of the Act would cover the situations of construction on premises takenon lease, since the assessee was not the owner of the building, the expenditure could only be treated as revenue in nature, theassessee preferred further appeals before the Tribunal. Appreciating the contention made on behalf of the assessee, the Tribunal allowed the appeal and held that the expenditure incurredby the assessee on the construction of the building on theleasehold land was not attracted by Explanation 1 to Section 32(1)of the Act, as it was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1.4.1988 andtherefore, the said expenditure was revenue in nature. Hence, thepresent appeal raising the above mentioned substantial question oflaw.

Before proceeding further, it is apt to refer Explanation1 of Section 32(1) of the Act. "32. Depreciation(1) In respect of depreciation of -(i) buildings, machinery, plant or furniture, beingtangible assets; (ii)know-how, patents, copyrights, trade marks, licences, franchises or any other business orcommercial rights of similar nature, beingintangible assets acquired on or after the 1stday of April, 1998,owned, wholly or partly, by the assessee and used forthe purposes of the business or profession, thefollowing deductions shall be allowed -(i)in the case of assets of an undertaking engagedin generation or generation and distribution ofpower, such percentage on the actual costthereof to the assessee as may be prescribed; (ii)in the case of any block of assets, suchpercentage on the written down value thereof asmay be prescribed:...Explanation 1 - Where the business or profession of theassessee is carried on in a building not owned by himbut in respect of which the assessee holds a lease orother right of occupancy and any capital expenditure is https://hcservices.ecourts.gov.in/hcservices/ incurred by the assessee for the purposes of thebusiness or profession on the construction of anystructure or doing of any work in or in relation to, andby way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shallapply as if the said structure or work is a buildingowned by the assessee.... "4.1.

What constitutes a capital expenditure and what doesnot, to attract Explanation 1 to Section 32(1) of the Act dependsupon the construction of any structure or doing any work or inrelation to and by way of renovation, extension or improvement tothe building which is put up in a building taken on lease by himfor carrying on his business and profession of the assessee, butnot in a case of construction of any structure or doing any workor relation to where such building is put up/constructed for thepurpose of business or the profession of the assessee in a landtaken on lease by the assessee. Because the assessee did notacquire a capital asset, viz. the land in the instant case, buthave put up a construction of the building only for the businessadvantage, with the result the entire construction cost isadmissible as the revenue expenditure.4.

The Apex Court in L.H.Sugar Factory and Oil Mills (P)Ltd. v. Commissioner of Income Tax [(1980) 125 ITR 293] held thatthe construction of roads in the case of Sugar Mill as revenueexpenditure. Similarly, contribution to the State Housing Boardfor construction of tenements for the workers also held to be therevenue expenditure by the Apex Court in the case of Commissionerof Income Tax v. Bombay Dyeing and Manufacturing Co. Ltd. [(1996)219 ITR 521]. 4.