2007 (6) TMI 44 - HC - Income Tax

Expenditure to erect building on leased land treated as revenue, not capital, under Explanation 1 to s.32(1)

HC held that expenditure on erecting a building on leased land is revenue, not capital, for purposes of Explanation 1 to s.32(1). The Explanation applies ... Expenditure on construction of a building in a leasehold premises - Capital or Revenue expenditure under Explanation 1 to Section 32(1) - HELD THAT:- To attract Explanation 1 to Section 32(1) of the Act depends upon the construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to the building which is put up in a building taken on lease by him for carrying on his business and profession of the assessee, but not in a case of construction of any structure or doing any work or relation to where such building is put up/constructed for the purpose of business or the profession of the assessee in a land taken on lease by the assessee. Because the assessee did not acquire a capital asset, viz. the land in the instant case, but have put up a construction of the building only for the business advantage, with the result the entire construction cost is admissible as the revenue expenditure. As the Explanation 1 to Section 32(1) of the Act is not attracted - Accordingly, these appeals are dismissed. Issues:1. Whether the expenditure on construction of a building in a leasehold premises amounts to revenue expenditure under Explanation 1 to Section 32(1) of the Income Tax Act.Analysis:The judgment delivered by the High Court of Madras involved a significant issue regarding the classification of expenditure on the construction of a building in a leasehold premises as revenue expenditure under Explanation 1 to Section 32(1) of the Income Tax Act. The court examined the case where the assessee claimed the expenditure as revenue in nature, but the Assessing Officer treated it as capital expenditure. The Commissioner upheld the Assessing Officer's decision, leading the assessee to appeal before the Tribunal.The main contention revolved around whether Explanation 1 to Section 32(1) of the Act applied to situations where construction occurred on leasehold land. The Tribunal ruled in favor of the assessee, stating that the expenditure on construction of a building on leasehold land was revenue in nature as the Explanation was inserted post the construction. The court then analyzed the provisions of Explanation 1 to Section 32(1) of the Act, emphasizing that the fiction created by the Explanation did not apply in this case as the building was constructed solely on leasehold land, not a leased building.Furthermore, the Revenue argued that the term 'building' should include lands, expanding the scope of the provision. However, the court rejected this argument, emphasizing the importance of interpreting statutory provisions plainly and unambiguously. The court cited legal precedents to support the literal interpretation of statutes, highlighting that any departure from the literal rule would amount to amending the law through interpretation, which is impermissible.The court clarified that the distinction between capital and revenue expenditure under Explanation 1 to Section 32(1) depended on whether the construction was related to a building taken on lease or a structure on leased land. Since the assessee did not acquire the land but constructed the building for business advantage, the entire construction cost was deemed admissible as revenue expenditure. The court referenced judicial decisions to support this interpretation, citing cases where similar constructions were treated as revenue expenditure.In conclusion, the court dismissed the appeals, stating that no substantial question of law was raised as Explanation 1 to Section 32(1) of the Act did not apply in the case at hand. The judgment provided a detailed analysis of the legal provisions and precedents to support the decision to classify the expenditure as revenue in nature.