Leasehold construction expense may be revenue, and leasehold possession does not by itself create ownership for tax purposes.

Construction expenditure by a lessee on leasehold land was treated as revenue expenditure, because the character of the outlay depended on the lessee's lack of ownership despite the creation of an enduring structure. On that footing, the assessee could not claim the capital-expenditure-linked benefit under Section 32(1A) of the Income-tax Act, 1961. The court also held that leasehold possession and construction of a superstructure do not make the lessee the owner during the lease term, so the rent from the buildings could not be assessed on an ownership basis urged by the Revenue. The assessee succeeded on the construction and ownership issues, but failed on the Section 32(1A) claim.

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Issues: (i) Whether the expenditure incurred by the assessee on construction of buildings on leasehold land was revenue expenditure or capital expenditure. (ii) Whether the assessee was entitled to the benefit of Section 32(1A) of the Income-tax Act, 1961. (iii) Whether the rent received from the buildings constructed on leasehold land was assessable as business income and whether the assessee could be treated as owner of the superstructure during the currency of the lease.

Issue (i): Whether the expenditure incurred by the assessee on construction of buildings on leasehold land was revenue expenditure or capital expenditure.

Analysis: Expenditure resulting in an enduring asset is ordinarily capital in nature, but the character of the outlay depends on whether it is incurred by a person having ownership rights or by a mere lessee. Where a lessee constructs a building on leased land for business purposes and does not acquire ownership of the land, the outlay is treated differently from expenditure incurred by an owner. The ruling in Madras Auto Service was applied to the facts.

Conclusion: The expenditure was revenue expenditure and the issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the assessee was entitled to the benefit of Section 32(1A) of the Income-tax Act, 1961.

Analysis: The claim under Section 32(1A) depended on the expenditure being capital expenditure. Once the construction expenditure was held to be revenue expenditure, the statutory basis for invoking that provision disappeared. The two positions could not coexist on the facts found.

Conclusion: The assessee was not entitled to the benefit of Section 32(1A), and the issue was decided in favour of the Revenue.

Issue (iii): Whether the rent received from the buildings constructed on leasehold land was assessable as business income and whether the assessee could be treated as owner of the superstructure during the currency of the lease.

Analysis: Leasehold rights and ownership are distinct concepts, and a lessee does not become owner merely because the lessee has constructed a superstructure or enjoys possession for a long term. The Court rejected the view that a lessee can be treated as owner in the absence of a transfer in accordance with law. The income from the buildings constructed for business purposes on leased land was therefore not to be treated on the footing suggested by the Revenue.

Conclusion: The assessee could not be treated as owner of the superstructure, and the issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered by upholding the assessee's position on the construction expenditure and ownership-linked income issues, while rejecting the claim to capital-depreciation treatment under Section 32(1A).

Ratio Decidendi: A lessee who incurs construction expenditure on leased land without acquiring ownership does not thereby incur capital expenditure merely because an enduring structure results, and leasehold possession does not convert into ownership in the absence of a lawful transfer.

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