Payments for building leased premises treated as revenue expenditure and deductible, not capital investment eligible for depreciation

SC dismissed the appeals with costs, holding the sums spent on constructing the new premises were revenue, not capital, expenditure. The assessee did not acquire ownership of the asset but obtained a long-term lease at a reduced rent, conferring a business advantage and saving future revenue outlays. Accordingly the payments were deductible in computing income for the relevant assessment year and not to be treated as capital investment eligible for depreciation.

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Issues:
1. Determination of whether the expenditure incurred by the assessee in constructing a new building is revenue expenditure or capital expenditure.
2. Interpretation of the nature of the benefit obtained by the assessee through the construction of the new building.
3. Application of legal tests to distinguish between capital expenditure and revenue expenditure.
4. Analysis of relevant case laws where expenditure led to an enduring benefit but did not result in ownership of the asset by the assessee.

Issue 1: Determination of Expenditure Nature
The assessee, a limited company engaged in the sale of motor parts, constructed a new building on leased premises. The lease agreement allowed the assessee to demolish the existing premises and build a new structure without compensation to the lessors. The Income-tax Tribunal treated the construction expenditure as revenue expenditure, allowing deduction. The Department contended it was capital expenditure. The High Court upheld the Tribunal's view, stating the expenditure was revenue expenditure as it secured a long lease of suitable premises at a low rent.

Issue 2: Benefit Analysis
The assessee's expenditure aimed to secure a long lease of a new building at a reduced rent. The new building, although not owned by the assessee, provided a substantial saving in monthly rent for 39 years. The commercial advantage gained was lower expenditure in the form of rent, indicating a revenue expenditure nature.

Issue 3: Application of Legal Tests
The Supreme Court referred to the Assam Bengal Cement Co. Ltd. case to distinguish between capital and revenue expenditure. The court emphasized that expenditure leading to an enduring asset for trade benefit is capital expenditure. In this case, as the building did not belong to the assessee and the only advantage was reduced rent, the expenditure was rightly treated as revenue expenditure.

Issue 4: Analysis of Relevant Case Laws
The court examined cases like Lakshmiji Sugar Mills, L. H. Sugar Factory, and Associated Cement Companies, where expenditure created enduring benefits but not ownership of assets. In each case, the expenditure was considered revenue expenditure as it facilitated business operations without acquiring capital assets. The court emphasized that the expenditure's purpose was to conduct business profitably, similar to the present case where the assessee obtained a business advantage through reduced rent without acquiring ownership of the building.

In conclusion, the Supreme Court dismissed the appeals, affirming the expenditure as revenue expenditure due to the enduring business advantage gained through reduced rent without ownership of the asset.

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