TaxTMI 
TaxTMI 
TaxTMI 
2014 (6) TMI 80
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....13, assessee has also challenged the additions made on account of adjustment for transfer pricing made with respect to international transactions ignoring the comparable cases produced by the appellant-assessee. The following substantial questions of law arise for consideration of this Court: "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of 6,48,70,634/- incurred by the appellant in repairs and improvements works in leased premises? 2. Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the appellate Tribunal that the sum of 6,48,70,634/- incurred by the Appellant in repairs and improvements works in leased premises is capital expenses? 3. Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in confirming the addition of 31,68,298/- under transfer pricing adjustment? 4. Whether on the facts and in the circumstances of the case, there is any evidence or material on record before the Appellate Tribunal to justify the addition of31,68,298/- under transfer pricing adjustment?" 3. Learned ....
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....sel appearing for the appellants-assessees as well as revenue referred to several decisions which are discussed hereunder in order to arrive at a conclusion whether the expenses claimed by the appellants herein would amount to revenue expenditure or capital expenditure. 6. Learned Counsel arguing for the appellants-assessees places reliance on certain decisions in support of their contentions. Reliance is placed on Veeraraghavan v. Commissioner of Income-Tax, Kerala [(1967)64 ITR 63] to distinguish the law laid down in the said judgment by this Court from the law laid down by the Apex Court in the later decisions contending that the law laid down in Veeraraghavan's case (Supra) cannot be applied universally. The question that arose before this Court was whether the amounts spent by the assessee for reclaiming a piece of land over which licence was granted in favour of the assessee to install a petroleum pump by an oil distributing company could be taken as business expenditure. The improvements claimed by the assessee were effected on the land which include filling up of the ditches and making the land levelled for the purpose of constructing a wall. The assessee claimed the e....
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....iture in relation to the payer. The fact that certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. Referring to Racecourse Betting Control Board v. Wild [(1938)22 TC 182, 188 (KB) wherein Macnaghten, J. pointed out that payment may be revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa. Therefore, they opined that the position in Maheshwari Devi Jute Mills' case (Supra) cannot be regarded as an authority for the proposition. In the case of Maheshwari Devi Jute Mills' (Supra), the payment for sale of loom hours was treated as capital asset and the decision was handed over on that basis. Referring to judgment of Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [(1965)58 ITR 241 (PC)] on the principle of enduring benefit, learned Senior Counsel stresses upon the following: "....There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduri....
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....tructure, but because the profit making structure could be operated for longer working hours. 9. Their Lordships also referred to the judgment in Hallstorm's Property Ltd. v. Federal Commissioner of Taxation (72 CLR 634). In the said case, Justice Dixon held, what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. Opining that the question must be viewed in the larger context of business necessity or expediency, it was held that if the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition, it is revenue expenditure. Ultimately, what we can gather is, the Apex Court as opined in Empire Jute Co.Ltd's case (Supra) there cannot be a universal proposition that what may be capital receipt in the hands of the payee must necessari....
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.... larger plant modelled on the pilot plant and the payment was not made in the course of carrying out an existing business but was for the purpose of setting up a new plant and a new process. It also opined that the expenditure on outlay was incurred for complete replacement of the equipment of the business inasmuch as a new process with a new type of plant was set up in the place of old process and old plant. Even High court on a reference concurred with the opinion of the Tribunal rejecting the claim of the assessee that it was revenue expenditure. 11. The Apex Court opined that High Court fell in error on the ground that there was no material before the Tribunal to come to the finding that the appellant had obtained under the agreement a completely new plant with a completely new process and a completely new technical know-how from Japanese Company. The business of the appellant from the commencement of its plant in 1961 was manufacturing penicillin and even after the agreement, the product continued to be penicillin and the agreement only assisted the appellant-assessee to augment the yield of penicillin. It also held that there was no material to opine that improvisation was n....
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....elevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it.' The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The "once for all" payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of "enduring benefit" might break down." 12. During the course of judgment, Their Lordships referred to the case of Assam Bengal Cement C....
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....Cement Company's case (Supra), T.V.Sundaram Iyengar and Sons' case (Supra) and other cases they opined that unless the expenditure brings into existence a new asset or advantage or enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. On the other hand, if the purpose is for running the business or working it with a view to produce profits, it is revenue expenditure. The source or the manner of the payment would then be of no relevance as the character of the expenditure alone would determine the nature of expenditure. 15. They also rely upon CIT v. Bongaigaon Refinery and Petro-Chemicals Ltd. [(1996) 222 ITR 208 (Gauhati)]. The assessee was running a refinery. It made contributions to refinery department for construction of railway track and siding, which was obviously necessary for the purpose of smooth running of business of the assessee in a profitable and advantageous manner. High Court opined that it was an expenditure incurred in the relevant year and assessment should be allowed as revenue expenditure by referring to L.H.Sugar Factory and Oil Mills (P) Ltd. v. CIT [(1980) 125 ITR 293 (SC)]. In the said....
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.... and staff under low cost housing scheme. Their Lordships held that as the purpose of agreement was to provide certain amenities to labour to keep them contented, to ensure good relations between employer and labour for purpose of carrying on business more efficiently, expenditure was to be allowed as business expenditure and not capital expenditure. 19. In Regal Theatre v. CIT, New Delhi [(1996)59 ITR 449 (SN) 15] Delhi Bench of Punjab High Court opined that expenses for paneling walls to cover up cracks and ugly spots, as the assessee has taken cinema theatre on lease was considered as business expenditure. The wooden panels on removal were not of much value and could not be re-installed in the same condition elsewhere. The amounts spent by the assessee in fixing the wooden panels was allowed as expenditure of revenue nature giving deduction under Section 10 of the Indian Income-Tax Act, 1922. 20. Gauhati High Court in B and A Plantations and Industries Ltd. v. CIT [(2000) 242 ITR 22 (Gauhati)] had an occasion to consider whether the assessee who had taken newly constructed premises on lease incurring expenses towards wall papers, partition walls, marble flooring provided in th....
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....of the Tribunal was set aside. Their Lordships while analysing the facts with reference to the question of law to be decided made general observations as under: "The question that we have to consider is whether the amount sought to be deducted represents a capital expenditure or a revenue expenditure. The problem is a familiar one that has haunted the courts time and again for determination, and which, each time has proved to be an elusive will-of-the-wisp. Decisions are numerous, which have dealt with, and explained, the principle to be applied in telling one type of expenditure from the other. We do not propose at this point of time, and at this stage of the development of the law, to survey the history of these decisions. We venture to quote the observations made by Mr.Justice Hidayatullah (as he then was) in Abdul Kayoom's case (1962)44 ITR 689 (SC) at 703, where the learned Judge observed: 'None of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation....
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....isplay cases, cupboards, removable light fittings, depreciation was claimed capitalising the expenditure. So far as improvements made by spending money on flooring, plastering and painting the walls, electrical wiring, plumbing, sanitary facilities, they claimed as revenue expenditure. According to appellant, though this system of accounting was consistently followed by the appellant in the past, which was accepted by the income-tax authorities and even the assessments were completed, only for 2007-2008, the assessing officer took a completely different view categorising the entire expenditure on the premises taken on lease as capital expenditure. When the said order came to be challenged before the first appellate authority, the order of the assessing officer was upheld. The basis for the opinion was Explanation to Section 32(1) of the Income Tax Act, which allows depreciation of capital expenditure incurred on tenanted premises. It also placed reliance on the decision of this Court in Veeraraghavan's case (Supra) where the test of enduring benefit or advantage for construction of a petrol pump was considered as capital expenditure. 25. So far as appellant in I.T.A.No. 263 of....
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....antage to the assessee for a long duration, the expenditure would be of revenue account. Therefore, enduring benefit cannot be a conclusive test and it cannot be mechanically applied without referring to facts of a particular case. If money is spent to produce extra or additional quantity of goods or augment the income of the assessee, in the absence of the assessee able to retrieve infrastructure or carry the advantage with him at the end of the term of lease irrespective of number of years in which he would be able to earn profits, it cannot amount to capital expenditure. Therefore, though income earning effort that is the expenditure spent on different items would be the basis to ascertain whether it is a capital or revenue expenditure, unless and until it ultimately leads to acquisition of an asset or a right of permanent character irrespective of the possession of the same for a long period, it would not amount to capital expenditure. In the process of renovation and repairs of the premises taken on lease, expenditure may be on different items like flooring, panelling of walls, electrical wiring and fittings, air conditioning, setting up of cupboards, showcases etc. Though ele....
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....enever renovation or repair was made by the assessee and claims capital expenditure, it would only mean, whatever depreciation is allowable to the owner of the building would apply to the tenant assessee, who is in possession of a building or structure on lease. In other words, if the expenditure were to be considered as capital expenditure in the hands of the owner, it has to be considered as capital expenditure in the hands of the tenant, who is the assessee so far depreciation and other benefits. If the expenditure has to be treated as revenue expenditure in the hands of the owner, it would amount to revenue expenditure even in the hands of the assessee tenant. In other words, Section 32(1)(i) of the Income Tax Act read with Explanation 1 thereto, would only mean, whatever the owner of the building is entitled so far as benefits of other depreciation will be applicable to the case of the assessee, who takes the building on lease. 29. Advantage to facilitate trade operations providing the management to conduct business more effectively to make profits without the need of expanding or extending capital asset (permanent structure), what assessee acquires by spending money is to ac....