TaxTMI 
TaxTMI 
2016 (5) TMI 472
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.... issues which are up for consideration before us. These three appeals have been filed by the assessee (Indus Motor Company Pvt. Ltd) against the common order dated July 25, 2014 of the Income-tax Appellate Tribunal, Cochin Bench by which order the three Income-tax appeals filed by the Deputy Commissioner of Income-tax (Revenue) were decided. The three appeals arose out of different assessment years ; 2007-08, 2008-09 and 2009-10. It shall be sufficient to refer to the facts in I. T. A. No. 4 of 2015 arising out of assessment year 2007-08 for answering the reference. 3. The assessee is a dealer in vehicles, spares and accessories of Maruti Suzuki and an authorised service centre for its vehicles. To carry on its business, the assessee has various show rooms/workshops in different Districts of Kerala and in the State of Tamil Nadu. The return of income for the year 2007-08 was filed on October 30, 2007 which was processed under section 143(1) of Income-tax Act, 1961 (hereinafter referred to as "1961 Act"). Subsequently, the case was selected for scrutiny and scrutiny assessment was completed on December 30, 2009 making certain disallowances/ additions. The expenditure of Rs. 3,12,....
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....Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of Rs. 1,22,66,205 incurred on superstructures constructed by the appellant on leased land, as capital expenditure ? (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 Rs. 1,22,66,205 incurred for construction of superstructures by the appellant on leased land is capital expenditure ? (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of Rs. 1,89,68,567 incurred for repairs refurbishing and improvements on buildings taken on lease ? (4) 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 Rs. 1,89,68,567 incurred for repairs refurbishing and temporary improvements such as partitions on buildings taken on lease is not a revenue expense ?" 6. We have heard Shri Joseph Markos, senior advocate for the assessee and Shri P. K. Ra....
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....age 344) : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of Rs. 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 Rs. 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 Rs. 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 of Rs. 31,68,298 under transfer pricing adjustment ?" 11. The assessee in the above case has several jewellery shops situated only in tenanted premises in different parts of country. During the relevant assessment year they had opened four new shops. The assessee incurred considerable amount of expen....
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....nts spent on renovation or repairs on the premises taken by the assessee on lease would amount to capital gains, as the building has to be treated as the structure belonging to the assessee for the purpose of section 32 of the Income-tax Act, therefore, the advantage created has to be considered as asset in the hands of the assessee. Reading of the above provision definitely would not mean so. Whenever 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 t....
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....kkas' case entered into a finding that merely because the buildings taken on lease are refurbished, no enduring benefit on the capital is enjoyed by the assessee and therefore the same cannot be treated as capital expenditure. In paragraphs 22 and 23 of the reference order the Division Bench expressed its reason for making the reference. The reasons given by the Division Bench as noted in paragraph 23 are as follows (page 717 of 378 ITR) : "So far as the question regarding the expenditure incurred by the assessee for refurbishing the building taken on lease is concerned, we are of the considered opinion that, after the introduction of Explanation 1 to section 32(1) of the Act, there is no scope left out at all for any interpretation, since by a legal fiction, the assessee is treated as the owner of the building for the period of his occupation. This means that by refurbishing, decorating or by doing interior work in the building an enduring benefit was derived by the assessee for the period of occupation and therefore, is a capital expenditure and not revenue expenditure. So also, as contended by the senior counsel for the Revenue the criteria that is to be adopted for....
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....ercentage on the written down value of the structure or work as may in any case or class of cases be prescribed ; (ii) in the case of any such structure or work which is sold, dis carded, demolished, destroyed or is surrendered as a result of the determination of the lease or other right of occupancy in respect of the building in the previous year (other than the previous year in which it is constructed or done) the amount by which the moneys payable in respect of such structure or work together with the amount of scrap value, if any, fall short of the written down value thereof : Provided that such deficiency is actually written off in the books of the assessee." Sub-section (1A) was introduced in section 32 with effect from April 1, 1971, prior to which no depreciation was allowable in respect of capital expenditure incurred by the assessee on any asset belonging to a third party. Sub-section (1A), however, confined to buildings only and does not extend to plant, machinery or furniture. As per sub-section (1A) an asses see who carries on his business or profession in a building not owned by him but taken on lease or licence and who incurs any capital expendit....
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....ent was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which could apply to all situations. One has therefore got to apply these criteria one after the other from the business p....
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....ses." 18. Justice M. N. Venkatachaliah in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) has again reiterated that the question in each case would necessarily be whether the test relevant and significant in one set of circumstances are relevant and significant in the case on hand. After review of relevant English cases and judgment of the apex court, following was observed at pages 385 and 386 : "In Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1966] AC 295, Lord Reid emphasised the futility of a strict application of and exclusive dependence on any single principle in the search for the true position and pointed out the difficulty arising from taking too literally the general statements made in earlier cases and seeking to apply them to a different case which their authors certainly did not have in mind. The learned Lord also identified as another source of difficulty the tendency in some cases to treat someone criterion as paramount and to press it to its logical conclusion without proper regard to the other factors in the case. Lord Reid further said (at page 313) : 'So it is not surprising that no one test or principle or rule of t....
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....y particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over exacting.'" 20. Learned counsel for the assessee has placed reliance on the judgment of the apex court in CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468 (SC) ; [1998] 6 SCC 404. That was a case where expenditure was incurred to construct a building for business by the assessee which building did not belong to him. The question arose in the case was as to whether the expenditure is deductible expenditure. In paragraph 3 of the judgment the question was extracted, which is as follows (page 471) : "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the building expenses of Rs. 1,62,835 are not liable to be taken into account as deductible expenditure in arriving at the real income of the assessee for the assessment year 1968-69 ?" The apex court taking note of the earlier judgment of the apex court in Assam Bengal Cement Co. Ltd. (supra) and other cases, laid down the following (page 472 of 233 ITR) : "7. The test for distinguishing between ....
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....n, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. (emphasis ours)." In the facts of the said case it was held that the said expenditure should be treated as a revenue expenditure. As noted above, whether a particular expenditure is a capital expenditure or revenue expenditure depends on the facts of each case and relevant test applicable. 21. Another judgment relied on by learned counsel for the assessee is CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad) which was a case of construction of the building on leasehold land. The Madras High Court in the facts of the said case after considering Explanation 1 to section 32(1) laid down the following in paragraphs 8, 9 and 10 (page 436) : "What constitutes a capital expenditure and what does not, 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 whic....
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....land consisting of filling up the ditches and raising the land and of constructing a wall are not of a capital nature. Even so, it is suggested that, because the assessee had only leave and licence over the land, the rule that expenses in the nature of capital expenditure should not be deducted in computing the assessable income should not be applied. We are unable to accept this contention. The changes effected were of an enduring nature and the conclusion reached by the assessing authorities that the money was expended for capital purposes is correct. We, therefore, answer the first question referred to us in the affirmative, that is, in favour of the Department and against the assessee. In view of our answer to question No. (1) question No. (2) cannot arise and it is so agreed. This Income-tax referred case is ordered on the above terms. There will be no order as to costs." In the above case the amount expended was for reclaiming a piece of land over which licence has been granted to the assessee to install a petrol pump by the Burmah shell Oil Distributing Company. In the facts of the said case the Division Bench held that the said expenditure is of capital nature. ....
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....a legal fiction, i.e., in the event of any capital expenditure incurred as referred to in explanation, it will be deemed that said structure or work is a building owned by the assessee. A deeming provision, i.e., legal fiction, is created by the legislature to attain a particular purpose. However, it has been held that the legal fiction is only for a definite purpose and is limited for the purpose for which it is created. The apex court in the case of CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC) ; [1973] 3 SCC 17 had laid down the following in paragraph 12 (relevant portion) (page 8) : "12. . . . As held by this court in CIT v. Amarchand N. Shroff [1963] 48 ITR (SC) 59 ; AIR 1963 SC 1448 legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field." 26. In CIT v. Urmila Ramesh [1998] 230 ITR 422 (SC) ; [1998] 3 SCC 6, the apex court had occasion to consider section 41(2) of the Income-tax Act, 1961. Although section 41(2) did not use any deeming expression whereas the words used were "the provisions of this sub-section shall apply as if the business or profession i....
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....ave been taxed as income from business. Building, machinery, plant or furniture, on which depreciation has been allowed, would be the capital asset of the assessee. Any sum received in respect thereof would ordinarily represent a capital receipt. But section 41(2) regard this amount as income from business or profession and of the year in which the amount becomes due. Even though the word 'deemed' is not used in section 41(2) of the Act, as has been used in section 10(2)(vii) second proviso of 1922 Act, nevertheless this proviso creates a legal fiction whereby an amount received in excess of the written down value is firstly treated as income and secondly regarded as income from business or profession and thirdly it is considered to be the income of the previous year in which the money payable became due. That the section creates a legal fiction has been held by this court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) ; AIR 1978 SC 1099, where at page 93 of 113 ITR 84 : of the report it was observed as under : 'It is true that by a legal fiction created under section 41(2) a balancing charge arising from sale of old machinery or bu....
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.... the Constitution Bench of this court in K. Prabhakaran v. P. Jayarajan [2005] 1 SCC 754 opined : 'A legal fiction presupposes the existence of the state of facts which may not exist and then works out the consequences which flow from that state of facts. Such consequences have got to be worked out only to their logical extent having due regard to the purpose for which the legal fiction has been created. Stretching the con sequences beyond what logically flows amounts to an illegitimate extension of the purpose of the legal fiction.'" 28. The plain reading of the language of Explanation 1 indicates that the legal fiction was created as if the said structure or work is the building owned by the assessee. There is no warrant of reading Explanation 1 in a manner to read that when the assessee who holds a lease or other right of occupancy incurs any expenditure for purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to and by way of renovation or extension or improvement to the building, then the said expenditure has to be treated as capital expenditure. The legal fiction has not been created to treat t....
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.... The court cannot add words to a statute or read words into it which are not there. In State of Kerala v. Mathai Verghese [1986] 4 SCC 746 this court has reiterated the well-settled position that the court can merely interpret the section ; it cannot rewrite, recast or redesign the section. In interpreting the provision the exercise undertaken by the court is to make explicit the intention of the Legislature which enacted the legislation. It is not for the court to reframe the legislation for the very good reason that the powers to 'legislate' have not been conferred on the court. In Gwalior Rayons Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests [1990] Suppl SCC 785, the court rightly observed that in seeking legislative intention judges not only listen to the voice of the Legislature but also listen attentively to what the Legislature does not say. The House of Lords in Pinner v. Evertt [1969] 3 All ER 257 (HL) ; [1969] 1 WLR 1266 aptly observed that we have been warned again and again that it is wrong and dangerous to proceed by substituting some other words for the words of the statute. Therefore, the legal position seems t....