TaxTMI 
TaxTMI 
2017 (12) TMI 1168
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....e same as also the constructions made, again on lease hold properties; both to carry on the business of the assessee. Whether the expenses incurred are to be treated as revenue expenditure or capital expenditure, is the issue common to all the assessment years. Two appeals, I.T.A.Nos.15/2015 and 29/2016, raise different questions, which will be dealt with after answering the main questions common to the appeals. 2. The question raised for all the assessments years, for consideration of this Court, as re-framed by us, are the following: (i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of expenses incurred for repairs, refurbishing and making improvements on the buildings taken on lease, treating them as capital expenditure. (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in confirming the disallowance of expenses incurred for construction of buildings in leased out lands as capital expenditure? 3. The issue with respect to expenses made on leased out buildings to refurbish the same for the purpose of carrying on the day-to-day busine....
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.... dictum in Joy Alukkas, was based on Explanation 1 to Section 32 (1). Section 32 deals with depreciation as a deduction; the aspects on which, the manner in which and the rates at which it can be claimed. Explanation 1, which is relevant is extracted hereunder: "Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession and the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee". 7. We are not called upon to interpret the aforesaid Explanation, since the Full Bench has interpreted it to find that it is only a fiction created insofar as permitting a lessee to claim the capital expenditure made in a building, leased out for its business; just as the owner of the building would claim it, if it were his business that was run in the building. The view....
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....d manner, the facts relevant to be noticed in this appeal, with respect to the first question, are only that the assessee had taken out leasehold buildings which were refurbished and improvements made for the purpose of carrying on the day-to-day business. 9. The learned Senior Counsel for the assessee would point out that any item which would revert back to the assessee was treated as a capital and depreciation alone was claimed treating it as a capital expenditure. However, with respect to the other improvements made to the building, like painting and constructions made or alterations carried out, were treated as revenue expenditure since the assessee does not get any enduring benefit out of the same. They are also recurring expenditure since the business of the assessee, to a great extent, depends upon the ambiance provided, which varies with time, consumers and very many factors which are not constant. True the Full Bench has directed the Division Bench, hearing the case, to look into whether on facts the claim is sustainable or not. The Full Bench has affirmed the view taken by another Division Bench in Joy Alukkas, on identical facts. The discussion on facts and law in par....
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....erm 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 electrical fittings could be removed and taken, so also cupboards, showcases, electrical wiring, painting and flooring cannot be taken away by the assessee. Hence, at the end of the day, it has to be an asset in the hands of the assessee which could be called as capital asset. The fact that assessee with creation of a new ambience would earn more profits in the premises cannot be the criterion to decide the issue. Ultimately, the items on which expend....
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.... leased out building, then such expenditure has to be mandatorily treated as capital expenditure. The explanation only meant that in the event of any capital expenditure incurred by the assessee, who is only a lessee, the provisions of Section 32(1) shall be applicable as if the leased out premises is owned by the assessee. The explanation was interpreted as one enabling even a lessee to claim depreciation if capital expenditure is made on a building or in a property, which is leased out from the real owner. It is not to say that the Explanation deemed any expenditure made by the lessee on a leasehold building or on a leasehold property as capital expenditure. Nor does the decision of the Full Bench or the Division Bench in Joy Alukkas, hold that such expenditure would necessarily be a revenue expenditure. 14. We do not see any deviation having been made by the two-Judge Bench of the Supreme Court in Madras Auto Service, especially when they had referred to Assam Bengal Cement Co. to come to such a finding. The facts in Madras Auto Service are relevant and are noticed for clarity. Therein the assessee, again a Company engaged in sale of motor parts, had taken on lease certain la....
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....depreciation; stands altered in so far as the introduction of Explanation I. It rectifies the precise anomaly noticed in Madras Auto Service. 16. By virtue of the Explanation, any expenditure incurred by a lessee, which could be treated as capital expenditure in the hands of the owner, would be so entitled to be treated as capital expenditure in the hands of the lessee also. The interpretation given to the Explanation and the decision in Madras Auto Service read together puts the issue in the correct perspective. The Explanation does not alter the dictum, laid down by Madras Auto Service, on the peculiar facts, but rectifies the anomaly in so far as a lessee being entitled to claim depreciation on capital expenditure made in a leased out building. In Madras Auto Service lands were taken on lease and investments were made on the said lands by way of constructions. The Hon'ble Supreme Court found that the lease rent was very minimal and investments were to be deemed as setting off the actual lease rent payable over a period of time. It was in such circumstances that the expenditure made on making constructions in leased out lands were held to be revenue expenditure and not cap....
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....Counsel appearing for the assessee produced a number of agreements, before this Court, to support the case of lease having been taken of properties, in which superstructures were build, on investments made by the assessee themselves. It will not be proper for us to look into the agreements, when the Assessing Officer at the first instance has not done it. The agreements' were also produced before the Assessing Officer as evidence, to substantiate the claim of the assessee. 19. Merely to understand the nature of the lease, we went through one of the agreements, which indicates almost 60cents of property having been taken on lease for Rs. 25,000/- per month. The superstructures were also built on the said property the actual plinth area of which is not disclosed. The money invested for making such construction is what is claimed as revenue expenditure. We have to observe that, prima facie, considering the extent of property the amount of Rs. 25,000/- could be treated as minimal rent, which all the same would have to be verified with the total plinth area constructed in the property and the period for which the lease is permitted. The going market rent for buildings, in the spe....
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.... 21. Considering the fact that the said procedure before the various District Registrars would result in different orders of penalty being passed and the assessments would also be kept pending for long, we alternatively pass the following orders. The assessee shall produce the lease deeds of period one year or above before the concerned Sub-Registrars, who shall calculate the duty payable under Article 33 of the Stamp Act and levy penalty of Rs. 10,000/- each. If the assessee pays up the amounts then the procedure as prescribed in Section 37(1) shall be complied with. The Sub-Registrar shall also register the document de-hors Sections 23 and 25 of the Registration Act, but levying registration fees as applicable and an amount of Rs. 5,000/- each as penalty. The assessee then shall produce the registered documents before the respondent A.O, who shall finalise the assessment on the principles herein above stated, determining whether the expenditure made by the assessee can be treated as a capital expenditure or revenue expenditure. If the assessee does not comply with the above directions then the respondent shall impound the documents and send it for stamping under the provisions of....