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PETITIONER: COMMISSIONER OF INCOME-TAX, TAMIL NADU II, MADRAS

       Vs.

RESPONDENT: MADRAS AUTO SERVICE (P) LTD. ETC.

DATE OF JUDGMENT:       12/08/1998

BENCH: SUJATA V. MANOHAR, S. RAJENDRA BABU

ACT:

HEADNOTE:

JUDGMENT:                          THE 12TH DAY OF AUGUST, 1998 Present :             Hon’ble Mrs. Justice Sujata V. Manohar             Hon’ble Mr. Justice S. Rajendra Babu K.N. Shukla,  Sr. Adv.,  (S. Rajappa,) Adv. for B.K. Prasad, Adv. with him for the appellant T.A. Ramachandran,  Sr. Adv. Mrs. Janaki Ramachandran, Ms. H . Wahi, Advs. with him for the Respondents                      J U D G E M E N T The following Judgment of the Court was delivered :            [With C.A. Nos. 6066-67 (NT) of 1983] Mrs. Sujata V. Manohar. J.      The assessee  is a  limited  company  carrying  on  the business of  sale of  motor parts.  Its  head-office  is  at Madras. It  has a branch at Bangalore. Under an agreement of lease dated  1st of  February, 1966,  the assessee  obtained from M/S.  Hajira Comer and Mrs. Rabia Bai Razack a lease of premises Nos.  64 and  64/1 situated  at  Sri  Narasimharaja Road, Bangalore for a period of 39 years commencing from 1st of January,  1966. Under  the terms  and conditions  of  the lease, the  lessee (that  is to  say the  assessee), had the right to  demolish at  its own expense the existing premises and appropriate  to itself  all the material thereof without paying to  the lessors  any compensation and construct a new building thereon  to suit  the purpose  of their business as per the  plan approved by the lessors. Under Clause 2 of the lease deed,  the lessee  was required  to pay  a rent of Rs. 1000/- per month for the first fifteen years, Rs. 1500/- per month for  the next  ten years, Rs. 1650/- per month for the next ten  years and  Rs. 2000/-  per month for the remaining years.  The   lease  deed  further  provided  that  the  new construction shall,  right from  t he  commencement  of  the work, be the property of the lessors; and upon completion of the work  of construction  the lessee  will   have only  the right to  be a  tenant for  a period  of 39  years under the existing  lease   subject  to   the  payment   of  rent  and observation of  other terms and conditions of the lease. The lessee shall  not be  entitled under  any circumstances  for any   compensation whatsoever  on account  of its putting up the new construction in the place of the old.

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    Acting under  the lease agreement the assessee invested a sum  of Rs.  1,62, 835/- in  the previous year relevant to the assessment  year 1968/69  and Rs.  50, 937/-  during the succeeding year  in constructing  a new building on the said land. The  assesee claimed before the Income-tax Officer the expenditure of  the said sums of Rs. 1, 62,835/- and Rs. 50, 937/- in  the relevant  assessment years as capital loss. In the  alternative,   the  assessee  claimed  depreciation  on capital investment; in the alternative, the assessee claimed deduction of  the payments  as business  expenditure  or  as extra  rent   for  the  lease.  Ultimately,  the  Income-tax Tribunal has  held that  the expenditure  of  the  said  two amounts for  the construction  of a  new building  is in the nature of business expenditure for proper carrying on of the business of  the  assessee.  The  Tribunal  has,  therefore, treated these  amounts as  revenue expenditure and allowed a deduction in  that regard  to the assessee. The claim of the department that  the expenditure was capital expenditure and was,  therefore,   not  deductible   was  negatived  by  the Tribunal.      On the  application  of  the  department  the  Tribunal referred the  following question  to the  High Court for its determination under  Section 256(1)  of the  Income-tax Act, 1961 :      "Whether on  the fact  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  fro  the      assessment year 1968-69?"      For the  next assessment  year, a  similar question was raised in regard to the second sum of Rs. 50,937/-. The High Court has,  by the impugned judgment, upheld the view of the Tribunal and  has  held  that  the  two  amounts  constitute revenue expenditure  for the  concerned assessment years and are deductible  in order  to arrive  at the  income  of  the assessee for  the said assessment years. The present appeals are filed  by the  department from  the impugned judgment of the High Court.      The assessee  in the present case has spent the amounts in question  in order  to construct  a  new  building  after demolishing the  old building.  The new  building,  however, from inception  was to  belong to  the lessor and not to the assessee. The  assessee, however,  had the  benefit  of  the existing lease  in respect of the new building at the agreed rent for  a period of 39 years. The Tribunal has found, as a fact, that the rent as stipulated in the lease was extremely low. It  rental rate  for the area in which the building was situated was  much higher  and would  be not  less than  Rs. 12,000/- as  against which  the maximum  rent  the  assessee would be paying was only Rs. 2,000/-. This concessional rent was on  account of  the  fact  that  the  new  building  was constructed by the assessee at its own cost.      In order  to decide whether this expenditure is revenue expenditure or  capital expenditure,  one has to look at the expenditure from  a commercial point of view. What advantage did the  assessee  get  by  constructing  a  building  which belonged to  somebody  else  and  spending  money  for  such construction? The  assessee got  a long  lease  of  a  newly constructed building  suitable to its own business at a very concessional rent.  The expenditure,  therefore, was made in order to  secure a  long lease  of  new  and  more  suitable

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business premises  at a  lower rent.  In  other  words,  the assessee made  substantial savings  in monthly  rent  for  a period of 39 years by expending these amounts. The saving in expenditure was   saving  in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be  considered as  revenue  expenditure.  Moreover, assessee in  the present  case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have  claimed any depreciation. Looking to the nature of the advantage  which the  assessee obtained  in a commercial sense, expenditure appears to be revenue expenditure.      The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this Court in  Assam Bengal  Cement Co.  Ltd. v.  Commissioner of Income-tax, West  Bengal (27  ITR 34).  In  that  case,  the appellant-company had  acquired from the Government of Assam lease of  certain lime-stone  quarries for  a period  of  20 years for  the purpose  of manufacture of cement. The lessee had, inter  alia, agreed  to pay  an annual  sum during  the whole period  of the  lease  as  a  protection  fee  and  in consideration of  that payment,  the lessor undertook not to grant to any person any lease, permit or prospecting licence for lime-stone.  This Court  examined  tests  laid  down  in various cases for distinguishing between capital expenditure and revenue  expenditure. One  of the  standard tests now in use was  laid down  in  the  case  of  Atherton  v.  British Insulated and Helsby Cables Ltd. ([1925] 10 Tax. Cases 155). It said  : "When  an expenditure  is made, not only once and for all  but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there  is very  good reason  (in the absence of special circumstances  leading   to  an   opposite  conclusion)  for treating such an expenditure as properly attributable not to revenue but  to capita."  Whether by  spending the money any advantage of  an enduring  nature has  been obtained  or not will depend  upon the  facts of  each case. Moreover, as the above passage  itself provides, this test would not apply if there are  special circumstances  pointing to  the contrary. This Court in the above case summarised the tests as follows :(p. 44) :      1.   Outlay is deemed to be capital           when  it   is  made   for  the           initiation of  a business, for           extension of  a  business,  or           for a  substantial replacement           of equipment.      2.   Expenditure may  be treated as           properly    attributable    to           capital when  it is  made  not           only once  and  for  all,  but           with a  view to  bringing into           existence  an   asset  or   an           advantage  for   the  enduring           benefit          of          a           trade...........If what is got           rid of  by a  lump sum payment           is an  annual business expense           chargeable  against   revenue,           the lump  sum  payment  should           equally  be   regarded  as   a           business expense,  but if  the           lump sum  payment brings  in a           capital asset,  then that puts           the   business    on   another           footing altogether.

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    3.   Whether for the purpose of the           expenditure, any  capital  was           withdrawn, 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.                     (underlining ours)      Relying upon  the second test enumerated above, learned counsel for  the appellant  has submitted  that the assessee got enduring  benefit of  a capital  nature by  spending the amount because  the assessee  obtained a  new building for a period of  39 years. The difficulty, however, in the present case, arises  from the  fact that this building was never to belong to  the assesseee. Right from inception, the building was of  the ownership  of the lessor. Therefore, by spending this money,  the assessee did not acquire any capital asset. The only  advantage which  the assessee  derived by spending the money  was that  it got the lease of a new building at a low rent.  From the  business point  of view, therefore, the assessee got  the benefit  of reduced  rent. The  High Court has, therefore,  rightly  considered  this  as  obtaining  a business advantage.  The expenditure  is, therefore,  to  be treated as revenue expenditure.      Although there  are a number of cases dealing with this question, we  will limit  ourselves to examining a few cases where the assessee, by expending money, created and asset of an enduring  nature. However,  the asset  so created did not belong to  the assessee. In such a situation the courts have held that  the expenditure was for better carrying on of the business of  the assessee  and could  be allowed  as revenue expenditure, looking  to the  circumstances of each of those cases.  Thus  in  Lakshmiji  Sugar  Mills  Co.  P.  Ltd.  v. Commissioner of  Income-tax, New  Delhi  (82  ITR  376)  the assessee company was carrying on the business of manufacture and sale  of sugar.  It paid to the Cane Development Council certain amounts  by way of contribution for the construction and development of roads between various sugarcane-producing centres and  the sugar  factories of the assessee. The roads remained the  property of  the Government.  This Court  held that the  expenditure was not of a capital nature and had to be allowed  as an  admissible  deduction  in  computing  the profits of  the assessee’s  business.  The  expenditure  was incurred for  the purpose of facilitating the running of the assessee’s motor  vehicles  and  other  means  employed  for transportation of sugarcane to its factories.      In the  case of  L.H. Sugar  Factory and Oils Mills (P) Ltd. v.  Commissioner of Income-tax, U.P. (125 ITR 293), the assesee was carrying on the business of manufacture and sale of sugar.  It has  its factory  in U.P.  The assessee paid a contribution towards  meeting the  cost of  construction  of roads in  the area  around its  factory  under  a  sugarcane development scheme. The question was whether this amount was deductible in  computing the  assessee’s profits.  The Court held that it was. Because although the advantage secured was of long  duration, it  was not  an advantage  in the capital field because  no tangible  or intangible asset was acquired by the  assessee; nor was there any addition to or expansion of the  profit making apparatus of t he assessee. The amount

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was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, revenue expenditure.      In the case of Commissioner of Income-tax, Bombay City- I v.  Associated Cement  Companies Ltd.  (172 ITR  257)  the respondent-company entered into an agreement to supply water to the  municipality and  provide water pipelines as also to supply  electricity   for  street  lighting  and  put  up  a transmission line for that purpose. The assessee also agreed to concrete  the main  road from  the factory to the railway station. The  amounts expended  for these purposes were held to  be  revenue  expenditure  since  the  installations  and accessories were  the assets  of the municipality and not of the assessee.  The expenditure, therefore, did not result in creating any  capital asset  for the  company. The advantage secured by the respondent was immunity from liability to pay municipal rates  and taxes  for a  period of  15 years. This Court  said  that  had  these  liabilities  been  paid,  the payments would  have been on revenue account. Therefore, the advantage secured  was in  the  field  of  revenue  and  not capital.      In the  case of  Commissioner of  Income-tax v.  Bombay Dyeing and  Manufacturing Co. Ltd. (219 ITF 521) the company contributed to  the State  Housing Board certain amounts for construction of  tenements for  its workers.  The  tenements remained the property of the Housing Board. It was held that the expenditure  was incurred  wholly and exclusively on the welfare  of   the  employees   and,  therefore,  constituted legitimate business  expenditure. As  the  assessee  company acquired no  ownership rights  in the  tenements, this Court said that the expenditure was incurred merely with a view to carry on  the business  of the  company more  efficiently by having a contented labour force.      All these  cases have looked upon expenditure which did bring about  some kind of an enduring benefit to the company as a  revenue expenditure when the expenditure did not bring into existence  any capital asset for the company. The asset which was  created belonged to somebody else and the company derived an  enduring business  advantage  by  expending  the amount. In all these cases, the expense has been looked upon as having  been made  for  the  purpose  of  conducting  the business  of   the  assessee   more   profitably   or   more successfully. In  the present  case also,  since  the  asset created by  spending the  said amounts did not belong to the assessee but  t he  assessee got  the business  advantage of using  modern   premises  at   a  low   rent,  thus   saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court  have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.      In the premises, the appeals are dismissed with costs.