DCIT, Tiruppur V. Eastman Exports Global Clothing (P) Ltd., Tiruppur

ITA 101/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8468 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 29-06-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 19-01-2016
• Court: TRIBUNAL
• Department Lawyers: DEBENDRA N KAR
• Assessee Lawyers: T BANUSEKARC A
• Keywords: Capital asset; Depreciation; Wrong claim; Capital receipt; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 32; 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , . !' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NOS.101,102 & 103/MDS./2016 / ASSESSMENT YEARS :2011-12, 2011-12 & 2012-13 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-I, TIRUPUR. VS. M/S.EASTMAN EXPORTS GLOBAL CLOTHING (P) LTD., 12, 2 ND STREET, KUMAR NAGAR SOUTH, TIRUPUR 641 603,. [PAN AACCC 0952 E ] ( #$ / APPELLANT) ( %&#$ /RESPONDENT) / APPELLANT BY : MR.DEBENDRA N.KAR, CIT DR /RESPONDENT BY : MR.T.BANUSEKAR,C.A / DATE OF HEARING : 29 - 0 6 - 201 6 !' / DATE OF PRONOUNCEMENT : 21 - 0 9 - 2016 ' / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS ARE FILED BY THE REVENUE IN ITA NO.101/MDS./16 FOR ASSESSMENT YEAR 2011-12 & IN ITA NO.103/MDS/16 FOR ASSESSMENT YEAR 2012-13 ARE DIRECTED AGAINST T HE DIFFERENT ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-3, COI MBATORE, BOTH ITA NOS. 101 TO 103/MDS./2016 :- 2 -: ORDER PASSED UNDER SECTION 143(3) OF THE ACT DATE D 27.10.2015. ANOTHER APPEAL OF THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-3, COIMBATORE , DATED 27.10.2015 PERTAINING TO ASSESSMENT YEAR 2011-12 PA SSED UNDER SECTION 271(1)(C) OF THE ACT. SINCE ISSUES INVOLV ED IN ALL THESE REVENUES APPEALS ARE COMMON IN NATURE, THESE APPEA LS ARE CLUBBED TOGETHER, HEARD TOGETHER, DISPOSED OFF BY THIS COMM ON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.101/MDS./16(A.Y: 2011-12) 2. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD TO DELETION OF ADDITION MADE BY AO ON ACCOUNT OF DISALLOWANCE OF D EDUCTION U/S.80-IA OF THE ACT AMOUNTING TO ` 2,89,77,784/-. 3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THIS ISSUE IS SQUARELY C OVERED BY THE ORDER OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF VEL AYUDHASWAMY SPINNING MILLS (P) LTD VS. ACIT 340 ITR 477, WHEREI N IT WAS HELD THAT:- FROM READING OF SUB-S (1) OF S. 80IA, IT IS CLEAR THAT IT PROVIDES THAT WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE IN CLUDES ANY PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR AN E NTERPRISE FROM ANY BUSINESS REFERRED TO IN SUB-S (4) I.E. REF ERRED TO AS THE ELIGIBLE BUSINESS, THERE SHALL, IN ACCORDANCE W ITH AND SUBJECT TO THE PROVISIONS OF THE SECTIONS, BE ALLOW ED, IN ITA NOS. 101 TO 103/MDS./2016 :- 3 -: COMPUTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUC TION OF AN AMOUNT EQUAL TO 100 PER CENT OF THE PROFITS AND GAI NS DERIVED FROM SUCH BUSINESS FOR TEN CONSECUTIVE ASSESSMENT Y EARS. DEDUCTION IS GIVEN TO ELIGIBLE BUSINESS AND THE SAM E IS DEFINED IN SUB-S. (4). SUB-S(2) PROVIDES OPTION TO THE ASS ESSEE TO CHOOSE 10 CONSECUTIVE ASSESSMENT YEARS OUT OF 15 YE ARS. OPTION HAS TO BE EXERCISED. IF IT IS NOT EXERCISED , THE ASSESSEE WILL NOT BE GETTING THE BENEFIT. FIFTEEN YEARS IS O UTER LIMIT AND THE SAME IS BEGINNING FROM THE YEARS IN WHICH THE UNDERTAKING OR THE ENTERPRISE DEVELOPS AND BEGINS T O OPERATE ANY INFRASTRUCTURE ACTIVITY ETC SUB-S. (5) DEALS WI TH QUANTUM OF DEDUCTION FOR AN ELIGIBLE BUSINESS. THE WORDS INITIAL ASSESSMENT YEAR ARE USED IN SUB-S (5) AND THE SAM E IS NOT DEFINED UNDER THE PROVISIONS. IT IS TO BE NOTED TH AT INITIAL ASSESSMENT YEAR EMPLOYED IN SUB-S (5) IS DIFFERENT FROM THE WORDS BEGINNING FROM THE YEAR REFERRED TO IN SU B-S(2). IMPORTANT FACTORS ARE TO BE NOTED IN SUB-S(5) AND T HEY ARE AS UNDER: (1)IT STARTS WITH NON OBSTANTE CLAUSE WHICH MEANS IT OVERRIDES ALL THE PROVISIONS OF THE ACT AND OTHER P ROVISIONS ARE TO BE IGNORED; (2) IT IS FOR THE PURPOSE OF DETERMI NING THE QUANTUM OF DEDUCTION; (3) FOR THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR ; (4) IT IS A DEEMING PROVISION; (5) FICTION CREATED THAT THE ELI GIBLE BUSINESS IS THE ONLY SOURCE OF INCOME; AND (6) DUR ING THE PREVIOUS YEAR RELEVANT TO THE INITIAL ASSESSMENT YE AR AND EVERY SUBSEQUENT ASSESSMENT YEAR. FROM READING OF THE AB OVE, IT IS CLEAR THAT THE ELIGIBLE BUSINESS WERE THE ONLY SOUR CE OF INCOME, DURING THE PREVIOUS YEAR RELEVANT TO INITI AL ASSESSMENT YEAR AND EVERY SUBSEQUENT ASSESSMENT YEA RS. ITA NOS. 101 TO 103/MDS./2016 :- 4 -: WHEN THE ASSESSEE EXERCISES THE OPTION, THE ONLY LO SSES OF THE YEARS BEGINNING FROM INITIAL ASSESSMENT YEAR ALONE ARE TO BE BROUGHT FORWARD AND NOT LOSSES OF EARLIER YEARS WHI CH WERE ALREADY SET OFF AGAINST THE INCOME OF THE ASSESSEE. LOOKING FORWARD TO A PERIOD OF TEN YEARS FROM THE INITIAL A SSESSMENT CONTEMPLATED. IT DOES NOT ALL THE REVENUE TO LOOK BACKWARD AND FIND OUT IF THERE IS ANY LOSS OF EARLIER YEARS AND BRING FORWARD NATIONALLY EVEN THOUGH THE SAME WERE SET OF F AGAINST OTHER INCOME OF THE ASSESSEE AND THE SET OFF AGAINS T THE CURRENT INCOME OF THE ELIGIBLE BUSINESS. ONCE THE SET OFF IS TAKEN PLACE IN EARLIER YEAR AGAINST THE OTHER INCOM E OF THE ASSESSEE, THE REVENUE CANNOT REWORK THE SET OFF AMO UNT AND BRING IT NOTIONALLY. FICTION CREATED IN SUB-S(5) D OES NOT CONTEMPLATES TO BRING SET OFF AMOUNT NOTIONALLY. F ICTION IS CREATED ONLY FOR THE LIMITED PURPOSE AND THE SAME C ANNOT BE EXTENDED BEYOND THE PURPOSE FOR WHICH IT IS CREATED . THERE IS NO DISPUTE THAT LOSSES INCURRED BY THE ASSESSEE WER E ALREADY SET OFF AND ADJUSTED AGAINST THE PROFITS OF THE EAR LIER YEARS. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE E XERCISED THE OPTION UNDER S.80-IA(2). IN TAX CASE NO.918 OF 2008 THE ASSESSMENT YEAR WAS 2004-05. DURING THE RELEVANT P ERIOD, THERE WERE NO UNABSORBED DEPRECIATION OR LOSS OF TH E ELIGIBLE UNDERTAKINGS AND THE SAME WERE ALREADY ABSORBED IN THE EARLIER YEARS. THERE IS A POSITIVE PROFIT DURING T HE RELEVANT YEAR. THEREFORE, LOSS IN THE YEAR EARLIER TO INITI AL ASSESSMENT YEAR ALREADY ABSORBED AGAINST THE PROFIT OF OTHER B USINESS CANNOT BE NOTIONALLY BROUGHT FORWARD AND SET OFF AG AINST THE PROFIT OF THE ELIGIBLE BUSINESS AS NO SUCH MANDATE IS PROVIDED IN S. 80-IA(5) CIT VS. TTK PHARMA LTD (TAX CASE ( APPEAL ) ITA NOS. 101 TO 103/MDS./2016 :- 5 -: NO.298 OF 2004, DT. 23RD DEC., 2009) FOLLOWED; CIT VS. MEWAR OIL & GENERAL MILLS LTD (2004) 186 CTR (RAJ) 141; ( 2004) 271 ITR 311 (RAJ) CONCURRED WITH; MOHAN BREWERIES & DIS TILLERIES LTD VS. ASST. CIT (2008) 114 TTJ (CHENNAI) 532: (20 08) 3 DTR (CHENNAI) (TRIB) 477 AFFIRMED. 4. ACCORDINGLY, WE ARE OF THE OPINION THAT THE COMMISSIONER OF INCOME TAX (APPEALS), COIMBATORE IS JUSTIFIED IN DE CIDING THE ISSUE IN FAVOUR OF THE ASSESSEE. THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 5. THE NEXT GROUND IS WITH REGARD TO ALLOWING OF W RITING OFF TRADE ADVANCE AS REVENUE EXPENDITURE IN TERMS OF SE CTION 37 OF THE ACT. 5.1 THE FACTS OF THE ISSUE ARE THAT DURING PREVIOU S YEAR RELEVANT TO ASSESSMENT YEAR 2010-11, THE ASSESSEE HAD ADVANC ED A SUM OF ` 650 LAKHS TO M/S.CIBI INTERNATIONAL, CONSEQUENT TO AGREEMENT BETWEEN THEM. IN THE ASSESSMENT YEAR UNDER CONSIDER ATION, THE ASSESSEE HAS GIVEN ANOTHER ` 2 CRORES TO THE SAME COMPANY I.E. M/S.CIBI INTERNATIONAL FOR THE PURPOSE OF ESTABLISH ING AND MAINTAINING INFRASTRUCTURE FACILITIES FOR MANUFACTURE OF KNITTE D GARMENTS AND SUCH FACILITY EXCLUSIVELY FOR THE ASSESSEES PURPOSE IN THE EVENT OF DEFAULT BY M/S.CIBI INTERNATIONAL TO ESTABLISH AND MAINTAIN FACILITY FOR MANUFACTURE OF KNITTED GARMENTS FOR A PERIOD OF 10 YEARS. THE ITA NOS. 101 TO 103/MDS./2016 :- 6 -: ASSESSEE HAVE THE RIGHT TO CLAIM THE AMOUNT SO PAID AS REFUND AND M/S.CIBI INTERNATIONAL MAINTAINED THE FACILITY AS R EQUIRED BY THE ASSESSEE. M/S.CIBI INTERNATIONAL HAS NO OBLIGATION TO REPAY THE SAME TO THE ASSESSEE. BEING THE POSITION IN THE ASSESSME NT YEAR UNDER CONSIDERATION, ASSESSEE CLAIMED SAID SUM OF ` 2 CRORES AS A DEDUCTION U/S.37 OF THE ACT. THE SAME WAS DISALLOWED BY THE A O OBSERVING THAT IT IS ONLY A TRADE ADVANCE AND IT IS NOT AN EXPENDI TURE INCURRED FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE . ON APPEAL LD.CIT(A) ALLOWED THE CLAIM BY FOLLOWING THE ORDER OF TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2010-11 IN ITA NO.1429/MDS./14 FOR ASSESSMENT YEAR 2010-11 DATED31 ST JULY 2014 WHEREIN HELD THAT: 7. IN CONSIDERATION TO SHOULDERING THE RESPONSIBILITIES OF PROVIDING INFRASTRUCTURAL AND O PERATIONAL FACILITIES TO THE ASSESSEE FOR MANUFACTURING KNITTE D GARMENTS, THE ASSESSEE COMPANY PAID A SUM OF ` 650 LAKHS TO M/S. CIBI INTERNATIONAL IN THE PREVIOUS YEAR REL EVANT TO THE ASSESSMENT YEAR UNDER APPEAL. ACCORDING TO THE ASSESSEE, THE PAYMENT HAS BEEN MADE FOR THE PURPOSE OF CARRYING ON OF ITS BUSINESS IN A SUBSTANTIAL MANNER SO AS TO HONOUR THE COMMITMENT OF EXPORT FOR A PERIOD OF 10 YEARS. THE ASSESSEE IDENTIFIED M/S. CIBI INTERNATIONAL AS AN ASSOCIATE FOR THE PURPOSE OF PRODUCTION FOR THE REA SON THAT M/S. CIBI INTERNATIONAL HAS TRAINED AND SKILLED LAB OUR FORCE OF AROUND 40000 WITH THEM, WHO COULD EXECUTE THE WO RK WITHOUT ANY PROBLEM. M/S. CIBI INTERNATIONAL ALSO ITA NOS. 101 TO 103/MDS./2016 :- 7 -: POSSESSED EXPERTISE TO MANUFACTURE KNITTED GARMENTS ACCORDING TO THE BUYERS SPECIFICATIONS. THE ASSES SEE PAID THE SUM OF ` 650 LAKHS M/S. CIBI INTERNATIONAL TO PREPARE AND COMMIT TO THE WORK ENTRUSTED BY THE ASSESSEE COMPANY WITHOUT ANY HITCH OR HINDRANCE. THE ASSESS EE FELT THAT INSTEAD OF ACQUIRING ITS OWN INFRASTRUCTURAL F ACILITIES, IT IS MORE ECONOMICAL TO UTILIZE THE FACILITIES OF A C OMPETENT ASSOCIATE, SO THAT THE ASSESSEE NEED NOT INCUR RECU RRING EXPENDITURE FOR THE MAINTENANCE OF INFRASTRUCTURAL AND OPERATIONAL FACILITIES. ONCE THE ASSESSEE PAID ` 6 50 LAKHS TO M/S. CIBI INTERNATIONAL, THE SAID ASSOCIATE WOUL D PROCURE ALL THE NECESSARY FACILITIES TO MAKE THE OPERATIONS TO THE SATISFACTION OF THE BUSINESS INTERESTS OF THE ASSE SSEE. MORE PARTICULARLY, THE ASSESSEE HAS PAID ` 650 LAKH S TO M/S. CIBI INTERNATIONAL TO EXECUTE HUGE EXPORT ORDER AND THE SAID ASSOCIATE COULD UPDATE ITS OPERATIONAL FACILIT IES TO THE REQUIRED STANDARDS FOR THE ADVANTAGE OF THE BUSINES S OF THE ASSESSEE. 8. THE ASSESSEE CLAIMED THIS AMOUNT OF ` 650 LAKHS AS A DEDUCTION IN COMPUTING ITS TAXABLE INCOM E FOR THE IMPUGNED ASSESSMENT YEAR. THE DEDUCTION HAS BE EN CLAIMED UNDER SEC.37 OF THE ACT. BUT THE ASSESSING OFFICER DID NOT ALLOW THE ABOVE DEDUCTION CLAIMED BY THE AS SESSEE. THE ASSESSING OFFICER HELD THAT THE ACQUISITION OF FACILITIES BY M/S. CIBI INTERNATIONAL AGAINST PAYMENT OF ` 650 LAKHS MADE BY THE ASSESSEE, WOULD RESULT IN ENDURING BENE FIT TO THE ASSESSEE AND, THEREFORE, THE PAYMENT COULD NOT BE CONSIDERED AS A REVENUE EXPENDITURE. AS IT IS ALSO NOT IN THE NATURE OF TRADE ADVANCE, THE ASSESSING OFFICER HELD THAT THE PAYMENT IS VOLUNTARY AND THERE WAS NO OBLIGATIO N FOR THE ASSESSEE TO MAKE SUCH PAYMENT. THE MERE FACT T HAT THE PAYMENT WAS MADE UNDER AN AGREEMENT, DOES NOT ITA NOS. 101 TO 103/MDS./2016 :- 8 -: ESTABLISH THAT THE EXPENDITURE HAS BEEN INCURRED DU RING THE YEAR. THE SUM GIVEN BY THE ASSESSEE WAS SPENT FOR IMPROVING THE INFRASTRUCTURE OF M/S. CIBI INTERNATI ONAL. THE ASSESSING OFFICER ALSO OBSERVED THAT M/S. CIBI INTE RNATIONAL HAS SHOWN THIS ADVANCE AS ITS BUSINESS LIABILITY IN ITS BALANCE SHEET. WHEN THE ASSESSEE HAS CLAIMED IT AS A DEDUCTION UNDER SEC.37, M/S. CIBI INTERNATIONAL OUG HT TO HAVE SHOWN IT AS INCOME. FOR THE REASONS STATED AB OVE, HE DISALLOWED THE CLAIM OF DEDUCTION AND ADDED BACK TH E SUM OF ` 650 LAKHS TO THE INCOME OF THE ASSESSEE COMPAN Y. 9. IN FIRST APPEAL, AFTER GOING THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME-TAX(APPEALS) HELD THAT ON THE PAYMENT OF ` 6 50 LAKHS TO M/S. CIBI INTERNATIONAL, AN ENTIRELY NEW C APITAL ASSET FOR THE EXCLUSIVE USE OF THE ASSESSEE HAS BEE N CREATED AND THEREFORE, IT CANNOT BE DENIED THAT THE ASSESSEE IS DERIVING ENDURING BENEFIT. HE CONFIRME D THE FINDING OF THE ASSESSING OFFICER ON THE ABOVE ISSUE . 10. IN THE LIGHT OF THE FACTS STATED ABOVE AND THE ORDERS PASSED BY THE LOWER AUTHORITIES, WE CONS IDERED THE NATURE OF PAYMENT OF ` 650 LAKHS, IN DETAIL. WE HAVE ALSO CONSIDERED THE DECISION OF THE HONBLE SUPREME COURT RENDERED IN THE CASE OF EMPIRE JUTE CO. LTD. VS. CI T, 124 ITR 1, RELIED ON BY THE LEARNED COUNSEL APPEARING F OR THE ASSESSEE. 11. THE ASSESSEE HAS PAID THE SUM OF ` 650 LAKHS TO M/S. CIBI INTERNATIONAL ON THE BASIS OF A BUSINESS AGREEMENT. THE BUSINESS AGREEMENT CASTS DUTIES AND OBLIGATIONS ON THE ASSESSEE AS WELL AS ON M/S. CIBI INTERNATIONAL. AS FAR AS THE ASSESSEE IS CONCERNED , IT MUST PAY ` 650 TO M/S. CIBI INTERNATIONAL TO IMPROVE AND UPDATE ITS OPERATIONAL FACILITIES TO UNDERTAKE THE WORK EN TRUSTED BY ITA NOS. 101 TO 103/MDS./2016 :- 9 -: THE ASSESSEE COMPANY IN CONTEMPLATION OF FULFILLING ITS EXPORT OBLIGATIONS. M/S. CIBI INTERNATIONAL, ON TH E OTHER HAND, WAS BOUND TO EXECUTE PRODUCTION ORDERS IN CONFORMITY TO THE QUALITY STANDARD PRESCRIBED BY TH E FOREIGN BUYERS. AS PER THE AGREEMENT, M/S. CIBI INTERNATIO NAL WAS ALSO BOUND TO REPAY THE SUM OF ` 650 LAKHS TO THE ASSESSEE COMPANY, IF M/S. CIBI INTERNATIONAL FAILS TO PERFOR M THE OBLIGATIONS CAST ON IT. SINCE SUCH A LIABILITY IS CAST ON M/S. CIBI INTERNATIONAL AS PER THE AGREEMENT, M/S. CIBI INTERNATIONAL MIGHT HAVE SHOWN THE AMOUNT OF ` 650 LAKHS AS A LIABILITY IN ITS BALANCE SHEET. SUCH A DISCLO SURE IN THE BALANCE SHEET OF M/S. CIBI INTERNATIONAL NEED NOT I NFLUENCE IN DECIDING THE REAL CHARACTER OF THE PAYMENT OF ` 650 LAKHS MADE BY THE ASSESSEE COMPANY. 12. IT IS VERY DIFFICULT TO ACCEPT THE FINDINGS OF THE LOWER AUTHORITIES THAT BY PAYING `650 LAKHS, TH E ASSESSEE COMPANY HAD ACQUIRED NEW CAPITAL ASSET OF ENDURING BENEFIT. THERE IS NO DISPUTE ON THE FACT THAT THE FACILITIES WERE CREATED IN THE WORK PLACE OF M/S. C IBI INTERNATIONAL AND NOT IN THE PREMISES OF THE ASSESS EE COMPANY. THEREFORE, IF AT ALL ANY NEW ASSET IS CRE ATED BY UTILIZING THIS AMOUNT, THAT ASSET IS OWNED BY M/S. CIBI INTERNATIONAL. THE RIGHT OF THE ASSESSEE IS ONLY T O UTILIZE SUCH FACILITY FOR THE PURPOSE OF CARRYING ON OF ITS BUSINESS. THEREFORE, IT IS NOT POSSIBLE TO SAY THAT THE ASSES SEE COMPANY HAS ACQUIRED ANY CAPITAL ASSET BY PAYING ` 650 LAKHS TO M/S. CIBI INTERNATIONAL. SUCH A FINDING I S NOT POSSIBLE IN THE FACTS OF THE PRESENT CASE. 13. IT IS TO BE SEEN THAT THE PAYMENT WAS NOT MADE BY THE ASSESSEE COMPANY GRATUITOUSLY. THE PAY MENT WAS MADE AGAINST THE BUSINESS AGREEMENT ENTERED INT O BETWEEN THE ASSESSEE AND M/S. CIBI INTERNATIONAL, W HEREBY ITA NOS. 101 TO 103/MDS./2016 :- 10 - : M/S. CIBI INTERNATIONAL IS OBLIGED TO CARRY OUT THE PRODUCTION ASSIGNED BY THE ASSESSEE COMPANY CONFORMING TO THE STANDARDS AND QUALITY. THAT IS A BUSINESS OBLIGATI ON UNDERTAKEN BY M/S. CIBI INTERNATIONAL. THE QUESTIO N, THEREFORE, TO BE DECIDED IS WHETHER THE ARRANGEMENT MADE BY THE ASSESSEE COMPANY WITH M/S. CIBI INTERNATION AL IS FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSE SSEE AND WHETHER JUSTIFIED IN THE FACTS AND CIRCUMSTANC ES OF THE CASE. THE SECOND QUESTION, TO BE CONSIDERED IS WHE THER THE PAYMENT OF ` 650 LAKHS IS COMMENSURATE AND REASONABLE TO THE TASKS ASSIGNED TO M/S. CIBI INTER NATIONAL. 14. AS ALREADY STATED IN PARAGRAPHS ABOVE, THE ASSESSEE COMPANY WAS GOING TO RECEIVE BULK ORDERS FOR EXPORT OF KNITTED GARMENTS FOR A PERIOD OF 10 YEARS . THE EXPORT ORDERS ARE FOR AN AMOUNT OF US$ 4 BILLION APPROXIMATELY AMOUNTING TO ` 17,600 CRORES AT THAT POINT OF TIME. THIS IS A HUGE ORDER. THEREFORE, IT WAS NEC ESSARY FOR THE ASSESSEE COMPANY TO ENSURE ATLEAST FOR A PERIOD OF 10 YEARS THAT SUFFICIENT OPERATIONAL FACILITIES ARE AV AILABLE AT ITS DISPOSAL. THE EXECUTION OF EXPORT ORDERS WOULD BE POSSIBLE ONLY IF SUCH REFINED FACILITIES ARE AVAILA BLE AT THE DISPOSAL OF THE ASSESSEE COMPANY. THEREFORE, THERE IS NO DOUBT THAT THE ASSESSEE WAS BADLY IN NEED OF SUFFIC IENT OPERATIONAL FACILITIES TO EXECUTE THE EXPORT ORDER. IF THOSE FACILITIES WERE CREATED IN ASSESSEES OWN PREMISES, IT WOULD HAVE BEEN DEFINITELY HELD AS AN EXPENDITURE INCURRE D FOR THE PURPOSE OF BUSINESS CARRIED ON BY THE ASSESSEE. 15. THE QUESTION IS THAT WHETHER THE CHARACTER OF THE EXPENDITURE WOULD BE ALTERED, IF THE ASSESSE E ENTRUSTS THE WORK TO ANOTHER ASSOCIATE ON THE BASIS OF AN AGREEMENT. THERE IS NO DOUBT THAT SUFFICIENT FACIL ITIES ARE NECESSARY FOR THE ASSESSEE TO EXECUTE THE EXPORT OR DERS. ITA NOS. 101 TO 103/MDS./2016 :- 11 - : INSTEAD OF CREATING FACILITIES FOR ITSELF, THE ASSE SSEE ENTERED INTO AN AGREEMENT WITH M/S. CIBI INTERNATIONAL SO T HAT, THE PRODUCTION FACILITIES AVAILABLE WITH THE LATTER WOU LD BE UTILIZED FOR PRODUCING THE KNITTED GOODS REQUIRED B Y THE ASSESSEE COMPANY FOR MEETING ITS EXPORT COMMITMENTS . WHILE TAKING THE DECISION TO RELY ON M/S. CIBI INTE RNATIONAL FOR AVAILING PRODUCTION FACILITIES RATHER THAN ACQU IRING SUCH FACILITIES BY ITSELF, THE ASSESSEE COMPANY HAS ASSE SSED THE ECONOMY OF SCALE AND ALL OTHER OPERATIONAL AND BUSI NESS CONSIDERATIONS. IN ITS WISDOM, THE ASSESSEE FOUND THAT IT IS MORE ECONOMICAL TO PAY A LUMP SUM AMOUNT TO M/S. CI BI INTERNATIONAL TO DEVELOP THE PRODUCTION FACILITIES FOR ASSESSEES OWN BUSINESS, RATHER THAN ESTABLISHING S UCH FACILITIES IN ITS OWN WORK PLACE. THEREFORE, IT I S NOT POSSIBLE TO QUESTION THE BUSINESS DECISION ARRIVED AT BY THE ASSESSEE COMPANY, UNLESS IT IS OTHERWISE PROVED TO BE A DEVI CE TO CONCEAL ANY ULTERIOR MOTIVE. SUCH ALLEGATIONS ARE ANYHOW NOT MADE IN THE PRESENT CASE. 16. THEREFORE, THE SIMPLE FACT EMERGING OUT OF THE DISCUSSION IS THAT THE ASSESSEE COMPANY INSTEA D OF CREATING THE FACILITIES IN ITS OWN PREMISES, SELECT ED M/S. CIBI INTERNATIONAL TO SHOULDER THE RESPONSIBILITY OF THE PRODUCTION OF KNITTED GARMENTS UTILIZING THEIR FACI LITIES AND TO IMPROVE THE FACILITIES, AN AMOUNT OF ` 650 LAKHS WAS PAID. A CLEAR NEXUS IS APPARENT BETWEEN THE PAYMEN T OF ` 650 LAKHS TO M/S. CIBI INTERNATIONAL AND THE BUSINE SS INTERESTS OF THE ASSESSEE COMPANY. THEREFORE, IT I S CLEAR THAT THE ASSESSEE COMPANY HAS MADE THE PAYMENT OF `650 LAKHS TO M/S. CIBI INTERNATIONAL ON THE BASIS OF TH E BUSINESS AGREEMENT FOR THE PURPOSE OF CARRYING ON OF ITS BUS INESS MORE EFFECTIVELY AND MORE ECONOMICALLY. IN SUCH CIRCUMSTANCES, IT IS NOT POSSIBLE TO HOLD THAT THE ASSESSEE ITA NOS. 101 TO 103/MDS./2016 :- 12 - : HAS ACQUIRED AN ENDURING BENEFIT BY CREATING NEW CA PITAL ASSET BY MAKING PAYMENT OF ` 650 LAKHS TO M/S. CIBI INTERNATIONAL. IN FACT, THE ASSESSEE HAS MADE THE PAYMENT OF ` 650 LAKHS TO M/S. CIBI INTERNATIONAL FOR THE P URPOSE OF EXECUTING ITS EXPORT COMMITMENT SPANNING OVER A PER IOD OF 10 YEARS. THE EXPENDITURE IS, THEREFORE, INCURRED FOR RUNNING THE BUSINESS AND NOT FOR CREATING THE FACIL ITIES TO RUN THE BUSINESS. THEREFORE, WE FIND THAT THE PAYMENT OF ` 650 LAKHS MADE BY THE ASSESSEE COMPANY IS AN EXPENDITURE ALLOWABLE UNDER SEC.37 OF THE ACT. 17. THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND THE ASSESSING OFFICER IS DIRECTED TO D ELETE THE ADDITION OF ` 650 LAKHS. AGAINST THIS THE REVENUE IS IN APPEAL BEFORE US. 5.2 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE AMOUNT OF ` 2 CRORES PAID BY THE ASSESSEE TO M/S.CIBI INTERNATIONAL FOR THE PURPOSE OF ESTABLISH ING AND MAINTAINING INFRASTRUCTURE FACILITIES FOR MANUFACTURE OF KNITTE D GARMENTS AND IF M/S.CIBI INTERNATIONAL MAINTAINS THE SAID FACILITY EXCLUSIVELY FOR THE BENEFIT OF ASSESSEE, THE ASSESSEE CANNOT CLAIM THE SAME AS REFUND. ON THE OTHER HAND, IF THE M/S.CIBI INTERNATIONAL FA ILED TO MAINTAIN THE SAID FACILITY, FOR THE EXCLUSIVE BENEFIT OF ASSESSE E FOR A PERIOD OF 10 YEARS THAN THE ASSESSEE HAS A RIGHT TO CLAIM THE SA ME AS REFUND. THE SAME WAS EXAMINED BY THE TRIBUNAL ON EARLIER OCCASI ON FOR ASSESSMENT YEAR 2010-11 AND IT WAS ALLOWED AS DEDUCTION IN THE HANDS OF ASSESSEE ITA NOS. 101 TO 103/MDS./2016 :- 13 - : U/S.37 OF THE ACT. BEING SO, WE ARE NOT IN A POSITI ON TO TAKE CONTRARY VIEW AS A JUDICIAL DISCIPLINE REQUIRES CONSISTENCY IN ITS PROCEEDINGS. HENCE, WE DECLINE TO INTERFERE WITH THE ORDER OF CI T(A) ON THIS ISSUE. THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 6. THE NEXT GROUND FOR OUR CONSIDERATION IS WITH R EGARD TO ALLOWING THE DEDUCTION TOWARDS COST OF BUILDING CON STRUCTION ON LEASEHOLD LAND AS A REVENUE EXPENDITURE. 6.1 THE FACTS OF THE ISSUE ARE THAT THE AO HAD TRE ATED THE AMOUNT AS CAPITAL EXPENDITURE AS THE SUPER STRUCTUR E OF THE BUILDING HAS BEEN CONSTRUCTED ON LEASED LAND BY THE ASSESSEE . THE MAIN REASON FOR DISALLOWANCE BY THE AO IS THAT HUGE AMOUNT OF M ONEY HAS BEEN SPENT WITHOUT GETTING OWNERSHIP OVER THE LAND WHICH IS LEASEHOLD. THE AO HAS INVOKED THE EXPLANATION 1 TO SEC.32(1) TO HO LD THAT EXPENDITURE IS CAPITAL IN NATURE AND THE CLAIM MADE BY THE ASSE SSEE IS REJECTED. ON APPEAL, THE LD.CIT(A) RELIED ON JURISDICTIONAL HIGH COURT OF MADRAS IN THE CASE OF TVS LEAN LOGISTICS LTD.,(293 ITR 432) W HEREIN HELD THAT BECAUSE THE ASSESSEE DID NOT ACQUIRE A CAPITAL ASSE T VIZ. THE LAND, IN THE INSTANT CASE, BUT HAS PUT UP A CONSTRUCTION OF THE BUILDING ONLY FOR THE BUSINESS ADVANTAGE, THE ENTIRE CONSTRUCTION COS T IS ADMISSIBLE AS THE REVENUE EXPENDITURE. FURTHER, LD.CIT(A) OBSERVE D THAT THOUGH THE AO HAS MADE A STATEMENT THAT THE LEASE DEED IS A SH AM TRANSACTION, ITA NOS. 101 TO 103/MDS./2016 :- 14 - : EVIDENCE TO CORROBORATE THIS HAS NOT BEEN BROUGHT O N RECORD. CONSIDERING THE BINDING NATURE OF THE JURISDICTION AL HIGH COURT THE ADDITION MADE INVOKING EXPLANATION 1 TO SEC.32(1), TREATING THE AMOUNT OF ` 4,06,25,386/- AS CAPITAL EXPENDITURE IS DELETED BY LD.CIT(A). AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 6.2 LD.D.R STRONGLY SUPPORTED THE ORDER OF AO ON T HIS ISSUE AND PROVISIONS OF THE SECTION 32(1) ARE APPLICABLE TO T HE FACTS OF THE CASE. 6.3 ON THE CONTRARY, LD.A.R SUBMITTED THAT THE ASS ESSEE HAD TAKEN LAND ON LEASE AND ON SUCH LANDS TAKEN ON LEAS E, THE ASSESSEE CONSTRUCTED BUILDINGS/SUPERSTRUCTURE ON IT. SUCH SU PER STRUCTURES ARE OWNED BY THE OWNERS OF THE LAND AND THE ASSESSEE HA D ONLY THE RIGHT OF POSSESSION OVER A LIMITED PERIOD. ACCORDING TO T HE LD.A.R, AFTER THE EXPIRY OF THE LEASE PERIOD THE ASSESSEE HAD TO VACA TE THE LAND AND THE BUILDING/SUPER STRUCTURES CONSTRUCTED BY ASSESSEE S HALL THEN BELONG TO THE LAND OWNER AND THE ASSESSEE HAS NO RIGHT/CLAIM OVER IT. THE LD.A.R FURTHER REITERATED THAT THE ASSESSEE HAD NOT ACQUIR ED ANY ASSET OR ADVANTAGE OF AN ENDURING NATURE. THE ASSESSEE IS NO T THE OWNER OF THESE FACILITIES, BUT HAD ONLY A RIGHT OF POSSESSIO N FOR A LIMITED PERIOD. THESE STRUCTURES WERE PUT UP FOR THE BUSINESS PURPO SES AND HAD TO BE DEMOLISHED/REMOVED AFTER THE PERIOD OF LEASE AND HE NCE ARE NOT PERMANENT NATURE. FURTHER, THE LD.A.R SUBMITTED THA T THE PAYMENT OF ITA NOS. 101 TO 103/MDS./2016 :- 15 - : MONTHLY RENT IS ONLY REVENUE EXPENDITURE AND HENCE PAYMENT OF SUCH REVENUE EXPENDITURE CUMULATIVELY IN THE YEAR IS ALS O REVENUE IN NATURE. RELATING TO REVENUE EXPENDITURE ON LEASEHOLD BUILDI NG, THE LD.A.R SUBMITTED THAT THE EXPENSES WERE ONLY TO MAKE THE S TRUCTURE USEFUL TO THE ASSESSEES BUSINESS DURING THE TENURE OF THE LE ASE PERIOD WHICH WAS FOR A SHORT PERIOD. THE LD.A.R RELIED ON THE FO LLOWING CASE LAWS. 1. IN THE CASE OF CIT VS.TVS LEAN LOGISTICS LTD. (2 93 ITR 432)(MAD.) WHEREIN HELD THAT WHAT CONSTITUTES CAPIT AL EXPENDITURE AND WHAT DOES NOT, TO ATTRACT EXPLANATI ON 1 TO SECTION 32(1) OF THE ACT DEPENDS UPON THE CONSTRUCTION OF ANY STRUCTURE OR WORK IN RELATION T O AND BY WAY OF RENOVATION, EXTENSION OR IMPROVEMENT TO A BUILDING TAKEN ON LEASE BY THE ASSESSEE FOR CARRYING ON HIS BUSINESS AND PROFESSION BUT NOT IN A CASE OF CONSTRUCTION OF ANY STRUCTURE OR DOING ANY WORK WHERE SUCH BUILDING IS PUT UP OR CONSTRUCTED F OR THE PURPOSE OF THE BUSINESS OR PROFESSION OF THE ASSESSEE IN LAND TAKEN ON LEASE BY THE ASSESSEE. TH E ASSESSEE DID NOT ACQUIRE A CAPITAL ASSET BUT HAD PU T UP A CONSTRUCTION OF THE BUILDING ONLY FOR BUSINESS ADVANTAGE WITH THE RESULT THAT THE ENTIRE CONSTRUCT ION COST WAS ADMISSIBLE AS REVENUE EXPENDITURE. 2. IN THE CASE OF CIT VS.BOMBAY DYEING & MFG. CO. L TD., REPORTED IN 219 ITR 521(SC) WHEREIN HELD THAT A COMPANY WAS AMALGAMATED WITH THE ASSESSEE- COMPANY. IN THAT CONNECTION AN EXPENDITURE OF RS. ITA NOS. 101 TO 103/MDS./2016 :- 16 - : 10,350 WAS INCURRED BY THE ASSESSEE-COMPANY TOWARDS PROFESSIONAL CHARGES PAID TO A FIRM OF SOLICITORS. IN THE ASSESSMENT PROCEEDINGS, DEDUCTIO N OF THE SAID AMOUNT WAS CLAIMED AS REVENUE EXPENDITURE. THE INCOME-TAX OFFICER AND THE APPELLATE ASSISTANT COMMISSIONER REJECTED THE CLAIM BUT THE TRIBUNAL ALLOWED IT ON THE GROUND THAT AS B OTH THE COMPANIES WERE CARRYING ON COMPLEMENTARY BUSINESS AND THEIR AMALGAMATION WAS NECESSARY FOR THE SMOOTH AND EFFICIENT CONDUCT OF THE BUSINESS, I T WAS AN EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THE TRIBUNAL REFUSED TO MAKE A REFERENCE AND THE HIGH COURT REJECTED AN APPLICATION TO DIRECT REFERENCE. ON APPEAL TO THE SUPREME COURT: HELD, DISMISSING THE APPEAL, THAT THE EXPENDITURE INCURRED TOWARDS PROFESSIONAL CHARGES OF THE SOLICITORS' FIRM FOR THE SERVICES RENDERED IN CONNE CTION WITH THE AMALGAMATION WAS IN THE COURSE OF CARRYING ON OF THE ASSESSEE'S BUSINESS AND, THEREFORE, DEDUCTIBLE AS A REVENUE EXPENDITURE. 3. IN THE CASE OF CIT VS. MADRAS AUTO SERVICE P. L TD. IN 233 ITR 468 (MAD.) WHEREIN HELD THAT THAT RIGHT FRO M INCEPTION, THE BUILDING WAS OF THE OWNERSHIP OF THE LESSOR. THEREFORE, BY SPENDING THIS MONEY, THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET. THE ONL Y ADVANTAGE WHICH THE ASSESSEE DERIVED BY SPENDING THE MONEY WAS THAT IT GOT THE LEASE OF A NEW BUILDI NG ITA NOS. 101 TO 103/MDS./2016 :- 17 - : AT A LOW RENT. FROM THE BUSINESS POINT OF VIEW, THEREFORE, THE ASSESSEE GOT THE BENEFIT OF REDUCED RENT. THE HIGH COURT HAD, THEREFORE, RIGHTLY CONSIDERED THIS AS OBTAINING A BUSINESS ADVANTAGE. THE EXPENDITURE WAS, THEREFORE, TO BE TREATED AS REVENUE EXPENDITURE. 4. IN THE CASE OF ACIT VS. M.M.PUBLICATION LTD., ( 43 SOT 59) WHEREIN HELD THAT ENTIRE CONSTRUCTION COST TOWARDS RENOVATION IS ADMISSIBLE FOR DEDUCTION U/S.37(1) OF THE ACT. HE FURTHER SUBMITTED THAT JUDICIAL DISCIPLINE REQUI RES CONSISTENCY IN ITS PROCEEDINGS AND FOR THAT PROPOSI TION, HE RELIED ON THE FOLLOWING DECISIONS. 5. IN THE CASE OF SANGHVI & DOSHI ENTERPRISE LTD. VS. ITO IN [2011] 141 TTJ 1(ITAT CHENNAI) WHEREIN HELD THAT IF THERE IS A DECISION OF JURISDICTIONAL HIGH COURT ON RELEVANT ISSUE, THE SAME TO BE FOLLOWED. 6.IN THE CASE OF ITO VS.RANISAT FABRIC MILLS (P) LT D. IN 116 TTJ 177 (MUM.) WHEREIN HELD THAT A SOLITARY JUDGEMENT OF ANY HIGH COURT IN THE COUNTRY ON A PARTICULAR POINT SHOULD BE FOLLOWED BY ALL THE BENC HES OF THE TRIBUNAL. 7. AFFECTION INVESTMENTS LTD. VS. ACIT IN [2009] 22 2 CTR 387 (GUJ) WHEREIN HELD THAT ONCE THE TRIBUNAL COME S ITA NOS. 101 TO 103/MDS./2016 :- 18 - : TO THE CONCLUSION THAT THE FACT SITUATION IN THE CA SE BEFORE IT IS IDENTICAL TO THE ONE CONSIDERED BY THE TRIBUNAL IN EARLIER MATTER, IT HAS NO RIGHT OF JURISDICTION TO RECORD A DECISION ENTIRELY ON CONCL USION REACHED BY ANY CO-ORDINATE BENCH ON THE SAME SET OF FACTS AND CIRCUMSTANCES. 8. IN THE CASE OF ACIT VS. AURANGABAD HOLDIAY RESO RTS P. LTD. IN 111 TTJ 741 (PUNE) WHEREIN HELD THAT DECISION OF NON-JURISDICTIONAL HIGH COURT IS A BIND ING PRECEDENT FOR THE TRIBUNAL UNLESS A CONTRARY DECISI ON GIVEN BY ANY OTHER HIGH COURT. 6.4 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CASE, THE ASSESSEE HAS TAKEN THE LAND ON LEASEHOLD ON WHICH THE ASSESSEE CONSTRUCTED SUPER S TRUCTURE AND CLAIMED AS REVENUE EXPENDITURE. THE SAME WAS ALLOWE D BY THE LD.CIT(A). THE LD.D.R CONTENDED THAT THE ASSESSEE C ONSTRUCTED THE BUILDING IN THE LEASED LAND AND IT IS NOT THE CASE OF RENOVATION OF THE LEASED BUILDING OR IMPROVEMENT OF THE LEASED BUILDI NG. FOR SETTLING THE CONTROVERSY, WE HAVE TO GO THROUGH THE EXPLANATION 1 TO SEC.32(1) OF THE ACT WHICH WAS INSERTED BY THE TAXATION LAWS (AM ENDMENT AND ITA NOS. 101 TO 103/MDS./2016 :- 19 - : MISCELLANEOUS PROVISIONS) ACT, 1986 W.E.F 1.4.1998 WHICH DEALS WITH THE SITUATION WHERE THE EXPENDITURE HAS BEEN INCURR ED BY THE ASSESSEE ON CONSTRUCTION OF ANY STRUCTURE ON LEASE HOLD PREM ISES. THE EXPLANATION 1 IS REPRODUCED HEREWITH BELOW:- EXPLANATION 1. WHERE THE BUSINESS OR PROFESSION OF THE ASSESSEE IS CARRIED ON IN A BUILDING NOT OWNED BY H IM BUT IN RESPECT OF WHICH THE ASSESSEE HOLDS A LEASE OR OTHE R RIGHT OF OCCUPANCY AND ANY CAPITAL EXPENDITURE IS INCURRED B Y THE ASSESSEE FOR THE PURPOSES OF THE BUSINESS OR PROFES SION ON 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. 6.5 TO FALL WITHIN THE AMBIT OF EXPLANATION 1 QUES TIONS WHICH ARE TO BE ANSWERED ARE: (I) WHETHER THE ASSESSEE IS CARRYING ON BUSINESS OR PROFESSION IN A LEASEDHOLD BUILDING OR OTHER RIGHTS OF OCCUPANCY? (II) WHETHER THE ASSESSEE HAS INCURRED ANY CAPIT AL EXPENDITURE FOR THE PURPOSE OF BUSINESS ON THE CONSTRUCTION OF ANY STRUCTURE OR DOING ITA NOS. 101 TO 103/MDS./2016 :- 20 - : OF ANY WORK IN OR IN RELATION TO AND BY WAY OF RENO VATION OR EXTENSION OR IMPROVEMENT IN THE BUILDING. 6 .6 IF THE ANSWER TO THE AFOREMENTIONED QUESTIONS IS IN AFFIRMATIVE, THE ASSESSEE FALLS WITHIN THE PURVIEW OF EXPLANATIO N ITO SEC. 32(1). IN THE INSTANT CASE, IT IS AN ADMITTED FACT THAT THE A SSESSEE HAS TAKEN LAND ON LEASE FOR SETTING UP OF ITS BUSINESS. IT IS ALSO UNDISPUTED THAT THE ASSESSEE HAS CONSTRUCTED THE BUILDING AT THE LEASED PREMISES. THUS THE ASSESSEE HAS CONSTRUCTED SUPER STRUCTURE. THESE CON STRUCTION ACTIVITIES CARRIED OUT BY THE ASSESSEE, AND CONSEQUENT TO THIS THE LIABILITY OF RENT IS REDUCED SUBSTANTIALLY. THE ASSESSEE IN ORDER TO SUPPORT HIS CASE HAS RELIED ON THE JUDGMENT OF THE HONBLE MADRAS HIGH C OURT IN THE CASE OF TVS LEAN LOGISTICS LTD. (SUPRA). IN THE SAID CASE, THE ASSESSEE HAD CONSTRUCTED A BUILDING ON THE LEASED LAND FOR THE B USINESS ADVANTAGE. THE HIGH COURT HELD THAT THE ENTIRE COST OF CONSTRU CTION IS ADMISSIBLE AS REVENUE EXPENDITURE. EXPLANATION I CATEGORICALLY STATES THAT THE BUSINESS OR PROFESSION IS CARRIED ON IN A LEASED BU ILDING AND NOT ON LAND. THE HONBLE HIGH COURT IN PATA 4.4 OF THE JUD GMENT HELD AS UNDER: 4.4 WHAT CONSTITUTES A CAPITAL EXPENDITURE AND WHA T DOES NOT, TO ATTRACT EXPLN. 1 TO SECTION 32(1) OF THE AC T 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 WHICH IS PUT UP IN A BU ILDING TAKEN ON LEASE BY HIM FOR CARRYING ON HIS BUSINESS AND ITA NOS. 101 TO 103/MDS./2016 :- 21 - : PROFESSION OF THE ASSESSEE, BUT NOT IN A CASE OF CO NSTRUCTION OF ANY STRUCTURE OR DOING ANY WORK OR RELATION TO W HERE SUCH BUILDING IS PUT UP/CONSTRUCTED FOR THE PURPOSE OF B USINESS OR THE PROFESSION OF THE ASSESSEE IN A LAND TAKEN ON L EASE BY THE ASSESSEE. 6 .7 THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF MADRAS AUTO SERVICE (P) LTD., 233 1TR 468 WHILE DEALING WITH A SIMILAR CONTROVERSY HAS OBSERVED AS UNDER: 5 IN ORDER TO DECIDE WHETHER THIS EXPENDITURE IS R EVENUE EXPENDITURE OR CAPITAL EXPENDITURE, ONE HAS TO LOOK AT THE EXPE NDITURE FROM A COMMERCIAL POINT OF VIEW. WHAT ADVANTAGE DID THE AS SESSEE GET BY CONSTRUCTING A BUILDING WHICH BELONGED TO SOMEBODY ELSE AND SPENDING MONEY FOR 214/COCH/2014 SUCH RECONSTRUCTION? THE AS SESSEE GOT A LONG LEASE OF A NEWLY CONSTRUCTED BUILDING SUITABLE TO I TS OWN BUSINESS AT A VERY CONCESSIONAL RENT. THE EXPENDITURE THEREFORE, WAS MADE IN ORDER TO SECURE A LONG LEASE OF NEW AND MORE SUITABLE BUS INESS PREMISES AT A LOWER RENT. IN OTHER WORDS, THE ASSESSEE MADE SUBST ANTIAL SAVINGS IN MONTHLY RENT FOR A PERIOD OF 39 YEARS BY EXPENDING THESE AMOUNTS. THE SAVING IN EXPENDITURE WAS A SAVING IN REVENUE EXPEN DITURE IN THE FORM OF RENT. WHATEVER SUBSTITUTES FOR REVENUE EXPENDITU RE SHOULD NORMALLY BE CONSIDERED AS REVENUE EXPENDITURE. MOREOVER, ASS ESSEE IN THE PRESENT CASE DID NOT GET ANY CAPITAL ASSET BY SPEND ING THE SAID AMOUNTS. THE ASSESSEE THEREFORE COULD NOT HAVE CLAI MED ANY DEPRECIATION. LOOKING TO THE NATURE OF THE ADVANTAG E WHICH THE ASSESSEE OBTAINED IN A COMMERCIAL SENSE, THE EXPEND ITURE APPEARS TO BE REVENUE EXPENDITURE. 6.8. FURHTER JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. HARI VIGNESH MOTORS P. LTD IN [2006] 282 ITR 338 (MAD) H ELD AS FOLLOWS:- ITA NOS. 101 TO 103/MDS./2016 :- 22 - : HELD: DISMISSING THE REVENUES APPEAL, THAT THE ASS ESSEE HAD PUT UP THE GROUND FLOOR OVER THE EXISTING BASEMENT FLOOR ONLY TO HAVE THE BUSINESS PREMISES ACCORDING TO THE SPEC IFICATIONS PUT FORTH BY TVS SUZUKI LTD. AND, FURTHER, THERE WA S A CLEAR- CUT STIPULATION IN THE LEASE DEED THAT REIMBURSEMEN T OF THE EXPENDITURE WAS NOT POSSIBLE FROM THE OWNER OF THE PREMISES. HENCE, IN VIEW OF THE BUSINESS EXIGENCIES , THE ASSESSEE HAD PUT UP THE CONSTRUCTION IN AND BY WHIC H THE ASSESSEE WOULD NOT GET ANY CAPITAL ASSET. THE EXPEN DITURE WAS, THEREFORE, DEDUCTIBLE . 6.9 FURTHER, THE CO-ORDINATE BENCH IN THE CASE OF M/S.THE CONTINENTAL ENTERPRISE, IN ITA NO.700/MDS./2014 DAT ED 11.09.2015 HELD AS FOLLOWS:- 7. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD . IN THE PRESENT CASE, THE ASSESSEE HAS TAKEN THE LAND ON LEASEHOLD ON WHICH THE ASSESSEE CONSTRUCTED SUPER STRUCTURE AND CLAIMED AS REVENUE EXPENDITURE. THE SAME WAS DISALLOWED BY THE CIT(A). THE LD. DR CONTENDED THAT THE ASSESSEE CONSTRUCTED THE BUILDIN G IN THE LEASED LAND AND IT IS NOT THE CASE OF RENOVATION OF THE LEASED BUILDING OR IMPROVEMENT OF THE LEASED BUILDING AS IN THE CASE O F ABT LTD CITED SUPRA AS HELD BY THE TRIBUNAL. FOR SETTLING THE CONTROVER SY, WE HAVE TO GO THROUGH THE EXPLANATION 1 TO SEC. 32(1) OF THE ACT WHICH WAS INSERTED BY THE TAXATION LAWS (AMENDMENT AND MISCELLANEOUS PROV ISIONS) ACT, 1986 WITH EFFECT FROM 1.4.1988 WHICH DEALS WITH THE SITU ATION WHERE THE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE ON CO NSTRUCTION OF ANY STRUCTURE ON LEASEHOLD PREMISES. THE EXPLANATION 1 IS REPRODUCED HEREWITH BELOW: ITA NOS. 101 TO 103/MDS./2016 :- 23 - : EXPLANATION 1. WHERE THE BUSINESS OR PROFESSION 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 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 OF IMPROVEMENT TO, BUILDING THEN, THE PROVISIONS OF THIS CLAUSE SHALL APPLY AS IF THE SAI D STRUCTURE OR WORK IS A BUILDING OWNED BY THE ASSESSEE. 8. TO FALL WITHIN THE AMBIT OF EXPLANATION 1 QUESTI ONS WHICH ARE TO BE ANSWERED ARE: (I) WHETHER THE ASSESSEE IS CARRYING ON BUSINESS OR PROFESSION IN A LEASED BUILDING OR OTHER RIGHTS OF OCCUPANCY? (II) WHETHER THE ASSESSEE HAS INCURRED ANY CAPITAL EXPENDITURE FOR THE PURPOSE OF BUSINESS 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 IN THE BUILDING. 9. IF THE ANSWER TO THE AFOREMENTIONED QUESTIONS IS IN AFFIRMATIVE, THE ASSESSEE FALLS WITHIN THE PURVIEW OF EXPLANATION 1 TO SEC. 32(1). IN THE INSTANT CASE, IT IS AN ADMI TTED FACT THAT THE ASSESSEE HAS TAKEN LAND ON LEASE FOR SETTING UP OF PROJECT FOR PROCESSING OF COIR. IT IS ALSO UNDISPUTED THAT THE ASSESSEE HAS CONSTRUCTED THE BUILDING AT THE LEASED PREMISES . THUS THE ASSESSEE HAS CONSTRUCTED SUPER STRUCTURE. THESE CON STRUCTION ACTIVITIES CARRIED OUT BY THE ASSESSEE IF PUT ON TO THE TEST OF EXPLANATION 1 WOULD SHOW THAT THE CONSTRUCTION MADE BY THE ASSESSEE ON THE LEASED OUT PREMISES WOULD AMOUNT TO CAPITAL EXPENDITURE. THE ASSESSEE IN ORDER TO SUPPORT HIS C ASE HAS RELIED ON THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF ITA NOS. 101 TO 103/MDS./2016 :- 24 - : TVS LEAN LOGISTICS LTD. (SUPRA). IN THE SAID CASE, THE ASSESSEE HAD CONSTRUCTED A BUILDING ON THE LEASED LAND FOR T HE BUSINESS ADVANTAGE. THE COURT HELD THAT THE ENTIRE COST OF CONSTRUCTION IS ADMISSIBLE AS REVENUE EXPENDITURE. EXPLANATION 1 CATEGORICALLY STATES THAT THE BUSINESS OR PROFESSIO N IS CARRIED ON IN A LEASED BUILDING AND NOT ON LAND. THE HIGH COU RT IN PARA 4.4 OF THE JUDGMENT FURTHER HELD AS UNDER:- 4.4 WHAT CONSTITUTES A CAPITAL EXPENDITURE AND WHA T DOES NOT, TO ATTRACT EXPLN. 1 TO SECTION 32(1) OF THE AC T DEPENDS UPON THE CONSTRUCTION OF ANY STRUCTURE OR DOING ANY WORK OR IN RELATION TO AND BY WAY OF RENOVATION, EXTENSI ON OR IMPROVEMENT TO THE BUILDING WHICH IS PUT UP IN A BU ILDING TAKEN ON LEASE BY HIM FOR CARRYING ON HIS BUSINESS AND PROFESSION OF THE ASSESSEE, BUT NOT IN A CASE OF CO NSTRUCTION OF ANY STRUCTURE OR DOING ANY WORK OR RELATION TO W HERE SUCH BUILDING IS PUT UP/CONSTRUCTED FOR THE PURPOSE OF BUSINESS OR THE PROFESSION OF THE ASSESSEE IN A LAN D TAKEN ON LEASE BY THE ASSESSEE. 10. IN THE ABOVE CASE, THE ASSESSEE HAS TAKEN LAND ON LEASE AND MADE CERTAIN CONSTRUCTION. IT IS THE CASE THAT THE ASSESSEE HAS CONSTRUCTED A NEW BUILDING ON THE LEASED LAND. THE HIGH COURT HAS FURTHER HELD IN THE AFORESAID CASE THAT T HE LANGUAGE EMPLOYED IN A STATUTE IS THE DETERMINATIVE FACTOR O F THE LEGISLATIVE EVENT AND EVEN ASSUMING THERE IS A DEFECT OR ANY OM ISSION IN THE WORDS USED IN THE LEGISLATURE, THE COURT CANNOT COR RECT OR MAKE UP THE DEFICIENCY, ESPECIALLY WHEN A LITERAL READIN G THEREOF PRODUCES AN INTELLIGIBLE RESULT AN ANY DEPARTURE FR OM THE LITERAL RULE WOULD REALLY BE AMENDING THE LAW IN THE GARB O F INTERPRETATION, WHICH IS NOT PERMISSIBLE AND WHICH WOULD BE DESTRUCTIVE OF JUDICIAL DISCIPLINE. 11. THE SUPREME COURT OF INDIA IN THE CASE OF MADR AS AUTO SERVICE (P) LTD., 233 ITR 468 WHILE DEALING WI TH A SIMILAR CONTROVERSY HAS OBSERVED AS UNDER: ITA NOS. 101 TO 103/MDS./2016 :- 25 - : 5 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 RECONSTRUCTION? 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 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 A 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, THE EXPENDITURE APPEARS TO BE REVENUE EXPENDITURE. 12. THEREAFTER, THE APEX COURT REFERRING TO SEVERA L CASES DECIDED HELD AS UNDER: 11. 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 EXPENSES HAVE 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 CAS E ALSO SINCE THE ASSET CREATED BY SPENDING THE SAID AMOUNTS DID NOT BELONG TO THE ASSESSEE BUT THE 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 ITA NOS. 101 TO 103/MDS./2016 :- 26 - : EXPENDITURE SHOULD BE LOOKED UPON AS REVENUE EXPENDITURE. 13. FROM THE ABOVE JUDGMENT, WE CAN CONCLUDE THAT I T IS ESSENTIAL THAT THE EXPENDITURE INCURRED ON THE CONSTRUCTION OF ANY STRUCTURE ON THE LEASED PREMISES SHOULD RESULT IN ENDURING BENEFIT. IN OUR CONSIDERED OPINION, THE CASE OF THE ASSESSEE VERY MUCH FALLS W ITHIN THE AMBIT OF EXPLANATION 1 OF SECTION 32(1) OF THE ACT AND IN VI EW OF SUPREME COURT JUDGMENT IN THE CASE OF MADRAS AUTO SERVICE, CITED SUPRA, WE ARE NOT CONSIDERING THE VARIOUS JUDGMENTS CITED BY THE LD. AR. 6.10 FURTHER, THE CO-ORDINATE BENCH IN THE CASE OF M/S.K.R.BRAKES, IN ITA NO.1384/MDS./2014 DATED 29.0 5.2015 HELD AS FOLLOWS:- 11. IN THE PRESENT CASE, THE ASSESSEE HAS TAKEN BUI LDING ON LEASE AND MADE CERTAIN INTERIOR DECORATION. IT IS THE CASE TH AT THE ASSESSE HAS BEAUTIFIED THE LEASED BUILDING. THE HIGH COURT HAS FURTHER HELD IN THE AFORESAID CASE THAT THE LANGUAGE EMPLOYED IN A STAT UTE IS THE DETERMINATIVE FACTOR OF THE LEGISLATIVE INTENT AND EVEN ASSUMING THERE IS A DEFECT OR ANY OMISSION IN THE WORDS USED IN THE LEGISLATURE, THE COURT CANNOT CORRECT OR MAKE UP THE DEFICIENCY, ESPECIALLY WHEN A LITERAL R EADING THEREOF PRODUCES AN INTELLIGIBLE RESULT AN ANY DEPARTURE FROM THE LITER AL RULE WOULD REALLY BE AMENDING THE LAW IN THE GARB OF INTERPRETATION, WHI CH IS NOT PERMISSIBLE AND WHICH WOULD BE DESTRUCTIVE OF JUDICIAL DISCIPLINE. 12. THE SUPREME COURT OF INDIA IN THE CASE OF MADR AS AUTO SERVICE (P) LTD., 233 ITR 468 WHILE DEALING WITH A SIMILAR CONTROVERSY HAS OBSERVED AS UNDER: 5 IN ORDER TO DECIDE WHETHER THIS EXPENDITURE IS R EVENUE EXPENDITURE OR CAPITAL EXPENDITURE, ONE HAS TO LOOK AT THE EXPENDITURE FROM A COMMERCIAL POINT OF VIEW. WHAT A DVANTAGE DID THE ASSESSEE GET BY CONSTRUCTING A BUILDING WHI CH BELONGED TO SOMEBODY ELSE AND SPENDING MONEY FOR SUCH RECONS TRUCTION? ITA NOS. 101 TO 103/MDS./2016 :- 27 - : THE ASSESSEE GOT A LONG LEASE OF A NEWLY CONSTRUCTE D 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 BUSINESS PREMISES AT A LOW ER RENT. IN OTHER WORDS, THE ASSESSEE MADE SUBSTANTIAL SAVINGS IN IN MONTHLY RENT FOR A PERIOD OF 39 YEARS BY EXPENDING THESE AMOUNTS. THE SAVING IN EXPENDITURE WAS A SAVING IN REVENUE EXPENDITURE IN THE FORM OF RENT. WHATEVER SUBSTITUT ES FOR REVENUE EXPENDITURE SHOULD NORMALLY BE CONSIDERED A S 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 OBTA INED IN A COMMERCIAL SENSE, THE EXPENDITURE APPEARS TO BE REV ENUE EXPENDITURE. 13. THEREAFTER, THE APEX COURT REFERRING TO SEVERAL CASES DECIDED HELD AS UNDER: 11.ALL THESE CASES HAVE LOOKED UPON EXPENDITURE WH ICH DID BRING ABOUT SOME KIND OF AN ENDURING BENEFIT TO THE COMPA NY AS A REVENUE EXPENDITURE WHEN THE EXPENDITURE DID NOT BR ING INTO EXISTENCE ANY CAPITAL ASSET FOR THE COMPANY. THE AS SET WHICH WAS CREATED BELONGED TO SOMEBODY ELSE AND THE COMPANY D ERIVED AN ENDURING BUSINESS ADVANTAGE BY EXPENDING THE AMOUNT . IN ALL THESE CASES, THE EXPENSES HAVE BEEN LOOKED UPON AS HAVING BEEN MADE FOR THE PURPOSE OF CONDUCTING THE BUSINESS OF THE ASSESSEE MORE PROFITABLY OR MORE SUCCESSFULLY. IN THE PRESEN T CASE ALSO SINCE THE ASSET CREATED BY SPENDING THE SAID AMOUNTS DID NOT BELONG TO THE ASSESSEE BUT THE ASSESSEE GOT THE BUSINESS ADVA NTAGE OF USING MODERN PREMISES AT A LOW RENT, THUS SAVING CONSIDER ABLE REVENUE EXPENDITURE FOR THE NEXT 39 YEARS, BOTH THE TRIBUNA L AS WELL AS THE HIGH COURT HAVE RIGHTLY COME TO THE CONCLUSION THAT THE EXPENDITURE SHOULD BE LOOKED UPON AS REVENUE EXPENDITURE. 14. FROM THE ABOVE JUDGMENT, WE CAN CONCLUDE THAT I T IS ESSENTIAL THAT THE EXPENDITURE INCURRED ON THE CONSTRUCTION OF ANY STR UCTURE ON THE LEASED PREMISES SHOULD RESULT IN ENDURING BENEFIT. THAT AN Y EXPENDITURE INCURRED FOR CIVIL WORK BY A LESSEE IN RESPECT OF THE LEASE PREM ISES, WITHOUT ANY FURTHER PROOF CANNOT BE SAID TO BE CAPITAL EXPENDITURE OR R EVENUE EXPENDITURE. IN ORDER TO FIND OUT THE NATURE OF EXPENDITURE, IT IS NECESSARY TO FIND OUT THE NATURE OF CONSTRUCTION PUT UP, THE PURPOSE OF CONST RUCTION/RENOVATION AND THE USE TO WHICH THE CONSTRUCTION PUT UP AND ALSO I F IT IS A CASE OF REPAIR, REPLACEMENT, ADDITION OR IMPROVEMENT HAS TO BE GONE INTO. IT IS ONLY ON THE AFORESAID MATERIAL, KEEPING IN MIND THE PRINCIPLES ENUNCIATED IN THE JUDGMENTS BY THE SUPREME COURT AND KEEPING IN MIND SECTION 37 AND SECTION 32 OF THE ACT, THAT ONE HAS TO DETERMINE WH ETHER THE EXPENDITURE IS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE. WHAT WO ULD APPLY TO CIVIL WORK ITA NOS. 101 TO 103/MDS./2016 :- 28 - : EQUALLY APPLIES TO ELECTRICAL WORK OR INTERIOR DECO RATION. THE ASSESSEE HAD NOT STATED THE NATURE OF CIVIL WORKS CONSTRUCTED, THE N ATURE OF INTERIOR DECORATION MADE TO THE LEASEHOLD PREMISES AND ALSO THE NATURE OF ELECTRICAL WORK UNDERTAKEN. IN THE ABSENCE OF THAT MATERIAL AND WIT HOUT PROPER APPLICATION OF MIND, THE ASSESSING AUTHORITY PROCEEDED ON THE F OOTING THAT THE EXPENDITURE CONSTITUTED CAPITAL EXPENDITURE. 15. IN VIEW OF THE ABOVE, WE REMIT THE ISSUE IN DIS PUTE TO AO TO CONSIDER WHETHER THE EXPENDITURE IS REVENUE OR CAPITAL IN NA TURE AND DECIDE AFRESH. 6.11 FURTHER, THE CO-ORDINATE BENCH IN THE CASE OF M/S.JAYAKRISHNA FLOUR MILLS PVT. LTD., IN ITA NO.70 0/MDS./2013 DATED 27.10.2014 HELD AS FOLLOWS:- 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRE SENTATIVES OF BOTH THE SIDES. WE HAVE ALSO PERUSED THE ORDERS OF THE AUTHORITIES BELOW, AS WELL AS, THE DECISIONS/JUDGMENTS ON WHICH BOTH THE SIDES HAVE PLACED RELIANCE. THE ONLY ISSUE IN APPEAL IS: WHETHER THE EXPENDITURE OF 53,88,776I- INCURRED BY ASSESSEE ON CONSTRUCTION OF SHEDS ON LEASE-HOLD LAND IS REVENUE OR CAPITAL IN NATURE? TH E ASSESSEE HAS BEEN ALLOTTED FOUR STORAGE DEPOTS BY TAMIL NADU FOODGRAI NS MARKETING YARD LIMITED. THE ASSESSEE CONTRIBUTED MORE THAN 53.00 L AKHS FOR CONSTRUCTION OF SHEDS TO BE USED FOR STORAGE OF WHEAT ETC., AND CLA IMED THE SAME AS REVENUE EXPENDITURE. WHEREAS, THE CONTENTION OF THE REVENUE IS THAT AFTER INSERTION OF EXPLANATION-I TO SECTION 32(1), ANY CO NSTRUCTION MADE ON LEASE- HOLD PREMISES IS TO BE TREATED AS CAPITAL EXPENDITU RE. BEFORE PROCEEDING FURTHER, LET US FIRST EXAMINE EXPLANATION-I WHICH R EADS AS UNDER: EXPLANATION 1.--WHERE THE BUSINESS OR PROFESSION O F THE ASSESSEE IS CARRIED ON IN A BUILDING NOT OWNED BY H IM BUT IN RESPECT OF WHICH THE ASSESSEE HOLDS A LEASE OR OTHE R RIGHT OF OCCUPANCY AND ANY CAPITAL EXPENDITURE IS INCURRED B Y THE ASSESSEE FOR THE PURPOSES OF THE BUSINESS OR PROFES SION ON THE CONSTRUCTION OF ANY STRUCTURE OR DOING OF ANY WORK, IN OR IN RELATION TO, AND BY WAY OF RENOVATION OR EXTENSION OF, OR ITA NOS. 101 TO 103/MDS./2016 :- 29 - : IMPROVEMENT TO, THE BUILDING, THEN, THE PROVISIONS OF THIS CLAUSE SHALL APPLY AS IF THE SAID STRUCTURE OR WORK IS A B UILDING OWNED BY THE ASSESSEE . EXPLANATION-1 TO SECTION 32(1) WAS INSERTED BY THE TAXATION LAWS (AMENDMENT AND MISCELLANEOUS PROVISIONS) ACT, 1986 W.E.F. 01-04-1998 TO DEAL WITH THE SITUATION WHERE THE ASSESSEE IS CARRY ING ON BUSINESS OR PROFESSION IN A BUILDING ON LEASE OR OTHER RIGHTS O F OCCUPANCY. ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOS E OF BUSINESS OR PROFESSION ON THE CONSTRUCTION OF ANY STRUCTURE OR RENOVATION OR EXTENSION OR IMPROVEMENT TO THE BUILDING THEN THE EXPENDITURE SH ALL BE TREATED AS CAPITAL EXPENDITURE. THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS . TVS LEAN LOGISTICS LTD., (SUPRA) HAS EXPLAINED THAT THE EXPRESSION BU ILDING HAS TO BE INTERPRETED IN THE MANNER AS IT IS USED IN THE SECT ION. THE HONBLE COURT THUS HELD: IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD PUT UP THE IMPUGNED CONSTRUCTION OF BUILDING ONLY ON LEASEHOLD LAND AND NO BUILDING WAS TAKEN ON LEASE BY THE ASSESSEE. THEREFORE, THE FICTION CREATED BY EXPLANATION 1 THAT THE BUILDING PUT UP B Y HIM IN THE LEASEHOLD LAND OR STRUCTURE OR WORK SHALL BE CONSTR UED AS IF THE SAME IS OWNED BY THE ASSESSEE, IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE AND EXPLANATION 1 TO SECTION 32(1) OF THE ACT IS NOT ATTRACTED TO THE INSTANT CASE OF THE ASSESSEE AT AL L. OF COURSE, AN ARGUMENT WAS ADVANCED ON BEHALF OF TH E REVENUE THAT THE WORDS WHERE THE BUSINESS OR PROFESSION IS CARRIED ON IN A BUILDING NOT OWNED BY HIM BUT IN RESPECT OF WH ICH THE ASSESSEE HOLDS A LEASE OR OTHER RIGHT OF OCCUPANCY WOULD ALSO INCLUDE LANDS AND WOULD BE READ AS WHERE THE BUSIN ESS OR PROFESSION OF THE ASSESSEE IS CARRIED ON IN A LAND NOT OWNED BY HIM BUT IN RESPECT OF WHICH THE ASSESSEE HOLDS A LE ASE OR OTHER RIGHT OF OCCUPANCY AND IN SUCH CASE, EXPLANATION 1 TO SECTION 32(1) OF THE ACT IS SQUARELY APPLICABLE TO THE INST ANT CASE OF THE ITA NOS. 101 TO 103/MDS./2016 :- 30 - : ASSESSEE. BUT WE ARE UNABLE TO APPRECIATE THE SAID ARGUMENT. IN A CASE WHERE THE STATUTORY PROVISION IS PLAIN AN D UNAMBIGUOUS, THE COURT SHALL NOT INTERPRET THE SAME IN A DIFFERENT MANNER, ONLY BECAUSE OF HARSH CONSEQUENCE S ARISING THEREFROM : AND IT IS WELL KNOWN THAT THE COURT CAN IRON OUT THE CREASES BUT IT CANNOT CHANGE THE TEXTURE OF THE FAB RIC, CANNOT ENLARGE THE SCORE OF LEGISLATION OR INTENTION WHEN THE LANGUAGE OF THE PROVISION I PLAIN AND UNAMBIGUOUS, CANNOT AD D OR SUBTRACT WORDS TO A STATUTE OR READ SOMETHING INTO IT WHICH IS NOT THERE AND CANNOT REWRITE OR RECAST LEGISLATION, VIDE NASIRUDDIN V. SITA RAM AGARWAL (200312 SCC 577. SIMILARLY, THERE SHOULD BE A LITERAL RULE OF INTE RPRETATION OF A STATUTE, WHICH IS THE FIRST AND FOREMOST PRINCIPL E OF INTERPRETATION AND WHERE THE OF A STATUTE ARE ABSOL UTELY CLEAR AND UNAMBIGUOUS, RECOURSE CANNOT BE HAD TO THE PRIN CIPLES OF INTERPRETATION OTHER THAN THE IFTERA! RULE AND EVEN IF THE LITERAL INTERPRETATION RESULTS IN HARDSHIP OR INCONVENIENCE , IT HAS TO BE FOLLOWED. THE LANGUAGE EMPLOYED IN A STATUTE IS THE DETERMINATIVE FACTOR OF THE LEGISLATIVE EVENT AND E VEN ASSUMING THERE IS A DEFECT OR ANY OMISSION IN THE WORDS USED IN THE LEGISLATION, THE COURT CANNOT CORRECT OR MAKE UP TH E DEFICIENCY, ESPECIALLY WHEN A ILTERAL READING THEREOF PRODUCES AN INTELLIGIBLE RESULT AND ANY DEPARTURE FROM THE LITERAL RULE WOUL D REALLY BE AMENDING THE LAW IN THE GARB OF INTERPRETATION, WHI CH IS NOT PERMISSIBLE AND WHICH WOULD BE DESTRUCTIVE OF JUDIC IAL DISCIPLINE, VIDE RAGHUNATH RAI BAREJA V. PUNJAB NATIONAL BANK [ 20071135 COMP CAS 163 (SC) ; [200712 SCC 230. WHAT CONSTITUTES CAPITAL EXPENDITURE AND WHAT DOES NOT, TO ATTRACT EXPLANATION 1 TO SECTION 32(1) OF THE ACT D EPENDS 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 WHICH IS UT UP IN A BUILDTH.G TAKEN ON LEASE BY ITA NOS. 101 TO 103/MDS./2016 :- 31 - : HIM FOR CARRYING ON HIS BUSINESS AND PROFESSION OF THE ASSESSEE, BUT NOT IN A CASE OF CONSTRUCTION OF ANY STRUCTURE OR DOING ANY WORK OR RELATION TO WHERE SUCH BUILDING IS PUT UP/C ONSTRUCTED FOR THE PURPOSE OF BUSINESS OR THE PROFESSION OF TH E ASSESSEE IN A LAND TAKEN ON LEASE BY THE ASSESSEE. BECAUSE THE ASSESSEE DID NOT ACQUIRE A CAPITAL ASSET, VIZ., THE LAND IN THE INSTANT CASE, BUT HAS PUT UP A CONSTRUCTION OF THE BUILDING ONLY FOR THE BUSINESS ADVANTAGE, WITH THE RESULT THE ENTIRE CONS TRUCTION COST IS ADMISSIBLE AS THE REVENUE EXPENDITURE. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF C IT VS. MADRAS AUTO SERVICE (P) LTD. (SUPRA) HAS OBSERVED T HAT WHERE THE INITIAL EXPENDITURE INCURRED RESULTS IN SAVING OF REVENUE EXPENDITURE N THE SUBSEQUENT AYS, THE SAID INITIAL EXPENDITURE SHALL BE CONSIDERED AS REVENUE IN NATURE. 6. A PERUSAL OF THE RECORDS SHOW THAT THE ASSESSEE WAS ALLOTTED FOUR YEARDS TO STORAGE I.E, OPEN SPACE WIT HOUT SHED. THE ASSESSEE CONTRIBUTED FOR CONSTRUCTION OF SHEDS ON THE SPACE PROVIDED BY THE TAMIL NADU FOODRGAINS MARKETING YAR D LTD. THUS, THERE WAS NO BUILDING OR ANY STRUCTURE IN EXI STENCE ON THE LAND IN RELATION TO WHICH ANY RENOVATION OR EXTENSI ON OR IMPROVEMENT OR ANY SIMILAR WORK WAS CARRIED OUT BY THE AS.E THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS . TVS LEAN LOGISTICS LTD.,(SUPRA) HAS HELD THAT EXPLANATION-1 WILL NOT APPLY WHERE THERE IS NO BUILDING. IN THE PRESENT CASE, TH E FACTS AS EMANATING FROM RECORDS SHOW THAT THE ASSESSEE HAS N OT TAKEN ANY BUILDING ON LEASE. FURTHER, THE ASSESSEE HAS STATED THAT WITH THE CONT RIBUTION FOR CONSTRUCTION OF SHEDS, THE ASSESSEE SHALL BE ENTITL ED FOR LOWER MONTHLY LEASE RENTS. THIS FACT HAS NOT BEEN DISPUTED BY THE REVENUE. THE ITA NOS. 101 TO 103/MDS./2016 :- 32 - : PAYMENT OF LEASE RENTALS IS A REVENUE EXPENDITURE. THUS, THE CONTRIBUTION MADE BY ASSESSEE INITIALLY WOULD SAVE REVENUE EXPENDITURE IN LATER YEARS. THUS, IN THE LIGHT OF JUDGEMENTS DISCUSSED ABOVE, IT CAN BE SAFELY CONSTRUED THAT THE EXPENDITURE INCURRED TOWA RDS CONSTRUCTION OF SHEDS BY THE ASSESSEE IS REVENUE IN NATURE. 7. IN VIEW OF THE ABOVE JUDGEMENTS, WE ARE OF THE OPINION THAT THE AO HAS TO SEE THAT THE EXPENDITURE INCURRED ON CONSTRUCTION OF ANY SUPER STRUCTURE ON THE LEASEHOLD LAND RESULTED IN S AVINGS OF ANY REVENUE EXPENDITURE IN THE FORM OF MONTHLY RENT AT THE SUBSEQUENT STAGE IN FUTURE OR NOT. SINCE THERE IS NO FINDING B Y THE LOWER AUTHORITIES REGARDING SAVINGS OF THE FUTURE REVENUE EXPENDITURE BY THE ASSESSEE SO AS TO SAY IT IS A REVENUE EXPENDITURE. AS SUCH, WE ARE NOT IN A POSITION TO APPRECIATE THE FACTS OF THE CASE. ACCOR DINGLY, WE REMIT THE ISSUE TO THE FILE OF AO TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF JUDGEMENT OF JURISDICTIONAL HIGH COURT AND SUPREME COURT CITED SUPRA AS DISCUSSED ABOVE. 8. IN THE RESULT, THE APPEAL OF REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.103/MDS./16(A.Y: 2012-13) 9. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD TO DELETION OF ADDITION MADE BY AO ON ACCOUNT OF DISALLOWANCE OF D EDUCTION U/S.80-IA OF THE ACT AMOUNTING TO ` 2,76,25,507/-. SINCE WE HAVE ALREADY ITA NOS. 101 TO 103/MDS./2016 :- 33 - : HELD IN THE ASSESSMENT YEAR 2011-12 AT PARA NOS.3 & 4 OF THIS ORDER THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S.80-IA OF THE ACT ON THE SAME REASON WE HAVE UPHELD THE ORDER OF THE LD.CIT(A) ON THIS I SSUE. THIS GROUND IS REJECTED. 9.1 REGARDING THE LAST GROUND IS WITH REGARD TO DI RECTION OF LD.CIT(A) TO DELETION OF ADDITION MADE BY AO ON THE GROUND THAT BUILDING CONSTRUCTION ON A LEASEHOLD LAND IS REVENUE IN NATURE, WHICH IS CONSIDERED BY US IN THE ASSESSMENT YEAR 2011-12 AT PARA NOS.6.4 TO 6.9 OF T HIS ORDER. ACCORDINGLY, THIS GROUND OF ASSESSEE IS REMITTED TO THE FILE OF AO TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF ABOVE FINDI NGS IN [2006] 282 ITR 338 (MAD)., THIS GROUND RAISED BY THE REVENUE IS AL LOWED FOR STATISTICAL PURPOSES. 9.2. IN THE RESULT, THE APPEAL OF REVENUE IN ITA NO .103/MDS./2016 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.102/MDS./16(A.Y: 2011-12) 10. REGARDING THE MAIN GRIEVANCE OF REVENUE IN THIS APP EAL IS WITH REGARD TO DIRECTION OF LD.CIT(A) TO DELETION OF PENALTY IM POSED U/S.271(1)(C) OF THE ACT BY AO. 10.1 THE LD.CIT(A) WAS JUSTIFIED IN DELETING THE P ENALTY IMPOSED U/S.271(1)(C) OF THE ACT ON THE REASON THAT THE ASS ESSEE STRUCTURED THE ITA NOS. 101 TO 103/MDS./2016 :- 34 - : WHOLE TRANSACTION WITH RESPECT TO INTANGIBLE ASSETS AND WRONG CLAIM OF DEPRECIATION WITH THE MOTIVE TO REDUCE THE TAX LIAB ILITY. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 10.2 THE FACTS OF THE CASE ARE THAT THE ASSESSEE F ILED RETURN OF INCOME ON 30.09.2011 DECLARING AN INCOME OF RS.24,21,36,760/- . SUBSEQUENTLY, THE CASE WAS SELECTE4D FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED MAKING ADDITIONS IN RESPECT OF DISALLOWANCE IN RESPECT OF ADVANCE MADE TO M/S.CIBI INTERNATIONAL P. LTD, DISALLOWANCE U/S.80-IA,DISALL OWANCE OF INCOME FROM SALE OF SCRIBES, DISALLOWANCE IN RESPECT OF AMOUNT SPEND ONLEASEHOLD LAND, DISALLOWANCE OF DEPRECIATION CLAIMED ON INTANGIBLE ASSETS, DISALLOWANCE OF TUF REIMBURSEMENT CLAIMED AS CAPITAL RECEIPT, DISA LLOWANCE OF EXCESS DEPRECIATION CLAIMED ON MACHINERIES AND DISALLOWANC E OF AMOUNT ON PROTO TYPE SAMPLES. FURTHER, THE AO STATED IN PENALTY OR DER THAT THE ASSESSEE WENT IN APPEAL BEFORE CIT(A) EXCEPT FOR ADDITION ON DISALLOWANCE OF EXCESS DEPRECIATION ON MACHINERIES AND LATER WITHDREW THE APPEAL FILED ON THE ADDITION MADE ON DISALLOWANCE OF DEPRECIATION OF IN TANGIBLE ASSETS. THE AO ELABORATELY DISCUSSED IN THE PENALTY ORDER THE REAS ONS FOR LEVYING PENALTY AND LEVIED A PENALTY OF RS.1,76,63,327/- U/S.271(1) (C OF THE ACT. 10.3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. IN OUR OPINION, IT IS PREPOSTEROUS TO DECIDE THE IS SUE OF PENALTY LEVIED U/S.271(1)(C) OF THE ACT AT THIS STAGE, SINCE CERTA IN ISSUE RELATING TO ADDITION OF DELETION BY THE LD.CIT(A) ARE REMITTED BY US TO THE FILE OF AO FOR FRESH CONSIDERATION FOR THE ASSESSMENT YEAR UNDER CONSIDE RATION. HENCE, AT THIS ITA NOS. 101 TO 103/MDS./2016 :- 35 - : STAGE, THE ASSESSMENT ORDER ON THE BASIS OF WHICH P ENALTY HAS BEEN LEVIED, STILL THE SUBJECT MATTER OF LITIGATION, WHICH IS NO T . HENCE, IN OUR OPINION, THE AO IS AT LIBERTY TO INITIATE THE PENALTY PROCEEDING S ONLY AFTER GIVING EFFECT TO THE TRIBUNAL ORDER BY HIM IN THE ISSUE OF QUANTUM A DDITION. ACCORDINGLY, WE VACATE THE PENALTY ORDER AT THIS STAGE. AS SUCH WE DISMISS THIS APPEAL OF REVENUE AS INFRUCTUOUS. 11. IN THE RESULT, THE APPEALS OF THE REVENUE IN I TA NO.101/MDS./2016 & ITA NO.103/MDS./2016 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND ITA NO.102/MDS./2016 I S DISMISSED. ORDER PRONOUNCED ON 21 ST SEPTEMBER, 2016, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 21 ST SEPTEMBER, 2016 K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF