Kerala High Court
Joy Alukkas India Pvt. Ltd vs The Assistant Commissioner Of Income ... on 29 May, 2013
Author: Manjula Chellur
Bench: Manjula Chellur, A.M.Shaffique
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT:
THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR
&
THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE
MONDAY, THE 20TH DAY OF JANUARY 2014/30TH POUSHA, 1935
ITA.No. 230 of 2013
---------------------------
[ARISING OUT OF ORDER DATED 29/05/2013 OF THE INCOME TAX APPELLATE
TRIBUNAL, COCHIN BENCH, COCHIN IN I.T (T.P) A.NO.02/COCH/2012
ASSESSMENT YEAR 2007-08]
..................
APPELLANT:
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JOY ALUKKAS INDIA PVT. LTD.,
(FORMERLY JOY ALUKKAS TRADERS (INDIA) PVT. LTD.),
40/2096, PEEVEES TRITON, MARINE DRIVE,
SHANMUGHAM ROAD, ERNAKULAM, PAN:AABCJ1087G.
BY SRI.JOSEPH MARKOSE, SENIOR ADVOCATE,
ADVS.SRI.V.ABRAHAM MARKOS,
SRI.BINU MATHEW,
SRI.TOM THOMAS (KAKKUZHIYIL),
SRI.ABRAHAM JOSEPH MARKOS,
SRI.ABRAHAM VARGHESE THARAKAN.
RESPONDENT:
---------------------
THE ASSISTANT COMMISSIONER OF INCOME TAX,
CIRCLE-1(2), KOCHI.
BY SRI.P.K.RAVEENDRANATHA MENON, SR. S.C, I.T,
ADV.SRI.JOSE JOSEPH, S.C.
THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON
10-12-2013, ALONG WITH I.T.A.NO. 263/2013, THE COURT ON
20-01-2014 DELIVERED THE FOLLOWING:
Prv.
I.T.A. NO.230/2013:
APPENDIX
PETITIONER'S ANNEXURES:
ANNEXURE-A: TRUE COPY OF THE ORDER DATED 31/10/2011 PASSED BY THE
TRANSFER PRICING OFFICER-II, KOCHI.
ANNEXURE-B: TRUE COPY OF DRAFT ASSESSMENT ORDER DATED 28/11/2011
PASSED BY THE JOINT COMMISSIONER OF INCOME-TAX
(OSD), CIRCLE-1 (2), KOCHI.
ANNEXURE-C: TRUE COPY OF THE STATEMENT DETAILING THE NATURE AND
BREAK OF EXPENSES INCURRED.
ANNEXURE-D: TRUE COPY OF THE ORDER DATED 28/08/2012 OF THE
DISPUTE RESOLUTION PANEL, BANGALORE.
ANNEXURE-E: TRUE COPY OF THE ORDER DATED 22/10/2012 PASSED UNDER
SECTION 144C BY THE ASSISTANT COMMISSIONER OF
INCOME-TAX, CIRCLE-1(2), KOCHI.
ANNEXURE-F: TRUE COPY OF THE IMPUGNED ORDER DATED 29/05/2013
PASSED BY THE ASSISTANT REGISTRAR, INCOME TAX
APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN IN I.T (T.P).
A.NO.02/COCH/2012.
ANNEXURE-G: TRUE COPY OF THE ORDER DATED 01/03/2013 PASSED BY THE
ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL,
COCHIN BENCH, COCHIN IN S.A. NO.100/COCH/2012 ARISING
OUT OF I.T. (T.P).A.NO.02/COCH/2012.
ANNEXURE-H: TRUE COPY OF THE BANK GUARANTEE DATED 06/03/2013.
RESPONDENTS' ANNEXURES: NIL.
//TRUE COPY//
P.A. TO JUDGE.
Prv.
C.R.
MANJULA CHELLUR, C.J
&
A.M.SHAFFIQUE, J.
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I.T.A.Nos. 230 and 263 of 2013
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Dated this the 20th January, 2014
JUDGMENT
Manjula Chellur, C.J.
The above two appeals involve common substantial questions of law pertaining to deductions under Section 37 of the Income Tax Act so far as the expenditure spent by the appellants- assessees on the premises taken on lease towards repairs, fixtures etc. The consistent claim of the appellants-assessees before the authorities was that the expenditure incurred by the assessees towards refurnishing repairs and improvements of the leased premises used for business purpose can always be a revenue expenditure and not capital expenditure. The improvements made by the appellants-assessees which are of temporary nature and which cannot be retrieved by the assessees at the end of the term of the lease can only be revenue expenditure.
2. So far as I.T.A.230 of 2013, assessee has also challenged the additions made on account of adjustment for transfer pricing made with respect to international transactions ignoring the ITA.230 & 263/13 2 comparable cases produced by the appellant-assessee. The following substantial questions of law arise for consideration of this Court:
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of 6,48,70,634/- incurred by the appellant in repairs and improvements works in leased premises?
2. Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the appellate Tribunal that the sum of 6,48,70,634/- incurred by the Appellant in repairs and improvements works in leased premises is capital expenses?
3. Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in confirming the addition of 31,68,298/- under transfer pricing adjustment?
4. Whether on the facts and in the circumstances of the case, there is any evidence or material on record before the Appellate Tribunal to justify the addition of31,68,298/- under transfer pricing adjustment?"
3. Learned Senior Counsel Sri.S.Ganesh arguing for appellants contend that the expenditure in controversy consists of ITA.230 & 263/13 3 two types, one giving rise to distinct capital assets, i.e., air conditioners, jewellery display cases, cupboards, removable light fittings, which could be taken away by the appellant-assessee at the conclusion of the lease period. The other type of expenditure is towards the improvements made to the tenanted premises which does not result in any asset owned by the appellants and further cannot be taken away by the assessee on termination of lease, i.e., expenditure on flooring, plastering and painting on the walls, electrical wiring, plumbing, sanitary facilities etc. According to the appellants-assessees, the test of enduring benefit or advantage cannot be applied to the facts of the present case and by virtue of settled position, each case has to be analysed depending upon the nature of expenditure irrespective of benefit of long duration or enduring benefit or advantage. According to them, irrespective of enduring benefit lasting for many years, in the absence of creation of an asset said to be belonging to the assessee, such expenditure can never be termed as capital expenditure and can always be a revenue expenditure.
4. So far as transfer pricing, according to learned Senior Counsel Sri.S.Ganesh, there was no justification for the Tribunal to ITA.230 & 263/13 4 refuse to consider the computations of two assessees solely on the ground that they had losses in some years. Once comparable computations of 18 similarly placed assessees are placed on record pertaining to jewellery and also textile business all the cases have to be taken into consideration without any discrimination based on facts.
5. As against this, learned Senior Standing Counsel Sri.P.K.Raveendranatha Menon contends that whenever expenditure is made to make or bring out sales outlets, if it is an income earning effort, irrespective of whether it is expansion or extension of the business or not, it has to be considered as capital investment, as it augments income and the benefit is enduring. According to learned Senior Counsel, the expenditure spent for acquiring an asset for the first time including repairs and renovations has to be considered with reference to explanation to Section 32(1) of the Income Tax Act, which certainly would bring the expenditure as a capital expenditure. Learned Senior Counsel appearing for the appellants-assessees as well as revenue referred to several decisions which are discussed hereunder in order to arrive at a conclusion whether the expenses claimed by ITA.230 & 263/13 5 the appellants herein would amount to revenue expenditure or capital expenditure.
6. Learned Counsel arguing for the appellants-assessees places reliance on certain decisions in support of their contentions. Reliance is placed on Veeraraghavan v. Commissioner of Income-Tax, Kerala [(1967)64 ITR 63] to distinguish the law laid down in the said judgment by this Court from the law laid down by the Apex Court in the later decisions contending that the law laid down in Veeraraghavan's case (Supra) cannot be applied universally. The question that arose before this Court was whether the amounts spent by the assessee for reclaiming a piece of land over which licence was granted in favour of the assessee to install a petroleum pump by an oil distributing company could be taken as business expenditure. The improvements claimed by the assessee were effected on the land which include filling up of the ditches and making the land levelled for the purpose of constructing a wall. The assessee claimed the expenditure and sought for deduction. Their Lordships rejected the said contention of the assessee on the ground that the assessee had only leave and licence over the ITA.230 & 263/13 6 land, the expenditure incurred, therefore, could not be allowed as business expenditure. The said claim of the assessee, according to this Court, was not maintainable, as the changes effected were of an enduring nature, therefore, such expenditure has to be considered as capital expenditure.
7. In Empire Jute Co. Ltd. v. Commissioner of Income- Tax [(1980)124 ITR 1 (SC)], the issue was whether the transaction of transfer of allotment of hours of work per week which was commonly known as sale of loom hours by one member to another would constitute a capital expenditure or revenue expenditure. Their Lordships, by referring to Section 10(2)(xv) of the Indian Income Tax Act, 1922 while considering what amounts could be deductible had an occasion to deal with the entire matter from every angle including decisions of other countries across the world on similar controversy. It was held that an expenditure incurred by an assessee can qualify for deduction by virtue of Section 10(2)(xv) of the Act only if it is incurred wholly and exclusively for the purpose of his business, but fulfillment of this requirement alone is not enough, as it has to be further clarified whether such business expenditure comes within the ITA.230 & 263/13 7 ambit of revenue expenditure or expenditure of capital nature. The amount claimed in the said case was 2,03,255/- paid by the assessee. They referred to CIT v. Maheshwari Devi Jute Mills Ltd. [(1965)57 ITR 36] wherein it was opined that the claim of the assessee has to be brought under the expenditure of capital nature. In the case of Maheshwari Devi Jute Mills' case (Supra) assessee was the receiver of amount for sale of loom hours and the question was whether it was revenue receipt or capital receipt. As it was held as capital receipt, the Supreme Court opined, it was not deductible. The said decision of Maheshwari devi Jute Mills' case (Supra) was pressed into service by the revenue in Empire Jute Co. Ltd's case (Supra). In that context, Their Lordships opining that said argument suffers from fallacy, proceeded to hold, in the first place there cannot be a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. Referring to Racecourse ITA.230 & 263/13 8 Betting Control Board v. Wild [(1938)22 TC 182, 188 (KB) wherein Macnaghten, J. pointed out that payment may be revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa. Therefore, they opined that the position in Maheshwari Devi Jute Mills' case (Supra) cannot be regarded as an authority for the proposition. In the case of Maheshwari Devi Jute Mills' (Supra), the payment for sale of loom hours was treated as capital asset and the decision was handed over on that basis. Referring to judgment of Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [(1965)58 ITR 241 (PC)] on the principle of enduring benefit, learned Senior Counsel stresses upon the following:
"....There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If ITA.230 & 263/13 9 the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case......."
8. In the case of Empire Jute Co.Ltd's case (Supra), the stand of the revenue was by purchase of loom hours the assessee acquired a right to produce more than what it otherwise would have been entitled to do and this right to produce additional quantity of goods constituted addition to or augmentation of its profit-making structure. Their Lordships opined that though it is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure, but the same cannot be universally applied and in Empire Jute Co.Ltd's case (Supra) the situation was, assessee acquired a source of profit or income, when he purchased loom ITA.230 & 263/13 10 hours. It is different from the case of Maheshwari Devi Jute Mills (Supra), as the assessee was the payer of the amounts and not the payee. Their Lordships opined, there was no enlargement of the permanent structure of which the income would be the produce or fruit. What the assessee acquired was merely an advantage in the nature of relaxation of restriction on working hours imposed by the working time agreement, so that the assessee could operate its profit-earning structure for a longer number of hours. Though, undoubtedly, the profit-earning structure of the assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit-making structure, but because the profit making structure could be operated for longer working hours.
9. Their Lordships also referred to the judgment in Hallstorm's Property Ltd. v. Federal Commissioner of Taxation (72 CLR 634). In the said case, Justice Dixon held, what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed ITA.230 & 263/13 11 or exhausted in the process. Opining that the question must be viewed in the larger context of business necessity or expediency, it was held that if the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition, it is revenue expenditure. Ultimately, what we can gather is, the Apex Court as opined in Empire Jute Co.Ltd's case (Supra) there cannot be a universal proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. They further held that though expenditure incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It was held that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. It must be considered from the point of advantage in a commercial sense and only when it amounts to advantage in the capital field that the expenditure would be disallowable on an application of enduring benefit test.
ITA.230 & 263/13 12 In the converse, if the advantage merely facilitates the assessee's trading operations in a way to operations to be carried on profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.
10. Other relevant case referred to is Alembic Chemical Works Co.Ltd. v. Commissioner of Income-Tax, Gujarat [(1989)177 ITR 377 (SC)]. The appellant-assessee Company in the above case was engaged in manufacturing of antibiotics and pharmaceuticals. A licence was granted for the manufacture of penicillin. This manufacturing outlay commenced in 1963 and initially only moderate yields of penicillin was achieved. In order to increase the yield, the assessee negotiated with a reputed Japanese enterprise engaged in the manufacture of antibiotics, which ultimately resulted in an agreement between the parties dated 9.10.1963. The Japanese Company is one Meiji. Once for all payment was agreed to supply to the appellant-assessee the subcultures of Meiji's most suitable penicillin producing strains, in a pilot plant, the technical information, know-how and written description of Meiji's process for fermentation of penicillin ITA.230 & 263/13 13 including the design and specifications of the main equipment, so also training of the appellant's representatives in their plant at Japan at appellant's expenses and advice. Appellant was able to produce more quantities of penicillin. In 1964-1965 the appellant claimed deduction of 2,39,625/- (equivalent to US $ 50,000 then) as revenue expenditure. This came to be rejected by both, the department and Tribunal holding that the expenditure was capital in nature. Tribunal interpreted the terms of agreement saying that the appellant had to install a larger plant modelled on the pilot plant and the payment was not made in the course of carrying out an existing business but was for the purpose of setting up a new plant and a new process. It also opined that the expenditure on outlay was incurred for complete replacement of the equipment of the business inasmuch as a new process with a new type of plant was set up in the place of old process and old plant. Even High court on a reference concurred with the opinion of the Tribunal rejecting the claim of the assessee that it was revenue expenditure.
11. The Apex Court opined that High Court fell in error on the ground that there was no material before the Tribunal to come to the finding that the appellant had obtained under the ITA.230 & 263/13 14 agreement a completely new plant with a completely new process and a completely new technical know-how from Japanese Company. The business of the appellant from the commencement of its plant in 1961 was manufacturing penicillin and even after the agreement, the product continued to be penicillin and the agreement only assisted the appellant-assessee to augment the yield of penicillin. It also held that there was no material to opine that improvisation was not part of the existing business but completely a different process. The Apex Court, so far as the restrictions on the right of the appellant in dealing with the know- how, opined that the conditions were mostly in relation to confidentiality and secrecy of the know-how than to its exclusive acquisition. The improvisation in the process and technology was held as supplemental to the existing process and technology and there was no material indicating new or fresh venture. The agreement was in respect of a product already in the line of the appellant's established business and not a new product. Therefore, Their Lordships held, the improvement of the existing business was an outcome of the financial outlay under the agreement, therefore, it was revenue in nature and was allowable ITA.230 & 263/13 15 as deduction in computing the business profits of the appellant. Their Lordships further opined in the above case as under:
"(i) 'It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital.'
(ii) 'In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are ITA.230 & 263/13 16 generally efficacious and serve as useful servants; but as masters they tend to be overexacting.'
(iii) ' The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it.' The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.
There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The "once for all" payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of "enduring benefit" might break down."
ITA.230 & 263/13 17
12. During the course of judgment, Their Lordships referred to the case of Assam Bengal Cement Companies Ltd. v. CIT [(1955)27 ITR 34] wherein it was held that unless the expenditure is made for acquiring or bringing into existence an asset for the benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure, if on the other hand, it is not made for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is revenue expenditure. Reference is also made to the case of CIT v. Ciba of India Ltd. [(1968)69 ITR 692 (SC)] with regard to financial outlay and other agreement. In the said case it was held that there is no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The once for all payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. Therefore, they opined, in a given case the test of enduring benefit might break down. They also referred to Empire Jute Co.Ltd's case (Supra), which is already discussed above.
ITA.230 & 263/13 18
13. Another judgment referred to by the appellant is Commissioner of Income Tax, Madras v. T.V.Sundaram Iyengar and Sons P. Ltd. [(1990)186 ITR 276 (SC)]. In this case assessee spent amounts for purchasing land in the name of government for the purpose of construction of houses for employees under subsidised scheme of government. The Apex Court opined that the amounts spent by the respondent was revenue expenditure. The respondent was not the owner of the land and only contributed a portion of the construction cost towards the subsidised welfare scheme. The fact that the scheme was not for any temporary or particular duration has made little difference to the nature of expenditure. In other words, facts and circumstances under which expenditure was made determine whether it is revenue expenditure or capital expenditure.
14. In the case of CIT v. Premier Cotton spinning Mills Ltd. [(1997)223 ITR 440 (Ker.)] an occasion arose for this Court to refer to Section 37 of the Income-Tax Act wherein the expression used is "for the purpose of business" and they compared the same with the expression "for the purpose of ITA.230 & 263/13 19 earning profits". According to Their Lordships, its range is wide. After referring to Assam Bengal Cement Company's case (Supra), T.V.Sundaram Iyengar and Sons' case (Supra) and other cases they opined that unless the expenditure brings into existence a new asset or advantage or enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. On the other hand, if the purpose is for running the business or working it with a view to produce profits, it is revenue expenditure. The source or the manner of the payment would then be of no relevance as the character of the expenditure alone would determine the nature of expenditure.
15. They also rely upon CIT v. Bongaigaon Refinery and Petro-Chemicals Ltd. [(1996) 222 ITR 208 (Gauhati)]. The assessee was running a refinery. It made contributions to refinery department for construction of railway track and siding, which was obviously necessary for the purpose of smooth running of business of the assessee in a profitable and advantageous manner. High Court opined that it was an expenditure incurred in the relevant year and assessment should be allowed as revenue expenditure by referring to L.H.Sugar ITA.230 & 263/13 20 Factory and Oil Mills (P) Ltd. v. CIT [(1980) 125 ITR 293 (SC)]. In the said case contribution was made for construction of roads in the area around a factory which were wholly and exclusively laid out for business. The Supreme Court held that it was not a capital expenditure but a revenue expenditure and the entire expenditure was allowed. After referring to L.H.Sugar Factory and Oil Mills's case (Supra) and CIT v. Associated Cement Companies Ltd. [(1988) 172 ITR 257 (SC)], Gauhati High Court opined that the expenditure incurred for the purpose of construction of railway track and siding was revenue expenditure and not capital expenditure.
16. CIT, A.P.-I v. Singareni Collieries Co. Ltd. [(1980) 121 ITR 466 (A.P)] is also relevant for the purpose of understanding the present case. Houses were constructed as per the scheme of Coal Mine Labour Housing Board for the employees of the colliery. Expenditure was also substantially repaid by the Housing Board. It was opined that said expenditure was not bringing into existence any enduring benefit but was incurred for carrying on its business, therefore, it amounts to revenue expenditure. They arrived at this conclusion by opining that in the light of possible and probable long span of company's life, the indirect profit which the assessee-company may derive through ITA.230 & 263/13 21 contented workmen for a limited period of just 15 years cannot constitute such a lasting benefit as to classify the expenditure as capital in nature.
17. CIT v. Birla Jute Manufacturing Co. Ltd. [(1990) 182 ITR 497 (Cal)] is a judgment of the Calcutta High Court. For laying of service lines, an agreement was entered into between the assessee and West Bengal Electricity Board. The Apex Court held that the expenditure incurred by the assessee could not be treated in the commercial sense bringing an advantage in the capital field with monthly payment towards cost of asset which never belonged to assessee. In spite of such payment is attributable to the user of the service lines and apparatus for continued supply of energy by the Board to enable the assessee to carry on its business operation, it was treated as revenue expenditure and not capital expenditure.
18. The High Court of Bombay in the case of CIT v.
Bombay City-I v. Hingir Rampur Coal Co. Ltd. [(1983) 140 ITR 73] had an occasion to deal with a case where the assessee agreed with Coal Mines Labour Housing Board to acquire land and construct tenements for workers and staff under low cost housing ITA.230 & 263/13 22 scheme. Their Lordships held that as the purpose of agreement was to provide certain amenities to labour to keep them contented, to ensure good relations between employer and labour for purpose of carrying on business more efficiently, expenditure was to be allowed as business expenditure and not capital expenditure.
19. In Regal Theatre v. CIT, New Delhi [(1996)59 ITR 449 (SN) 15] Delhi Bench of Punjab High Court opined that expenses for paneling walls to cover up cracks and ugly spots, as the assessee has taken cinema theatre on lease was considered as business expenditure. The wooden panels on removal were not of much value and could not be re-installed in the same condition elsewhere. The amounts spent by the assessee in fixing the wooden panels was allowed as expenditure of revenue nature giving deduction under Section 10 of the Indian Income-Tax Act, 1922.
20. Gauhati High Court in B and A Plantations and Industries Ltd. v. CIT [(2000) 242 ITR 22 (Gauhati)] had an occasion to consider whether the assessee who had taken newly constructed premises on lease incurring expenses towards wall ITA.230 & 263/13 23 papers, partition walls, marble flooring provided in the premises would be assets or not. It was held that when the premises was vacated, it would not be the assets of the assessee, therefore, expenditure incurred on interior decoration of the premises was a revenue expenditure.
21. In the case of CIT & another v. Infosys Technologies Ltd [(2012) 349 ITR 588 (Karn)] expenditure of 15,89,613/- was incurred by the assessee company towards brick work, cement, plastering, painting walls, laying ceramic tiles, steel grill, internal sanitary fixtures etc. The assessing officer held this as capital expenditure, as it had enduring nature so far as benefit is concerned. Their Lordships held that as the premises was taken on lease by the assessee and the repairs were carried out for the purpose of business to create ambience and carry out repairs to the premises used as the office of the assessee as there was stiff competition in the business, therefore, the opinion of the Tribunal opining it as revenue expenditure was upheld.
22.Learned Senior Standing Counsel Sri.P.K.Raveendranatha Menon places reliance on the following decisions, apart from referring to certain portions of the decisions in Empire Jute ITA.230 & 263/13 24 Co.Ltd's case (Supra) and also Alembic Chemical Works Co.Ltd'S case (Supra). He places reliance on Commissioner of Income Tax, Kerala-1 v. Jacobs (P) Ltd. [(1979) 120 ITR 197]. In this case the assessee Company, by agreement dated 24.7.1970 undertook to take over some of the assets and liabilities of wholesale business in liquor, which was being carried on by a firm. The agreement in unequivocal and clear terms referred to two distinct items. One is an ongoing concern of the assets, rights and the liabilities of the vendors described in the schedule and the second one is sale of the right to carry on business as wholeselling agent of M & Co., Sherthallai, together with the right to carry on the said business in continuation of vendors' business. Referring to second clause Their Lordships opined that as per the third clause, the vendors are undertaking to pay 2,31,000/- in fully paid 231 equity shares of 1,000/- each as residue or the remaining part of what was sold by the vendors, Their Lordships held that assessee was not entitled to deduction of receipts under this clause, as it represents capital payment for the purpose of a capital asset for carrying on the business, i.e., clause 2. Accordingly, opinion of the ITA.230 & 263/13 25 Tribunal was set aside. Their Lordships while analysing the facts with reference to the question of law to be decided made general observations as under:
"The question that we have to consider is whether the amount sought to be deducted represents a capital expenditure or a revenue expenditure. The problem is a familiar one that has haunted the courts time and again for determination, and which, each time has proved to be an elusive will-of-the-wisp. Decisions are numerous, which have dealt with, and explained, the principle to be applied in telling one type of expenditure from the other. We do not propose at this point of time, and at this stage of the development of the law, to survey the history of these decisions. We venture to quote the observations made by Mr.Justice Hidayatullah (as he then was) in Abdul Kayoom's case (1962)44 ITR 689 (SC) at 703, where the learned Judge observed:
'None of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another'"
ITA.230 & 263/13 26
23. He also places reliance in the case of CIT, Nagpur v. Agrawal Trading Company [(1984) 149 ITR 222]. In this case the assessee claimed the expenditure incurred for construction of a new shop as revenue expenditure, as he was compulsorily required to build a new shop on land which was not his own property. Their Lordships, after referring to CIT v. Vasant Screens [(1980) 124 ITR 835(Bom)], wherein Benarsidas Jagannath, In re [(1947)15 ITR 185 (Lah)(FB)] was referred to, opined that if capital is spent only once and for all, but with a view to bring in an asset or an advantage for the enduring benefit of a trade, it amounts to capital expenditure and not revenue expenditure. They also opined that the question as to whether a particular benefit can be said to be of enduring character has to be determined on the facts of each case. Their Lordships opined that as there was no evidence to prove that the owner was under
an obligation to incur expenditure, the expenditure incurred by the assessee for construction of the shop was not deductible. He also refers to Delhi Cloth & General Mills Co. Ltd. v. Addl. Commissioner of Income-Tax [(1986) 160 ITR 857). Expenditure was on electric fittings in retail cloth depots of the ITA.230 & 263/13 27 assessee and the expenses for purchase of new furniture and racks replacing the old ones in the existing retail depots of the assessee. The Tribunal allowed the deductions on account of expenditure on electric fittings to such expenses as related to old depots only and disallowed the expenses for purchase of furniture and racks as they amount to capital expenses.
24. From the above decisions, we have to appreciate facts of the present case. Appellant in ITA.No.230 of 2013 owns about 37 jewellery shops situated only in tenanted premises located all over India. It is also on record that about 4 to 5 new shops are opened every year. During the relevant assessment year 2007-2008, he opened four new shops. As the jewelery shops are required to maintain high standard of interior decor, appellant had incurred a considerable amount of expenditure for renovation and interior decoration of shop before it can be used. Therefore, they claimed two types of expenditure. So far as the amounts spent towards purchase of air conditioners, jewelery display cases, cupboards, removable light fittings, depreciation was claimed capitalising the expenditure. So far as improvements made by spending money on flooring, plastering and painting the walls, electrical wiring, ITA.230 & 263/13 28 plumbing, sanitary facilities, they claimed as revenue expenditure. According to appellant, though this system of accounting was consistently followed by the appellant in the past, which was accepted by the income-tax authorities and even the assessments were completed, only for 2007-2008, the assessing officer took a completely different view categorising the entire expenditure on the premises taken on lease as capital expenditure. When the said order came to be challenged before the first appellate authority, the order of the assessing officer was upheld. The basis for the opinion was Explanation to Section 32(1) of the Income Tax Act, which allows depreciation of capital expenditure incurred on tenanted premises. It also placed reliance on the decision of this Court in Veeraraghavan's case (Supra) where the test of enduring benefit or advantage for construction of a petrol pump was considered as capital expenditure.
25. So far as appellant in I.T.A.No. 263 of 2013, it is a textile business. The premises was taken on lease by appellant-assessee and spent money for fixtures and furniture to make the property fit for business. A portion of the claim was allowed as deduction under Section 37 of the Income Tax Act rejecting the other ITA.230 & 263/13 29 portion. According to the assessee, the disallowance of expenditure on the ground that the repairs or renovation was a capital expenditure is erroneous and he has challenged the orders of the Tribunal before us.
26. The appellants-assessees are conducting their business in rented premises. They claim to have made improvements to the premises taken on lease in order to create good ambience by spending money on interior decoration which has resulted in expenditure on many items. Out of those items, some of them could be retrieved at the end of the lease and could be used by the appellants-assessees again. Some of the improvements made cannot be taken away along with the lessee assessee at the end of the term of the lease. Though in some of the decisions enduring benefit irrespective of creating an asset or not was alone the criterion and later on the Apex Court, while dealing with the subject exhaustively in Empire Jute Co.Ltd's case (Supra), has held that theory of enduring benefit or advantage may break depending upon the facts and circumstances of the case. Therefore, the stand and argument of the revenue that as long as there is income earning effort by whatever means or name you ITA.230 & 263/13 30 call it, whether it could be expansion or extension of the business, the same has to be considered as capital investment has to be looked into from the facts of the present case. As a matter of fact, in Empire Jute Co.Ltd's case (Supra) distinguishing the facts from the facts of Maheshwari Devi Jute Mills' case (Supra) it was held, what amounts to capital receipt in the hands of the payee need not be capital expenditure so far as the payer. Therefore, payment of certain amounts would not be the deciding factor to arrive at a conclusion whether a particular expenditure is revenue or capital. Every advantage of enduring nature acquired by an assessee need not be the criterion. What is relevant is the nature of advantage in a commercial world which is the determining factor. Unless the advantage is in the capital field, such claim cannot be disallowed. If the capital is left untouched in spite of advantage to the assessee for a long duration, the expenditure would be of revenue account. Therefore, enduring benefit cannot be a conclusive test and it cannot be mechanically applied without referring to facts of a particular case. If money is spent to produce extra or additional quantity of goods or augment the income of the assessee, in the absence of the assessee able ITA.230 & 263/13 31 to retrieve infrastructure or carry the advantage with him at the end of the term of lease irrespective of number of years in which he would be able to earn profits, it cannot amount to capital expenditure. Therefore, though income earning effort that is the expenditure spent on different items would be the basis to ascertain whether it is a capital or revenue expenditure, unless and until it ultimately leads to acquisition of an asset or a right of permanent character irrespective of the possession of the same for a long period, it would not amount to capital expenditure. In the process of renovation and repairs of the premises taken on lease, expenditure may be on different items like flooring, panelling of walls, electrical wiring and fittings, air conditioning, setting up of cupboards, showcases etc. Though 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 ITA.230 & 263/13 32 expenditure was made must be able to come back to the assessee at the end of the day.
27. Learned Senior Standing Counsel for the Revenue places reliance on Explanation 1 to Section 32(1) of the Income-Tax Act. Section 32(1)(i) of the Act refers to 'depreciation' of buildings, which reads as under:
"(i) buildings, machinery, plant or furniture, being tangible assets;"
Explanation 1 to Section 32(1) of the Act reads as under:
"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 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."
28. Reading of the above provision would mean, whenever an assessee carries on business or profession in a building not owned by him, but over which he has a lease or right and if any ITA.230 & 263/13 33 capital expenditure is incurred by the assessee for the purpose of business on the construction of any structure or doing any work like renovation or extension or improvement, the provisions of the Section shall apply to the case of the assessee as if said structure or work is a building owned by the assessee. According to learned Senior Standing Counsel, the amounts 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 ITA.230 & 263/13 34 has to be treated as revenue expenditure in the hands of the owner, it would amount to revenue expenditure even in the hands of the assessee tenant. In other words, Section 32(1)(i) of the Income Tax Act read with Explanation 1 thereto, would only mean, whatever the owner of the building is entitled so far as benefits of other depreciation will be applicable to the case of the assessee, who takes the building on lease.
29. Advantage to facilitate trade operations providing the management to conduct business more effectively to make profits without the need of expanding or extending capital asset (permanent structure), what assessee acquires by spending money is to achieve good ambience which may result in profits without changing the building itself in which the business is conducted. The outgoing expenditure though forms part of profit earning exercise, in the absence of acquiring any asset or a right of permanent nature, it cannot be considered as capital expenditure. There is no replacement of complete structure with the new process. The nature of business prior to expenditure in question and afterwards being the same without any change, except some improvements to augment more profits in order to ITA.230 & 263/13 35 compete with the other competitors in the business regarding new interior designs etc. it cannot be termed as capital expenditure. There was no fresh venture by the assessee so far as the business is concerned. Intended object and the effect must be with reference to business realities. Whether advantage or benefit is for a shorter or longer period, it is immaterial. Therefore, character of expenditure is alone the deciding factor.
30. Therefore, the stand of the revenue that the Tribunal was justified in rejecting the claim of the assessees has to be rejected. It is made clear that the business expenditure irrespective of creating enduring benefit or advantage even if it is a profit earning effort unless at the end of the term of lease the items on which expenditure was spent could be retrieved by the appellants-assessees, it shall not amount to capital expenditure but it can be termed only as revenue expenditure.
31. Coming to the next question of transfer pricing made in respect of international transfers, there is no justification for the revenue to ignore certain comparable cases only on the ground that those two assessees sustained losses in some years. In comparable cases produced by the assessee with respect of ITA.230 & 263/13 36 international transactions, the revenue has to bear in mind the case of the assessees based on the computations made in the comparable cases.
In that view of the matter, in the light of above discussion and reasoning, we are of the opinion, all the substantial questions of law deserve to be answered in favour of the assessees. In the light of the above observations, appeals are allowed, the impugned orders are set aside and the assessing authorities concerned have to work out the computation of tax payable.
Sd/-
MANJULA CHELLUR, CHIEF JUSTICE Sd/-
A.M.SHAFFIQUE,
JUDGE
vgs /true copy/