The judgment of the court was delivered by
Ashok Bhushan, CJ.- A Division Bench hearing these appeals entertained a doubt regarding the correctness of an earlier Division Bench judgment of this court in Joy Alukkas India Pvt. Ltd. v. Asst. CIT (I. T. A. No. 230 of 2013) (Ker) By reference order dated August 18, 2015 (Indus Motor Company P. Ltd. v. Deputy CIT [2015] 378 ITR 706 (Ker)), the Division Bench opined that the judgment in Joy Alukkas case (supra) requires reconsideration, consequently the Income-tax appeals have been placed before this Full Bench for consideration.
2. The brief facts giving rise to these appeals need to be noted for appreciating the issues which are up for consideration before us. These three appeals have been filed by the assessee (Indus Motor Company Pvt. Ltd) against the common order dated July 25, 2014 of the Income-tax Appellate Tribunal, Cochin Bench by which order the three Income-tax appeals filed by the Deputy Commissioner of Income-tax (Revenue) were decided. The three appeals arose out of different assessment years ; 2007-08, 2008-09 and 2009-10. It shall be sufficient to refer to the facts in I. T. A. No. 4 of 2015 arising out of assessment year 2007-08 for answering the reference.
3. The assessee is a dealer in vehicles, spares and accessories of Maruti Suzuki and an authorised service centre for its vehicles. To carry on its business, the assessee has various show rooms/workshops in different Districts of Kerala and in the State of Tamil Nadu. The return of income for the year 2007-08 was filed on October 30, 2007 which was processed under section 143(1) of Income-tax Act, 1961 (hereinafter referred to as "1961 Act"). Subsequently, the case was selected for scrutiny and scrutiny assessment was completed on December 30, 2009 making certain disallowances/ additions. The expenditure of Rs. 3,12,34,772 was treated as capital expenditure out of which the assessee had incurred expenditure of Rs. 2,23,09,152 for construction of superstructures on leasehold lands/premises and another expenditure of Rs. 89,25,620 for setting up of workshop facilities in the leasehold premises. The assessee filed an appeal challenging the assessment order dated December 30, 2009. The assessee claimed the aforesaid expenditure as a revenue expenditure and placed reliance on a Division Bench judgment of Madras High Court in the case of CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad). The Commissioner of Income-tax (Appeals), Kozhikode, allowed the appeal directing deletion of addition of Rs. 3,12,34,772.
4. The Revenue, aggrieved by the order of the Commissioner of Income-tax (Appeals), filed Appeal No. 2012/2014. The Revenue before the Tribunal contended that the expenditure incurred by the assessee were all capital expenditure. Reliance was also placed on Explanation 1 to section 32 of the Income-tax Act, 1961. With regard to the expenditure incurred on superstructure on leasehold land it was contended by the assessee that section 32 speaks only about "building" taken on lease and not land, hence the said Explanation has no relevance. With regard to the expenditure incurred for setting up of show rooms/workshop facilities, it was contended by the assessee that expenses were incurred for the purpose of providing partition, flooring, interior works, etc., for making the premises ready for functional use and no asset or benefits of enduring nature is achieved from such expenditure, hence that expenditure is only a revenue expenditure. Before the Tribunal both the parties placed reliance on different judgments of the apex court, this court and other High Courts. The Tribunal after hearing the parties held that the case of the assessee very much falls within the ambit of section 32 of the 1961 Act. The Tribunal further held that construction activities carried out by the assessee if put on to the test of Explanation 1 would show that construction made by the assessee on the leased out premises would amount to capital expenditure. The appeals filed by the Revenue were allowed. Aggrieved by that order these three appeals have been filed by the assessee.
5. The appeals were admitted by this court on January 15, 2015 on the following questions of law :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of Rs. 1,22,66,205 incurred on superstructures constructed by the appellant on leased land, as capital expenditure ?
(2) Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the Appellate Tribunal that the sum of Rs. 1,22,66,205 incurred for construction of superstructures by the appellant on leased land is capital expenditure ?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of Rs. 1,89,68,567 incurred for repairs refurbishing and improvements on buildings taken on lease ?
(4) Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the Appellate Tribunal that the sum of Rs. 1,89,68,567 incurred for repairs refurbishing and temporary improvements such as partitions on buildings taken on lease is not a revenue expense ?"
6. We have heard Shri Joseph Markos, senior advocate for the assessee and Shri P. K. Ravindranatha Menon for the Revenue.
7. The appeals came up for hearing before a Division Bench. The learned senior counsel appearing for the assessee apart from relying on various other judgments has placed reliance on the Division Bench judgment of this court in Joy Alukkas' case (supra). It was contended by learned counsel for the assessee that by constructing a building or by refurbishing the constructed building taken on lease, no enduring benefit is achieved so as to be treated as capital expenditure and hence such expenditure incurred has only to be treated as revenue expenditure entitled for deduction.
8. Learned senior counsel for the Revenue had also placed reliance on various judgments of the apex court and different High Courts and contended that various cases relied on by the assessee were cases prior to introduction of Explanation 1 to section 32(1)(i) of the 1961 Act. Learned senior counsel for the Revenue contended that in view of Explanation 1 the expenditure incurred by the assessee are capital expenditure and has rightly been so held by the Tribunal. The Division Bench noted the respective submissions of learned counsel for the parties, and after referring to various cases relied on by the respective parties expressed an opinion that by adding Explanation 1 to section 32(1)(i) Parliament has manifested its legislative intention to treat the expenditure incurred by the assessee on leasehold land as capital expenditure and the Explanation 1 to section 32(1)(i) cannot be subjected to any other interpretation. Expressing the aforesaid opinion the Division Bench opined that the law laid down by this court in Joy Alukkas' case requires reconsideration.
9. Reference made by the Division Bench in the order dated August 18, 2015 is confined only to the question as to whether the law laid down by the Division Bench in Joy Alukkas' case requires reconsideration or not ? We thus have proceeded to examine the contention only in the above respect leaving all issues on facts of the case to be considered by appropriate Division Bench. Before we proceed to examine the respective contentions and relevant statutory provisions, it is necessary to note in some details, the facts of Division Bench case in Joy Alukkas.
10. The appeal in Joy Alukkas' case was admitted on following questions of law as has been extracted in the judgment (page 344) :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of Rs. 6,48,70,634 incurred by the appellant in repairs and improvements works in leased premises ?
2. Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the Appellate Tribunal that the sum of Rs. 6,48,70,634 incurred by the appellant in repairs and improvements works in leased premises is capital expenses ?
3. Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in confirming the addition of Rs. 31,68,298 under transfer pricing adjustment ?
4. Whether on the facts and in the circumstances of the case, there is any evidence or material on record before the Appellate Tribunal to justify the addition of Rs. 31,68,298 under transfer pricing adjustment ?"
11. The assessee in the above case has several jewellery shops situated only in tenanted premises in different parts of country. During the relevant assessment year they had opened four new shops. The assessee incurred considerable amount of expenditure for renovation and interior decoration of shops. The assessee claimed two types of expenditure, so far as the amount spent towards purchase of air conditioners, jewellery display cases, cupboards, removable light fittings and depreciation was claimed capitalising the expenditure. So far as improvements made by spending money on flooring, plastering and painting the walls, electrical wiring, plumbing, sanitary facilities, they claimed as revenue expenditure. The Assessing Officer took a completely different view categorising the entire expenditure as capital expenditure. The first appellate authority also upheld the order of Assessing Officer on the basis of Explanation 1 to section 32(1) (i) of Act 1961. The Division Bench in Joy Alukkas' case after referring to Explanation 1 to section 32(1)(i) of the Act laid down the following in paragraphs 27 and 28 (page 357) :
"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.'
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 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 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."
12. The Division Bench in Joy Alukkas' case adverted to the facts of that case and came to the conclusion that the expenditure shall not amount to capital expenditure and can be termed only as revenue expenditure. Following was observed in paragraphs 29 and 30 of the judgment (page 358) :
"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 ambiance 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 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.
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."
13. The Division Bench in its reference order dated August 18, 2015, extracted paragraphs 29 and 30 of the judgment in Joy Alukkas' case. It was noticed in the reference order that the Division Bench in Joy Alukkas' case entered into a finding that merely because the buildings taken on lease are refurbished, no enduring benefit on the capital is enjoyed by the assessee and therefore the same cannot be treated as capital expenditure. In paragraphs 22 and 23 of the reference order the Division Bench expressed its reason for making the reference. The reasons given by the Division Bench as noted in paragraph 23 are as follows (page 717 of 378 ITR) :
"So far as the question regarding the expenditure incurred by the assessee for refurbishing the building taken on lease is concerned, we are of the considered opinion that, after the introduction of Explanation 1 to section 32(1) of the Act, there is no scope left out at all for any interpretation, since by a legal fiction, the assessee is treated as the owner of the building for the period of his occupation. This means that by refurbishing, decorating or by doing interior work in the building an enduring benefit was derived by the assessee for the period of occupation and therefore, is a capital expenditure and not revenue expenditure. So also, as contended by the senior counsel for the Revenue the criteria that is to be adopted for identifying the enduring benefit is the nature of enhancement and advantage that the assessee has deprived by putting the building to use for business purpose. According to us by adding Explanation 1 to section 32(1), Parliament has manifested its legislative intention to treat expenditure incurred by the assessee on leasehold building as capital expenditure and therefore, Explanation 1 to section 32(1) cannot be subjected to any other interpretation. Further the language of Explanation 1 is very plain and clear and there was no scope for providing a different meaning for the words used and hence we are bound to consider the question by giving literal meaning to the expressions and phraseologies by the legislature applied."
14. The Division Bench thus expressed its opinion that the legislative intention as manifested by adding Explanation 1 to section 32(1) is to treat the expenditure incurred by the assessee on leasehold building as capital expenditure. What is the intent and scope of Explanation 1 to section 32(1)(i) is one of the issues which needs to be answered by us and as to whether the view expressed by the Division Bench in its reference order in paragraph 23 as noted above is based on correct interpretation of Explanation 1 ?
15. Explanation 1 to section 32(1) was inserted by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 with effect from April 1, 1988. Section 32 deals with depreciation. Prior to April 1, 1988, it was sub-section (1A) of section 32 which granted depreciation in respect of capital expenditure on building taken on lease or licence by the assessee. It is relevant to extract sub-section (1A) to section 32 as was existing prior to April 1, 1988 which was to the following effect :
"32. (1A) Where the business or profession is carried on in a building not owned by the assessee 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 after the 31st day of March 1970, 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, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of section 34, be allowed-
(i) such percentage on the written down value of the structure or work as may in any case or class of cases be prescribed ;
(ii) in the case of any such structure or work which is sold, dis carded, demolished, destroyed or is surrendered as a result of the determination of the lease or other right of occupancy in respect of the building in the previous year (other than the previous year in which it is constructed or done) the amount by which the moneys payable in respect of such structure or work together with the amount of scrap value, if any, fall short of the written down value thereof :
Provided that such deficiency is actually written off in the books of the assessee."
Sub-section (1A) was introduced in section 32 with effect from April 1, 1971, prior to which no depreciation was allowable in respect of capital expenditure incurred by the assessee on any asset belonging to a third party. Sub-section (1A), however, confined to buildings only and does not extend to plant, machinery or furniture. As per sub-section (1A) an asses see who carries on his business or profession in a building not owned by him but taken on lease or licence and who incurs any capital expenditure for the purposes of his business or profession after March, 1970, 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, was entitled to depreciation allowable under sub-section (1A) in respect of such structure or work.
16. Whether an expenditure is a capital expenditure or revenue expenditure is the question which had been a relevant question both in the Income-tax Act, 1922 and the Income-tax Act, 1961. The Constitution Bench of the Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) had occasion to consider the provisions of section 10(2)(xv) of 1922 Act in the context of revenue expenditure or capital expenditure and noticed various tests laid down by different courts for determining what is the capital expenditure as distinguished from revenue expenditure. The Constitution Bench laid down the following at pages 45 and 46 (relevant portion) :
"In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring 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 made not 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 a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which could apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductable allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the Income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles."
17. Justice Hidayatullah, speaking for the Supreme Court in K.T.M.T.M. Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) had held that none of the tests laid down in various authorities 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 insignificant detail may alter the entire aspect. After considering the earlier judgment of the apex court in Assam Bengal Cement Co. Ltd. (supra), following was observed in page 703 of 44 ITR :
"What is attributable to capital and what to revenue has led to a long string of cases here and in the English Courts. The decisions of this court reported in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) and Pingle Industries v. CIT [1960] 40 ITR 67 (SC) have considered all the leading cases, and have also indicated the tests, which are usually applied in such cases. It is not necessary for us to cover the same ground again. Further 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. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases."
18. Justice M. N. Venkatachaliah in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) has again reiterated that the question in each case would necessarily be whether the test relevant and significant in one set of circumstances are relevant and significant in the case on hand. After review of relevant English cases and judgment of the apex court, following was observed at pages 385 and 386 :
"In Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1966] AC 295, Lord Reid emphasised the futility of a strict application of and exclusive dependence on any single principle in the search for the true position and pointed out the difficulty arising from taking too literally the general statements made in earlier cases and seeking to apply them to a different case which their authors certainly did not have in mind. The learned Lord also identified as another source of difficulty the tendency in some cases to treat someone criterion as paramount and to press it to its logical conclusion without proper regard to the other factors in the case. Lord Reid further said (at page 313) :
'So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in the light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle.'
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, it is truly said, are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. The non-determinative quality, by itself, of any particular test is highlighted in B. P. Australia Ltd. v. Commr. of Taxation of Commonwealth of Australia [1966] AC 224 (PC). Lord Pearce said (at page 264) :
'The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all the guiding features which must provide the ultimate answer . . .'" (emphasis supplied).
19. The Division Bench in its reference order has made reference of another passage from Alembic Chemical Works Co. Ltd. (supra) has referred to in paragraph 17 of the order as follows (page 713 of 378 ITR) :
"17. Taking us through the facts of the case in Alembic Chemical works Co. Ltd. also, learned counsel contended that the ratio laid down by the hon'ble apex court is that no definite principle can be formulated as a general rule. He invited our attention to paragraph 3 of the judgment, where it was held as follows :
'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 generally efficacious and serve as useful servants; but as masters they tend to be over exacting.'"
20. Learned counsel for the assessee has placed reliance on the judgment of the apex court in CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468 (SC) ; [1998] 6 SCC 404. That was a case where expenditure was incurred to construct a building for business by the assessee which building did not belong to him. The question arose in the case was as to whether the expenditure is deductible expenditure. In paragraph 3 of the judgment the question was extracted, which is as follows (page 471) :
"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the building expenses of Rs. 1,62,835 are not liable to be taken into account as deductible expenditure in arriving at the real income of the assessee for the assessment year 1968-69 ?"
The apex court taking note of the earlier judgment of the apex court in Assam Bengal Cement Co. Ltd. (supra) and other cases, laid down the following (page 472 of 233 ITR) :
"7. The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this court in, Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) ; AIR 1955 SC 89. It that case, the appellant company had acquired from the Government of Assam lease of certain lime stone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting licence for lime stone. This court examined tests laid down in various cases for distinguishing between capital expenditure and revenue expenditure. One of the standard tests now in use was laid down in the case of, Atherton (H. M. Inspector of Taxes) v. British Insulated and Helsby Cables, Ltd. [1925] 10 Tax Cas 155 (HL). It said : 'When an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital'. Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage itself provides, this test would not apply if there are special circumstances pointing to the contrary. This court in the above case summarised the tests as follows (page 44) :
'1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment.
2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade . . . If what is got rid of by a lump sum payment is an annual business expenses chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether.
3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. (emphasis ours)."
In the facts of the said case it was held that the said expenditure should be treated as a revenue expenditure. As noted above, whether a particular expenditure is a capital expenditure or revenue expenditure depends on the facts of each case and relevant test applicable.
21. Another judgment relied on by learned counsel for the assessee is CIT v. TVS Lean Logistics Ltd. [2007] 293ITR 432 (Mad) which was a case of construction of the building on leasehold land. The Madras High Court in the facts of the said case after considering Explanation 1 to section 32(1) laid down the following in paragraphs 8, 9 and 10 (page 436) :
"What constitutes a capital expenditure and what does not, to attract Explanation 1 to section 32(1) of the Act depends upon the construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to the building which is put up in a building taken on lease by 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/constructed for the purpose of business or the profession of the 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 construction cost is admissible as the revenue expenditure.
The apex court in L. H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 (SC) held that the construction of roads in the case of sugar mill is revenue expenditure. Similarly, contribution to the State Housing Board for construction of tenements for the workers were also held to be revenue expenditure by the apex court in the case of CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521 (SC).
Seeing through the pipelines of the above ratio in the facts and circumstances of the instant case, we do not see any substantial question of law as raised by the Tribunal, for out consideration, as Explanation 1 to section 32(1) of the Act is not attracted. Accordingly, these appeals are dismissed. Consequently, M. P. No. 1 of 2007 is also dismissed."
The Madras High Court held that Explanation 1 to section 32(1) was not attracted. Again the above case was based on the facts of the said case and need to be considered when issue is to be considered determining as to whether in the present case it is revenue expenditure or capital expenditure.
22. Sri. P. K. Ravindranatha Menon, learned senior counsel appearing for the Revenue has placed reliance on a Division Bench judgment of this court reported in Veeraraghavan v. CIT [1967] 64 ITR 63 (Ker). The above case arose out of Income-tax Act, 1922 in which section 10 came for consideration as to whether expenditure of Rs. 2,625 as capital expenditure was justified in law ? The Division Bench stated the following (page 64) :
"The amount admittedly has been expended for reclaiming a piece of land over which licence has been granted to the assessee to install a petrol pump by the Burmah Shell Oil Distributing Company. It cannot be said that the improvements that have been effected on the land consisting of filling up the ditches and raising the land and of constructing a wall are not of a capital nature. Even so, it is suggested that, because the assessee had only leave and licence over the land, the rule that expenses in the nature of capital expenditure should not be deducted in computing the assessable income should not be applied. We are unable to accept this contention. The changes effected were of an enduring nature and the conclusion reached by the assessing authorities that the money was expended for capital purposes is correct. We, therefore, answer the first question referred to us in the affirmative, that is, in favour of the Department and against the assessee. In view of our answer to question No. (1) question No. (2) cannot arise and it is so agreed.
This Income-tax referred case is ordered on the above terms. There will be no order as to costs."
In the above case the amount expended was for reclaiming a piece of land over which licence has been granted to the assessee to install a petrol pump by the Burmah shell Oil Distributing Company. In the facts of the said case the Division Bench held that the said expenditure is of capital nature. The above case was on its own facts which is not attracted in the facts of the present case, nor any such ratio has been laid down in the said judgment which can be relied on by the counsel for the Revenue. As noted above, for determining the nature of expenditure, facts of each case and relevant test applicable has to be found out. A slight distinction in the facts of the case becomes relevant.
23. Thus to find out whether a particular expenditure incurred by the assessee is a capital expenditure or revenue expenditure various tests have to be looked into, however, with a caution that none of the tests are either exhaustive or universal and each case depends on its own facts. Thus to find out whether a particular expenditure incurred by the assessee is a capital expenditure or revenue expenditure, the facts of the particular case and all circumstances have to be taken into consideration in the light of the law laid down by the apex court as noted above.
24. The facts of each case have to furnish the answer to the query and the findings in one case based on few different factors may not be relevant for another case which may have one or two minor variations. The findings which have been recorded by the Division Bench in Joy Alukkas' case in paragraphs 29 and 30 are the findings based on the facts of that case, taking the view that the expenditure is revenue expenditure. The observations made and tests applied by the Division Bench were on the facts of that case and does not form the ratio of the judgment. The ratio of judgment is contained in paragraph 28 as extracted above.
25. Now we revert back to the interpretation of Explanation 1 to section 32(1)(i) of the 1961 Act. Reading of paragraph 23 of the reference order gives an impression that the Division Bench opined that Explanation 1 manifests a legislative intention to treat the expenditure incurred by the assessee on leasehold building as capital expenditure. As noted above, the earlier provision which provided for giving depreciation was section 32(1A). However, the said provision confined the depreciation only to the buildings, whereas now section 32(1)(i) read with Explanation 1 extends the depreciation to machinery, plant and furniture. Explanation 1 also creates a legal fiction, i.e., "as if the said structure or work is a building owned by the assessee". The Explanation contains thus a legal fiction, i.e., in the event of any capital expenditure incurred as referred to in explanation, it will be deemed that said structure or work is a building owned by the assessee. A deeming provision, i.e., legal fiction, is created by the legislature to attain a particular purpose. However, it has been held that the legal fiction is only for a definite purpose and is limited for the purpose for which it is created. The apex court in the case of CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC) ; [1973] 3 SCC 17 had laid down the following in paragraph 12 (relevant portion) (page 8) :
"12. . . . As held by this court in CIT v. Amarchand N. Shroff [1963] 48 ITR (SC) 59 ; AIR 1963 SC 1448 legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field."
26. In CIT v. Urmila Ramesh [1998] 230 ITR 422 (SC) ; [1998] 3 SCC 6, the apex court had occasion to consider section 41(2) of the Income-tax Act, 1961. Although section 41(2) did not use any deeming expression whereas the words used were "the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year". Section 41(2) is quoted in paragraph 8 which is to the following effect :
"41. (2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income- tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due : . . .
Explanation.-Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year."
The apex court in paragraph 9 held that section 41(2) created a legal fiction. Following was laid down in paragraph 9 (page 432 of 230 ITR) :
"It will be appropriate to first consider whether section 41(2) of the Act contains any legal fiction or not. The second proviso to section 10(2)(vii) of the Income-tax Act, 1922 clearly provides that where the amount for which the building, machinery or plant is sold, exceeds the written down value. Then so much of the excess as would not exceed the difference between the original cost and written down value 'shall be deemed to be the profit of previous year in which the sales took place'. Section 41(2) of the Act does not, however, use the expression 'shall be deemed . . .' This, however, in our opinion would make no difference. Section 41(2) of the Act is a special provision whereby the amount received in excess of written down value becomes chargeable to Income-tax as income of the business or profession of the previous year in which the money payable for the building, machinery, plant or furniture becomes due. But for this specific provision, this amount would not have been taxed as income from business. Building, machinery, plant or furniture, on which depreciation has been allowed, would be the capital asset of the assessee. Any sum received in respect thereof would ordinarily represent a capital receipt. But section 41(2) regard this amount as income from business or profession and of the year in which the amount becomes due. Even though the word 'deemed' is not used in section 41(2) of the Act, as has been used in section 10(2)(vii) second proviso of 1922 Act, nevertheless this proviso creates a legal fiction whereby an amount received in excess of the written down value is firstly treated as income and secondly regarded as income from business or profession and thirdly it is considered to be the income of the previous year in which the money payable became due. That the section creates a legal fiction has been held by this court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) ; AIR 1978 SC 1099, where at page 93 of 113 ITR 84 : of the report it was observed as under :
'It is true that by a legal fiction created under section 41(2) a balancing charge arising from sale of old machinery or building is treated as deemed income and the same is brought to tax ; in other words, the legal fiction enables the Revenue to take back what it had given by way of depreciation allowance in the preceding years since what was given in the preceding years was in excess of that which ought to have been given. This shows that the fiction has been created for the purpose of computation of the assessable income of the assessee under the head "Business income". It was rightly pointed out by the learned Solicitor General that legal fictions are created only for a definite purpose and they should be limited to the purpose for which they are created and should not be extended beyond their legitimate field. But, as indicated earlier, the fiction under section 41(2) is created for the purpose of computation of assessable income of the assessee under the head "Business income" and under section 80E(1), in order to compute and allow the permissible special deduction, computation of total income in accordance with the other provisions of the Act is required to be done and after allowing such deduction the net assess able income chargeable to tax is to be determined ; in other words, the legal fiction under section 41(2) and the grant of special deduction in the case of specified industries are so closely connected with each other that taking into account the balancing charge (i.e., deemed pro fits) before computing the 8 per cent. deduction under section 80E(1) would amount to extending the legal fiction within the limits of the purpose for which the said fiction has been created.'"
27. In Maruti Udyog Ltd. v. Ram Lal [2005] 2 SCC 638 the apex court again reiterated the scope and ambit of purpose for which the deeming fiction is created. In paragraphs 35 and 36 following was stated :
"35. In construing a legal fiction the purpose for which it is created should be kept in mind and should not be extended beyond the scope thereof or beyond the language by which it is created. Furthermore, it is well known that a deeming provision cannot be pushed too far so as to result in an anomalous or absurd position. The court must remind itself that the expressions like 'as if' are adopted in law for a limited purpose and there cannot be any justification to extend the same beyond the purpose for which the Legislature adopted it.
36. In a recent decision, the Constitution Bench of this court in K. Prabhakaran v. P. Jayarajan [2005] 1 SCC 754 opined :
'A legal fiction presupposes the existence of the state of facts which may not exist and then works out the consequences which flow from that state of facts. Such consequences have got to be worked out only to their logical extent having due regard to the purpose for which the legal fiction has been created. Stretching the con sequences beyond what logically flows amounts to an illegitimate extension of the purpose of the legal fiction.'"
28. The plain reading of the language of Explanation 1 indicates that the legal fiction was created as if the said structure or work is the building owned by the assessee. There is no warrant of reading Explanation 1 in a manner to read that when the assessee who holds a lease or other right of occupancy incurs any expenditure for purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to and by way of renovation or extension or improvement to the building, then the said expenditure has to be treated as capital expenditure. The legal fiction has not been created to treat the said "such work" as mentioned therein as capital expenditure rather, the fiction has been created that when such work is carried out, it shall be treated as structure or work owned by the assessee. The words "any capital expenditure" used in Explanation 1 indicate that the legal fiction has to be read when any capital expenditure is incurred. Thus whether any capital expenditure has been incurred is a question which has to be decided on the basis of facts of each case and relevant tests applicable. Explanation 1 cannot be read as to mean that when works mentioned therein are carried out by the assessee, it shall be treated as capital expenditure. Explanation 1 however shall be attracted when expenditure is treated as capital expenditure. The use of the word "any" before the capital expenditure emphasises that the provision is attracted when there is any capital expenditure.
29. The Division Bench in its reference order is not correct in its assumption that by Explanation 1 to section 32(1) Parliament manifested its legislative intention to treat the expenditure incurred by the assessee on leasehold building as capital expenditure. Had the Legislature intended to provide that all such expenditure incurred by the assessee as referred to in Explanation 1 shall be treated as capital expenditure, the explanation would have used different phraseology. It is well settled principle of statutory interpretation that language of the statute should be read as it is. Thus Explanation 1 has to be read as it is. The above rule of statutory interpretation was laid down by the apex court in CIT v. Tara Agencies [2007] 292 ITR 444 (SC) ; [2007] 6 SCC 429. Elaborating the statutory principle following was observed in paragraphs 57 to 62 (page 464) :
"The intention of the Legislature has to be gathered from the language used in the statute which means that attention should be paid to what has been said as also to what has not been said.
In Union of India v. Deoki Nandan Aggarwal [1992] Supp (1) SCC 323 a three-Judge Bench of this court held that it is not the duty of the court either to enlarge the scope of legislation or the intention of the Legislature, when the language of the provision is plain. The court cannot rewrite the legislation for the reason that it had no power to legislate. The power to legislate has not been conferred on the courts.
The court cannot add words to a statute or read words into it which are not there.
In State of Kerala v. Mathai Verghese [1986] 4 SCC 746 this court has reiterated the well-settled position that the court can merely interpret the section ; it cannot rewrite, recast or redesign the section. In interpreting the provision the exercise undertaken by the court is to make explicit the intention of the Legislature which enacted the legislation. It is not for the court to reframe the legislation for the very good reason that the powers to 'legislate' have not been conferred on the court.
In Gwalior Rayons Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests [1990] Suppl SCC 785, the court rightly observed that in seeking legislative intention judges not only listen to the voice of the Legislature but also listen attentively to what the Legislature does not say.
The House of Lords in Pinner v. Evertt [1969] 3 All ER 257 (HL) ; [1969] 1 WLR 1266 aptly observed that we have been warned again and again that it is wrong and dangerous to proceed by substituting some other words for the words of the statute.
Therefore, the legal position seems to be clear and consistent that it is the bounden duty and obligation of the court to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the Legislature in its wisdom has deliberately not incorporated."
Thus whether a particular expenditure is a capital expenditure or revenue expenditure is to be found out from the facts of each case and by applying the relevant tests in each case and when it is found that nature of such expenditure is capital expenditure, Explanation 1 shall automatically come into operation.
30. The ratio laid down in Joy Alukkas' case contained in paragraph 28 is as follows (page 358) :
"Whenever renovation or repair was made by the assessee and claims capital expenditure, it would only mean, whatever depreciation is allowable to the owner of the building would apply to the tenant assessee, who is in possession of a building or structure on lease. In other words, if the expenditure were to be considered as capital expenditure in the hands of the owner, it has to be considered as capital expenditure in the hands of the tenant, who is the assessee so far depreciation and other benefits. If the expenditure has to be treated as revenue expenditure in the hands of the owner, it would amount to revenue expenditure even in the hands of the assessee tenant. In other words, section 32(1)(i) of the Income-tax Act read with Explanation 1 thereto, would only mean, whatever the owner of 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."
31. We do not find that the ratio as laid down by the Division Bench in paragraph 28 is not in accordance with the ambit and scope of Explanation 1 to section 32. The ratio expressed by the Division Bench in paragraph 28 lays down the correct law and needs no reconsideration.
32. We reiterate that the observations and opinions expressed by the Division Bench in paragraphs 29 and 30 (Joy Alukkas' case) for holding that the expenditure incurred by the assessee in the above case was not a capital expenditure but revenue expenditure were observations based on facts of that case and relevant test applied by the Division Bench. The observation made by the Division Bench in paragraphs 29 and 30 has to confine to the facts of the above case.
33. As has been observed above, whether an expenditure incurred by the assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant tests. Explanation 1 to section 32(1)(i) does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, then such expenditure has to be mandatorily treated as capital expenditure. The Explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of section 32(1) shall be applicable as if the said structure or work is a building owned by the assessee. We thus answer the reference holding that the ratio of the judgment of the Division Bench in Joy Alukkas' case as expressed in paragraph 28 of the judgment needs no reconsideration.
34. We further hold that whether an expenditure incurred by the assessee is a capital expenditure or revenue expenditure is to be decided on the facts of each case by applying the relevant tests.
35. We make it clear that we have not expressed any opinion on the merits of the case. Let our answer be placed before the appropriate Division Bench to consider all issues and decide the appeals accordingly.