The judgment of the court was delivered by
1. Shaji P. Chaly J.-These appeals arise from the orders of the Income- tax Appellate Tribunal, Cochin Bench, in I. T. A. Nos. 212 of 2014, 213 of 2014 and 214 of 2014, respectively, dated July 25, 2014. The subject matter of the appeals relate to the assessment years 2007-08, 2008-09 and 2009- 10. The Tribunal has passed a common order allowing the appeals filed by the Revenue and restored the order of the Assessing Officer and held that the amount expended by the assessee for putting up multi-storied structures on leasehold land and refurbishing leasehold buildings are capital expenditure, rejecting the claim of the appellant for treating the same as revenue expenditure and, therefore, deductible under section 32(1) and Explanation 1 of the Income-tax Act.
2. Since the issues raised in these appeals are identical in nature, they were disposed of by the Tribunal by a common order. Therefore, it is only expedient that these appeals are also considered together.
3. The assessee is a leading dealer of vehicles, spares and accessories of Maruti Suzuki and is an authorised service provider, of vehicles manufactured by the said company. The assessee is having dealership in various districts across Kerala and in Chennai, State of Tamil Nadu. The return of income for the aforesaid assessment years were processed under section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for short), and, subsequently, the same were scrutinised under section 143(2) of the Act and additions were made.
4. The assessee went in appeal and relying on the judgments of the apex court, the Madras High Court and the orders of the Appellate Tribunal, the first appellate authority allowed the appeals and held that the expenditure incurred by the assessee is to be treated as revenue expenditure and, therefore, liable to be deducted.
5. Aggrieved by the said order, the Revenue preferred appeals before the. Tribunal and these appeals were allowed holding that the expenditure incurred by the assessee can only be treated as capital expenditure not deductible and, thus, the order of assessment was restored. This is the circumstances in which the assessee has filed these appeals.
6. Heard the senior counsel appearing for the assessee and the senior counsel for the Revenue.
7. Brief facts relevant to each assessment year are separately stated hereunder for the purpose of convenient disposal :
7. Assessment year 2007-08
Return of income was filed by the assessee on October 30, 2007, declaring an income of Rs. 4,76,18,190. Later on, the assessee filed a revised return on June 12, 2008, declaring an income at Rs. 1,95,59,270. As stated earlier the return was processed under section 143(1) and later, the case was taken up for scrutiny by issuing notice under section 143(2) of the Act and after hearing the representative of the assessee, the assessing authority added an amount of Rs. 3,12,34,772 (Rs. 1,22,66,205 towards con struction of superstructure on leasehold lands and Rs. 1,89,68,567 incurred for repairs, refurbishing and improvements of buildings taken on lease) against capital expenditure after declining the claim made by the assessee that the expenditure incurred by it are liable to be deducted since they are revenue expenditure.
Assessment year 2008-09
Return was filed on September 30, 2008, a revised return was later electronically filed and a copy submitted on March 24, 2009, was scruti nised by the assessing authority and has disallowed a similar claim raised by the assessee on account of the superstructure constructed on land taken on lease and expenditure incurred for refurbishing buildings taken on lease by the assessee amounting to Rs. 4,85,77,013 (Rs. 1,49,98,591 towards con struction of superstructure and Rs. 3,35,78,423 incurred for repairs, refur bishing and improvements) and added the same to the capital expenditure, refusing deduction claimed by the assessee against revenue expenditure.
Assessment year 2009-10
The assessee filed return on September 30, 2009. Thereafter, the same was revised on March 18, 2010. Scrutiny was carried out by the Assessing Officer and, thereafter, apart from various other additions, an amount of Rs. 4,02,16,063 (Rs. 3,37,33,873 towards construction of superstructure and Rs. 64,82,190 incurred for repairs, refurbishing and improvements) was added as capital expenditure, declining the claim of the assessee against the revenue expenditure.
8. On the basis of the contentions raised by the appellant, this court, vide its order dated January 15, 2015, has framed questions of law to be decided in the appeals. The questions of law raised in I. T. A. No. 4 of 2015 are extracted hereunder and the questions in other appeals are similar except for the facts and figures :
"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 for construction of superstructures 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 the 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 ?"
9. The thrust of the contentions put forth by the learned senior counsel for the assessee before us was that since construction was carried out by the assessee on leasehold land on termination or expiry of lease, the building either reverts back to the owner of the land or is dismantled and removed by the assessee as per the terms of the agreement, which in turn becomes mere scrap, no enduring benefit is derived by it so also it was contended that as per the modern business techniques, refurbishing of the building taken on lease or constructed by them on leasehold land, is done every 4 or 5 years and, therefore, by constructing the building or by refurbishing the constructed building or the building, taken on lease, no enduring benefit is derived so as to treat the expenditure incurred as capital expenditure and, therefore, the expenditure incurred by the assessee can only be treated as revenue expenditure, entitled to deduction.
10. Learned senior counsel has relied on the decisions in CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 (SC), CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad). He also placed reliance on the judgment of this court in Joy Alukkas India Pvt. Ltd. v. Asst. CIT I. T. A. No. 230 of 2013-[2015] 5 ITR-OL 340 (Ker), and contended that the facts and circumstances discussed therein are similar to the facts and circumstances involved in the present case.
11. In Madras Auto Service (P.) Ltd. (supra), the question considered was whether the assessee which took the landed property on lease, demolished the building situated therein and constructed a new building at its own expense, and used it for a period of 39 years at a low rent, was entitled to treat the expenditure incurred as capital asset. Therein, the assessment year concerned was 1966-67 and the hon'ble apex court dismissed the appeal preferred by the Revenue, and held as follows (page 475) :
"All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of con ducting the business of the assessee more profitably or more suc cessfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the con clusion that the expenditure should be looked upon as revenue expenditure."
12. In the case of TVS Lean Logistics Ltd. (supra), the Madras High Court has considered the question whether by carrying out construction of building on leasehold land, for business advantage, any capital asset has been acquired by the assessee. In the said decision, one remarkable difference from the judgment in Madras Auto Services Ltd. (supra) of the hon'ble apex court is that Explanation 1 to section 32(1) was introduced with effect from April 1, 1988, and the Madras High Court has considered the question with reference to the Explanation so brought into the Income-tax Act. There also the appeal preferred by the Revenue was dismissed holding as follows (page 435 of 293 ITR) :
"It is not in dispute that the assessee had put up the impugned construction of building only on leasehold land and no building was taken on lease by the assessee. Therefore, the fiction created by Explanation 1 that the building put up by him in the leasehold land or structure or work shall be construed as if the same is owned by the assessee, is not applicable to the case of the assessee and Explanation 1 to section 32(1) of the Act is not attracted to the instant case of the assessee at all.
Of course, an argument was advanced on behalf of the Revenue that the words 'where the business or profession is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy' would also include lands and would be read as 'where the business or profession of the assessee is carried on in a land not owned by him but in respect of which the assessee holds a lease or other right of occupancy' and in such case, Explanation 1 to section. 32(1) of the Act is squarely applicable to the instant case of the assessee. But we are unable to appreciate the said argument. In a case where the statutory provision is plain an unambi guous, the court shall not interpret the same in a different manner, only because of harsh consequence arising therefrom ; and it is well known that the court can iron out the creases but it cannot change the texture of the fabric, cannot enlarge the scope of legislation or intention when the language of the provision is plain and unambi guous, cannot add or subtract words to a statute or read something into it which is not there and cannot rewrite or recast legislation, vide Nasiruddin v. Sita Ram Agarwal [2003] 2 SCC 577."
13. In the decision in Joy Alukkas (supra), this court has taken into account almost all the decisions of the hon'ble apex court as well as various High Courts including a Division Bench judgment of this court and held that the expenditure incurred for refurbishing the building taken on lease by the assessee therein was to be treated as revenue expenditure. The Division Bench has also entered into a finding that merely because the buildings taken on lease are refurbished, no enduring benefit on the capital acquired is enjoyed by the assessee and, therefore, the same cannot be treated as a capital expenditure. After considering the facts involved in the said case, it was concluded in paragraphs 29 and 30 of the judgment thus :
"29. Advantage to facilitate trade, operations providing the man agement to conduct business more effectively to make profits without the need of expanding or extending capital asset (permanent struc ture), 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 acquir ing 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.
30. Therefore, the stand of the revenue that the Tribunal was jus tified 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."
14. On the other hand, the learned senior counsel for the Revenue contended that while interpreting section 32(1) and its Explanation, the consideration should be whether by construction of the building on leasehold land or using the building on lease or refurbishing the same, the assessee has acquired of derived any enduring benefit out of the use if the same. And further that after introduction of Explanation 1 supra, so far as the building taken on lease and repaired or refurbished is concerned, the same is clearly covered under Explanation 1 to section 32(1) of the Act. Therefore, the senior counsel contended that the expenditure incurred is to be treated as capital expenditure. It was also contended that in Veeraraghavan v. CIT [1967] 64 ITR 63 (Ker), a Division Bench of this court had occasion to consider the very same question regarding the expenditure incurred by the assessee for developing a leasehold land and laid down that the expenditure so incurred is a capital expenditure and, therefore, the assessee is not entitled to treat the same as revenue expenditure. Learned counsel has specially invited our attention to paragraph 4 of the said decision, which is as follows (page 64) :
"The amount admittedly has been expended for reclaiming, a piece of land over which, licence has been granted to the assessee to instal a petrol pump by the Burmah Shell Oil Distributing Co. It cannot be said that the improvements that have been effected on the land con sisting of filling up the ditches and raising the land and of construct ing 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 cor rect. We, therefore, answer the first question referred to us in the affirmative, that is, in favour of the department and against the asses see. In view of our answer to question No. (1), question No. (2) can not arise and it is so agreed."
15. Learned senior counsel for the Revenue has also relied on the judgments in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) and this court in CIT v. Jacobs (P.) Ltd. [1979] 120 ITR 197 (Ker) to contend that in those judgments referred to in Joy Alukkas (supra), section 37 of the Income-tax Act, 1961, was interpreted. and further that those were cases relating to the assessment years prior to the introduction of Explanation 1 to section 32(1) of the Act. Learned counsel also canvassed for the proposition that no one fact in a case may be similar to the facts arid circumstances of another case and, therefore, ultimately the issues are to be considered and decided with specific reference to the facts involved in the case under consideration.
16. Senior counsel also referred us to Jacobs (P.) Ltd. (supra), where at page 205, towards the end of paragraph 2, it was held as follows :
"The present is a case relating to the application of income to dis charge a liability incurred not in the course of running the business but a liability undertaken to the purpose of acquiring the sole selling agency right which was indisputably an asset of capital nature."
17. Taking us through the facts of the case in Alembic Chemical Works Co. Ltd. also, the 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 (page 384) :
"In the infinite variety of situational diversities in which the con cept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the gen erality 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 rea sonably be held to fall. These tests are generally efficacious and serve as useful servants ; but as masters they tend to be over-exact ing."
18. Learned senior counsel further contended that the judgment in Madras Auto Service (supra) was also rendered in the context of the Act, as it stood prior to the introduction of Explanation 1 to section 32(1) and, therefore, the principles laid down in that judgment will not in any manner improve the case of the assessee.
19. Having taken note of the contentions raised by both sides, we shall proceed to consider the impugned order of the Tribunal. The Tribunal held as follows in paragraphs 26 to 30 :
"26. In the present case, the assessee has taken land on lease and made certain construction. It is the case that the assessee has con structed a new building on the leased land. The hon'ble High Court has further held in the aforesaid case that the language employed in a statute is the determinative factor of the legislative event and even assuming there is a defect or any omission in the words used in the Legislature, the court cannot correct or make up the deficiency, espe cially when a literal reading thereof produces an intelligible result an any departure from the literal rule would really be amending the law in the garb of interpretation, which is not permissible and which would be destructive of judicial discipline.
27. The hon'ble Supreme Court of India in the case of Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 (SC) while dealing with a similar controversy has observed as under (page 472) :
'5 In order to decide whether this expenditure is revenue expen diture or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spend ing money for such construction ? The assessee got a long lease of a newly constructed building suitable to its own business at a very con cessional rent. The expenditure therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee therefore could not have claimed any depre ciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure.'
28. Thereafter, the hon'ble apex court referring to several cases decided held as under (page 475 of 233 ITR) :
'11. All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into exist ence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the pur pose of conducting the business of the assessee more profitably or more successfully. In the present case also since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.'
29. From the above judgment, we can conclude that it is essential that the expenditure incurred on the construction of any structure on the leased premises should result in enduring benefit. In our consi dered opinion, the case of the assessee very much falls within the ambit of Explanation 1 to section 32(1) of the Act and in view of Supreme Court judgment in the case of Madras Auto Service, cited supra, we are not considering the various judgments cited by the learned authorised representative.
30. In view of the above, we find no merit in the arguments of the assessee's counsel on this issue. Hence, this ground of the Revenue is allowed."
20. The learned Appellate Tribunal in paragraph 22 of its order has discussed the judgment of the Division Bench of this court rendered in Joy Alukkas India Pvt. Ltd. (supra) and held that in view of Explanation 1 of section 32(1) of the Act, the assessee perfectly falls within the ambit of the same and thus held as follows :
"To fall within the ambit of Explanation 1 questions which are to be answered are :
(i) Whether the assessee is carrying on business or profession in a leased building or other rights of occupancy ?
(ii) Whether the assessee has incurred any capital expenditure for the purpose of business on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement in the building ?
24. If the answer to the aforementioned questions is in affirmative, the assessee falls within the purview of Explanation 1 to section 32(1). In the instant case, it is an admitted fact that the assessee has taken land on lease for setting up of service stations. It is also undis puted that the assessee has constructed the building at the leased premises. Thus the assessee has constructed super structure. These construction activities carried out by the assessee if put on to the test of Explanation 1 would show that the construction made by the assessee on the leased out premises would amount to capital expen diture."
21. In order to evaluate the situation contemplated under Explanation 1 to section 32(1) of the Act, it is only appropriate that the same is extracted hereunder for the purpose of discussion :
"Explanation 1.-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 busi ness 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."
22. According to us, on a reading of Explanation it is categoric and clear that so far as the expenditure incurred as contemplated in the Explanation is concerned, a legal fiction is created, by which the assessee, enjoying a leasehold right on a building is treated as the owner of the building. So according to us, the question to be considered in such a case is whether the assessee has acquired any enduring benefit by putting the refurbished building to use over a period of time in accordance with the agreement entered into between the assessee and the building owner.
23. 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 derived by putting the building to use for business purposes. According to us, by adding Explanation 1 to section 32(1), Parliament has manifested its legislative intention to treat the 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 the literal meaning to the expressions and phraseologies by the Legislature applied.
24. In the aforesaid reasons, we are of the opinion that the law laid down by the Division Bench of this court in Joy Alukkas India Pvt. Ltd. requires reconsideration.
Registry is directed to place the matter before the hon'ble the Chief Justice for, appropriate orders in the matter.