IN THE HIGH COURT OF BOMBAY AT GOA **** TAX APPEAL NO. 3 OF 2002 The Commissioner of Income Tax, having office at Aayar Bhavan, Patto Plaza, Panaji, Goa. .... Appellant Versus 1. M/s Hede Consultancy Pvt. Ltd., Hede Centre, Durga Bhavan, Tonca, Caranzalem, Panaji, Goa, 2. The Income Tax Appellate Tribunal, Panaji Bench, Aaykar Bhawan, Patto Plaza, Panaji, Goa. .... Respondents. Shri S. R. Rivonkar, advocate for the appellant. Shri M. S. Sonak, advocate for respondent no.1. CORAM: V. C. DAGA & P. V. HARDAS. JJ. DATE: 10th June, 2002. ORAL ORDER (Per V. C. Daga, J.) This Tax Appeal has been filed at the instance of the Revenue setting out certain questions of law. For the sake of brevity, we reframed and modified the question reading, as under:- " Whether on the facts and in the circumstances of the case the expenditure incurred by the assessee in converting the godown taken on lease, into office premises could be termed as revenue expenditure or capital expenditure?" - 2 - FACTS IN BRIEF 2. The brief facts pertaining to the case are as under:- The assessee is a Pvt. Ltd. Company carrying on business at various places, inter alia at Mumbai. The assessment year involved is 1988-1989. The assessee filed its return on 30th June, 1988, declaring taxable income of Rs.20,267/-. The assessee spent Rs.9,20,436/- for converting the godown premises into office by renovating it, incurring expenses on interior decoration, which resulted in replacement of existing roof with that of cement sheets, replacement of floor with that of marble, plastering of walls and construction of bathrooms and W.C., etc. The assessee claimed the said expenditure of Rs.9,20,436/- as revenue expenditure and thereby refused to treat it as capital expenditure, since in his belief it was towards repairs and maintenance of the said premises taken on rent by the assessee. 3. In response to the Notice under Sections 142(1) and 143(2) of the Income Tax, 1961, (hereinafter referred to as the "IT Act") the assessee furnished various details. However, the Assessing Officer disallowed the claim and allowed depreciation on the said amount under Section 32 of the IT Act, holding the said - 3 - expenditure to be of capital in nature. 4. The appeal was carried at the instance of the assessee to the Commissioner of Income Tax (Appeals), ( "C.I.T.(A)", for short). The C.I.T.(A), by Order dated 31st October, 1991, allowed 1/6th of the rental value as maximum possible amount attributable towards repairs and the balance of the amount was treated as capital expenditure. 5. Being aggrieved, the assessee filed an appeal before Income Tax Appellate Tribunal ("ITAT" for short). The ITAT by Order dated 28th September, 2001, deleted the additions made by the Assessment Officer, holding that the expenditure incurred on the rented building for the renovation or alteration is, ordinarily, of a revenue in nature. 6. Being aggrieved by the aforesaid Order, of the ITAT, the Revenue is in appeal before us under Section 620 A of the IT Act and has raised the question of law set out hereinabove. SUBMISSIONS 7. The learned counsel appearing on behalf of the Revenue has contended that looking to the nature and - 4 - extent of the expenditure incurred, it could not be said to be of revenue in nature. He submits that looking to the items of expenditure, it can be seen that the assessee has converted a godown into a well-furnished decorated costly looking office providing facilities of W.C. and bathroom, using marble and other costly items so as to provide other modern facilities. Thus, in his submission the expenditure incurred cannot be termed, in any case, as revenue in nature, because the assessee has created new office premises, though in a rented building. The expenses mentioned in the bills cannot be taken as recurring, but they are expected to work for a long period, as such, he submitted that the entire expenditure is of capital nature and by no stretch of imagination it could be treated as of a revenue nature. 8. Per-contra, learned counsel appearing for the assessee submitted that deletion made under Section 37 (3A) was rightly made by the ITAT. In his submission the ITAT rightly appreciated that the amount spent by the assessee on alteration and addition is allowable as revenue expenditure. He relied on the decision of the Bombay High Court in the case of Nile Products Ltd. Nile Products Ltd. Nile Products Ltd. vs. Commissioner of Income-Tax, Bombay Commissioner of Income-Tax, Bombay Commissioner of Income-Tax, Bombay , (149 ITR 689) and also placed heavy reliance on the judgment of the Apex Court in the case of Commissioner of Income-tax Commissioner of Income-tax Commissioner of Income-tax vs. Madras Auto Service (P) Ltd. Madras Auto Service (P) Ltd. Madras Auto Service (P) Ltd., [(1998) 233 ITR 0468]. He - 5 - also contended that renovation of office premises and cost of panelling walls with plywood is revenue expenditure as held in CIT CIT CIT vs. J.K. Industries Pvt. Ltd. J.K. Industries Pvt. Ltd. J.K. Industries Pvt. Ltd., 125 ITR 218. Alternatively, he submitted that even if such repairs are assumed to be of capital nature, even then the same are deductible as held in the cases of Instalment Supply Pvt. Instalment Supply Pvt. Instalment Supply Pvt. Ltd. Ltd. Ltd.. vs. CIT Delhi-II CIT Delhi-II CIT Delhi-II , 149 ITR 52 and Allied Metal Allied Metal Allied Metal Products Products Products vs. CIT CIT CIT, 137 ITR 689. He prayed for rejection of the appeal with costs. CONSIDERATION 9. In computing the income chargeable under the head "Profits and gains of business or profession", Section 37 of the IT Act, enables the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid out for purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure. 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 - 6 - 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. One of the early pronouncements which serves to indicate a broad area of distinction is City of City of City of London Contract Corporation London Contract Corporation London Contract Corporation vs. Styles Styles Styles, (1887) 2 Tax Cas 239, where Bowen L.J. indicated that the outlay on "acquisition of the concern" would be capital while an outlay in "carrying on the concern" is revenue. In Vallambrosa Rubber Co Vallambrosa Rubber Co Vallambrosa Rubber Co vs. Farmer Farmer Farmer, (1910) 5 Tax Cas 529, Lord Dunedin suggested as "not a bad criterion" the test that if the expenditure is "once for all", it is capital and if it is "going to recur every year", it is revenue. 10. In Assam Bengal Cement Corporation Ltd. Assam Bengal Cement Corporation Ltd. Assam Bengal Cement Corporation Ltd. vs. CIT CIT CIT, (1955) 27, ITR 34 the Apex Court observed:- " If the expenditure is made of 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. - 7 - The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." 11. The Apex Court in the case of CIT CIT CIT vs. Madras Auto Service (P) Ltd. Madras Auto Service (P) Ltd. Madras Auto Service (P) Ltd., (cited supra) had an occasion to deal with an identical question on similar facts. In that case, the assessee was a company carrying on business of sale of motor parts. Its head office was at Madras. It had a branch at Bangalore. Under the agreement of lease the assessee obtained certain premises for a period of thirty nine years at Bangalore. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its own expense the existing premises and appropriate to itself all the material, thereof, without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business as per the plan approved by the lessors. Under clause 2 of the lease deed, the lessee was required to pay a rent of Rs.l,000/- per month for the first fifteen years, Rs.l500/- per month for the next ten years, Rs.l,650/- per month for the next ten years and Rs.2,000/- per month for the remaining years. The lease deed further provided that the new construction shall, right from the commencement of the work, be the property of the lessors and upon completion of the work of construction the lessee would have only the right to be a tenant for a period of 39 years under the - 8 - existing lease, subject to the payment of rent and observation of other terms and conditions of the lease. The lessee would not be entitled under any circumstances to any compensation whatsoever on account of its putting up the new construction in place of the old. Acting under the lease agreement, the assessee invested a sum of Rs.l,62,835/- in the previous year relevant to the assessment year 1968-69 and Rs.50,937/- during the succeeding year in constructing a new building on the said land. The assessee claimed before the Income-tax Officer the expenditure of the said sums of Rs.l,62,835/- and Rs.50,937/- in the relevant assessment years as capital loss. In the alternative, the assessee claimed deduction of the payments as business expenditure or as extra rent for the lease. Ultimately, the Income-tax Appellate Tribunal held that the expenditure of the said two amounts for the construction of a new building was in the nature of business expenditure for proper carrying on of the business of the assessee. The Tribunal had, therefore, treated these amounts as revenue expenditure. This was upheld by the High Court. On appeal to the Supreme Court, while dismissing the appeal the Apex Court held that right from inception, the building was of the ownership of the lessor. By spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business - 9 - point of view, therefore, the assessee got the benefit of reduced rent. The expenditure was, therefore, treated as revenue expenditure. 12. The Apex Court while dealing with the said question also laid down the general principles applicable in determining whether expenditure is capital or revenue expenditure. They are as under:- " The general principles applicable in determining whether a particular expenditure is capital or revenue expenditure are as follows: (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether; (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 - 10 - business or part of its circulating capital." 13. The Apex Court while dealing with this question relied on the following cases:- (i) Lakshmiji Sugar Mills Co. P. Ltd. vs. CIT, (1971) 082 ITR 0376 (SC); wherein the assessee company was carrying on business of manufacture and sale of sugar. It paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane-producing centres and the sugar factories of the assessee. The road remained the property of the Government. The Apex Court held that the expenditure was not of capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee’s business. The expenditure was incurred for the purpose of facilitating the running of the assessee’s motor vehicles and other means employed for transportation of sugarcane to its factories. (ii) In the case of L. H. Sugar Factory and Oils Mills (P) Ltd. vs. CIT (1980) 125 ITR 293 (SC), the assessee was carrying on the business of manufacture and sale of sugar. It had its factory in U.P. The assessee paid a contribution towards meeting the cost of - 11 - construction of roads in the area around it factory under a sugarcane development scheme. The question was whether this amount was deductible in computing the assessee’s profits. The Apex Court held that it was, because although the advantage secured was of long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee; nor was there any profit to or expansion of the profit-making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, held to be expenditure of revenue nature. (iii) In another case CIT vs. Associated Cement Co. Ltd., (1988) 172 ITR 0257 (SC), the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to the railway station. The amounts expended for these purposes were held to be revenue expenditure since the installations and accessories were the assets of the Municipality and not of the assessee. The expenditure, therefore was held to be not of capital nature. The advantage secured by the respondent was immunity from - 12 - liability to pay municipal rates and taxes for a period of 15 years. The Apex Court said that had these liabilities been paid the payment would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capital. (iv) In the case of CIT vs. Bombay Dyeing and Manufacturing Co. Ltd., (1996) 219 ITR 521 (SC), the company contributed to the State Housing Board certain amounts for construction of tenements for its workers. The tenements remained the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, constituted legitimate business expenditure. As the assessee-company acquired no ownership rights in the tenements, the Apex Court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contented labour force. All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee - 13 - more profitably or more successfully. As in the present case also since the assets created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern business premises at a low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure. No fault can be found with the findings recorded by the Tribunal. 14. In the result, the Appeal is dismissed, with no order as to costs. V. C. DAGA, J. P. V. HARDAS, J.