Case: Commissioner Of Income-Tax, Tamil Nadu Ii, Madras Vs. Madras Auto Service (P) Ltd. Etc

The assessee is a limited company carrying on the business of sale of motor parts. Its head office is at Madras. It has a branch at Bangalore. Under an agreement of lease dated February 1, 1966, the assessee obtained from Hajira Comer and Mrs. Rabia Bai Razack a lease of premises Nos. 64 and 64/1 situated at Sri Narasimharaja Road, Bangalore, for a period of 39 years commencing from January 1, 1966. 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. 1, 000 per month for the first fifteen years, Rs. 1, 500 per month for the next ten years, Rs. 1, 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 will have only the right to be a tenant for a period of 39 years under the existing lease, subject to the payment of rent and observation of other terms and conditions of the lease. The lessee shall not be entitled under any circumstances for any compensation whatsoever on account of its putting up the new construction in the place of the old Acting under the lease agreement, the assessee invested a sum of Rs. 1, 62, 835 in the previous year relevant to the assessment year9 and Rs. 50, 937 during the succeeding year in constructing a new building on the said land. The assessee claimed before thex Officer the expenditure of the said sums of Rs. 1, 62, 835 and Rs. 50, 937 in the relevant assessment years as capital loss. In the alternative, the assessee claimed depreciation on capital investment; in the alternative, the assessee claimed deduction of the payments as business expenditure or as extra rent for the lease. Ultimately, thex Tribunal has held that the expenditure of the said two amounts for the construction of a new building is in the nature of business expenditure for proper carrying on of the business of the assessee. The Tribunal has, therefore, treated these amounts as revenue expenditure and allowed a deduction in that regard to the assessee. The claim of the Department that the expenditure was capital expenditure and was, therefore, not deductible, was negatived by the TribunalOn the application of the Department, the Tribunal referred the following question to the High Court for its determination under section 256(1) of thex Act, 1961  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? *  For the next assessment year, a similar question was raised in regard to the second sum of Rs. 50, 937. The High Court has, by the impugned judgment, upheld the view of the Tribunal and has held that the two amounts constitute revenue expenditure for the concerned assessment years and are deductible in order to arrive at the income of the assessee for the said assessment years. The present appeals are filed by the Department from the impugned judgment of the High Court

Court's reasoning:
The question was whether this amount was deductible in computing the assessees profits. The 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 addition to or expansion of theg 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, revenue expenditureIn the case of CIT v. Associated Cement Companies Ltd. (SC), they 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, did not result in creating any capital asset for the company. The advantage secured by the respondent was immunity from liability to pay municipal rates and taxes for a period of 15 years. This court said that had these liabilities been paid, the payments would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capitalIn the case of CIT v. Bombay Dyeing and Manufacturing Co. Ltd. (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 they acquired no ownership rights in the tenements, this 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 forceAll these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully.