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Commissioner Of Income-Tax v. Tvs Lean Logistics Ltd.
Factual and Procedural Background
The Revenue filed appeals challenging whether expenditure on construction of a building on leasehold land should be treated as revenue expenditure or capital expenditure under Explanation 1 to section 32(1) of the Income-tax Act, 1961. The relevant assessment years were 2001-02 and 2002-03. The assessee claimed the construction expenditure as revenue expenditure, but the Assessing Officer classified it as capital expenditure. The Commissioner upheld this classification, dismissing the assessee’s appeals. The assessee then appealed to the Tribunal, which allowed the appeal, holding that Explanation 1 did not apply to construction on leasehold land, thereby treating the expenditure as revenue in nature. The Revenue challenged this decision before the court, raising a substantial question of law.
Legal Issues Presented
- Whether the expenditure on construction of a building on leasehold premises amounts to revenue expenditure or capital expenditure under Explanation 1 to section 32(1) of the Income-tax Act, 1961.
- Whether Explanation 1 to section 32(1) applies to construction on leasehold land where the building is constructed by the assessee and not taken on lease.
Arguments of the Parties
Revenue's Arguments
- The phrase “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” should be interpreted to include leasehold land, thereby making Explanation 1 applicable.
Assessee's Arguments
- Explanation 1 to section 32(1) covers only cases where the building itself is leased, not where construction is on leasehold land.
- Since the assessee does not own the building but constructed it on leased land, the expenditure should be treated as revenue expenditure.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Nasiruddin v. Sita Ram Agarwal, [2003] 2 SCC 577 | Statutory interpretation requires plain and unambiguous language to be followed literally without adding or subtracting words. | The court relied on this precedent to reject the Revenue’s broader interpretation of Explanation 1, emphasizing the plain language of the statute. |
| Raghunath Rai Bareja v. Punjab National Bank, [2007] 2 SCC 230 | The literal rule of interpretation is paramount; courts cannot amend legislation under the guise of interpretation even if literal reading causes hardship. | Applied to uphold the literal interpretation of Explanation 1, affirming that no extension to leasehold land is permissible by judicial construction. |
| L.H Sugar Factory and Oil Mills P. Ltd. v. CIT, [1980] 125 ITR 293 | Construction of roads in a sugar mill was held to be revenue expenditure. | Used as an example to support that certain construction costs can be revenue expenditure when not resulting in acquisition of capital asset. |
| CIT v. Bombay Dyeing and Manufacturing Co. Ltd., [1996] 219 ITR 521 | Contribution for construction of workers' tenements was held to be revenue expenditure. | Supported the principle that expenditure for business advantage without acquisition of capital asset can be revenue expenditure. |
Court's Reasoning and Analysis
The court examined Explanation 1 to section 32(1) of the Income-tax Act, which applies where business is carried on in a building not owned by the assessee but leased, and capital expenditure is incurred on construction or improvement of that building. The court found that the assessee had constructed a building on leasehold land but did not lease an existing building. Therefore, the statutory fiction treating the building as owned by the assessee did not apply.
The court rejected the Revenue's argument that the provision should be extended to include leasehold land by stressing the plain and unambiguous language of the statute. It cited authoritative precedents emphasizing that courts must apply the literal rule of interpretation and cannot enlarge the scope of legislation or add words to it, even if the literal interpretation results in hardship.
Further, the court distinguished the case from those involving capital assets acquired by the assessee, holding that since the assessee did not acquire a capital asset but only constructed a building on leased land for business purposes, the expenditure qualifies as revenue expenditure.
Precedents were cited to illustrate that certain construction costs related to business operations (such as roads or workers' housing) have been held to be revenue expenditure, reinforcing the court's conclusion.
Consequently, the court found no substantial question of law requiring interference with the Tribunal's decision and dismissed the appeals.
Holding and Implications
The appeals filed by the Revenue are dismissed.
The court held that expenditure incurred on construction of a building on leasehold land, where the building itself is not leased, does not attract Explanation 1 to section 32(1) of the Income-tax Act, 1961, and is to be treated as revenue expenditure. This decision directly affects the parties by affirming the Tribunal’s ruling but does not establish any new precedent beyond the interpretation of the statutory provision in the present context.
P.D Dinakaran, J.:— The Revenue has preferred these appeals on a vexed substantial question of law as to whether the expenditure on construction of building in leasehold premises would amount to revenue expenditure, contrary to the clear provisions of Explanation 1 to section 32(1) of the Income-tax Act, 1961, under the following facts and circumstances of the case.
2. The relevant assessment years are 2001-02 and 2002-03 respectively. The assessee claimed the expenditure incurred by it on construction of a building, concededly on leasehold land, as revenue in nature.
3. But the Assessing Officer treated it as capital expenditure by orders dated March 23, 2004, and February 7, 2005, respectively. Against the said orders, the assessee preferred appeals, which were, by common order dated September 21, 2005, dismissed by the Commissioner, upholding the order of the Assessing Officer.
4. Contending that Explanation 1 to section 32(1) of the Act would cover the situations of construction on premises taken on lease, since the assessee was not the owner of the building, the expenditure could only be treated as revenue in nature, the assessee preferred further appeals before the Tribunal. Appreciating the contention made on behalf of the assessee, the Tribunal allowed the appeal and held that the expenditure incurred by the assessee on the construction of the building on the leasehold land was not attracted by Explanation 1 to section 32(1) of the Act, as it was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from April 1, 1988, and therefore, the said expenditure was revenue in nature. Hence, the present appeal raising the abovementioned substantial question of law.
5. Before proceeding further, it is apt to refer to Explanation 1 of section 32(1) of the Act:
“32. Depreciation.—(1) In respect of depreciation of—
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,
owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—
(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:………
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 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.”
6. 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.
7. 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 and unambiguous, the court shall not interpret the same in a different manner, only because of harsh consequences 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 unambiguous, 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.
8. Similarly, there should be a literal rule of interpretation of a statute, which is the first and foremost principle of interpretation and where the words of a statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule and even if the literal interpretation results in hardship or inconvenience, it has to be followed. 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 legislation, the court cannot correct or make up the deficiency, especially when a literal reading thereof produces an intelligible result and 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, vide Raghunath Rai Bareja v. Punjab National Bank, [2007] 135 Comp Cas 163 (SC); [2007] 2 SCC 230.
9. 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.
10. The apex court in L.H Sugar Factory and Oil Mills P. Ltd. v. CIT, [1980] 125 ITR 293 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 was 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.
11. 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 our 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.
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