The distinction between revenue and capital expenditure is of grave importance from the income-tax viewpoint, as this can have a impact on the tax liability of the assessee. The same is advantageous in tax planning and reducing the taxes. Whether a particular expenditure is capital or revenue has been a matter of much debate in spite of various judgements on the controversy.A recent Supreme Court judgement has created a stir by treating the amount spent by an assessee on the demolition and construction of a new building at a premises taken on lease as revenue expenditure.
The facts of the case were that the assessee was a company carrying on the business of sale of motor parts. Under an agreement of lease, the assessee obtained certain premises for a period of 39 years. Under the terms and condition of the lease, 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 lessor any compensation. The assesseecould also construct a new building thereon to suit the purpose of its business as per the plan approved by the lessor.
Under the terms of the lease deed, the lessee was required to pay a rent of Rs 1,000 per month for the first 15 years, Rs 1,500 per month for the next 10 years, Rs 1,650 per month for the 10 years following that and Rs 2,000 for the remaining years. The lease deed provided that the new construction would, right from the commencement of the word, be the property of the lessor 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.
The lessee would not be entitled under anycircumstances to any compensation whatsoever on account of its putting up the new construction in place of the old. The assessee spent an amount of Rs 162,835 in the previous year and Rs 50,397 during the succeeding year on the construction. The assessee claimed before the Income Tax Officer the said sums of Rs 162,835 and Rs 50,397 in the relevantassessment year as capital loss. In the alternative, the assessee claimed the deduction of the payment because the expenditure was capital expenditure and, therefore, not deductible.
While deciding the case, the Supreme Court observed: ``One of the standard tests now in use was laid down in the case of Atherton vsBritish Insulated and Helsby Cables Ltd. 1925 10TC155. 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 here 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 a enduring nature has been obtained or not, will not 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.''
Thecourt in the above case summarised the test as follows:
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. Expenditure may be treated as properly attributable to capital when it is made, not only once 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 be equally regarded as a business expense, but if the lump-sum payment should bring in a capital asset, then that puts the business on another footing altogether. 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 or part of its circulating capital.Relying upon the second test enumerated above, thecounsel for the appellant had submitted that the assessee got an enduring benefit of a capital nature by spending the amount because the assessee obtained a new building for a period of 39 years. However, the difficulty in the present case arises from the fact that this building was never to belong to the assessee. Right from inception, the building was owned by the lessor. Therefore, by spending the money, the assessee did not acquire any capital asset. The only advantage that the assessee derived by spending the money was that it got the lease of new building at a low rent. The High Court has, therefore, rightly considered this as obtaining a business advantage. The expenditure is, therefore, to be treated as a revenue expenditure.
The court further held: ``All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company when the expenditure did not bring into existence any capital asset of the company. The assets which were created belong to somebody elseand the company derived an enduring business advantage by expending the amount. In all the 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. In the present case also, since the asset created by spending the said amount 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 expenditure should be looked upon as the revenue expenditure.''
The above judgement passed in the case of CIT vs Madras Auto Service P Ltd. (S.C.) 1998 233 ITR 468 is an important landmark judgement for distinguishing between capital and revenue expenditure. Further, this can be of immense help to assessees who are about to spent a substantial sum on the reconstruction of a tenanted building and equally want toreduce their tax liability.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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