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Capital expenditure is not admissible as deduction under the income tax Act unless otherwise so stated in the Act. For instance section 37 (1) prohibits allowance of capital expenditure. Likewise section 30 and 31 by their attached Explanation provides that the deduction on account of repairs and current repairs of plant and machinery and building do not include expenditure in the nature of capital expenditure. Now the moot question therefore would be how to judge the nature of expenditure to be revenue or capital as the Act even till today does not so provide for any definition of capital expenditure.

Given this scenario the only solution therefore would be to make a judgment on the basis of established principles and guidelines laid down by the Apex Court and the High Courts. It is only in the guise of this unfortunate scenario that the Assessing Officer would possibly treat every bit of repairs expenditure to be capital in nature, allow depreciation and then leave it to be tested by the Courts. This open ended approach to capital and revenue divide merely drives a case to an uncertainty.

In a recent case before the Madras High Court in CIT v Viswams (2019) 105taxmann.com 289 the assessee incurred an expenditure of Rs.2,99,36,364/-for civil and renovation/interior improvements works. It claimed such expenditure as revenue on the basis of the binding precedent in CIT v. Hari Vignesh Motors (P.) Ltd. [2006] 282 ITR 338 (Mad.). The Madras High Court then in this case of scooter dealer held as under:

‘Held the assessee had put up the ground floor over the existing basement floor only to have the business premises according to the specifications put forth by TVS Suzuki Ltd. and, further, there was a clear-cut stipulation in the lease deed that reimbursement of the expenditure was not possible from the owner of the premises. Hence, in view of the business exigencies, the assessee had put up the construction in and by which the assessee would not get any capital asset. The expenditure was, therefore, deductible.’

The Tribunal on the basis of doctrine of judicial discipline and law of precedents therefore followed this view and held in favour of the assessee in Viswam case.

Madras High Court Taking Different Stand


There was no clause in the lease deed similar to what is found in Hari Vignesh case (supra). The Counsel for the assessee never did refer to the lease deed to defend its claim either. Instead it simply expected the Court to follow their previous decision in Hari Vignesh without going into the lease agreement which is given to be unregistered.


The Madras High Court however did not agree to such stand and instead went on to hold a view that the nature of expenditure would come within the mischief of Explanation 1 to section 32(1). It further derived its conclusion following Apex Court decision in the case of Ballimal Naval Kishore and Another v. CIT ( 1997) 224 ITR 414. The Court thus held the Assessees have actually put up substantial construction of enduring benefit and also renovated the building for the purpose of their business and as such therefore only depreciation would be admissible.


In the Hari Vignesh case the Madras High Court followed CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468 (SC). In that case the assessee had acquired a right under the lease 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. Further under clause 2 of the lease deed, the lessee was required to pay a nominal rent during the entire period of lease of 39 long years. Also the lease deed provided that the new construction shall, right from the commencement of the work, be the property of the lessors. In other words the ownership over the new construction passed on the lessors in lieu of concessional rent advantage.

In elaborating further the Supreme Court held (Page No : 0472)

‘In order to decide whether this expenditure is revenue expenditure 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 spending money for such construction ? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional 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, the assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure.’

The dichotomy of how depreciation could be allowed to a lessee is no longer uncertain after insertion of Explanation 1 to section 32 (1) which read as under:

“[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.”

In other words by now the assessee lessee can claim depreciation on the amount of any expenditure on civil or non civil works in no uncertain terms if these provide an advantage of enduring nature. In the peculiar fact situation there is a clear finding in the above case that the assessee got savings in monthly rent for a long period of 39 years by expanding certain capital expenditure. It is only for this reason that the Supreme Court held the expenditure as revenue and more so because there was no other way to claim deduction of depreciation in the alternative manner. This decision still holds the field on its peculiar facts and not otherwise.

In the Viswams case before the Madras High Court there was no savings of rental despite having incurred substantial civil cost on construction of structure and renovation /building improvements.   Further the lease was silent as far as any understanding on the subject either.  The Madras High Court therefore chose to go by the Explanation 1 to section 32 (1) in the Act to the favour of revenue.

The lease agreement therefore assumes relevance to ascertain the recurring commercial advantage if any derived by the lessee for undertaking civil and renovation/improvements work.

The Madras High Court did not refer to the following previous decisions favouing assessee:

  1. CITAyesha Hospitals (P.) Ltd. [2006] 292 ITR 266 (Mad)
  2. Thiru Arooran Sugars Ltd. v.  CIT [2013] 350 ITR 324/213 Taxman 90 (Mag.)/31 taxmann.com 3 (Mad.),
  3. CIT v Anush Shares and Securities Ltd. [2015] 62 taxmann.com 287 (Madras)
  4. CIT v Armour Consultants Pvt Ltd. ( 2013) 355ITR418.

In each of the these decisions the High Court followed Supreme Court ruling in CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468. It is only recently that the High Court in Viswams case diverted from its uniform stance and chose to take a different view in favour of the revenue.

The Mumbai Tribunal in ITO v Theobroma Foods Pvt. Ltd. ( 2019) 71ITR (Trib) 659 directed the AO to verify following two aspects to decide the nature of renovation expense to be either as capital or revenue:

  1. Whether the lease agreement was renewable after five years;
  2. Whether according to the terms of the lease agreement the assessee would get ownership rights over the assets created by renovation in the premises or the ownership of assets created by those renovations expense vests with the lessors.

The second premise on ownership rights vesting with the lessors may have little relevance in view of Explanation 1 to section 32(1) deeming the lessee to be the owner. As far as absence of the renewal of lease clause in the agreement goes there can be a pointer to the not so enduring advantage subject however to the fact that the transaction of lease is at arm’s length between two strangers or among the related parties.


Also in another decision in Urban Infrastructure Venture Capital Ltd. v Dy CIT (2015) 119DTR (Mum) (Trib) 322 the bench held that since none of the repair and renovation/interiors expenditure entailed any structural change or extension or improvement of the building therefore Expln. 1 to section 32 (1) will not apply. The assessee in this case incurred expenditure of marble flooring, plumbig, painting, wall tiling, etc. It is on this ground that the assessee successfully claimed that such expenses did not bring into existence an asset of a permanent nature.

However, carrying out any modification and improvement to the semi-finished structure to suit the requirement of the assessee can invite application of Explanation 1 to section 32 vide MSA Motors v Add CIT [2017] 54 ITR (Trib) 8 (ITAT[Hyd]). Renovation of premises immediately after taking it on lease is held to be capital by the Delhi bench in MARUBENI-ITOCHU STEEL INDIA P. LTD v Dy CIT [2016] 7 ITR (Trib)-OL 428 (ITAT[Del]) reading on Explanation 1 to section 32.

Take from the above:

By and large therefore Expln. 1 to section 32 is a clear weapon available to the Assessing Officer to refute any claim for 100% deduction of building renovation expenditure unless the expenditure is associated to a temporary structure. It is only when the lease agreement so provide for any concession in rent or any other advantage so that such expenditure may be considered to be revenue in nature on the basis of Supreme Court decision in Madras Auto Service(supra). Also the factors such as whether the lease is renewable or whether the ownership of assets created by those renovations expense vests with the lessor or the lessee are certain tests that are to be validated by the Higher Court in the time to come. So there remains an uncertainty still in the field of capital and revenue divide.


Gopal Nathani


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