ORDER
R.P. Garg, Accountant Member
1. These appeals by the assessee and the cross-objections of the Revenue are directed against the order of the Commissioner of Income-tax (Appeals)-III, Hyderabad dated 18-2-1993.
2. In assessee’s appeals, the dispute is against the disallowance of expenditure incurred on construction of the building on the leasehold land.
3. Facts of the case are that the Young Men’s Christian Association of Hyderabad, hereinafter referred to as ‘the YMCA’ owned land and premises at 9-1-38, Sardar Patel Road, Secunderabad. For the development of its property, for the promotion of its programmes and activities and to achieve its objects by putting up a building complex in the said premises as per the building plan approved and sanctioned by the Municipal Corporation of Hyderabad, it was in search of a developer. It sought for a developer to take up the building activity at the North East corner of the said premises facing Sardar Patel Road, Secunderabad as per the approved plan annexed, admeasuring 240′ x 67′ comprising an area of 16,080 sq. ft. equivalent to 1,494 sq. meters. Assessee offered to take up the said development programme and agreed, as per the agreement dated 9-9-1984 for the following :-
(1) to take the premises on lease for 25 years (9+9+7) on an yearly rent fixed therein; and
(2) to construct at own cost a building as per approved sanction plan.
The ownership of the constructed building is to belong to the owner of the land brick-by-brick. Clause 6 of the agreement in this regard reads as under :
6. The entire building and the structure that will be constructed by the Lessee with all the fittings, fixtures, equipment, water connections, taps, drainage lines, therein including the Lifts, transformers, if any, not belonging to the sub-tenants or occupants therein shall be the property of the Lessor at all points of time and the Lessee shall have no right whatsoever on the said building except the lessee shall have the right to lease out the said premises. The lessee shall have the right to lease out the premises or portions of such premises that have been completely constructed and made fit for occupancy to persons or concerns and collect the rents from them for herself subject to the restrictions mentioned hereunder. The lessee shall not be entitled for any reimbursement of the amounts spent by her for the same.
The consideration to the assessee was that she has got the right to sublease the constructed premises during the period of lease. The total cost of construction and the rents received during the years under consideration are as follows :-
Asst. year Construction Rents received
expenses
Rs. Rs.
1986-87 7,68,361 2,49,984
1987-88 7,26,747 3,95,215
1988-89 3,23,693 4,43,556
1989-90 2,14,018 5,67,450
1990-91 1,84,352 6,09,378
The total constructed area on the ground floor was 12,240 sq. ft.; typical floor 13,056 sq. ft., second floor 1,305 sq. ft. and basement 5,500 sq. ft. Apart from the construction cost, assessee had also incurred certain other routine expenditure including the lease rent paid to the YMCA.
4. In the first year, viz. assessment year 1986-87, the Assessing Officer assessed the rent as business income and allowed only 1/25th of the cost of construction incurred in that year and 1/24th of the cost of construction incurred by the assessee in the earlier year, as expenditure, besides travelling and other over-head expenditure. However, in the subsequent years, the Assessing Officer assessed the rental income under the head ‘property’ and disallowed the entire cost on the ground that it was capital in nature, giving rise to enduring benefit.
5. On appeal, the CIT (Appeals) held that the rental income is to be assessed under the head ‘business’. He upheld the disallowance of cost of construction as being capital expenditure. However, applying the provisions of Section 32(1A), he allowed depreciation on the said cost of construction. Aggrieved by the order of the CIT (Appeals), assessee preferred these appeals.
6. The learned counsel of the assessee relying on the decision of the Tribunal (Hyderabad Bench ‘B’) for the assessment years 1983-84 and 1984-85 in the case of ITO v. Satish Chandra Modi [IT Appeal Nos. 103 and 104 (Hyd.) of 1988, dated 12-3-1993] and for assessment year 1988-89 in ITA No. 1117/Hyd./92 dated 18-3-1994, submitted that the property development expenditure incurred by the assessee in the course of business as real estate developer was revenue expenditure and it should be allowed. Relying on the decisions of the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1; of the Andhra Pradesh High Court in CIT v. Singareni Collieries Co. Ltd. [1980] 121 ITR 466; and of the Madras High Court in CIT v. Madras Auto Service Ltd. [1985] 156 ITR 740, the learned counsel for the assessee submitted that the expenditure incurred by the assessee would be of revenue nature and it is not a case of acquiring a benefit of enduring nature, falling in the capital field. As regards the applicability of Section 32(1A), the learned counsel for the assessee submitted that the assessee was carrying on the business with the property and not in the property which is the requirement for the application of this Section It is further submitted that the expenditure, insofar as the assessee is concerned, is a revenue one and not capital expenditure, in view of the Tribunal’s decision in the case of Satish Chandra Modi (supra) and the decisions of the Supreme Court, Andhra Pradesh High Court and the Madras High Court referred to in that decision and cited above.
7. The learned departmental representative, on the other hand, submitted that the expenditure incurred by the assessee for raising the building is an expenditure of capital nature and it certainly brings an enduring benefit into existence in the capital field. He submitted that in the case of Satish Chandra Modi (supra), a building was already in existence and it was not a case of new construction, whereas in the case on hand, a new building is altogether constructed. He submitted that the decisions of the Supreme Court in Empire Jute Co. Ltd.’s case (supra); of the A.P. High Court in Singareni Collieries Co. Ltd. ‘s case (supra) and of the Madras High Court in Madras Auto Service Ltd. ‘s case (supra) were rendered in connection with the expenditure on repairs and renewals and not with regard to capital expenditure for bringing into existence a new building altogether. He also referred to the commentary of Chaturvedi & Pithisaria and submitted that land may belong to one person and the superstructure may belong to another person and even if it had to be handed over to the lessor at the expiry of the lease, during the period of the lease, lessee was the owner and the expenditure to raise the building would be of capital nature. This contention was urged by him in support of the cross-objections filed by the Revenue. Relying on the decision of the Karnataka High Court in the case of D.R. Puttanna Sons (P.) Ltd. v. CIT [1986] 29 Taxman 158, the learned Departmental Representative submitted that the income from letting out the building so constructed by the assessee would be an income from house property and therefore, no deduction can be allowed, which is not covered by the provisions of Section 24 of the Act, which provides for deductions while computing the income from house property. The expenditure incurred by the assessee in raising the construction is not covered by any of the provisions of Section 24 of the Act.
8. In reply, the learned counsel for the assessee submitted that the owner of the construction, as is evident from Clause 6 of the lease deed, is the lessor. Brick-by-brick ownership belongs to the lessor and not the assessee. He submitted that in similar circumstances in the case of Satish Chandra Modi (supra), the Tribunal by its order dated 12-3-1993, held that the activity undertaken by the assessee was nothing but business and income received by way of rent and licence fees, from the property was business income and it should be assessed under the head ‘profits and gains of business’ and not under the head ‘income from other sources’.
9. We have heard the parties and considered their rival submissions. In the case of Satish Chandra Modi (supra) the Tribunal in the order for the assessment years 1983-84 and 1984-85 (supra), held that the expenditure incurred by the assessee on the development of the property in the course of carrying on the business as real estate developer was revenue expenditure and it should be allowed. In that case, the Tribunal placed reliance on the decisions of the Supreme Court in the case of Empire Jute Co. Ltd. (supra), of the Andhra Pradesh High Court in Singareni Collieries Co. Ltd.’s case (supra); and of the Madras High Court in Madras Auto Service Ltd.’s case (supra). The aforesaid decision of the Tribunal was followed in the subsequent decision of the Tribunal in that very assessee’s case in ITA No. 1117/Hyd./92 for the assessment year 1988-89, dated 18-3-1994, by observing that the expenditure incurred by the assessee for the development of the property was very much related to the carrying on or conduct of the property development business; and that it was an integral part of profit earning process; and it was not intended for the acquisition of any asset. By incurring the expenditure in question, the assessee had not acquired any capital asset. On the contrary, the ownership of the tangible asset brick-by-brick belonged to the lessor and the expenditure incurred by the assessee did not result in acquisition of any property to the assessee. After the lease period is over, the assessee is not allowed to take over the constructed portion by incurring the expenditure in the years under consideration. As aforesaid, the brick-by-brick ownership of the constructed building belonged to the lessor and the assessee at no point of time – be that during the currency of the lease or thereafter – acquired any benefit of capital nature. The expenditure was incurred by the assessee to earn income by sub-leasing the constructed portion during the currency of the lease. The expenditure in question, at best, could be said to be a payment to the lessor in addition to the payment of rent. This view is fully supported by the decision of the Supreme Court in the case of Empire Jute Co. Ltd (supra), the Andhra Pradesh High Court decision in Singareni Collieries Co. Ltd. ‘s case (supra) and of the Madras High Court decision in Madras Auto Service Ltd. ‘s case (supra) relied upon by the Tribunal while rendering its decision in the case of Satish Chandra Modi (supra), in favour of the assessee.
10. The question that remains therefore, whether any different view is to be taken in the instant case because of the introduction of Sub-section (1A) to Section 32 of the Income-tax Act. This Sub-section (1A) reads as under :
(1A) Where the business or profession is carried on in a building not owned by the assessee 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 after the 31st day of March, 1970, 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, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of Section 34, be allowed :-
(i) such percentage on the written down value of the structure or work as may in any case or class of cases be prescribed;
(ii) in the case of any such structure or work which is sold, discarded, demolished, destroyed or is surrendered as a result of the determination of the lease or other right of occupancy in respect of the building in the previous year (other than the previous year in which it is constructed or done) the amount by which the moneys payable in respect of such structure or work together with the amount of scrap value, if any, fall short of the written down value thereof:
Provided that such deficiency is actually written off in the books of the assessee.
This is a special provision enacted for the benefit of lessees providing for depreciation on the structure or work put up by them in the leasehold premises which they are not entitled to in the normal course, since they are not the owners. This is an enabling Section It does not alter the position of an expenditure incurred, viz., when no ownership is acquired by the assessee, the expenditure incurred on lease-hold property would be revenue expenditure insofar as the lessee is concerned. It is an admitted fact in this case that the property on which the assessee had incurred the expenditure for raising the building is a leasehold property. It is also an admitted fact that brick-by-brick ownership of the construction done by the assessee belongs to the lessor and at no point of time, the assessee got the ownership with regard to the said construction. Therefore, in our opinion, de hors the provisions of Section 32(1A), the expenditure incurred by the assessee is a revenue expenditure related to the carrying on or conduct of the assessee’s business and it was an integral part of the profit earning process neither intended to nor resulted in the acquisition of any asset by the assessee.
11. Depreciation is allowed to an assessee, who is the owner of a capital asset. That is the scheme of the Act and it is evident from the provisions of Section 32(1) which provides that ‘in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed’ [Emphasis supplied]. To claim depreciation under Section 32(1A) ownership of the capital asset, in our opinion, is a must. Unless the assessee has the ownership of the constructed building, he would not be entitled to depreciation. As aforesaid, in this case, the assessee has never acquired ownership rights in the building constructed by incurring the expenditure and the brick-by-brick ownership belonged to the lessor at every point of time. Therefore, claiming depreciation under Section 32(1A) would not arise.
12. The reference to the Commentary of Chaturvedi and Pithisaria, wherein it is stated that the land may belong to one and the superstructure may belong to another; and that the ownership of the superstructure continued with the lessee during the lease period, even if the property was to be handed over at the expiry of the lease, in our opinion, has to be read in the context of the facts and circumstances of this case. This view of the learned author would be true in a case where the ownership in the building constructed rests with the lessee and in that circumstance, it would not make any difference if the super-structure was to be handed over at the expiry of the lease. This observation, however, in our opinion, would not have any relevance in a case where the super-structure is never owned by the lessee and its ownership at no point of time rests with the assessee – either at the time when the expenditure was incurred or at any point of time during the currency of the lease or thereafter. However, as aforesaid, the proviso to Section 32(1A) are enabling provisions and would not alter the position where the expenditure even otherwise was of revenue nature. The Tribunal order in the case of Satish Chandra Modi (supra) and the three decisions of the Supreme Court, Madras High Court and the Andhra Pradesh High Court referred to therein and noted above, in our opinion, clearly support the view that the expenditure incurred by the assessee in raising the building was an expenditure of revenue nature and incurred for the purpose of carrying on or conducting the business of the assessee and it is an integral part of profit earning process. By incurring this expenditure, there was no acquisition of capital goods. Merely because the assessee secured a right to sub-lease the property for a particular period of time, the expenditure would not stand converted into an expenditure for acquiring an enduring benefit, amounting to a capital expenditure. Unless and until the expenditure incurred by the assessee resulted in an enduring benefit to the assessee for a particular period falling in capital field, as stated by the Supreme Court in the case of Empire Jute Co. Ltd. (supra), it would not be a capital expenditure. Capital field, in our opinion, would mean acquisition of ownership or proprietary rights of the assessee, which are lacking in this case. In the facts and circumstances of this case the case of the assessee is squarely covered by the decisions of the Tribunal in Satish Chandra Modi’s case (supra) and on account of introduction of Section 32(1A), no contrary view is required to be taken. Accordingly we direct the revenue authorities to allow the claim of the assessee. Consequently, depreciation or any other deduction or benefit that might have been allowed to the assessee, should be withdrawn.
13. We shall now take up the cross-objection filed by the Revenue. The memo of appeal filed by the assessee in these cases, was served on the Revenue on 5-5-1993. The cross-objections there against, were to be filed within 30 days of the receipt of the said memos of appeal. The Cross-Objections were, however, filed on 5-1-1994. The Revenue has moved a petition for the condonation of delay, explaining the delay as mainly on account of change of jurisdiction, lack of sufficient staff, pressure of work and other administrative reasons in the placement of relevant record before the appropriate authority. We have gone through the petition and are satisfied that there was a reasonable cause for the delayed filing of the cross-objections by the revenue. We accordingly condone the delay and proceed to decide the cross-objections, on merits.
14. The grounds taken in the cross-objections of the revenue centre around two issues, viz., whether the income from rent received by the assessee was ‘income from house property’ or ‘income from business’; whether depreciation and certain other expenses are allowable on the said capital expenditure. The Assessing Officer himself assessed the impugned receipt as ‘income from business’ in the assessment order for the assessment year 1986-87. Therefore, the department can have no grievance insofar as this year is concerned.
15. The Revenue’s grievance on the first aspect does not hold good even in the subsequent years. The order of the CIT(A) in this regard is as under :
3. The appellant is entitled to sub-lease of property and receive the rent. The appellant has carried on substantial activities of construction at her own cost. Presently, the appellant is responsible for maintaining the building to terminate sub-lease or to enter into fresh sub-lease. The activities carried on by the appellant are essentially the leasing activities, i.e, leasing of property. Considering that the appellant is not the owner and the appellant is bound to give back the possession and the ownership will be passed on to YMCA, I am inclined to hold that the agreement entered into by the appellant is a trade agreement and adventure in the nature of business. The activity is essentially a business activity and I direct that the income from properties of Deepthi Builders and Deepthi Arcade should be assessed as income from business and not income from house property. Hence, this ground of appeal is allowed.
In similar circumstances, the matter was decided against the Revenue and in favour of the assessee in the case of Satish Chandra Modi (supra) for assessment years 1983-84 and 1984-85, wherein the Tribunal in para-11 of its order dated 12-3-1993 observed as under :
11. The learned first appellate authority relying on the decision of the Supreme Court in S.G. Mercantile Corporation (P.) Ltd. v. CIT [1972] 83 ITR 700, in our opinion, very rightly held that the activity of the assessee in taking this property on lease and developing it and then leasing it out is clearly a business activity. In that case, the assessee, a company took on lease certain property and developed it and let it out in portions for shops, stalls etc. The question that arose before the Supreme Court was whether the income from sub-letting the stalls was assessable as business income Under Section – 1.0 of the Income-tax Act, 1922 or as income from other sources Under Section 12. Considering the fact of that case, the Supreme Court held that the income from sub-letting should be assessed under the head ‘Business’. In that connection, the Supreme Court held as follows :
The definition of the word business’ is Section 2(4) was of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market. The important question which misses in the latter case is whether the acquisition of the property on lease and letting out of the shops and stalls was in the course of investment or whether it was essential a part of the business and trading operations of the assessee. The paramount consideration which would weigh is whether the acquisition of the property was by way of investment and whether the property was let out because of the assessee having a title in the same or whether the acquisition and letting out of the property constituted the business and trading activity of the assessee.
Finally, the Supreme Court held that the assessee’s activity therein during the relevant period consisted of developing the demised property and letting out portions of the same as shops and stalls and grounds spares and that all those facts point to the conclusion that the taking up of the property on lease and sub-letting portions of the same was part of the business and trading activity of the appellant. In our opinion, the ratio of the decision in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) clearly covers the facts on hand. Following the said decision of the Supreme Court, we uphold the view taken by the first appellate authority that the activity undertaken by the assessee is nothing but business and that the income by way of rents or licence fee realised by him from Rasoolpura property is business income and that it should be assessed under the head ‘Profits and gains of business’ and not under the head ‘Income from other sources’.
In that case, the assessment of rental income was made by the Assessing Officer under Section 12 of the Act and the contention of the Revenue in that case was that it was assessable under the head ‘other sources’ only and reliance was placed on the decision of the Karnataka High Court in the case of D.R. Puttanna Sons (P.) Ltd. (supra), wherein it was held that income under the head ‘house property’ can be assessed in the hands of the owner of the building only. Here, as we have already observed aforesaid, the assessee has never been the owner of the property. She has been given only a right to exploit the property during the period of lease. The income earned by letting out the constructed portions during the lease period would be income from business, in the light of the discussion of the Tribunal in the case of Satish Chandra Modi (supra). The decision of the Karnataka High Court in P.R. Puttanna Sons (P.) Ltd. ‘s case (supra) is of no help to the Revenue, because in that case the lessee was the owner of the property. We do not see any merit in the cross-objections of the Revenue on this aspect, as in our opinion, the CIT(A) rightly directed the ITO to assess the rental income as business income.
16. As regards depreciation on the amount incurred by the assessee for raising the building and certain other expenditure related to the said amount, we agree with the Revenue that the same cannot be allowed, as the entire expenditure on construction has been allowed as revenue expenditure. Therefore, as we have already stated above, the depreciation and other allowances if any, allowed, have to be withdrawn. Similarly, the allowance of 1/24th and 1/25th of the expenditure on construction allowed in assessment year 1986-87 has also to be withdrawn consequently
17. In the result, assessee’s appeals are allowed and Revenue’s cross-objections are dismissed subject to our above observations.