IN INCOME TAX APPELLATE TRIBUNAL BENCH : CHENNAI, BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER . I.T.A.Nos.101,102 & 103 Mds. 2016 Assessment years :2011-12, 2011-12 & 2012-13 Deputy Commissioner of Vs. M s.Eastman Exports Global Income Tax, Clothing (P) Ltd., Circle-I, Tirupur. 12, 2nd Street, Kumar Nagar South, Tirupur 641 603,. [PAN AACCC 0952 E ] ( Appellant) ( Respondent) Appellant by : Mr.Debendra N.Kar, CIT DR Respondent by : Mr.T.Banusekar,C.A Date of Hearing : 29-06-2016 Date of Pronouncement : 21-09-2016 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER These two appeals are filed by Revenue in ITA No.101 Mds. 16 for assessment year 2011-12 & in ITA No.103 Mds 16 for assessment year 2012-13 are directed against different orders of Learned Commissioner of Income Tax(A)-3, Coimbatore, both :- 2 -: ITA Nos. 101 to 103 Mds. 2016 order passed under section 143(3) of Act dated 27.10.2015. Another appeal of Revenue is directed against order of Learned Commissioner of Income Tax(A)-3, Coimbatore, dated 27.10.2015 pertaining to assessment year 2011-12 passed under section 271(1)(c) of Act. Since issues involved in all these Revenue s appeals are common in nature, these appeals are clubbed together, heard together, disposed off by this common order for sake of convenience. ITA No.101 Mds. 16(A.Y: 2011-12) 2. first ground in this appeal is with regard to deletion of addition made by AO on account of disallowance of deduction u s.80-IA of Act amounting to `2,89,77,784 -. 3. We have heard both parties and perused material on record. In our opinion, this issue is squarely covered by order of jurisdictional High court in case of Velayudhaswamy Spinning Mills (P) Ltd vs. ACIT 340 ITR 477, wherein it was held that:- from reading of sub-s (1) of s. 80IA, it is clear that it provides that where gross total income of assessee includes any profits and gains derived by undertaking or enterprise from any business referred to in sub-s (4) i.e. referred to as eligible business, there shall, in accordance with and subject to provisions of sections, be allowed, in :- 3 -: ITA Nos. 101 to 103 Mds. 2016 computing total income of assessee, deduction of amount equal to 100 per cent of profits and gains derived from such business for ten consecutive assessment years. Deduction is given to eligible business and same is defined in sub-s. (4). Sub-s(2) provides option to assessee to choose 10 consecutive assessment years out of 15 years. Option has to be exercised. If it is not exercised, assessee will not be getting benefit. Fifteen years is outer limit and same is beginning from years in which undertaking or enterprise develops and begins to operate any infrastructure activity etc Sub-s. (5) deals with quantum of deduction for eligible business. words initial assessment year are used in sub-s (5) and same is not defined under provisions. It is to be noted that initial assessment year employed in sub-s (5) is different from words beginning from year referred to in sub-s(2). Important factors are to be noted in sub-s(5) and they are as under: (1)it starts with non obstante clause which means it overrides all provisions of Act and other provisions are to be ignored; (2) it is for purpose of determining quantum of deduction; (3) for assessment year immediately succeeding initial assessment year ; (4) It is deeming provision; (5) fiction created that eligible business is only source of income; and (6) during previous year relevant to initial assessment year and every subsequent assessment year. From reading of above, it is clear that eligible business were only source of income, during previous year relevant to initial assessment year and every subsequent assessment years. :- 4 -: ITA Nos. 101 to 103 Mds. 2016 When assessee exercises option, only losses of years beginning from initial assessment year alone are to be brought forward and not losses of earlier years which were already set off against income of assessee. Looking forward to period of ten years from initial assessment contemplated. It does not all Revenue to look backward and find out if there is any loss of earlier years and bring forward nationally even though same were set off against other income of assessee and set off against current income of eligible business. Once set off is taken place in earlier year against other income of assessee, Revenue cannot rework set off amount and bring it notionally. Fiction created in sub-s(5) does not contemplates to bring set off amount notionally. Fiction is created only for limited purpose and same cannot be extended beyond purpose for which it is created. There is no dispute that losses incurred by assessee were already set off and adjusted against profits of earlier years. During relevant assessment year, assessee exercised option under S.80-IA(2). In Tax Case No.918 of 2008 assessment year was 2004-05. During relevant period, there were no unabsorbed depreciation or loss of eligible undertakings and same were already absorbed in earlier years. There is positive profit during relevant year. Therefore, loss in year earlier to initial assessment year already absorbed against profit of other business cannot be notionally brought forward and set off against profit of eligible business as no such mandate is provided in S. 80-IA(5) CIT vs. TTK Pharma Ltd (Tax Case (Appeal ) :- 5 -: ITA Nos. 101 to 103 Mds. 2016 No.298 of 2004, dt. 23rd Dec., 2009) Followed; CIT vs. Mewar Oil & General Mills Ltd (2004) 186 CTR (Raj) 141; (2004) 271 ITR 311 (Raj) concurred with; Mohan Breweries & Distilleries Ltd vs. Asst. CIT (2008) 114 TTJ (Chennai) 532: (2008) 3 DTR (Chennai) (Trib) 477 affirmed . 4. Accordingly, we are of opinion that Commissioner of Income Tax (Appeals), Coimbatore is justified in deciding issue in favour of assessee. This ground raised by Revenue is dismissed. 5. next ground is with regard to allowing of writing off trade advance as revenue expenditure in terms of Section 37 of Act. 5.1 facts of issue are that during previous year relevant to assessment year 2010-11, assessee had advanced sum of `650 lakhs to M s.Cibi International, consequent to agreement between them. In assessment year under consideration, assessee has given another `2 crores to same company i.e. M s.Cibi International for purpose of establishing and maintaining infrastructure facilities for manufacture of knitted garments and such facility exclusively for assessee s purpose in event of default by M s.Cibi International to establish and maintain facility for manufacture of knitted garments for period of 10 years. :- 6 -: ITA Nos. 101 to 103 Mds. 2016 assessee have right to claim amount so paid as refund and M s.Cibi International maintained facility as required by assessee. M s.Cibi International has no obligation to repay same to assessee. Being position in assessment year under consideration, assessee claimed said sum of `2 crores as deduction u s.37 of Act. same was disallowed by AO observing that it is only trade advance and it is not expenditure incurred for purpose of carrying on business of assessee. On appeal Ld.CIT(A) allowed claim by following order of Tribunal in assessee's own case for assessment year 2010-11 in ITA No.1429 Mds. 14 for assessment year 2010-11 dated31st July 2014 wherein held that: 7. In consideration to shouldering responsibilities of providing infrastructural and operational facilities to assessee for manufacturing knitted garments, assessee company paid sum of ` 650 lakhs to M s. Cibi International in previous year relevant to assessment year under appeal. According to assessee, payment has been made for purpose of carrying on of its business in substantial manner so as to honour commitment of export for period of 10 years. assessee identified M s. Cibi International as associate for purpose of production for reason that M s. Cibi International has trained and skilled labour force of around 40000 with them, who could execute work without any problem. M s. Cibi International also :- 7 -: ITA Nos. 101 to 103 Mds. 2016 possessed expertise to manufacture knitted garments according to buyer s specifications. assessee paid sum of `650 lakhs M s. Cibi International to prepare and commit to work entrusted by assessee company without any hitch or hindrance. assessee felt that instead of acquiring its own infrastructural facilities, it is more economical to utilize facilities of competent associate, so that assessee need not incur recurring expenditure for maintenance of infrastructural and operational facilities. Once assessee paid ` 650 lakhs to M s. Cibi International, said associate would procure all necessary facilities to make operations to satisfaction of business interests of assessee. More particularly, assessee has paid ` 650 lakhs to M s. Cibi International to execute huge export order and said associate could update its operational facilities to required standards for advantage of business of assessee. 8. assessee claimed this amount of `650 lakhs as deduction in computing its taxable income for impugned assessment year. deduction has been claimed under sec.37 of Act. But Assessing Officer did not allow above deduction claimed by assessee. Assessing Officer held that acquisition of facilities by M s. Cibi International against payment of `650 lakhs made by assessee, would result in enduring benefit to assessee and, therefore, payment could not be considered as revenue expenditure. As it is also not in nature of trade advance, Assessing Officer held that payment is voluntary and there was no obligation for assessee to make such payment. mere fact that payment was made under agreement, does not :- 8 -: ITA Nos. 101 to 103 Mds. 2016 establish that expenditure has been incurred during year. sum given by assessee was spent for improving infrastructure of M s. Cibi International. Assessing Officer also observed that M s. Cibi International has shown this advance as its business liability in its balance sheet. When assessee has claimed it as deduction under sec.37, M s. Cibi International ought to have shown it as income. For reasons stated above, he disallowed claim of deduction and added back sum of ` 650 lakhs to income of assessee company. 9. In first appeal, after going through facts and circumstances of case, Commissioner of Income-tax(Appeals) held that on payment of ` 650 lakhs to M s. Cibi International, entirely new capital asset for exclusive use of assessee has been created and therefore, it cannot be denied that assessee is deriving enduring benefit. He confirmed finding of Assessing Officer on above issue. 10. In light of facts stated above and orders passed by lower authorities, we considered nature of payment of `650 lakhs, in detail. We have also considered decision of Hon ble Supreme Court rendered in case of Empire Jute Co. Ltd. vs. CIT, 124 ITR 1, relied on by learned counsel appearing for assessee. 11. assessee has paid sum of `650 lakhs to M s. Cibi International on basis of business agreement. business agreement casts duties and obligations on assessee as well as on M s. Cibi International. As far as assessee is concerned, it must pay ` 650 to M s. Cibi International to improve and update its operational facilities to undertake work entrusted by :- 9 -: ITA Nos. 101 to 103 Mds. 2016 assessee company in contemplation of fulfilling its export obligations. M s. Cibi International, on other hand, was bound to execute production orders in conformity to quality standard prescribed by foreign buyers. As per agreement, M s. Cibi International was also bound to repay sum of `650 lakhs to assessee company, if M s. Cibi International fails to perform obligations cast on it. Since such liability is cast on M s. Cibi International as per agreement, M s. Cibi International might have shown amount of `650 lakhs as liability in its balance sheet. Such disclosure in balance sheet of M s. Cibi International need not influence in deciding real character of payment of `650 lakhs made by assessee company. 12. It is very difficult to accept findings of lower authorities that by paying `650 lakhs, assessee company had acquired new capital asset of enduring benefit. There is no dispute on fact that facilities were created in work place of M s. Cibi International and not in premises of assessee company. Therefore, if at all any new asset is created by utilizing this amount, that asset is owned by M s. Cibi International. right of assessee is only to utilize such facility for purpose of carrying on of its business. Therefore, it is not possible to say that assessee company has acquired any capital asset by paying `650 lakhs to M s. Cibi International. Such finding is not possible in facts of present case. 13. It is to be seen that payment was not made by assessee company gratuitously. payment was made against business agreement entered into between assessee and M s. Cibi International, whereby :- 10 -: ITA Nos. 101 to 103 Mds. 2016 M s. Cibi International is obliged to carry out production assigned by assessee company conforming to standards and quality. That is business obligation undertaken by M s. Cibi International. question, therefore, to be decided is whether arrangement made by assessee company with M s. Cibi International is for purpose of carrying on business of assessee and whether justified in facts and circumstances of case. second question, to be considered is whether payment of `650 lakhs is commensurate and reasonable to tasks assigned to M s. Cibi International. 14. As already stated in paragraphs above, assessee company was going to receive bulk orders for export of knitted garments for period of 10 years. export orders are for amount of US$ 4 billion approximately amounting to `17,600 crores at that point of time. This is huge order. Therefore, it was necessary for assessee company to ensure atleast for period of 10 years that sufficient operational facilities are available at its disposal. execution of export orders would be possible only if such refined facilities are available at disposal of assessee company. Therefore, there is no doubt that assessee was badly in need of sufficient operational facilities to execute export order. If those facilities were created in assessee s own premises, it would have been definitely held as expenditure incurred for purpose of business carried on by assessee. 15. question is that whether character of expenditure would be altered, if assessee entrusts work to another associate on basis of agreement. There is no doubt that sufficient facilities are necessary for assessee to execute export orders. :- 11 -: ITA Nos. 101 to 103 Mds. 2016 Instead of creating facilities for itself, assessee entered into agreement with M s. Cibi International so that, production facilities available with latter would be utilized for producing knitted goods required by assessee company for meeting its export commitments. While taking decision to rely on M s. Cibi International for availing production facilities rather than acquiring such facilities by itself, assessee company has assessed economy of scale and all other operational and business considerations. In its wisdom, assessee found that it is more economical to pay lump sum amount to M s. Cibi International to develop production facilities for assessee s own business, rather than establishing such facilities in its own work place. Therefore, it is not possible to question business decision arrived at by assessee company, unless it is otherwise proved to be device to conceal any ulterior motive. Such allegations are anyhow not made in present case. 16. Therefore, simple fact emerging out of discussion is that assessee company instead of creating facilities in its own premises, selected M s. Cibi International to shoulder responsibility of production of knitted garments utilizing their facilities and to improve facilities, amount of ` 650 lakhs was paid. clear nexus is apparent between payment of ` 650 lakhs to M s. Cibi International and business interests of assessee company. Therefore, it is clear that assessee company has made payment of `650 lakhs to M s. Cibi International on basis of business agreement for purpose of carrying on of its business more effectively and more economically. In such circumstances, it is not possible to hold that assessee :- 12 -: ITA Nos. 101 to 103 Mds. 2016 has acquired enduring benefit by creating new capital asset by making payment of ` 650 lakhs to M s. Cibi International. In fact, assessee has made payment of ` 650 lakhs to M s. Cibi International for purpose of executing its export commitment spanning over period of 10 years. expenditure is, therefore, incurred for running business and not for creating facilities to run business. Therefore, we find that payment of ` 650 lakhs made by assessee company is expenditure allowable under sec.37 of Act. 17. issue is decided in favour of assessee and Assessing Officer is directed to delete addition of `650 lakhs. Against this Revenue is in appeal before us. 5.2 We have heard both parties and perused material on record. In this case, amount of `2 crores paid by assessee to M s.Cibi International for purpose of establishing and maintaining infrastructure facilities for manufacture of knitted garments and if M s.Cibi International maintains said facility exclusively for benefit of assessee, assessee cannot claim same as refund. On other hand, if M s.Cibi International failed to maintain said facility, for exclusive benefit of assessee for period of 10 years than assessee has right to claim same as refund. same was examined by Tribunal on earlier occasion for assessment year 2010-11 and it was allowed as deduction in hands of assessee :- 13 -: ITA Nos. 101 to 103 Mds. 2016 u s.37 of Act. Being so, we are not in position to take contrary view as judicial discipline requires consistency in its proceedings. Hence, we decline to interfere with order of CIT(A) on this issue. This ground raised by Revenue is dismissed. 6. next ground for our consideration is with regard to allowing deduction towards cost of building construction on leasehold land as revenue expenditure. 6.1 facts of issue are that AO had treated amount as capital expenditure as super structure of building has been constructed on leased land by assessee. main reason for disallowance by AO is that huge amount of money has been spent without getting ownership over land which is leasehold. AO has invoked Explanation 1 to sec.32(1) to hold that expenditure is capital in nature and claim made by assessee is rejected. On appeal, Ld.CIT(A) relied on jurisdictional High Court of Madras in case of TVS Lean Logistics Ltd.,(293 ITR 432) wherein held that because assessee did not acquire capital asset viz. land, in instant case, but has put up construction of building only for business advantage, entire construction cost is admissible as revenue expenditure. Further, Ld.CIT(A) observed that though AO has made statement that lease deed is sham transaction, :- 14 -: ITA Nos. 101 to 103 Mds. 2016 evidence to corroborate this has not been brought on record. Considering binding nature of jurisdictional High Court addition made invoking Explanation 1 to Sec.32(1), treating amount of `4,06,25,386 - as capital expenditure is deleted by Ld.CIT(A). Against this, Revenue is in appeal before us. 6.2 Ld.D.R strongly supported order of AO on this issue and provisions of section 32(1) are applicable to facts of case. 6.3 On contrary, ld.A.R submitted that assessee had taken land on lease and on such lands taken on lease, assessee constructed buildings superstructure on it. Such super structures are owned by owners of land and assessee had only right of possession over limited period. According to ld.A.R, after expiry of lease period assessee had to vacate land and building super structures constructed by assessee shall then belong to land owner and assessee has no right claim over it. ld.A.R further reiterated that assessee had not acquired any asset or advantage of enduring nature. assessee is not owner of these facilities, but had only right of possession for limited period. These structures were put up for business purposes and had to be demolished removed after period of lease and hence are not permanent nature. Further, ld.A.R submitted that payment of :- 15 -: ITA Nos. 101 to 103 Mds. 2016 monthly rent is only revenue expenditure and hence payment of such revenue expenditure cumulatively in year is also revenue in nature. Relating to revenue expenditure on leasehold building, ld.A.R submitted that expenses were only to make structure useful to assessee s business during tenure of lease period which was for short period. ld.A.R relied on following case laws. 1. In case of CIT Vs.TVS Lean Logistics Ltd. (293 ITR 432)(Mad.) wherein held that what constitutes capital expenditure and what does not, to attract Explanation 1 to section 32(1) of Act depends upon construction of any structure or work in relation to and by way of renovation, extension or improvement to building taken on lease by assessee for carrying on his business and profession but not in case of construction of any structure or doing any work where such building is put up or constructed for purpose of business or profession of assessee in land taken on lease by assessee. assessee did not acquire capital asset but had put up construction of building only for business advantage with result that entire construction cost was admissible as revenue expenditure. 2. In case of CIT Vs.Bombay Dyeing & Mfg. Co. Ltd., reported in 219 ITR 521(SC) wherein held that company was amalgamated with assessee- company. In that connection expenditure of Rs. :- 16 -: ITA Nos. 101 to 103 Mds. 2016 10,350 was incurred by assessee-company towards professional charges paid to firm of solicitors. In assessment proceedings, deduction of said amount was claimed as revenue expenditure. Income-tax Officer and Appellate Assistant Commissioner rejected claim but Tribunal allowed it on ground that as both companies were carrying on complementary business and their amalgamation was necessary for smooth and efficient conduct of business, it was expenditure laid out wholly and exclusively for purpose of business of assessee. Tribunal refused to make reference and High Court rejected application to direct reference. On appeal to Supreme Court: Held, dismissing appeal, that expenditure incurred towards professional charges of solicitors' firm for services rendered in connection with amalgamation was in course of carrying on of assessee's business and, therefore, deductible as revenue expenditure. 3. In case of CIT Vs. Madras Auto Service P. Ltd. in 233 ITR 468 (Mad.) wherein held that that right from inception, building was of ownership of lessor. Therefore, by spending this money, assessee did not acquire any capital asset. only advantage which assessee derived by spending money was that it got lease of new building :- 17 -: ITA Nos. 101 to 103 Mds. 2016 at low rent. From business point of view, therefore, assessee got benefit of reduced rent. High Court had, therefore, rightly considered this as obtaining business advantage. expenditure was, therefore, to be treated as revenue expenditure. 4. In case of ACIT Vs. M.M.Publication Ltd., (43 SOT 59) wherein held that entire construction cost towards renovation is admissible for deduction u s.37(1) of Act. He further submitted that judicial discipline requires consistency in its proceedings and for that proposition, he relied on following decisions. 5. In case of Sanghvi & Doshi Enterprise Ltd. Vs. ITO in [2011] 141 TTJ 1(ITAT Chennai) wherein held that if there is decision of jurisdictional High Court on relevant issue, same to be followed. 6.In case of ITO Vs.Ranisat Fabric Mills (P) Ltd. in 116 TTJ 177 (Mum.) wherein held that solitary judgement of any High Court in country on particular point should be followed by all Benches of Tribunal. 7. Affection Investments Ltd. Vs. Acit in [2009] 222 CTR 387 (Guj) wherein held that once Tribunal comes :- 18 -: ITA Nos. 101 to 103 Mds. 2016 to conclusion that fact situation in case before it is identical to one considered by Tribunal in earlier matter, it has no right of jurisdiction to record decision entirely on conclusion reached by any Co-ordinate Bench on same set of facts and circumstances. 8. In case of ACIT Vs. Aurangabad Holdiay Resorts P. Ltd. in 111 TTJ 741 (Pune) wherein held that decision of non-jurisdictional High Court is binding precedent for Tribunal unless contrary decision given by any other High Court. 6.4 We have heard both parties and perused material on record. In present case, assessee has taken land on leasehold on which assessee constructed super structure and claimed as revenue expenditure. same was allowed by Ld.CIT(A). ld.D.R contended that assessee constructed building in leased land and it is not case of renovation of leased building or improvement of leased building. For settling controversy, we have to go through Explanation 1 to sec.32(1) of Act which was inserted by Taxation Laws (amendment and :- 19 -: ITA Nos. 101 to 103 Mds. 2016 Miscellaneous Provisions) Act, 1986 w.e.f 1.4.1998 which deals with situation where expenditure has been incurred by assessee on construction of any structure on lease hold premises. Explanation 1 is reproduced herewith below:- Explanation 1. Where business or profession of assessee is carried on in building not owned by him but in respect of which assessee holds lease or other right of occupancy and any capital expenditure is incurred by assessee for purposes of business or profession on 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, building, then, provisions of this clause shall apply as if said structure or work is building owned by assessee. 6.5 To fall within ambit of Explanation 1 questions which are to be answered are: (i) Whether assessee is carrying on business or profession in leasedhold building or other rights of occupancy? (ii) Whether assessee has incurred any capital expenditure for purpose of business on construction of any structure or doing :- 20 -: ITA Nos. 101 to 103 Mds. 2016 of any work in or in relation to and by way of renovation or extension or improvement in building. 6.6 If answer to aforementioned questions is in affirmative, assessee falls within purview of Explanation ito sec. 32(1). In instant case, it is admitted fact that assessee has taken land on lease for setting up of its business. It is also undisputed that assessee has constructed building at leased premises. Thus assessee has constructed super structure. These construction activities carried out by assessee, and consequent to this liability of rent is reduced substantially. assessee in order to support his case has relied on judgment of Hon ble Madras High Court in case of TVS Lean Logistics Ltd. (supra). In said case, assessee had constructed building on leased land for business advantage. High Court held that entire cost of construction is admissible as revenue expenditure. Explanation I categorically states that business or profession is carried on in leased building and not on land. Hon ble High Court in pata 4.4 of judgment held as under: 4.4 What constitutes capital expenditure and what does not, to attract Expln. 1 to section 32(1) of Act depends upon construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to building which is put up in building taken on lease by him for carrying on his business and :- 21 -: ITA Nos. 101 to 103 Mds. 2016 profession of assessee, but not in case of construction of any structure or doing any work or relation to where such building is put up constructed for purpose of business or profession of assessee in land taken on lease by assessee. 6.7 Hon ble Supreme Court of India in case of Madras Auto Service (P) Ltd., 233 1TR 468 while dealing with similar controversy has observed as under: 5 In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at expenditure from commercial point of view. What advantage did assessee get by constructing building which belonged to somebody else and spending money for 214 Coch 2014 such reconstruction? assessee got long lease of newly constructed building suitable to its own business at very concessional rent. expenditure therefore, was made in order to secure long lease of new and more suitable business premises at lower rent. In other words, assessee made substantial savings in monthly rent for period of 39 years by expending these amounts. saving in expenditure was saving in revenue expenditure in form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in present case did not get any capital asset by spending said amounts. assessee therefore could not have claimed any depreciation. Looking to nature of advantage which assessee obtained in commercial sense, expenditure appears to be revenue expenditure. 6.8. Furhter Jurisdictional High Court in case of CIT Vs. Hari Vignesh Motors P. Ltd in [2006] 282 ITR 338 (Mad) held as follows:- :- 22 -: ITA Nos. 101 to 103 Mds. 2016 Held: dismissing Revenue s appeal, that assessee had put up ground floor over existing basement floor only to have business premises according to specifications put forth by TVS Suzuki Ltd. and, further, there was clear- cut stipulation in lease deed that reimbursement of expenditure was not possible from owner of premises. Hence, in view of business exigencies, assessee had put up construction in and by which assessee would not get any capital asset. expenditure was, therefore, deductible. 6.9 Further, Co-ordinate Bench in case of M s.The Continental Enterprise, in ITA No.700 Mds. 2014 dated 11.09.2015 held as follows:- 7. We have heard parties and perused record. In present case, assessee has taken land on leasehold on which assessee constructed super structure and claimed as revenue expenditure. same was disallowed by CIT(A). Ld. DR contended that assessee constructed building in leased land and it is not case of renovation of leased building or improvement of leased building as in case of ABT Ltd cited supra as held by Tribunal. For settling controversy, we have to go through Explanation 1 to sec. 32(1) of Act which was inserted by Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1.4.1988 which deals with situation where expenditure has been incurred by assessee on construction of any structure on leasehold premises. Explanation 1 is reproduced herewith below: :- 23 -: ITA Nos. 101 to 103 Mds. 2016 Explanation 1. Where business or profession is carried on in building not owned by him but in respect of which assessee holds lease or other right of occupancy and any capital expenditure is incurred by assessee for purposes of business or profession on construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of improvement to, building then, provisions of this clause shall apply as if said structure or work is building owned by assessee. 8. To fall within ambit of Explanation 1 questions which are to be answered are: (i) Whether assessee is carrying on business or profession in leased building or other rights of occupancy? (ii) Whether assessee has incurred any capital expenditure for purpose of business on construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement in building. 9. If answer to aforementioned questions is in affirmative, assessee falls within purview of Explanation 1 to sec. 32(1). In instant case, it is admitted fact that assessee has taken land on lease for setting up of project for processing of coir. It is also undisputed that assessee has constructed building at leased premises. Thus assessee has constructed super structure. These construction activities carried out by assessee if put on to test of Explanation 1 would show that construction made by assessee on leased out premises would amount to capital expenditure. assessee in order to support his case has relied on judgment of Madras High Court in case of :- 24 -: ITA Nos. 101 to 103 Mds. 2016 TVS Lean Logistics Ltd. (supra). In said case, assessee had constructed building on leased land for business advantage. Court held that entire cost of construction is admissible as revenue expenditure. Explanation 1 categorically states that business or profession is carried on in leased building and not on land. High Court in para 4.4 of judgment further held as under:- 4.4 What constitutes capital expenditure and what does not, to attract Expln. 1 to section 32(1) of Act depends upon construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to building which is put up in building taken on lease by him for carrying on his business and profession of assessee, but not in case of construction of any structure or doing any work or relation to where such building is put up constructed for purpose of business or profession of assessee in land taken on lease by assessee. 10. In above case, assessee has taken land on lease and made certain construction. It is case that assessee has constructed new building on leased land. High Court has further held in aforesaid case that language employed in statute is determinative factor of legislative event and even assuming there is defect or any omission in words used in Legislature, Court cannot correct or make up deficiency, especially when literal reading thereof produces intelligible result any departure from literal rule would really be amending law in garb of interpretation, which is not permissible and which would be destructive of judicial discipline. 11. Supreme Court of India in case of Madras Auto Service (P) Ltd., 233 ITR 468 while dealing with similar controversy has observed as under: :- 25 -: ITA Nos. 101 to 103 Mds. 2016 5 In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at expenditure from commercial point of view. What advantage did assessee get by constructing building which belonged to somebody else and spending money for such reconstruction? assessee got long lease of newly constructed building suitable to its own business at very concessional rent. expenditure therefore, was made in order to secure long lease of new and more suitable business premises at lower rent. In other words, assessee made substantial savings in monthly rent for period of 39 years by expending these amounts. saving in expenditure was saving in revenue expenditure in form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in present case did not get any capital asset by spending said amounts. assessee therefore could not have claimed any depreciation. Looking to nature of advantage which assessee obtained in commercial sense, expenditure appears to be revenue expenditure. 12. Thereafter, Apex Court referring to several cases decided held as under: 11. All these cases have looked upon expenditure which did bring about some kind of enduring benefit to company as revenue expenditure when expenditure did not bring into existence any capital asset for company. asset which was created belonged to somebody else and company derived enduring business advantage by expending amount. In all these cases, expenses have been looked upon as having been made for purpose of conducting business of assessee more profitably or more successfully. In present case also since asset created by spending said amounts did not belong to assessee but assessee got business advantage of using modern premises at low rent, thus saving considerable revenue expenditure for next 39 years, both Tribunal as well as high Court have rightly come to conclusion that :- 26 -: ITA Nos. 101 to 103 Mds. 2016 expenditure should be looked upon as revenue expenditure. 13. From above judgment, we can conclude that it is essential that expenditure incurred on construction of any structure on leased premises should result in enduring benefit. In our considered opinion, case of assessee very much falls within ambit of Explanation 1 of section 32(1) of Act and in view of Supreme Court judgment in case of Madras Auto Service, cited supra, we are not considering various judgments cited by Ld. AR. 6.10 Further, Co-ordinate Bench in case of M s.K.R.Brakes, in ITA No.1384 Mds. 2014 dated 29.05.2015 held as follows:- 11. In present case, assessee has taken building on lease and made certain interior decoration. It is case that assesse has beautified leased building. High Court has further held in aforesaid case that language employed in statute is determinative factor of legislative intent and even assuming there is defect or any omission in words used in Legislature, Court cannot correct or make up deficiency, especially when literal reading thereof produces intelligible result any departure from literal rule would really be amending law in garb of interpretation, which is not permissible and which would be destructive of judicial discipline. 12. Supreme Court of India in case of Madras Auto Service (P) Ltd., 233 ITR 468 while dealing with similar controversy has observed as under: 5 In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at expenditure from commercial point of view. What advantage did assessee get by constructing building which belonged to somebody else and spending money for such reconstruction? :- 27 -: ITA Nos. 101 to 103 Mds. 2016 assessee got long lease of newly constructed building suitable to its own business at very concessional rent. expenditure therefore, was made in order to secure long lease of new and more suitable business premises at lower rent. In other words, assessee made substantial savings in in monthly rent for period of 39 years by expending these amounts. saving in expenditure was saving in revenue expenditure in form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in present case did not get any capital asset by spending said amounts. assessee therefore could not have claimed any depreciation. Looking to nature of advantage which assessee obtained in commercial sense, expenditure appears to be revenue expenditure. 13. Thereafter, Apex Court referring to several cases decided held as under: 11.All these cases have looked upon expenditure which did bring about some kind of enduring benefit to company as revenue expenditure when expenditure did not bring into existence any capital asset for company. asset which was created belonged to somebody else and company derived enduring business advantage by expending amount. In all these cases, expenses have been looked upon as having been made for purpose of conducting business of assessee more profitably or more successfully. In present case also since asset created by spending said amounts did not belong to assessee but assessee got business advantage of using modern premises at low rent, thus saving considerable revenue expenditure for next 39 years, both Tribunal as well as high Court have rightly come to conclusion that expenditure should be looked upon as revenue expenditure. 14. From above judgment, we can conclude that it is essential that expenditure incurred on construction of any structure on leased premises should result in enduring benefit. That any expenditure incurred for civil work by lessee in respect of lease premises, without any further proof cannot be said to be capital expenditure or revenue expenditure. In order to find out nature of expenditure, it is necessary to find out nature of construction put up, purpose of construction renovation and use to which construction put up and also if it is case of repair, replacement, addition or improvement has to be gone into. It is only on aforesaid material, keeping in mind principles enunciated in judgments by Supreme Court and keeping in mind section 37 and section 32 of Act, that one has to determine whether expenditure is revenue expenditure or capital expenditure. What would apply to civil work :- 28 -: ITA Nos. 101 to 103 Mds. 2016 equally applies to electrical work or interior decoration. assessee had not stated nature of civil works constructed, nature of interior decoration made to leasehold premises and also nature of electrical work undertaken. In absence of that material and without proper application of mind, assessing authority proceeded on footing that expenditure constituted capital expenditure. 15. In view of above, we remit issue in dispute to AO to consider whether expenditure is revenue or capital in nature and decide afresh. 6.11 Further, Co-ordinate Bench in case of M s.Jayakrishna Flour Mills Pvt. Ltd., in ITA No.700 Mds. 2013 dated 27.10.2014 held as follows:- 5. We have heard submissions made by representatives of both sides. We have also perused orders of authorities below, as well as, decisions judgments on which both sides have placed reliance. only issue in appeal is: Whether expenditure of 53,88,776I- incurred by assessee on construction of sheds on lease-hold land is revenue or capital in nature? assessee has been allotted four storage depots by Tamil Nadu Foodgrains Marketing Yard Limited. assessee contributed more than 53.00 Lakhs for construction of sheds to be used for storage of wheat etc., and claimed same as Revenue expenditure. Whereas, contention of Revenue is that after insertion of Explanation-i to Section 32(1), any construction made on lease- hold premises is to be treated as capital expenditure. Before proceeding further, let us first examine Explanation-i which reads as under: Explanation 1.--Where business or profession of assessee is carried on in building not owned by him but in respect of which assessee holds lease or other right of occupancy and any capital expenditure is incurred by assessee for purposes of business or profession on construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or :- 29 -: ITA Nos. 101 to 103 Mds. 2016 improvement to, building, then, provisions of this clause shall apply as if said structure or work is building owned by assessee . Explanation-1 to Section 32(1) was inserted by Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 01-04-1998 to deal with situation where assessee is carrying on business or profession in building on lease or other rights of occupancy. Any expenditure incurred by assessee for purpose of business or profession on construction of any structure or renovation or extension or improvement to building then expenditure shall be treated as capital expenditure. Hon ble Madras High Court in case of CIT Vs. TVS Lean Logistics Ltd., (supra) has explained that expression building has to be interpreted in manner as it is used in section. Hon ble court thus held: It is not in dispute that assessee had put up impugned construction of building only on leasehold land and no building was taken on lease by assessee. Therefore, fiction created by Explanation 1 that building put up by him in leasehold land or structure or work shall be construed as if same is owned by assessee, is not applicable to case of assessee and Explanation 1 to section 32(1) of Act is not attracted to instant case of assessee at all. Of course, argument was advanced on behalf of Revenue that words Where business or profession is carried on in building not owned by him but in respect of which assessee holds lease or other right of occupancy would also include lands and would be read as Where business or profession of assessee is carried on in land not owned by him but in respect of which assessee holds lease or other right of occupancy and in such case, Explanation 1 to section 32(1) of Act is squarely applicable to instant case of :- 30 -: ITA Nos. 101 to 103 Mds. 2016 assessee. But we are unable to appreciate said argument. In case where statutory provision is plain and unambiguous, court shall not interpret same in different manner, only because of harsh consequences arising therefrom : and it is well known that court can iron out creases but it cannot change texture of fabric, cannot enlarge score of legislation or intention when language of provision i plain and unambiguous, cannot add or subtract words to statute or read something into it which is not there and cannot rewrite or recast legislation, vide Nasiruddin v. Sita Ram Agarwal (200312 SCC 577. Similarly, there should be literal rule of interpretation of statute, which is first and foremost principle of interpretation and where of statute are absolutely clear and unambiguous, recourse cannot be had to principles of interpretation other than Iftera! rule and even if literal interpretation results in hardship or inconvenience, it has to be followed. language employed in statute is determinative factor of legislative event and even assuming there is defect or any omission in words used in legislation, court cannot correct or make up deficiency, especially when ilteral reading thereof produces intelligible result and any departure from literal rule would really be amending law in garb of interpretation, which is not permissible and which would be destructive of judicial discipline, vide Raghunath Rai Bareja v. Punjab National Bank [20071135 Comp Cas 163 (SC) ; [200712 SCC 230. What constitutes capital expenditure and what does not, to attract Explanation 1 to section 32(1) of Act depends upon construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to building which is ut up in buildTh.g taken on lease by :- 31 -: ITA Nos. 101 to 103 Mds. 2016 him for carrying on his business and profession of assessee, but not in case of construction of any structure or doing any work or relation to where such building is put up constructed for purpose of business or profession of assessee in land taken on lease by assessee. Because assessee did not acquire capital asset, viz., land in instant case, but has put up construction of building only for business advantage, with result entire construction cost is admissible as revenue expenditure. Hon ble Supreme Court of India in case of CIT Vs. Madras Auto Service (P) Ltd. (supra) has observed that where initial expenditure incurred results in saving of Revenue expenditure n subsequent AYs, said initial expenditure shall be considered as Revenue in nature. 6. perusal of records show that assessee was allotted four yeards to storage i.e, open space without shed. assessee contributed for construction of sheds on space provided by Tamil Nadu Foodrgains Marketing Yard Ltd. Thus, there was no building or any structure in existence on land in relation to which any renovation or extension or improvement or any similar work was carried out by as.e Hon ble Madras High Court in case of CIT Vs. TVS Lean Logistics Ltd.,(supra) has held that Explanation-1 will not apply where there is no building. In present case, facts as emanating from records show that assessee has not taken any building on lease. Further, assessee has stated that with contribution for construction of sheds, assessee shall be entitled for lower monthly lease rents. This fact has not been disputed by Revenue. :- 32 -: ITA Nos. 101 to 103 Mds. 2016 payment of lease rentals is revenue expenditure. Thus, contribution made by assessee initially would save revenue expenditure in later years. Thus, in light of judgements discussed above, it can be safely construed that expenditure incurred towards construction of sheds by assessee is revenue in nature. 7. In view of above judgements, we are of opinion that AO has to see that expenditure incurred on construction of any super structure on leasehold land resulted in savings of any revenue expenditure in form of monthly rent at subsequent stage in future or not. Since there is no finding by lower authorities regarding savings of future revenue expenditure by assessee so as to say it is Revenue expenditure. As such, we are not in position to appreciate facts of case. Accordingly, we remit issue to file of AO to decide issue afresh in light of judgement of jurisdictional High Court and Supreme Court cited supra as discussed above. 8. In result, appeal of Revenue is partly allowed for statistical purposes. ITA No.103 Mds. 16(A.Y: 2012-13) 9. first ground in this appeal is with regard to deletion of addition made by AO on account of disallowance of deduction u s.80-IA of Act amounting to `2,76,25,507 -. Since we have already :- 33 -: ITA Nos. 101 to 103 Mds. 2016 held in assessment year 2011-12 at para Nos.3 &4 of this order that assessee is entitled for deduction u s.80-IA of Act on same reason we have upheld order of Ld.CIT(A) on this issue. This ground is rejected. 9.1 Regarding last ground is with regard to direction of Ld.CIT(A) to deletion of addition made by AO on ground that building construction on leasehold land is revenue in nature, which is considered by us in assessment year 2011-12 at Para Nos.6.4 to 6.9 of this order. Accordingly, this ground of assessee is remitted to file of AO to decide issue afresh in light of above findings in [2006] 282 ITR 338 (Mad)., this ground raised by Revenue is allowed for statistical purposes. 9.2. In result, appeal of Revenue in ITA No.103 Mds. 2016 is partly allowed for statistical purposes. ITA No.102 Mds. 16(A.Y: 2011-12) 10. Regarding main grievance of Revenue in this appeal is with regard to direction of Ld.CIT(A) to deletion of penalty imposed u s.271(1)(c) of Act by AO. 10.1 Ld.CIT(A) was justified in deleting penalty imposed u s.271(1)(c) of Act on reason that assessee structured :- 34 -: ITA Nos. 101 to 103 Mds. 2016 whole transaction with respect to intangible assets and wrong claim of depreciation with motive to reduce tax liability. Against this, Revenue is in appeal before us. 10.2 facts of case are that assessee filed return of income on 30.09.2011 declaring income of Rs.24,21,36,760 -. Subsequently, case was selecte4d for scrutiny and assessment was completed making additions in respect of disallowance in respect of advance made to M s.Cibi International P. Ltd, Disallowance u s.80-IA,disallowance of income from sale of scribes, disallowance in respect of amount spend onleasehold land, disallowance of depreciation claimed on intangible assets, disallowance of TUF reimbursement claimed as capital receipt, disallowance of excess depreciation claimed on machineries and disallowance of amount on proto type samples. Further, AO stated in penalty order that assessee went in appeal before CIT(A) except for addition on disallowance of excess depreciation on machineries and later withdrew appeal filed on addition made on disallowance of depreciation of intangible assets. AO elaborately discussed in penalty order reasons for levying penalty and levied penalty of Rs.1,76,63,327 - u s.271(1)(c of Act. 10.3. We have heard both parties and perused material on record. In our opinion, it is preposterous to decide issue of penalty levied u s.271(1)(c) of Act at this stage, since certain issue relating to addition of deletion by Ld.CIT(A) are remitted by us to file of AO for fresh consideration for assessment year under consideration. Hence, at this :- 35 -: ITA Nos. 101 to 103 Mds. 2016 stage, assessment order on basis of which penalty has been levied, still subject matter of litigation, which is not . Hence, in our opinion, AO is at liberty to initiate penalty proceedings only after giving effect to Tribunal order by him in issue of quantum addition. Accordingly, we vacate penalty order at this stage. As such we dismiss this appeal of Revenue as infructuous. 11. In result, appeals of Revenue in ITA No.101 Mds. 2016 & ITA No.103 Mds. 2016 are partly allowed for statistical purposes and ITA No.102 Mds. 2016 is dismissed. Order pronounced on 21st September, 2016, at Chennai. Sd - Sd - ( . ) ( ) (G.PAVAN KUMAR) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 21st September, 2016 K S Sundaram Copy to: 1. Appellant 3. ( ) CIT(A) 5. DR 2. Respondent 4. CIT 6. GF Deputy Commissioner of Income-tax, Circle-I, Tirupur v. M/s. Eastman Exports Global Clothing (P) Ltd