COMMISSIONER OF INCOME TAX, TAMIL NADU II, MADRAS versus MADRAS AUTO SERVICE (P) LTD.

Citation: [1998] 3 S.C.R. 1121 · Decided: 12-08-1998 · Supreme Court of India · Bench: SUJATA V. MANOHAR · Disposal: Dismissed

Judgment (excerpt)

COMMISSIONER OF INCOME TAX, 
TAMIL NADU II, MADRAS 
V. 
MADRAS AUTO SERVICE (P) LTD. 
AUGUST 12, I 998 
[SUJATA V. MANOHAR ANDS. RAJENDRA BABU, JJ.] 
Income Tax Act, 1961: Section 37(1) 
A 
B 
Income Tax-Capital or revenue expenditure- AYs 1968-69 and J 969- C 
70-Expenditure Incurred in constructing a new building not belonging to 
assessee-Nature of-Tests to determine-Assessee obtained lease of a premises 
for 39 years-Assessee Constructed a new building to suit the purposes of 
its business after demolishing the old building-Under the terms of the lease 
the new building belonged to the lessor right from its cor1struction and not 
to the assessee-However, assessee had the right to remain as tenant for 39 D 
years on an extremely low rent-Held: Under such circumstances, are case 
did not get any capital assets but made substantial savings in monthly rent 
for 39 years-Hence, the amount spent for construction is revenue expenditure 
and not capital expenditure.· 
The respondent-assessee obtained on lease a premises for a period of E 
39 years. During the previous years relevant to the assessment years 1968-
69 and 1969-70 the assessee, under the terms and conditions of lease, spent 
certain sums in constructing a new building to suit the purpose of its 
business after demolishing the old building. The new building right from its 
construction belonged to the lessor. However, the assessee had the right to F 
be a tenant for a period of 39 years on payment of an extremely low rent. 
The Income Tax Appellate Tribunal treated the amount on construction 
of the new building a revenue expenditure and not capital expenditure and 
allowed a deduction in that respect to the assessee. The High Court upheld 
the view of the Tribunal. Hence this appeal by the Revenue. 
G 
Dismissing the appeal, this Court 
HELD : I. In order to decide whether the amount spent on construction 
of the new building is revenue expenditure or capital expenditure, one has 
to look at the expenditure from a commercial point of view. One has to keep 
in view the advantage the assessee got by constructing a building, which H 
1121 
1122 
SUPREME COURT REPORTS 
[1998] 3 S.C.R. 
A 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 lower rent. In other words, the assessee made substantial savings in 
B 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 the 
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 
C the advantage, which the assessee obtained, in a commercial sense, the 
expenditure appears to be revenue expenditure. [1124-F-H) 
Lakshmi Sugar Mills Co. (P) ltd. v. CIT, 82 ITR 376; L.H. Sugar 
Factory and Oil Mills Ltd. v. CIT 125 ITR 293; CIT v. Associated Cement 
Companies ltd. 172 ITR 257 and C/Tv. Bombay Dyeing and Manufacturing 
D Co. Ltd. 219 ITR 521 relied on. 
E 
F 
Assam Bengal Cement Co. Ltd. v. CIT, 27 ITR 34, held inapplicable. 
Atherton v. British Insulated and Helsby Cables ltd., (1925) 10 Tax 
Cases 155, referred to. 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6068 (NT) of 
1983. 
From the Judgment and Order dated 9.3.82 of the Madras High Court 
in T.C. No. 618of1977. 
K.N. Shukla and (S. Rajappa,) for B.K. Prasad for the Appellant. 
T.A. Ramchandran, Mrs. Janaki Ramchandran and Ms. H. Wahi for the 
Respondents. 
G 
The Judgment of the Court was delivered by 
MRS. SUJATA V. MANOHAR. J. The assessee is a limited company 
carrying on the business 0f sale of motor parts. Its head-office is at Madras. 
It has a branch at Bangalore. Under an agreement of lease dated !st of 
February, 1966, the assessee obtained from MIS. Hajira Comer and Mrs. Rabia 
H Bai Razack a lease of premises Nos. 64 and 64/1 situated at Sri Narasimharaja 
'·MADRAS AUTO SERVICE (P) LTD. [SUJATA V. MANOHAR. J.] 1123 
Road, Bangalore for a period of 39 years commencing from 1st of January, A 
1966. Under the terms and conditions of the lease, the lessee (that is to say 
the 

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