2007 (9) TMI 437 - AT - Income Tax

Acquiring a right in the property in the nature of tenancy rights - whether section 32(1)(ii) does have any application on the issue that to treat the premium paid by the assessee as an intangible asset eligible for depreciation? - Expression licences - Nature of Expenses Capital or Revenue incurred in repairing and maintaining the premises acquired on lease. HELD THAT - In section 32(1)( ii ) the expression licences have been provided in the company of expressions like know-how patents copyrights trademarks franchises which are in the nature of business or commercial rights. The tenancy rights acquired by the assessee cannot be equated with the licence provided u/s 32 so as to qualify it as an intangible asset eligible for depreciation. Therefore we find that the lower authorities are justified in treating the premium amount not eligible for depreciation. The assessee has paid the premium to the vacating tenants. When the assessee is vacating the premises and giving it to new tenants the assessee can collect the premium from the new tenants as the assessee had paid premium to the former tenants. That is the way of recovery if at all necessary for the assessee to get back the amount of premium paid. It cannot be treated as intangible asset for claiming depreciation as provided u/s 32. The first ground is therefore decided against the assessee. Expenses incurred in repairing and maintaining the premises acquired on lease - Capital Or Revenue Expenditure - HELD THAT - The expenses were incurred by the assessee for updating the facilities of water supply electricity supply and other office arrangements. These expenses are in the nature of repairs and maintenance. Therefore we find that the lower authorities are not justified in treating the sum as capital expenditure. The assessing authority is directed to treat the amount as revenue expenditure eligible for deduction. But if any depreciation has been granted on the said amount the same shall be withdrawn. In the result the appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Depreciation on premium paid for acquiring office premises.
2. Classification of repair and maintenance expenses as capital or revenue expenditure.
3. Disallowance of motor car expenses for personal use.
4. Disallowance of telephone expenses.

Depreciation on Premium Paid for Acquiring Office Premises:
The appellant claimed depreciation on the premium paid for acquiring office premises, arguing it was an intangible asset akin to a license under section 32(1)(ii). The tribunal analyzed the nature of the right acquired, emphasizing that tenancy rights are not depreciable assets under the Income-tax Act. The tribunal applied the principle of ejusdem generis to interpret the term "licence" in section 32(1)(ii) alongside other specified intangible assets like patents and trademarks. It concluded that tenancy rights cannot be equated with a license for depreciation purposes, thus upholding the lower authorities' decision to deny depreciation on the premium amount.

Classification of Repair and Maintenance Expenses:
The appellant contested the classification of a portion of repair and maintenance expenses as capital expenditure. The tribunal examined the nature of the expenses incurred to enhance the premises for business operations, determining them to be revenue expenditure for updating facilities like water and electricity supply. It directed the assessing authority to treat the amount as revenue expenditure eligible for deduction, with any previously granted depreciation to be withdrawn.

Disallowance of Motor Car Expenses for Personal Use:
Regarding the disallowance of motor car expenses for personal use, the tribunal noted the lack of detailed records to separate personal and business usage. The appellant had voluntarily disallowed a portion, which was increased by the assessing authority. The tribunal upheld the increased disallowance, considering it just and proper based on the available information, dismissing the appellant's contention.

Disallowance of Telephone Expenses:
Similarly, the tribunal upheld the disallowance of a portion of telephone expenses, finding the assessing authority's decision justified and the quantum of disallowance reasonable. The tribunal concluded that the disallowance made in both the motor car and telephone expenses cases was appropriate, leading to the rejection of the appellant's arguments.

In conclusion, the tribunal partly allowed the appeal, ruling in favor of the appellant on the repair and maintenance expenses issue while upholding the decisions on depreciation, motor car expenses, and telephone expenses disallowance.