2006 (9) TMI 352 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 1,70,51,609 by capitalizing expenses under 'Repair and Maintenance'.
2. Nature of Rs. 37,57,007 spent on fixing imported carpet as capital expenditure.
3. Application of Explanation 1 to section 32 of the Income-tax Act regarding capital expenditure on leased premises.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance of Rs. 1,70,51,609 by Capitalizing Expenses Under 'Repair and Maintenance':
The revenue appealed against the deletion of disallowance by the CIT(A) concerning expenses claimed by the assessee under 'Repair and Maintenance'. The assessee argued that the expenses were revenue in nature, incurred to customize the leased premises for business purposes, and did not result in any fresh capital asset. The Assessing Officer (AO) disagreed, stating the expenses were in the nature of fixtures and fixed assets, thus capital in nature. The AO emphasized that the quantum of expenses (Rs. 1.7 crores) was significant and not comparable to the cited case of Modi Spg. & Wvg. Mills Co. Ltd., where the amount was only Rs. 34,606. The AO also referenced Explanation 1 to section 32, treating the expenditure as capital, and allowed depreciation accordingly. The CIT(A) reversed this, stating the benefit was not enduring and the expenses were justified given the large area occupied by the assessee. The Tribunal, however, agreed with the AO, holding that the expenditure was capital in nature as it resulted in extensive renovation and beautification, providing a fresh advantage not available from the original leased premises.

2. Nature of Rs. 37,57,007 Spent on Fixing Imported Carpet as Capital Expenditure:
The AO categorized the Rs. 37,57,007 spent on fixing imported carpet as capital expenditure, forming part of fixtures. The CIT(A) did not find this expenditure to be of enduring nature, considering the lease agreement required the lessee to restore the premises to their original condition upon vacating. The Tribunal, however, upheld the AO's view, stating that such an expense was part of extensive renovation and beautification, thus capital in nature.

3. Application of Explanation 1 to Section 32 of the Income-tax Act Regarding Capital Expenditure on Leased Premises:
The AO applied Explanation 1 to section 32, treating the leasehold improvements as capital expenditure, arguing that the expenses incurred on the construction, renovation, or improvement of the leased premises should be deemed as building owned by the assessee. The CIT(A) disagreed, stating there was no provision in the Income-tax Act allowing deferment of revenue expenditure and the expenses pertained to the year under consideration. The Tribunal, however, supported the AO's application of Explanation 1, stating that the nature of expenditure, whether capital or revenue, should be determined as if the premises were owned by the assessee. The Tribunal concluded that the expenditure was capital in nature as it related to fixed capital assets and provided a new or fresh advantage.

Conclusion:
The Tribunal reversed the CIT(A)'s order and restored the AO's order, holding that the expenses incurred by the assessee were capital in nature and not allowable as revenue expenditure. The Tribunal directed the AO to work out the depreciation allowable under Explanation 1 to section 32(1) after providing a reasonable opportunity of being heard to the assessee. The appeal of the revenue was allowed subject to this observation.