2009 (10) TMI 642 - AT - Income Tax

Summary

Issues Involved:
1. Nature of expenditure on repair and renovation of leased premises.
2. Applicability of section 30(a)(ii) and section 37 of the Income-tax Act, 1961.
3. Treatment of expenditure as capital or revenue.

Summary:

Issue 1: Nature of expenditure on repair and renovation of leased premises
The primary issue was whether the expenditure of Rs. 44,03,606 incurred by the assessee on the renovation and refurbishment of leased premises used for running a restaurant and bar was capital or revenue in nature. The Assessing Officer (AO) deemed the expenditure as capital, citing Explanation 1 to section 32 and Explanation to section 30, which exclude capital expenditure from repairs. The AO allowed depreciation, resulting in a net addition of Rs. 41,83,426. The CIT (Appeals) upheld this view, noting the extensive nature of the renovations, which included significant structural changes and improvements.

Issue 2: Applicability of section 30(a)(ii) and section 37 of the Income-tax Act, 1961
The assessee argued that the expenditure was for repairs and renovation necessary for smooth business operation and should be deductible u/s 30(a)(ii) as current repairs. However, the Tribunal noted that the renovations were extensive and carried out before the commencement of business operations. The Tribunal referenced judicial precedents, including the Hon'ble Supreme Court's decision in Ballimal Naval Kishore v. CIT, which clarified that 'current repairs' do not include expenditures that bring a new asset into existence or provide a new advantage.

Issue 3: Treatment of expenditure as capital or revenue
The Tribunal concluded that the expenditure was capital in nature, as it was incurred before the business commenced and resulted in significant structural modifications. The Tribunal rejected the assessee's argument that the expenditure was incurred under a joint venture agreement and should be treated as a business expense. The Tribunal emphasized that the expenditure was not incurred during the course of actual business operations and thus could not be allowed as a deduction u/s 37. Consequently, the Tribunal upheld the AO's treatment of the expenditure as capital, allowing depreciation u/s 32(1).

Conclusion:
The appeal filed by the assessee was dismissed, affirming the lower authorities' decision to treat the expenditure on renovation and refurbishment of the leased premises as capital in nature.