2002 (6) TMI 19 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee in converting the godown taken on lease into office premises could be termed as revenue expenditure or capital expenditure? - since the assets created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern business premises at a low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure. No fault can be found with the findings recorded by the Tribunal.

Issues Involved:
1. Whether the expenditure incurred by the assessee in converting a leased godown into office premises could be termed as revenue expenditure or capital expenditure.

Issue-wise Detailed Analysis:

1. Nature of Expenditure: Revenue vs. Capital
Facts in Brief:
The assessee, a private limited company, spent Rs. 9,20,436 to convert a leased godown into an office by renovating it, including interior decoration, replacing the roof with cement sheets, replacing the floor with marble, plastering walls, and constructing bathrooms and W.C. The assessee claimed this expenditure as revenue expenditure, arguing it was for repairs and maintenance of the rented premises.

Assessing Officer's Decision:
The Assessing Officer disallowed the claim, treating the expenditure as capital in nature and allowed depreciation under section 32 of the Income-tax Act.

CIT(A) Decision:
The Commissioner of Income-tax (Appeals) allowed 1/6th of the rental value towards repairs, treating the balance as capital expenditure.

ITAT Decision:
The Income-tax Appellate Tribunal deleted the additions made by the Assessing Officer, holding that the expenditure for renovation or alteration of a rented building is ordinarily of a revenue nature.

Revenue's Argument:
The Revenue contended that the nature and extent of the expenditure indicated it was capital in nature, as it involved converting a godown into a well-furnished office with modern facilities, which are not recurring expenses but expected to last for a long period.

Assessee's Argument:
The assessee argued that the ITAT rightly treated the expenditure as revenue, relying on precedents like Nila Products Ltd. v. CIT and CIT v. Madras Auto Service (P.) Ltd. They also cited cases where similar expenditures were treated as revenue or deductible even if considered capital.

Court's Consideration:
The court examined the principles under section 37 of the Income-tax Act, which allows deduction of expenses wholly and exclusively for business purposes, provided they are not capital in nature. The court referred to various tests and precedents to distinguish between capital and revenue expenditure.

Precedents Considered:
- City of London Contract Corporation Ltd. v. Styles: Distinguishes outlay on "acquisition of the concern" (capital) from "carrying on the concern" (revenue).
- Vallambrosa Rubber Co. Ltd. v. Farmer: Suggests if expenditure is "once for all," it is capital; if it recurs annually, it is revenue.
- Assam Bengal Cement Co. Ltd. v. CIT: Expenditure for acquiring an asset or advantage for enduring benefit is capital; for running the business or producing profits, it is revenue.
- CIT v. Madras Auto Service (P.) Ltd.: Expenditure on constructing a new building on leased premises was treated as revenue since the building was owned by the lessor, and the assessee only benefited from reduced rent.

General Principles:
The court reiterated principles from CIT v. Madras Auto Service (P.) Ltd.:
1. Outlay is capital if for initiating, extending, or substantially replacing business equipment.
2. Expenditure is capital if it brings an asset or advantage for enduring benefit.
3. Consider whether expenditure was part of fixed or circulating capital.

Similar Cases:
- Lakshmiji Sugar Mills Co. P. Ltd. v. CIT: Contributions for road construction benefiting business operations were revenue expenditure.
- L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT: Contributions for road construction around the factory were revenue as they facilitated business.
- CIT v. Associated Cement Companies Ltd.: Expenditure on municipal assets was revenue as it facilitated business operations.
- CIT v. Bombay Dyeing and Manufacturing Co. Ltd.: Contributions for worker tenements were revenue as they facilitated business efficiency.

Conclusion:
The court concluded that since the assets created by the expenditure did not belong to the assessee but provided a business advantage of modern premises at low rent, the expenditure should be treated as revenue. The appeal was dismissed with no order as to costs.

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