2014 (3) TMI 1006 - AT - Income Tax

Disallowance of expenses on account of renovation/interior decoration expenses incurred at the leased office premises - CIT(A) confirmed the addition treating the same to be capital in nature, invoking Explanation 1 to section 32 (1) of the Act except the stationery, security, telecom, statutory and miscellaneous expenses - Held that - Where the assessee has failed to produce the bills to prove its stand and in line with our observations in paras herein above, we direct the Assessing Officer to allow 70% of the expenditure in the hands of the assessee and the balance is to be treated as capital expenditure. - Decided partly in favour of assessee

Summary

Issues Involved:

1. Disallowance of renovation/interior decoration expenses as capital expenditure.
2. Non-compliance with Tribunal's directions regarding revenue expenditure.
3. Deletion of addition made by the Assessing Officer on enterprise expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Renovation/Interior Decoration Expenses as Capital Expenditure:

The assessee incurred expenses on renovation and interior decoration of leased office premises, which the Assessing Officer treated as capital expenditure under Explanation 1 to Section 32(1) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) upheld this view, except for certain expenses like stationery, security, telecom, statutory, and miscellaneous expenses, which were treated as revenue in nature. The Tribunal had previously directed the Assessing Officer to verify the nature of the expenditure to determine whether it was capital or revenue. In the second round of proceedings, the Assessing Officer again upheld the additions due to a lack of evidence provided by the assessee. The Commissioner of Income Tax (Appeals) differentiated between large-scale improvements, which were capital, and other expenses, which were revenue.

The Tribunal observed that the expenditure on temporary/wooden partitions, fittings, whitewashing, false ceilings, interior work, sanitary fittings, fire detection systems, ducting for air conditioning, etc., was significant. The Tribunal noted that the expenditure converted a hall into a top-class showroom, indicating a capital nature. However, travel, shifting/installation expenses, and other minor expenses were considered revenue. The Tribunal concluded that 30% of the total expenditure on renovation was capital, and the rest was revenue.

2. Non-Compliance with Tribunal's Directions Regarding Revenue Expenditure:

The Tribunal had previously directed the Assessing Officer to verify the nature of the expenditure and consider relevant case laws. The Assessing Officer, however, repeated the disallowance without proper verification. The Commissioner of Income Tax (Appeals) also failed to adhere strictly to the Tribunal's directions by not fully considering the evidence provided by the assessee. The Tribunal reiterated that only expenditures of a capital nature should be disallowed under Explanation 1 to Section 32(1). The Tribunal emphasized that the nature of each expense must be verified, and only capital expenditures should be disallowed.

3. Deletion of Addition Made by the Assessing Officer on Enterprise Expenses:

The Assessing Officer disallowed enterprise expenses due to a lack of evidence, but the Commissioner of Income Tax (Appeals) allowed the claim, accepting that the expenses were for connectivity payments to telecom companies, not equipment purchases. The Tribunal directed the Assessing Officer to allow 70% of the enterprise expenses as revenue expenditure and treat the remaining 30% as capital expenditure due to the lack of detailed evidence.

Conclusion:

The Tribunal partially allowed both the assessee's and the revenue's appeals. The Tribunal directed the Assessing Officer to recompute the income by allowing 70% of the disputed expenses as revenue expenditure and disallowing 30% as capital expenditure. The Tribunal emphasized the need for detailed verification of the nature of each expense to determine its appropriate classification.