2015 (5) TMI 1035 - AT - Income Tax

Disallowance of expenditure incurred on leased premises - revenue v/s capital expenditure - Held that - It is essential that the expenditure incurred on the construction of any structure on the leased premises should result in enduring benefit. That any expenditure incurred for civil work by a lessee in respect of the leased premises without any further proof cannot be said to be capital expenditure or revenue expenditure. In order to find out the nature of expenditure it is necessary to find out the nature of construction put up the purpose of construction/renovation and the use to which the construction put up and also if it is a case of repair replacement addition or improvement has to be gone into. It is only on the aforesaid material keeping in mind the principles enunciated in the judgments by the Supreme Court in the case of CIT v. Madras Auto Service (P) Ltd. 1998 (8) TMI 1 - SUPREME Court and keeping in mind section 37 and section 32 of the Act that one has to determine whether the expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. The assessee had not stated the nature of civil works constructed the nature of interior decoration made to the leasehold premises and also the nature of electrical work undertaken. In the absence of that material and without proper application of mind the assessing authority proceeded on the footing that the expenditure constituted capital expenditure. In view of the above we remit the issue in dispute to the Assessing Officer to consider whether the expenditure is revenue or capital in nature and decide afresh. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Classification of expenditure on leased premises as capital or revenue expenditure.
2. Application of Explanation 1 to Section 32(1) of the Income-tax Act.
3. Consideration of judicial precedents and their applicability to the case.

Detailed Analysis:

1. Classification of expenditure on leased premises as capital or revenue expenditure:

The primary issue in this appeal is whether the expenditure incurred by the assessee on leased premises should be classified as capital expenditure or revenue expenditure. The assessee incurred expenses for showroom maintenance and interior furnishing at three branches: Kadavanthara, Alinchuvadu, and Palarivattam. The Assessing Officer treated these expenditures as capital in nature. The Commissioner (Appeals) upheld this decision, noting that the expenditures included significant structural and interior modifications, which were deemed to provide enduring benefits and thus classified as capital expenditure.

2. Application of Explanation 1 to Section 32(1) of the Income-tax Act:

The Tribunal examined whether the expenditures fall within the ambit of Explanation 1 to Section 32(1) of the Income-tax Act. Explanation 1 states that if an assessee incurs capital expenditure on the construction of any structure or renovation on a leased building for business purposes, such expenditure should be treated as if the structure or work is a building owned by the assessee. The Tribunal affirmed that the assessee carried out substantial interior work, including flooring, false ceilings, sanitary works, and electrical installations, which amounted to capital expenditure under Explanation 1.

3. Consideration of judicial precedents and their applicability to the case:

The Tribunal considered various judicial precedents to determine the nature of the expenditure. The assessee relied on the Kerala High Court's judgment in Joy Alukkas India Pvt. Ltd. v. Asst. CIT, which treated similar expenditures as revenue expenditure. However, the Tribunal found this case distinguishable as the assessee's expenditures were more substantial and resulted in enduring benefits. The Tribunal also referenced the Madras High Court's judgment in CIT v. TVS Lean Logistics Ltd. and the Supreme Court's judgment in CIT v. Madras Auto Service (P) Ltd. These judgments emphasized that expenditures resulting in enduring benefits and substantial structural modifications should be classified as capital expenditure.

Separate Judgments:

The Tribunal's decision was unanimous, with no separate judgments delivered by the judges. The order was pronounced collectively by the members of the bench.

Conclusion:

The Tribunal concluded that the expenditures incurred by the assessee on the leased premises were capital in nature. The case was remitted to the Assessing Officer to reconsider the nature of the expenditure, taking into account the principles enunciated in the relevant judicial precedents and the specific details of the construction and renovation works undertaken by the assessee.

Order:

The appeal of the assessee was allowed for statistical purposes, and the issue was remitted to the Assessing Officer for fresh consideration. The order was pronounced on May 29, 2015, in Chennai.

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