2000 (2) TMI 844 - AT - Income Tax

Summary

Issues Involved:
1. Nature of expenditure (capital vs. revenue)
2. Allowability of depreciation on capitalized expenditure

Detailed Analysis:

Nature of Expenditure:

The primary issue in this appeal concerns the classification of an expenditure amounting to Rs. 7,85,866 incurred by the assessee-firm on the premises it leased. The expenditure was claimed as revenue expenditure by the assessee, which the CIT (Appeals) accepted. However, the Assessing Officer (AO) treated it as capital expenditure, leading to the appeal.

The assessee-firm, a tenant of a property owned by M/s. Bombay Cotton Mills Estate (P.) Ltd., incurred the expenditure to make the premises suitable for sub-leasing to Dena Bank. The work included replacing the roof, constructing new walls, reinforcing columns, and other alterations. The AO concluded that this expenditure was towards renovation and provided an enduring benefit, thus classifying it as capital expenditure. The AO's remarks were: "From any standard, payment to contractor is a capital expenditure which is in the nature of investment for enduring benefits."

The CIT (Appeals) allowed the assessee's claim, relying on the decision in CIT v. Dewar's Garage (India) (P.) Ltd. [1993] 204 ITR 763, which held that repairs by a lessee are revenue expenditure.

The Departmental Representative argued that the expenditure resulted in a substantial increase in rental income and was of a capital nature. He cited several cases, including Ballimal Naval Kishore v. CIT [1997] 224 ITR 414 (SC), to support this view.

The assessee's counsel contended that the expenditure was purely for repairs and should be allowed as revenue expenditure, citing cases like Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 11 (SC).

Decision on Nature of Expenditure:

The Tribunal examined the facts and concluded that the expenditure was indeed capital in nature. The Tribunal noted that the premises were held on a long-term lease and that the expenditure led to a significant enhancement in the utility of the premises, converting it from a warehouse to a bank. This conversion provided an enduring benefit, aligning with the characteristics of capital expenditure. The Tribunal stated: "The expenditure of Rs. 7,85,866 has been incurred to convert the premises fit for banking operations. Earlier, it could be used only for warehousing purposes."

The Tribunal distinguished the cases cited by the assessee, noting that the extent and nature of the work done were more akin to reconstruction and renovation rather than mere repairs. The Tribunal specifically referenced the case of Vasant Screens [1980] 124 ITR 835 (Bom.), where similar expenditure was treated as capital.

Allowability of Depreciation:

While the Tribunal upheld the AO's classification of the expenditure as capital, it directed that the assessee be allowed depreciation on the capitalized expenditure of Rs. 7,85,866 as per the law. This direction provides partial relief to the assessee by allowing depreciation benefits on the capitalized amount.

Conclusion:

The Tribunal set aside the order of the CIT (Appeals) and restored that of the AO, concluding that the expenditure was capital in nature. However, it allowed the assessee to claim depreciation on the capitalized expenditure, thus partially addressing the assessee's concerns. The appeal was allowed subject to this direction.