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2011 (10) TMI 46 - AT - Income TaxTemporary erection had been done in the office premises taken on lease - Depreciation on leasehold building - CIT(A) directed the AO to allow 100% depreciation - Transfer of shares - Applicability of section 79 - Held that - In the present case as observed by the ld. CIT (A) the assessee made its claim u/s 37 during the assessment proceedings though it had claimed depreciation to start with. The ld. CIT (A) held that the AO was wrong in rejecting the claim of the assessee. In this regard M/s. Hi Line Pens Pvt. Ltd. (2008 -TMI - 30864 - HIGH COURT DELHI) has rightly been pressed into service. Therein it has been held besides the above that the repairs all kind carried out therein like in the present case were expenses incurred for repairs for making the premises more conducive to the assessee s business activities and its expenses did not bring about any new capital asset. - Decided in favor of assessee. Transfer of shares - Applicability of section 79 - Held that - once the requirements of the provisions were FEMA the facts are to be stringently followed and it has been so done it was the requirement of the Foreign Direct Investment Laws which made the assessee to act in the manner discussed above. The provisions of section 79 of the I.T. Act therefore cannot be said to envisage the transfer of shares by the subscribers of the Memorandum of Articles of Association as a change in the shareholding of the assessee company. - for the purpose of Explanation II both legal ownership and beneficial ownership should be taken into account. - Decided in favor of assessee.
Issues Involved:
1. Whether the expenditure on leasehold improvements should be treated as capital expenditure and the rate of depreciation applicable. 2. Disallowance of payment for interior work due to non-production of bills. 3. Denial of set-off of brought forward losses due to change in shareholding under section 79 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Treatment of Expenditure on Leasehold Improvements: The primary issue was whether the expenditure on leasehold improvements should be treated as capital expenditure and the applicable rate of depreciation. The assessee claimed 100% depreciation on leasehold improvements, contending that the improvements were temporary and related to wooden partition, cabin making, interior work, etc. The Assessing Officer (AO) treated the expenditure as capital expenditure and allowed depreciation at 10%, as per section 32 of the Income Tax Act. The Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to allow 100% depreciation, considering the expenditure as not constituting capital expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the improvements were temporary and did not bring about any new capital asset, relying on precedents like "DSP Merrill Lynch Ltd. v. JCIT" and "CIT v. M/s. Hi Line Pens Pvt. Ltd.". 2. Disallowance of Payment for Interior Work: The AO disallowed Rs. 1,01,500/- paid for interior work due to non-production of bills. The CIT(A) confirmed this disallowance. The assessee contended that the bills could not be produced earlier as the Branch Manager handling the payments had resigned, and the records were untraceable. The Tribunal admitted the additional evidence (the bill) and remitted the matter to the AO for fresh consideration, directing the AO to consider the newly produced bill. 3. Denial of Set-off of Brought Forward Losses: The AO disallowed the set-off of brought forward losses for AY 2001-02 against the income of AY 2002-03, invoking section 79 of the Income Tax Act, due to a change in shareholding. The CIT(A) upheld this decision. The assessee argued that the shares were initially held by nominees due to legal requirements under FEMA, and the beneficial ownership remained unchanged. The Tribunal accepted the assessee's contention, noting that the shares were beneficially held by the same entities through nominees and that the provisions of section 79 were not violated. The Tribunal relied on "CIT v. Swadeshi Match Co." to support the view that beneficial ownership should be considered. Consequential Appeals: The Department's appeal for AY 2003-04, challenging the CIT(A)'s direction to allow the carry forward of losses from AY 2002-03, was dismissed, as it was consequential to the Tribunal's decision allowing the set-off of losses for AY 2002-03. Conclusion: The Tribunal dismissed the Department's appeals for AY 2001-02, 2002-03, and 2003-04, and partly allowed the assessee's appeal for AY 2002-03. The Tribunal upheld the CIT(A)'s decisions on the treatment of leasehold improvements and the set-off of brought forward losses, and remitted the issue of disallowance of payment for interior work to the AO for fresh consideration.
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