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2011 (7) TMI 776 - AT - Income TaxExpenditure on renovation of rented building - Capital or revenue expenditure - Assessing Officer noticed that the assessee has incurred a sum of 40, 25, 442.26 towards renovation of premises taken on lease - Revised return - The effect of sub-section (1A) or Explanation 1 to section 32 is that the assessee is entitled to depreciation on any capital expenditure incurred by him for the purpose of business or profession on the construction of any structure or doing of any work or in relation to and by way of renovation or extension of or improvement to the building even if the building is not owned by the assessee - It is pertinent to note that the provision relating to allowing depreciation on the capital expenditure incurred on lease hold building is available in the Act since the assessment year 1971-72 onwards - Held that the question whether the expenditure incurred on the rented or lease hold premises is in the nature of capital or revenue has to be examined independently under the facts and circumstances of each case - Appeal is allowed by way of remand to CIT(A)
Issues Involved:
1. Nature of Expenditure: Capital or Revenue 2. Applicability of Explanation 1 to Section 32 of the Income Tax Act Detailed Analysis: 1. Nature of Expenditure: Capital or Revenue The primary issue in this case is whether the expenditure of Rs. 36,87,585/- incurred by the assessee on the renovation of a rented building should be treated as capital expenditure or revenue expenditure. The Assessing Officer treated the majority of the expenditure as capital in nature, allowing only Rs. 3,37,859/- as revenue expenditure for painting and tube lights. The remaining amount was disallowed based on the provisions of Explanation 1 to Section 32 of the Income Tax Act, which allows depreciation on capital expenditure incurred on leased buildings. The assessee argued that the expenditure was incurred to make the building suitable for production requirements, thus qualifying as revenue expenditure. The CIT(A) sided with the assessee, relying on the Supreme Court's decision in CIT v. Madras Auto Service (P.) Ltd., where similar expenses were considered revenue in nature. 2. Applicability of Explanation 1 to Section 32 of the Income Tax Act The Departmental Representative contended that Explanation 1 to Section 32 applies, which means the expenditure should be treated as capital, allowing only depreciation. This explanation specifies that any capital expenditure on leased buildings should be treated as if the building were owned by the assessee, thus only allowing depreciation. The assessee countered that Explanation 1 to Section 32 should only be invoked if the expenditure is inherently capital in nature. They cited several cases, including CIT v. Madras Auto Service (P.) Ltd., where the Supreme Court ruled that expenses for constructing a new building on leased land were revenue expenditures because the building did not belong to the assessee. Judgment Analysis The Tribunal noted that the CIT(A) had relied heavily on the Supreme Court's decision in Madras Auto Service (P.) Ltd. However, the Tribunal emphasized that this decision must be understood in its specific context. The Supreme Court allowed the expenditure as revenue because the new construction belonged to the lessor, and the assessee merely gained a business advantage of using modern premises at a low rent. The Tribunal highlighted that the assessment years in the Madras Auto Service case were 1968-69 and 1969-70, before the introduction of Explanation 1 to Section 32. This provision, effective from 1.4.1971, allows depreciation on capital expenditure for leased buildings, suggesting that such expenditure should be treated as capital. The Tribunal concluded that the CIT(A) should not have blindly followed the Supreme Court's decision without considering the specific facts and the applicability of Explanation 1 to Section 32. The Tribunal set aside the CIT(A)'s order and remanded the issue back for reconsideration, instructing the CIT(A) to re-examine the nature of the expenditure independently, considering the provisions of Explanation 1 to Section 32. Conclusion The Tribunal allowed the revenue's appeal, directing the CIT(A) to reassess the nature of the expenditure in light of the discussions and legal provisions, particularly Explanation 1 to Section 32. The assessee is to be given an opportunity to present their case during this reassessment.
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