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2012 (6) TMI 540 - HC - Income TaxLeasehold property - Whether expenditure incurred by the assessee by way of electrical work civil work and interior decoration is in the nature of the revenue expenditure - assessee contended that the expenditure incurred are in respect of leased properties and they do not give to the assessee the benefit of enduring nature and the amount spent was for business purpose and not for acquisition of the capital asset Held that - for the purpose of section 32 which provides for depreciation if the condition No. 1 is satisfied by a legal fiction the lessee becomes the owner of the structure constructed on lease premises. Therefore any expenditure incurred for civil work by a lessee in respect of the lease premises without any further proof cannot be said to be a capital expenditure or revenue expenditure. it is necessary to find out the nature of construction put-up the purpose of construction and the use to which the said construction is put-up and also if it is a case of repair replacement addition or improvement has to be gone into. assessee has 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. Tribunal without going into the question as to the nature of civil work electrical work and interior decoration done to the lease premises has proceeded on the assumption that it constitutes a revenue expenditure. matter is remanded to the assessing authority to consider whether the said expenditure is revenue expenditure or capital expenditure
Issues Involved:
1. Nature of Expenditure - Capital vs. Revenue 2. Applicability of Section 32 and Section 37 of the Income Tax Act 3. Judicial Precedents and Tests for Determining the Nature of Expenditure Detailed Analysis: 1. Nature of Expenditure - Capital vs. Revenue: The primary issue in this case was whether the expenditure incurred by the assessee on electrical work, civil work, and interior decoration for leased properties should be classified as capital expenditure or revenue expenditure. The assessee argued that these expenses were incurred to make the leased premises suitable for business operations and did not result in the acquisition of any capital asset, thus qualifying as revenue expenditure. The Assessing Officer, however, treated the expenses as capital expenditure, citing that they provided an enduring benefit to the assessee. 2. Applicability of Section 32 and Section 37 of the Income Tax Act: The court examined the applicability of Section 32 (depreciation on capital expenditure) and Section 37 (deduction of revenue expenditure) of the Income Tax Act. The assessee contended that the expenses were revenue in nature and should be deductible under Section 37. The Revenue argued that the expenses brought into existence an asset or an advantage of enduring benefit, thus falling under the purview of Section 32, which deals with capital expenditure and allows for depreciation. 3. Judicial Precedents and Tests for Determining the Nature of Expenditure: The court referred to several judicial precedents to distinguish between capital and revenue expenditure. The key tests and principles considered include: - Enduring Benefit Test: As per the judgment in *Travancore-Cochin Chemicals Ltd. v. CIT*, expenditure that brings an asset or an advantage of enduring benefit is typically capital expenditure. - Purpose of Expenditure: The court in *Assam Bengal Cement Co. Ltd. v. CIT* emphasized that expenditure aimed at acquiring or bringing into existence an asset for enduring benefit is capital, whereas expenditure for running the business to produce profits is revenue. - Nature of Advantage: In *Empire Jute Co. Ltd. v. CIT*, it was held that if the advantage facilitates trading operations or management without altering fixed capital, the expenditure is revenue. - Tenant vs. Owner Expenditure: The Delhi High Court in *Instalment Supply (P.) Ltd. v. CIT* and *Hi Line Pens (P.) Ltd. v. CIT* differentiated between repairs by tenants (which can be revenue even if capital in nature) and owners (restricted to current repairs). Conclusion and Order: The court concluded that both the Assessing Officer and the Tribunal had not adequately examined the nature of the expenditure. The Assessing Officer assumed the expenses were capital without detailed analysis, while the Tribunal assumed they were revenue without sufficient scrutiny. Consequently, the court set aside the findings of both authorities and remanded the matter to the Assessing Officer for a fresh evaluation, instructing a thorough examination of the nature of the civil work, electrical work, and interior decoration in light of the principles and judicial precedents discussed. Final Order: The order passed by the Assessing Officer, Appellate Commissioner, and Tribunal concerning the expenditure of Rs. 22,33,057/- was set aside. The matter was remanded to the Assessing Officer for reconsideration to determine whether the expenditure is capital or revenue in nature, with instructions to provide relief as per the law. The substantial question of law was not answered, and each party was to bear its own costs.
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