2013 (2) TMI 265 - AT - Income Tax

Expenditure on construction/renovation of leased buildings - revenue v/s capital - Held that - As decided in CIT Versus Madras Auto Service Pvt. Limited 1998 (8) TMI 1 - SUPREME COURT it is essential that the expenditure incurred on the construction of any structure on the leased premises should result in saving of the revenue expenditure at the subsequent stage. In the present case, from the pleadings of both the sides, it cannot be ascertained whether the assessee is getting enduring benefit of revenue nature from the additional structure or renovation/repairs undertaken by the assessee on the leased out premises. Thus the case of the assessee very much falls within the ambit of Explanation 1 of section 32(1) held to be of capital nature - appeals of the assessee dismissed being devoid of merit. Renovation of existing shed and new electrical fittings are capital in nature & expenditure on demolition, dismantling etc. can only be allowed as revenue - partly in favour of revenue. Addition made u/s 68 on account of unexplained cash credit - CIT(A) deleted the addition - Held that - Order of the CIT(A) shows that during the course of appellate proceedings, the assessee was able to produce documents and the details of repayment made through cheque. Even the bank confirmations were filed by the assessee showing that the cheques issued by the assessee were encashed by the respective parties. The assessee had also furnished identity of persons with complete details of addresses and the FD applications showing details. After satisfying himself with the documents, the CIT(A) has allowed the ground of appeal of the assessee. The DR could not controvert the findings of the CIT(A) on this issue, therefore no reason to interfere with the findings of the CIT(A) - against revenue.

Summary

Issues Involved:
1. Nature of expenditure incurred on leased premises (capital vs. revenue expenditure).
2. Higher rate of depreciation on windmills.
3. Addition under section 68 of the Income Tax Act for unexplained cash credits.

Issue-wise Detailed Analysis:

1. Nature of Expenditure Incurred on Leased Premises:
The primary issue is whether the expenditure incurred by the assessee on leased premises should be classified as capital or revenue expenditure. The assessee argued that the expenditure was for making the premises suitable for business and should be treated as revenue expenditure. The Assessing Officer, however, capitalized the expenditure and allowed depreciation at 10%. The CIT(A) partly allowed the appeal, categorizing certain expenditures as capital and others as revenue. The Tribunal noted that Explanation 1 to Section 32(1) applies, which treats expenditure on leased premises for construction or renovation as capital expenditure. The Tribunal concluded that the assessee's expenditure on renovations and additions to leased buildings should be capitalized, dismissing the assessee's appeals on this ground.

2. Higher Rate of Depreciation on Windmills:
For the assessment year 2008-09, the Revenue challenged the CIT(A)'s decision to grant a higher rate of depreciation on windmills. The Tribunal noted that the case was covered by a previous Tribunal decision in K. Ravi v. Asstt. CIT, which supported the assessee's claim. Thus, the Tribunal dismissed the Revenue's appeal on this issue.

3. Addition Under Section 68 for Unexplained Cash Credits:
The Revenue also contested the CIT(A)'s decision to delete the addition made under section 68 for unexplained cash credits. The CIT(A) had found that the assessee provided sufficient documentation, including bank confirmations and details of repayments, to substantiate the genuineness of the transactions. The Tribunal upheld the CIT(A)'s findings, noting that the Revenue could not controvert the evidence provided by the assessee. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.

Conclusion:
The Tribunal dismissed both appeals by the assessee, confirming that the expenditures on leased premises should be treated as capital. The Tribunal partly allowed the Revenue's appeal for the assessment year 2005-06, modifying the CIT(A)'s order to classify certain expenditures as capital. The Revenue's appeal for the assessment year 2008-09 was dismissed, upholding the CIT(A)'s decisions on higher depreciation for windmills and the deletion of additions under section 68.