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2013 (6) TMI 426 - AT - Income TaxExpenditure on interior work - revenue v/s capital - Held that - It is not in dispute that the assessee took the premises on lease for 15 years with an option to extend the same for further period with an intention to set up a new show room in the lease premises & thereby incurred the expenditure in interior decoration like false ceiling, racks, change of flooring, etc. Though the entire title on the property is not transferred during the course of lease assessee would be in physical possession of the property on payment of the agreed amount as lease rent. Therefore, the expenditure incurred by the assessee resulted in expansion of the capital base of the assessee as it resulted in expansion of the profit making apparatus. Therefore, the expenditure incurred by the assessee for interior decoration and other works on the leased premises for the first time for the purpose of setting up of business is not in the course of profit earning process, but in the course of establishing a new capital asset / profit earning apparatus. Therefore be treated as capital in nature. See Veeraraghavan vs CIT 1965 (7) TMI 55 - KERELA HIGH COURT . Against assessee. Expenditure towards advertisement including payment made to temples, churches, clubs, educational institutions and trade unions, etc. - revenue v/s capital - Held that - In the written submission, the assessee claims that the prime motive for contribution is charity. If it is a charity, it has to be claimed u/s 80G if the same is approved by the respective CIT. Here, the assessee is claiming business expenditure. It is not the case of the assessee that the expenditure was incurred in connection with the welfare of the employees. Moreover, the assessee has incurred Rs.7,20,99,724 but the AO has disallowed only Rs.1 lakh. In the absence of claim of the assessee that the expenditure was incurred for business purpose or for welfare of the employees, this Tribunal is of the considered opinion that the contribution made by way of charity cannot be allowed u/s 37 as business expenditure. Against assessee. Interest on loan - revenue v/s capital - Held that - The assessee claims that the entire borrowed funds to the extent of Rs.76.06 crores was invested in the stock in trade. Even if the deposits of Rs.21.38 crores taken as assessee s investment, the balance amount claimed by the assessee to the extent of Rs.20.74 crores as interest free funds may not be available. Therefore, it is not known how the CIT(A) came to the conclusion that the loan of Rs.12.14 crores was given to the relatives out of the available interest free fund of Rs.20.74 crores. If the assessee demonstrates that sufficient capital funds are available, then there may not be any diversion of funds. However, it is for the assessee to demonstrate that sufficient capital funds were available in the books of account. Therefore, AO has to examine the same with regard to the available funds in capital / current account of the proprietor and the nature of deposit to the extent of Rs.21.38 crores, thus the issue of disallowance of interest on the borrowed fund is remitted back to the file of AO. In favour of revenue for statistical purpose.
Issues Involved:
1. Disallowance of Rs. 15,04,000 as capital expenditure. 2. Disallowance of Rs. 1 lakh as non-business expenditure. 3. Disallowance of interest on borrowed funds. Issue-wise Detailed Analysis: 1. Disallowance of Rs. 15,04,000 as Capital Expenditure: The first issue concerns the disallowance of Rs. 15,04,000 incurred by the assessee for setting up a new branch in leased premises. The assessee argued that the expenditure for interior work, such as false ceiling and flooring, in a leased building should be treated as revenue expenditure, not capital expenditure. The representative for the assessee cited the Supreme Court's judgment in CIT vs Madras Auto Service (P) Ltd and the Kerala High Court's judgment in CIT vs Premier Cotton Spinning Mills Ltd to support the claim that the expenditure did not create an enduring asset for the assessee. Conversely, the revenue argued that the expenditure expanded the capital base of the assessee and was incurred to establish a new showroom, thus creating a capital asset. The revenue relied on judgments from the Karnataka High Court and Delhi High Court to substantiate their position. The Tribunal concluded that the expenditure was indeed capital in nature as it resulted in the establishment of a new showroom, which is a capital asset. The Tribunal differentiated this case from the Hyderabad Bench's decision in Chaya Lakshmi Creations Pvt Ltd, noting that in the present case, the expenditure was for establishing a new asset, not for maintaining an existing one. The Tribunal also referenced the Kerala High Court's judgment in Premier Cotton Spinning Mills Ltd, which supported the revenue's stance. Consequently, the Tribunal upheld the disallowance of Rs. 15,04,000 as capital expenditure. 2. Disallowance of Rs. 1 Lakh as Non-Business Expenditure: The second issue pertains to the disallowance of Rs. 1 lakh out of Rs. 7,20,99,724 spent on advertisement, including payments to temples, churches, and other institutions. The assessee claimed the expenditure was for business purposes, while the revenue argued that contributions to religious and educational institutions had an element of charity and could not be considered business expenditure. The Tribunal noted that the assessee's written submission indicated the prime motive for the contributions was charity. Since charitable contributions should be claimed under section 80G of the Income-tax Act, the Tribunal found no justification for treating these expenses as business expenditure under section 37. The disallowance of Rs. 1 lakh was therefore confirmed. 3. Disallowance of Interest on Borrowed Funds: The third issue involved the disallowance of interest on borrowed funds amounting to Rs. 7,14,80,735. The revenue contended that the assessee had used interest-bearing business funds for personal advances, which lacked commercial expediency. The revenue cited the Kerala High Court's judgment in CIT vs V.I. Baby & Co to argue that interest on such funds should not be deductible. The assessee countered that the interest-free advances were given from the proprietor's capital and unsecured loans, not from borrowed funds. The assessee presented a balance-sheet showing sufficient interest-free funds available to cover the advances, and cited judgments from various High Courts and Tribunals to support their claim. The Tribunal found discrepancies in the assessee's claim about the availability of interest-free funds and noted that the nature of certain deposits was unclear. The Tribunal determined that the assessing officer needed to re-examine the availability of funds in the capital and current accounts of the proprietor. Therefore, the Tribunal set aside the lower authorities' orders and remitted the issue back to the assessing officer for a fresh examination. Conclusion: The assessee's appeal was dismissed, and the revenue's appeal was allowed for statistical purposes. The Tribunal upheld the disallowance of Rs. 15,04,000 and Rs. 1 lakh, while remitting the issue of disallowance of interest on borrowed funds back to the assessing officer for further examination. The order was pronounced on June 7, 2013.
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