2013 (10) TMI 517 - AT - Income Tax

Expenditure to be treated as Revenue or Capital Expenditure Reliance is placed upon the judgment in the case of Commissioner of Income-Tax Versus Abhishek Industries Limited 2006 (8) TMI 123 - PUNJAB AND HARYANA High Court - Interest on loan of Rs.1,37,61,301/- - Held that - The assessee has raised unsecured loans of Rs.1,37,61,301/- and the same from a common fund/kitty. These funds are available with the assessee for utilization by it either for extension or operation of its own business or for providing interest free advances - As per judgment of Hon ble High Court in the case of Abhishek Industries, there should be a nexus of use of borrowed funds for the purpose of business for the claim u/s 36(1)(iii) of the Act. In the present case, finding of the authorities as well as findings of the Tribunal that there is no escape for the assessee from the finding that interest being paid by the assessee to the extent the amounts borrowed on interest are diverted to sister concern on interest free basis are to be disallowed - Restriction of the disallowance to 40% of the interest has been upheld. Where the expenses are incurred by the assessee towards repairs of the premises taken on lease so as to make it fit for its business activity, such expenditure would fall within the expression of repairs as appearing in Section 30(a)(i) of the Act - In the instant case, there is nothing to distract from the plea set up by the assessee that the impugned expenditure has not resulted in demolition of old structure and construction of a new structure. The assessee has, therefore been successful in establishing that the impugned expenditure was revenue in nature. Merely because the amount spent has been used for construction of a building or structure of permanent nature is not the decisive test for holding the expenses to be of capital outlay or revenue outlay. The two tests emerging from the aforesaid decisions are that firstly where the building or construction of any permanent structure is brought into existence that is by itself is not sufficient to hold the expenses to be capital nature invariably. Where such construction does not result in acquisition of any capital assets to the trade of the assessee or the property does not become the property of the assessee, it does not result in acquisition of capital assets of enduring nature by the assessee. Secondly, it is also clearly discernible that if such expenses are incurred for the purpose of business for deriving any benefit whether to preserve the business or to facilitate the running of the business more smoothly or to make the business more profitable to secure any other advantage for the assessee s business or incurring expenditure by seeking exemption from or reduction in incurring of other expenses which would have been ordinarily allowable as revenue expenditure of the assessee s business, such expenses are to be treated as having been incurred wholly and exclusively for the business of the assesses and revenue expenditure. Such expenses cannot be construed as a capital expenses.

Summary

Issues Involved:
1. Deletion of addition by capitalizing building expenses.
2. Restriction of disallowance of interest.

Issue-wise Detailed Analysis:

1. Deletion of Addition by Capitalizing Building Expenses:

The Revenue challenged the deletion of an addition of Rs. 20,85,399/- made by the Assessing Officer (AO) by capitalizing building expenses. The AO observed that the expenses debited under "repair to building" were for major renovation and thus capital in nature. However, the CIT(A) deleted this addition, treating the expenses as revenue expenditure.

The Tribunal upheld the CIT(A)'s decision, referencing the ITAT Chandigarh's consolidated judgment in the assessee's own case for AY 2005-06, which distinguished between "repairs" and "current repairs." The Tribunal noted that the expenses were for preserving and maintaining an existing asset, not creating a new one, and thus were revenue in nature. The Tribunal cited several judgments, including those from the Hon'ble Delhi High Court and the Hon'ble Rajasthan High Court, supporting the view that expenses incurred for repairs to leased premises to make them fit for business activities are revenue expenses.

2. Restriction of Disallowance of Interest:

The AO disallowed Rs. 63,27,541/- of interest paid on borrowed funds, as the assessee had given interest-free loans while incurring interest on borrowed funds. The CIT(A) restricted this disallowance to 40% of the interest claimed. The Revenue contested this restriction, but the Tribunal upheld the CIT(A)'s decision, referencing the ITAT Chandigarh's judgment for the same AY, which followed the principles laid down in the Hon'ble Punjab & Haryana High Court's judgment in Abhishek Industries.

The Tribunal noted that the assessee failed to establish a direct nexus between the borrowed funds and their use for business purposes, as required under Section 36(1)(iii) of the Act. The Tribunal emphasized that the funds, whether borrowed or otherwise, form a common pool, and any diversion of these funds for non-business purposes justifies the disallowance of interest to that extent.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The deletion of the addition for building expenses was justified as revenue expenditure, and the restriction of interest disallowance to 40% was reasonable and in line with judicial precedents. The Tribunal found no valid reason to deviate from the established findings and legal interpretations provided in the referenced judgments.