2013 (12) TMI 891 - AT - Income Tax

Hoarding Maintenance Expenses - Held that - The expenses for putting up new median hoardings has generated income to assessee not only for this concerned assessment year but also for the next three succeeding assessment years - Treating a part of the expenses as capital in nature and granting depreciation on the same is justified - The steel purchase was only a subject matter of appeal before the CIT (A) and not the whole hoarding maintenance expenses - The CIT (A) have considered only the steel purchases as capital expenses and not of the whole hoarding maintenance expenses - Partly allowed in favour of assessee.

Issues:
1. Disallowance of hoarding maintenance expenses by Assessing Officer
2. Disallowance of hoarding maintenance expenses by CIT (A)
3. Capitalization of expenses and grant of depreciation
4. Discrepancy in disallowance percentage between Assessing Officer and CIT (A)

Issue 1: Disallowance of hoarding maintenance expenses by Assessing Officer
The Assessing Officer disallowed a portion of the hoarding maintenance expenses claimed by the assessee, treating it as capital expenditure. Specifically, out of the total amount spent on purchase of steel, only 20% was allowed as revenue expenditure for normal wear and tear, while the remaining amount was capitalized. The Assessing Officer allowed depreciation on the capitalized amount. The Assessing Officer justified this decision by stating that hoardings require maintenance, and steel components may be necessary for such maintenance. The total income was determined at Rs.1,47,61,441 after the disallowance.

Issue 2: Disallowance of hoarding maintenance expenses by CIT (A)
The CIT (A) partially upheld the addition made by the Assessing Officer on account of hoarding maintenance expenses. The CIT (A) disallowed 50% of the total expenditure claimed by the appellant, allowing only 50% as revenue expenditure and capitalizing the remaining 50%. The CIT (A) reduced the capitalized amount to Rs.1,01,36,152 instead of the Rs.1,30,06,490 capitalized by the Assessing Officer. The CIT (A) reasoned that a portion of the expenses should be capitalized due to the benefits expected in future years from an agreement with BBMP for median hoardings.

Issue 3: Capitalization of expenses and grant of depreciation
The agreement with BBMP for median hoardings was for a period of four years, entitling the assessee to revenue from advertising displayed on such hoardings. The expenses incurred for erecting these hoardings were primarily under the head of hoarding maintenance expenses. The CIT (A) and the Assessing Officer treated a portion of these expenses as capital in nature, allowing depreciation on the capitalized amount. The expenses incurred for the current year were expected to generate income for the next four years, justifying the capitalization of a portion of the expenses.

Issue 4: Discrepancy in disallowance percentage between Assessing Officer and CIT (A)
There was a discrepancy in the disallowance percentage between the Assessing Officer and the CIT (A). The Assessing Officer disallowed 80% of the expenses related to steel purchases, while the CIT (A) disallowed 50% of the total hoarding maintenance expenses. The CIT (A) should have only considered the steel purchases as capital expenses, not the entire hoarding maintenance expenses. Consequently, the disallowance was limited to Rs.81,29,056 instead of the Rs.1,01,36,152 sustained by the CIT (A).

In conclusion, the appeal filed by the assessee was partly allowed by the Appellate Tribunal, addressing the discrepancies in the treatment of hoarding maintenance expenses and capitalization by the Assessing Officer and the CIT (A). The Tribunal restricted the disallowance to the appropriate portion of the expenses, considering the future income generation from the median hoardings agreement.

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