2014 (1) TMI 887 - AT - Income Tax

Nature of Expenses Revenue or Capital - Deduction claimed on expenditure - Expenses incurred on renovation of office premises Held that - The Act draws no distinction between the capital expenditure incurred in relation to the user s own building or that in respect of which he enjoys leasehold or the other right of occupancy, i.e., for the purpose of grant of depreciation thereunder - Relying upon CIT vs. Madras Auto Service (P.) Ltd 1998 (8) TMI 1 - SUPREME Court - It would be proper to allow the assessee a final opportunity to present its case with regard to the relevant expenditure as being not capital expenditure but of revenue nature, i.e., as not falling with the scope and ambit of Explanation 1 to s. 32(1), before the AO - The CIT(A) having already allowed depreciation, i.e., on merits, which has not been contested by the Revenue, the assessee s claim with reference to its revised computation stands admitted for being considered Decided in favour of Assessee.

Summary

Issues:
Validity of the assessee's claim for deduction in respect of expenditure incurred on renovation of office premises.

Analysis:
The judgment revolves around the validity of the assessee's claim for deduction concerning the expenditure incurred on renovating its office premises. The primary contention is whether the expenditure is of a revenue or capital nature. The assessee asserts that the work done is temporary and does not result in any enduring advantage or capital asset. However, the Revenue argues that the expenditure, including civil work, fixtures, and electrical installations, constitutes capital improvement to the existing premises. The Revenue emphasizes that the law allows depreciation on such capital expenditure in relation to leased premises, indicating its capital nature. The Tribunal notes the distinction between revenue and capital expenditure, emphasizing that the decision hinges on factual analysis and legal principles established by previous court decisions.

The Tribunal scrutinizes the details of the expenditure, as listed in the contractor's bill, which includes demolition of existing structures, erection of new walls, and flooring work. Based on these details and the observations made during the hearing, the Tribunal leans towards considering the expenditure as capital in nature. The Tribunal highlights that the renovation work undertaken implies substantial capital expenditure, raising questions about mere ambience change versus value addition. Despite the assessee's arguments, the Tribunal finds the expenditure to align more with capital nature based on the work executed.

In light of the arguments presented and the need for further clarification, the Tribunal allows the assessee a final opportunity to demonstrate that the expenditure should be classified as revenue rather than capital. The Tribunal directs the assessee to present its case before the Assessing Officer (A.O.) to address the nature of the expenditure and any proportionate deductions concerning the lease period. The Tribunal's decision to allow the appeal for statistical purposes indicates that further examination and clarification are required regarding the classification of the expenditure as revenue or capital.

In conclusion, the judgment delves into the intricate distinction between revenue and capital expenditure, emphasizing the need for factual analysis and legal principles to determine the nature of the expenditure. The Tribunal's decision to grant the assessee an opportunity to present its case before the A.O. underscores the importance of clarity and thorough assessment in resolving the issue at hand.