2014 (8) TMI 641 - HC - Income Tax

Nature of expenses Capital or revenue Renovation expenses on modification of showroom Compulsory continuation of dealership agreement Held that - Any expenditure incurred by the assessee towards repairing the premises taken on rent if he has undertaken to bear the cost of the repairs so as to make it more conducive to its business activity falls within the expression repairs to the premises and the cost of such repairs is allowable as deduction under the provision Relying upon THE COMMISSIONER OF INCOME TAX, DELHI-IV. Versus M/s HI LINE PENS PVT. LTD. 2008 (9) TMI 25 - HIGH COURT DELHI - expenses that were incurred were towards repairing the premises taken on lease so as to make it more conducive to its business activity - Such expenses would clearly fall within the expression of repairs to the premises as appearing in Section 30(a)(i) - The legislature has made a distinction between expenses incurred by a tenant for repairs of the premises and expenses incurred by a person who is not a tenant towards current repairs to the premises Decided in favour of Assessee.

Summary

Issues:
1. Whether the expenditure incurred by the appellant is capital or revenue in nature?
2. Whether the findings of the Income Tax Appellate Tribunal were justified in reversing the action of CIT(A)?

Issue 1: The appellant, a partnership firm, incurred expenditure for renovating its showroom as per the dealership agreement with LML Limited. The Assessing Officer disallowed the expenditure as of enduring benefit and capital in nature. The Commissioner of Income tax (Appeals) allowed the appeal, but the Tribunal partly allowed it, holding the expenditure as capital. The appellant argued that the expenditure was revenue in nature under Section 30(a) (i) of the Income Tax Act, as it was for repairs to the rented premises to enhance business activity. The Delhi High Court judgment in CIT vs. Hi Line Pens (P) Limited supported this argument. The Court agreed that the expenditure on marble flooring, plaster of paris, painting, etc., was for repairs to the premises, making it conducive to business activity, thus falling under the provision for deductions under Section 30(a) (i).

Issue 2: The Court referred to the distinction between repairs by a tenant and current repairs to premises, emphasizing that the expenditure by the appellant was for repairs to the rented showroom, not creating a new asset. The judgment in Hi Line Pens (P) Limited's case supported this distinction, highlighting that the intention was not to create a new capital asset. The Court also discussed the relevance of the Supreme Court's decision in Ballimal Naval Kishore case, noting the difference in the provisions of the Income Tax Act applicable to the present case. Previous decisions by the Punjab & Haryana High Court supported the view that even if the benefit was enduring, the expenditure was revenue in nature if it was wholly and exclusively spent for the business, as in the case of the appellant. Consequently, the substantial question of law was answered in favor of the appellant, and the appeal was allowed.