2015 (12) TMI 1065 - HC - Income Tax

Nature of expenses - ITAT estimated the revenue expenditure and came to the conclusion that 70% expenditure was revenue and 30% was capital - Held that - As the case here relates to the assessment years 2000-01 and 2001-02 where the allowability of the expenditure is not in dispute but the issue is whether it had to be allowed in one year as revenue expenditure or by way of depreciation under Explanation 1 to Section 32 of the Act by spreading it over the years. At present, the number of years that have gone by from the initial year has been about more than thirteen years. Learned counsel for the revenue has not been able to demonstrate that there had been any change in the rate of taxation during these years. Thus, even if the substantial portion of the expenditure had been capitalized and depreciation allowed under Explanation 1 to Section 32 of the Act, at the prevalent rate admissible under the Act and the Income Tax Rules, 1962, the entire amount would have been allowed as deduction on account of depreciation by now and the case would be revenue neutral. Therefore, in such circumstances as well, we do not find any justification in interfering with the order of the Tribunal. - Decided against revenue

Summary

Issues:
- Whether the expenditure incurred on renovation, resulting in the conversion of a hall into a showroom, should be treated as revenue or capital expenditure.
- Whether the Tribunal's decision to bifurcate the renovation expenses into revenue and capital expenditure was justified.

Analysis:
1. The judgment pertains to two appeals (ITA Nos.309 and 312 of 2014) with identical issues. The primary issue revolves around the treatment of expenditure incurred on renovation for the assessment year 2000-01. The appellant, the revenue, challenged the Tribunal's decision under Section 260A of the Income Tax Act, 1961. The key question was whether the renovation expenses should be considered revenue or capital expenditure.

2. The appellant contended that the Tribunal erred in bifurcating the renovation expenses, holding 70% as revenue and 30% as capital in nature. The appellant relied on various judgments to support their argument. On the other hand, the respondent supported the Tribunal's findings.

3. The Tribunal analyzed the evidence and categorized the renovation expenditure under different heads, estimating 70% as revenue and 30% as capital expenditure. The Tribunal emphasized the enduring nature of certain items and the lack of complete details provided by the assessee. The Tribunal directed the Assessing Officer to recompute the income based on their directions.

4. The revenue argued that the Tribunal's decision was erroneous, but the Court found the Tribunal's view reasonable in the given circumstances. The Court noted that the judgments cited by the revenue did not invalidate the Tribunal's decision. No substantial question of law was found to arise.

5. The Court highlighted that the case spanned multiple assessment years, and the issue was not the allowability of expenditure but its treatment as revenue or capital. Considering the passage of time and stable tax rates, even if the expenditure had been capitalized earlier, the deduction through depreciation would have been completed by now, making the case revenue neutral.

6. Ultimately, the Court dismissed the appeal, affirming the Tribunal's decision to bifurcate the renovation expenses and finding no justification to interfere with the order.