2016 (2) TMI 1329 - AT - Income Tax

Reopening of assessment u/s 147 - Nature of expenditure - Disallowance of expenditure on construction of compound wall in place of replacement of Barbed wire fencing as capital expenditure - HELD THAT - As disputed disallowance on the issue of allowability of expenditure of replacement of compound wall was not discussed as referred at page no.3 of assessment order. Since there is no opinion was formed at the time of regular assessment u/s.143(3) of the Act completed on 30.11.2010 and the assessee has filed objections to reopening of the Act and ld. Assessing Officer considered the objection of the assessee on the reopening of assessment and disposed off by separate order dated 22.01.2014. Considering all we dismiss the appeal on the ground of re-assessment. Nature of expenditure - On Comparison with the provisions of Sec.37(1) and the nature of expenditure and the treatment of expenditure in the books of Accounts also factual circumstances and Apex Court decisions relied by the assessee the expenditure takes the characteristic of Revenue in nature though ld. Assessing Officer in his order has mentioned that this decision is not applicable for the issue in dispute as it pertaining to assessment year 1995-96 and 1997-98 and due to amendment in Sec.30 of the Act. Considering the factual circumstances the claim of the assessee fall under residual sec. of 37(1) were the expenditure has been incurred wholly and exclusively for the purpose of business and expenditure being a replacement cost to the existing asset which satisfy the functional test of revenue expenditure and also follow the jurisdictional High Court decision CIT vs. Southern Roadways Ltd 2007 (6) TMI 193 - MADRAS HIGH COURT we set aside the order of the Commissioner of Income Tax (Appeals) on this ground and Direct the Assessing Officer to allow the deduction of replacement of barbed wire fencing with compound wall as revenue expenditure - Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of assessment due to change of opinion.
2. Disallowance of expenditure on construction of a compound wall as capital expenditure.

Issue-wise Detailed Analysis:

1. Reopening of Assessment Due to Change of Opinion:
The assessee contended that the reopening of the assessment was merely due to a change of opinion as all material facts were fully and truly disclosed during the original assessment. The Assessing Officer (AO) had initially allowed the expenditure on the replacement of fencing, but later issued a notice under Section 148 of the Income Tax Act, 1961, claiming that the expenditure should have been capitalized. The AO relied on various court decisions, including the Supreme Court's ruling in Kalyanji Mavji & Company vs. CIT, to justify the reopening. The assessee argued that there was no concealment of facts and that the reassessment was invalid as it was based on a change of opinion.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, citing that the reassessment was initiated within four years and was valid as per the provisions of Section 147 of the Act. The CIT(A) referenced several judicial decisions, including Consolidated Photo and Finvest Limited vs ACIT and Gruh Finance Limited vs JCIT, to support the validity of the reassessment. The Tribunal concurred with the CIT(A), stating that there was no infirmity in the order and dismissed the appeal on the ground of reassessment.

2. Disallowance of Expenditure on Construction of Compound Wall as Capital Expenditure:
The assessee claimed that the expenditure of Rs. 40,98,880/- on replacing barbed wire fencing with a compound wall should be treated as revenue expenditure under Section 37(1) of the Act. The AO, however, treated it as capital expenditure, allowing only depreciation. The AO argued that the construction of the compound wall brought a new asset with enduring benefits, thus qualifying as capital expenditure.

The CIT(A) supported the AO's view, distinguishing the assessee's reliance on the Supreme Court decision in CIT vs. Mangayarkarasi Mills (P) Ltd and the jurisdictional High Court decision in CIT vs. Southern Roadways Ltd. The CIT(A) cited the Karnataka High Court decision in Senapathy Synams Insulations Pvt. Ltd vs. CIT and the jurisdictional High Court decision in CIT vs. Binny Limited to justify treating the expenditure as capital in nature.

Before the Tribunal, the assessee reiterated that the expenditure was incurred to safeguard the property and did not provide an enduring benefit, thus qualifying as revenue expenditure. The Tribunal, after considering the functional test and the jurisdictional High Court decision in CIT vs. Southern Roadways Ltd, held that the expenditure should be treated as revenue in nature. The Tribunal directed the AO to allow the deduction of the replacement of barbed wire fencing with a compound wall as revenue expenditure.

Conclusion:
The Tribunal upheld the reassessment proceedings as valid but allowed the assessee's claim regarding the expenditure on the compound wall, directing it to be treated as revenue expenditure. The appeal was partly allowed, with the order pronounced on February 26, 2016, at Chennai.