2016 (4) TMI 900 - AT - Income Tax

Claim for repair and maintenance expenditure - Held that - The fact of the matter is that if any asset forming part of block of assets gets discarded, depreciation thereon on its unabsorbed cost continues to be available till the same gets totally charged or realized by way of sale/scrap, etc. In other words, the circumstances adversely impacting the realization of the benefit/advantage envisaged from the capital expenditure, even if unrealized in whole or in part, would not render it as of revenue nature, and the law provides for a complete absorption of such expenditure, i.e., as that which does not suffer from such an impact. The assessee may well be able to secure its renewal. The same, in any case, i.e., irrespective of extension, is not to be confused with the nature of the expenditure incurred capital or revenue. In other words, the fallacy in the argument lies in determining the nature of the expenditure based on or with reference to the period of the right of occupancy. The two are independent of each other. In the instant case, it has already been indicated that the entire expenditure is in the nature of a set-up cost of the business. Even assuming, for which there is nothing on record to suggest so, that the business was already set up at the previous location, dislocation is disruptive of its business and would accordingly be required to be set up again. To the extent this entails additional expenditure, the same only implies a higher capital expenditure in-as-much as the capital work or assets discarded (at the old location) cannot be put to use again. Such discarded assets shall, however, continue to be subject to depreciation under law, as explained earlier. In view of the foregoing, the assessee s claims cannot be acceded to, and the treatment accorded by the Revenue is to be upheld. It may also be clarified that though the assessee has impugned the entire expenditure claimed (Rs.11.34 lacs), the net (of depreciation) disallowance is only for ₹ 91,940/- (1,33,914 41,974). An acceptance of the assessee s claim (at any further appellate stage) would entail withdrawal of depreciation and, as explained earlier, an allowance of the entire expenditure incurred for ₹ 8.39 lacs. - Decided against assessee

Issues Involved:
1. Deductibility in law of the assessee's claim for repair and maintenance expenditure.
2. Nature of the expenditure: whether it is capital expenditure or revenue expenditure.
3. Applicability of Explanation 1 to section 32(1) of the Income Tax Act, 1961.
4. Impact of the lease or leave and license arrangement on the nature of the expenditure.

Issue-wise Detailed Analysis:

1. Deductibility in Law of the Assessee's Claim for Repair and Maintenance Expenditure:
The primary issue in this appeal is the deductibility of the assessee's claim for repair and maintenance expenditure amounting to Rs. 1,33,914/-. The assessee, engaged in the development of software products and providing regulatory content services for BFSI sector, incurred an expenditure of Rs. 8,39,482/- on setting up its business premises. The Assessing Officer (A.O.) disallowed the claim, treating it as capital expenditure and allowed depreciation instead. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, leading to the second appeal by the assessee.

2. Nature of the Expenditure: Capital or Revenue:
The core issue is whether the expenditure incurred is capital in nature or merely repairs and maintenance. The assessee argued that the expenditure was necessary for the smooth conduct of its operations and did not alter the capital structure. However, the A.O. and CIT(A) considered the expenditure as capital, citing that it was incurred to make the premises fit for use, which included installation of workstations, flooring, electric wiring, false ceiling, and painting. The tribunal noted that repairs imply the existence of an asset that is being preserved or maintained, whereas the expenditure in question was for setting up the premises, making it capital in nature.

3. Applicability of Explanation 1 to Section 32(1) of the Income Tax Act, 1961:
Explanation 1 to section 32(1) was central to the tribunal's decision. It states that capital expenditure incurred on a building not owned by the assessee but for which the assessee holds a lease or other right of occupancy is eligible for depreciation as if the building were owned by the assessee. The tribunal found that the assessee's expenditure on setting up the premises fell under this provision, making it capital expenditure eligible for depreciation. The tribunal emphasized that the nature of the expenditure, not the accounting treatment, determines its deductibility.

4. Impact of the Lease or Leave and License Arrangement:
The assessee contended that the premises were under a leave and license arrangement, not a lease, and thus Explanation 1 to section 32(1) should not apply. However, the tribunal clarified that the nature of the right of occupancy (lease or leave and license) is immaterial under Explanation 1, as it covers any right of occupancy. The tribunal also noted that the assessee failed to provide evidence to distinguish between a lease and a leave and license arrangement. Therefore, the tribunal upheld the CIT(A)'s view that the expenditure was capital in nature, regardless of the occupancy arrangement.

Conclusion:
The tribunal concluded that the entire expenditure of Rs. 8,39,482/- was capital in nature and upheld the Revenue's treatment of allowing depreciation on this amount. The assessee's appeal was dismissed, and the tribunal emphasized that the nature of the expenditure determines its deductibility, not the period of the right of occupancy or the accounting treatment. The order was pronounced in the open court on January 29, 2016.

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