2016 (6) TMI 118 - AT - Income Tax

Disallowance under section 14A - Held that - It is an undisputed fact that, the assessee has not earned any exempt income during the year on the investment made in the subsidiary company, stated for the business purpose, that is, for acquiring controlling interest and in the nature of strategic investment. Once there is no exempt income during the year, then in wake of latest Delhi High Court decision in the case of Cheminvest Ltd. vs. CIT, reported in 2015 (9) TMI 238 - DELHI HIGH COURT , no disallowance under section 14A can be made. Thus we hold that, no disallowance under section 14A is called for - Decided in favour of assessee Disallowance of expenditure incurred on repairs and maintenance on household premises by treating the same to be capital expenditure - Held that - From the perusal of the details furnished before the authorities below as well as before us, we find that it is mainly in the nature of exterior works done like electrical work, P0P and false ceiling work, painting, plumbing, aluminum, partition cum door, vertical blinds, sun control films, fire alarm systems etc. The expenditures which have been incurred on the premises does not belong to the assessee, albeit has been taken for a temporary period for conducting its business, that is, to work efficiently in the premises looking to the needs and requirements of modern business premises. The Department has referred to Explanation 1 to section 32, which only refers to any capital expenditure incurred. It does not speak about the revenue expenditure. Thus, reference of Explanation 1 to section 32 in the grounds of appeal may not be relevant. The section 30(a)(i) on the other hand provides that, if repairs have been carried out in the premises occupies as a tenant then it has to be allowed as deduction under section 30 as repairs that is, as cost of repairs to the premises. Thus the expenses should be looked upon as having been made for the purpose of conducting the business more profitably. Thus, if the expenditure has been incurred for carrying on business more efficiently on day-to-day basis then it has to be reckoned as revenue expenditure. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act.
2. Classification of expenditure on repairs and maintenance as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act:

The primary issue in the assessee's appeals for the assessment years 2008-09 and 2009-10 was the disallowance of expenses under section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The assessee argued that the investments in shares of its subsidiary were for acquiring controlling interest and that no expenditure was incurred to earn exempt income. The Assessing Officer (AO) disallowed ?2,17,167/- for AY 2008-09 and ?14,66,757/- for AY 2009-10, citing the ITAT Special Bench decision in Cheminvest Ltd. vs ITO, which mandated disallowance under section 14A even without exempt income during the year.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, referencing the High Court's decision in Maxopp Investment Ltd vs CIT. However, the assessee's counsel cited a later High Court decision in Cheminvest Ltd. vs CIT, which clarified that section 14A does not apply if no exempt income is received or receivable during the relevant year. The Tribunal, following this latest decision, ruled that no disallowance under section 14A was warranted for both assessment years, thereby allowing the assessee's appeals.

2. Classification of expenditure on repairs and maintenance as capital or revenue expenditure:

The revenue's cross appeal for AY 2009-10 involved the classification of ?1,98,68,798/- spent on repairs and renovation of leased premises as capital expenditure. The assessee argued that these expenses were for making the premises suitable for business use and did not result in any enduring benefit or creation of a capital asset. The AO disallowed the expenditure as capital in nature, allowing only depreciation, resulting in a net addition of ?1,88,75,358/-.

The CIT(A) ruled in favor of the assessee, stating that the expenses were for leasehold improvements necessary for business operations and did not confer any tenancy rights or enduring benefits. The expenditure was considered revenue in nature, following precedents set by the Bombay High Court in CIT vs TVS Lean Logistics Ltd and CIT vs Hede Consultancy P. Ltd. The Tribunal upheld the CIT(A)'s decision, emphasizing that the repairs were for the premises occupied on a temporary basis and were necessary for efficient business operations. The Tribunal agreed that the expenses did not create any new capital asset and were thus deductible as revenue expenditure under section 30(a)(i).

Conclusion:
The Tribunal allowed the assessee's appeals regarding disallowance under section 14A for both assessment years and dismissed the revenue's appeal, affirming the classification of repair and maintenance expenses as revenue expenditure. The judgment emphasized the importance of actual receipt of exempt income for disallowance under section 14A and the nature of expenditure in determining its classification for tax purposes.