2016 (6) TMI 1043 - HC - Income Tax

Disallowances under section 30(1) - expenditure incurred on repair and renovation of Lajpat Nagar Hospital - Held that - In the instant case, there is nothing to distinct from the plea set up by the assessee that the impugned expenditure has not resulted in demolition of old structure and construction of a new structure. The assessee has, therefore, been successful in establishing that the impugned expenditure was revenue in nature. The case laws referred to by the learned DR are primarily in the context of the expression current repairs as appearing in section 30(a)(ii) of the Act whereas the instant case is to be considered in the light of section 30(a)(iv) of the Act. Infact, the distinction between the presence of expression repairs in section 30(a)(ii) which covers the case of rented premises and the expression current repairs in section 30(a)(ii) has been elaborately brought out by the Hon ble Delhi High Court in the case of High Line Pens (P) Limited (2008 (9) TMI 25 - HIGH COURT DELHI) - Decided against revenue Disallowance of interest under Section 36(1)(iii) - Held that - Once it is established that there is nexus between the expenditure and purpose of business, revenue cannot justifiably claim to put itself in arm chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to the circumstances of the case.- Decided against revenue

Issues Involved:
1. Deletion of disallowances under Section 30(1) without adjudicating on Explanation I to Section 30.
2. Deletion of 50% of the disallowance sustained by the CIT(A) without specific findings.
3. Deletion of Rs. 7,26,477/- disallowed under Section 36(1)(iii) without factual basis.
4. Disallowance of interest under Section 36(1)(iii) for the assessment years 2005-06 and 2006-07.

Detailed Analysis:

1. Deletion of Disallowances under Section 30(1):
The Tribunal had to decide whether the expenditure of Rs. 67,28,214/- incurred on repair and renovation of the Lajpat Nagar Hospital was of a capital or revenue nature. The Tribunal found that the expenditure did not involve demolition of an old structure or construction of a new hospital. It was incurred to make the leased premises fit for business activity, thus falling within the expression of "repair" under Section 30(a)(i) of the Act. The Tribunal's findings were based on the material on record and relevant case law, concluding that the expenditure was revenue in nature. The High Court found no perversity in these findings and thus answered the first question against the revenue.

2. Deletion of 50% of the Disallowance Sustained by the CIT(A):
The Tribunal had also addressed the disallowance sustained by the CIT(A), which had granted partial relief on the expenditure incurred. The Tribunal affirmed the CIT(A)'s view and concluded that the expenditure was revenue in nature. The High Court upheld the Tribunal's decision, finding no specific plea or cogent material to dispute the factual conclusions recorded by the CIT(A). Thus, the second question was also answered against the revenue.

3. Deletion of Rs. 7,26,477/- Disallowed under Section 36(1)(iii):
The Tribunal had deleted the disallowance of Rs. 7,26,477/- made by the Assessing Officer under Section 36(1)(iii), which was affirmed by the CIT(A). The Tribunal found that the assessee had taken unsecured loans and paid interest but had not charged interest on loans and advances given to various persons. The High Court found no perversity in the Tribunal's findings and thus answered the third question against the revenue.

4. Disallowance of Interest under Section 36(1)(iii):
The primary issue in ITA No.730 of 2010 and ITA No.288 of 2011 filed by the assessee was the disallowance of interest under Section 36(1)(iii) for the assessment years 2005-06 and 2006-07. The High Court, referencing the judgments in Hero Cycles (P) Limited vs. CIT and CIT vs. Kapsons Associates, remanded the matter to the Tribunal for fresh consideration. The Apex Court in Hero Cycles had held that once a nexus between the expenditure and the purpose of business is established, the revenue cannot question the reasonableness of the expenditure. Similarly, in Kapsons Associates, it was held that if interest-free funds are available and interest-free advances are made, the amounts advanced cannot be added to the assessee's income. The High Court directed the Tribunal to re-examine the matter in light of these principles.

Conclusion:
The High Court disposed of all the appeals, answering the first three questions against the revenue and remanding the issue of disallowance of interest under Section 36(1)(iii) to the Tribunal for fresh consideration.

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