2016 (7) TMI 71 - HC - Income Tax

Repairs and maintenance expenditure - revenue or capital - ITAT holding that the expenditure to the extent of 75% was capital in nature - Held that - There is nothing on record to indicate that any benefit was obtained by the assessee in the revenue field for having expended the amount for repairs / renovation of the office premises. We find that the authorities on facts found that some of the expenditure incurred out of ₹ 31.32 lakhs was incurred for maintenance such as plastering etc. This allowing of 25% was on the basis of an estimate. Nothing has been shown to us that the estimation by the authorities on the basis of facts found was in any way arbitrary or perverse. Thus we find no merit in the above submission. In the view taken by us that the expenditure of 75% of ₹ 31.32 lacs i.e. ₹ 23.49 lakhs is on capital account, the submission to claim deduction on account of Section 30 of the Act made by the Appellant need not be examined. In the above view, the concurrent finding of fact by the Authorities under the Act that the expenditure incurred claiming to be the repairs and maintenance was in fact on account of renovation of the premises, leading to enduring benefit to the appellant assessee in as much as it enabled the appellant to accommodate larger number of employees and also facilitate its trading operations. This benefit would be available to it for a long period of time and thus, was capital in nature. It was in the above view that the Tribunal granted the benefit of depreciation to the extent the claim as revenue expenditure was disallowed. - Decided against the assessee.

Summary

Issues:
- Challenge to order of Income Tax Appellate Tribunal regarding expenditure classification as capital or revenue in A.Y. 1996-97.

Analysis:
1. The appellant claimed &8377; 31.32 lakhs as repairs and maintenance expenditure for the premises it rented. The Assessing Officer found a portion of this expenditure to be capital in nature due to substantial renovation work. The Commissioner of Income Tax (Appeal) upheld this decision, leading to the Tribunal's order affirming that the renovation expense was capital in nature, qualifying for depreciation under Section 32 of the Income Tax Act, 1961.

2. The appellant argued that similar cases in the past allowed renovation expenses as revenue expenditure, citing Commissioner of Income Tax Vs. Talathi and Panthaky Associated P. Ltd. and Commissioner of Income Tax Vs. Hede Consultancy Pvt. Ltd. The appellant contended that the entire expenditure should be considered revenue and questioned the 75%-25% capital-revenue split by the authorities.

3. The High Court noted that the renovation work provided an enduring benefit to the appellant, allowing for increased employee accommodation and improved trading operations. The Court rejected the appellant's argument that being a tenant should automatically classify the expenditure as revenue, as Section 32 of the Act allows for depreciation on capital expenditure incurred by a tenant for renovation.

4. Referring to previous judgments, the Court distinguished cases where renovation expenses led to reduced rent for the tenant, stating that in the present case, no such benefit in the revenue field was evident. The Court upheld the authorities' decision to split the expenditure based on facts found, dismissing the appellant's challenge to the apportionment ratio.

5. The Court concluded that the expenditure claimed as repairs and maintenance was indeed for renovation, providing long-term benefits to the appellant, hence capital in nature. As the appellant failed to demonstrate the expenditure's revenue nature, the Court ruled in favor of the Revenue, affirming the Tribunal's decision to disallow the revenue expenditure claim.

6. Ultimately, the High Court disposed of the appeal, upholding the Tribunal's decision and answering the substantial legal question in favor of the Revenue and against the appellant, emphasizing the enduring capital nature of the renovation expenditure.