2016 (9) TMI 854 - AT - Income Tax

Addition being legal and professional expenses incurred in relation to shares buy back - Held that - The Hon ble Supreme Court in Punjab State Industrial Development Corporation (1996 (12) TMI 6 - SUPREME Court) has held that the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Similar view has been reiterated in Brooke Bond India Ltd. (1997 (2) TMI 11 - SUPREME Court ). As the expenditure of ₹ 1,95,320/- relates to buy back of shares, respectfully following the precedents noted by the ld.CIT(A), we uphold the disallowance. Addition in respect of Repair and maintenance expenses - revenue or capital expenditure - depreciation availability - Held that - The Hon ble jurisdictional High Court in Bigjo s India Ltd. vs. CIT (2007 (3) TMI 104 - HIGH COURT, DELHI ) considered almost a similar situation as is obtaining before us in the present appeal. In that case, the assessee, a licensee of the showroom, erected new counters and built a new lift shaft at a new site. It was held that such amount was not in the nature of current repairs but a capital expenditure not deductible in full. We thus reject the viewpoint of the assessee of such an expense being of revenue nature. Explanation 1 to section 32 provides that where the business is carried on in a building not owned by the assessee, but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred on the construction of any structure or doing of any work in or in relation to, and by way of renovation or expansion or, or improvement to, the building, then, the provisions of this clause shall apply as the said expenditure or work is a building owned by the assessee. It implies that whereas the expenditure of a capital nature incurred on the renovation etc. of a building, which is not owned by the assessee but in respect of which the assessee holds mere occupancy rights, cannot be allowed deduction as a revenue expense, but such expenditure of a capital nature is liable to be considered as a building owned by the assessee for the purposes of section 32 and hence depreciation is allowable pro tanto. In view of the above discussion, by which we have held that the expenditure incurred by the assessee in respect of the building is a capital and not a revenue expenditure, we hold that the assessee is entitled to depreciation at the stipulated rate. The AO is directed to allow such depreciation as per law after allowing a reasonable opportunity of hearing to the assessee.

Summary

Issues Involved:
1. Addition of legal and professional expenses related to shares buy back.
2. Treatment of repair and maintenance expenses as capital expenditure and disallowance of depreciation.

Analysis:
1. The first issue in this case pertains to the confirmation of the addition of legal and professional expenses amounting to &8377; 1,95,320 incurred in connection with shares buy back. The Assessing Officer (AO) disallowed a portion of these expenses as capital in nature, leading to an ad hoc disallowance of &8377; 5 lac. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced the disallowance to &8377; 1,95,320 based on precedents set by the Hon'ble Supreme Court in relevant cases. The Appellate Tribunal upheld the disallowance, citing that expenses related to buy back of shares retain the character of capital expenditure as they are directly linked to the expansion of the company's capital base.

2. The second issue revolves around repair and maintenance expenses of &8377; 8,28,304 incurred for building upkeep and maintenance. The AO treated these expenses as capital expenditure due to renovation activities and disallowed the deduction. The CIT(A) upheld this disallowance, emphasizing the capital nature of the expenses. The Appellate Tribunal concurred with the lower authorities, referencing judicial precedents that establish expenses on total renovation as capital expenditure. The Tribunal rejected the contention that these expenses were revenue in nature, highlighting the distinction between current repairs and capital expenditure. Additionally, the Tribunal invoked Explanation 1 to section 32, clarifying that while such capital expenditure on a non-owned building is not deductible as revenue expense, depreciation is allowable. Consequently, the Tribunal directed the AO to allow depreciation at the prescribed rate after providing a hearing to the assessee.

In conclusion, the appeal was partly allowed by the Appellate Tribunal, maintaining the disallowance of legal and professional expenses related to shares buy back and upholding the treatment of repair and maintenance expenses as capital expenditure while allowing depreciation on the same.