2016 (12) TMI 179 - AT - Income Tax

Disallowance of Building - Repairs, Renovation & Maintenance expenses - Held that - A perusal of the detail of expenditure reveals that the same is primarily incurred for maintenance and/or repairing/upgrading of existing structures. Though the Assessing Officer has canvassed that it results in creation of a new asset, but the details do not reflect so. Even with regard to the enduring benefit brought out by the Assessing Officer, it is to be understood that the enduring benefit in the case of repairs and maintenance may spread beyond one financial year, but that itself would not justify the characterisation of expenditure as capital in nature so long as it does not result in creation of any new asset or a benefit, in capital field. Apart therefrom, it is also to be appreciated that the expenditure in question, viz. plastering work, providing grills, granite flooring in corridors, terrace waterproofing, etc. are expenses which facilitate the upkeep of the premises and the enduring benefit, if any, is in the revenue field. Therefore, considering the fact-position, we find no reason to uphold the stand of the Revenue that the impugned expenditure is of capital in nature. Thus, the order of CIT(A) is set-aside and the Assessing Officer is directed to delete the addition. - Decided in favour of assessee. Disallowance u/s 14A - assessee had made a suo moto disallowance - Held that - It is a well settled proposition that before the Assessing Officer proceeds to determine the disallowance u/s 14A of the Act by applying the formula contained in Rule 8D of the Rules, it is imperative that a satisfaction is recorded by him with regard to the incorrectness or otherwise of the stand of assessee, having regard to its accounts. In the present case, assessee had suo moto disallowed a sum of ₹ 13,000/- and the same has been mechanically brushed aside by the Assessing Officer and instead, disallowance has been worked out in terms of Rule 8D of the Rules. The aforesaid approach is clearly inconsistent with the mechanics of Sec. 14A(2) of the Act and, therefore, the said action is hereby set-aside and Assessing Officer is directed to retain the disallowance to the extent of ₹ 13,000/- suo moto disallowed by the assessee itself. Also assessee raised a point of law to the effect that the formula specified in Rule 8D(2)(iii) of the Rules prescribing disallowance @ 0.5% of the average value of investments should only take into consideration those investments on which assessee has received exempt income and not the investments on which no exempt income has been received. The aforesaid point of law raised by the assessee is kept open as assessee has been allowed the necessary relief otherwise - Decided in favour of assessee. Life membership fee treated as revenue receipt - Held that - The said issue is a recurring issue and in the past years, the same has been held in favour of the assessee following the judgment of the Hon ble Bombay High Court in assessee s own case reported in (1979 (1) TMI 5 - BOMBAY High Court).

Summary

Issues:
1. Disallowance of building repair expenses
2. Disallowance under section 14A
3. Treatment of membership fees as revenue receipt

Issue 1: Disallowance of building repair expenses:
The dispute revolves around treating an amount debited under 'Building repairs, renovation, and maintenance' as capital expenditure. The Assessing Officer considered the expenditure as capital, leading to an addition to the returned income. The assessee argued that the expenditure was revenue in nature and not capital. The ITAT analyzed the details of the expenditure and concluded that the expenses were primarily for maintenance and did not result in the creation of a new asset. The enduring benefit, if any, was in the revenue field. Citing relevant case laws, the ITAT held that the expenditure was revenue and not capital. Consequently, the ITAT directed the Assessing Officer to delete the addition, ruling in favor of the assessee.

Issue 2: Disallowance under section 14A:
The Assessing Officer disallowed a sum under section 14A, which was higher than the amount voluntarily disallowed by the assessee. The ITAT noted that the Assessing Officer computed the disallowance without recording satisfaction as required by law. The ITAT emphasized that the Assessing Officer must justify the disallowance before applying Rule 8D of the Income Tax Rules. As the Assessing Officer did not follow the correct procedure and mechanically applied Rule 8D, the ITAT set aside the disallowance and directed the retention of the amount voluntarily disallowed by the assessee. Additionally, a legal point raised by the assessee regarding the computation of disallowance under Rule 8D(2)(iii) was kept open for future consideration.

Issue 3: Treatment of membership fees as revenue receipt:
The only issue in the Revenue's appeal pertained to the treatment of life membership fees as revenue receipts. The CIT(A) had ruled in favor of the assessee based on past judgments and precedents. The ITAT noted that previous decisions, including those by the Tribunal, had consistently favored the assessee on this issue. Citing these precedents, the ITAT upheld the CIT(A)'s decision and dismissed the Revenue's appeal. Consequently, the appeal of the assessee was allowed, and that of the Revenue was dismissed.

This comprehensive analysis of the judgment highlights the key issues, arguments presented, legal interpretations, and the final decisions rendered by the ITAT in each aspect of the case.