2017 (2) TMI 985 - AT - Income Tax

Expenditure on crockery cutlery utensils and other consumables - revenue or capital expenditure - Held that - These are necessary expenditure required to be incurred for the purpose of running of the restaurant and resort. The Ld. CIT appeal has held that out of a sum of ₹ 463916/- , ₹ 331404/- is considered to be capital in nature. The nature of the such expenditure are children game items. In our view such expenditure cannot be held to be capital in nature. Further with respect to the kitchen equipments such as cutlery of staff cafeteria and kitchen utensils cannot also be held to be capital expenditure because of the reason that the restaurant and the resort has been restarted during the year. It is not the case of the revenue that these are the new purchases for starting of the new restaurants and resorts. Furthermore a total claim of ₹ 1794501/- on account of expenses on testing kits, tools, tool bags etc which are been purchased for the resort area as it has become operational during the year under consideration and therefore the Ld. CIT appeal has held them to be capital expenditure and not revenue expenditure. We do not subscribe to the view of the Ld. CIT A as the facility tools and materials for resorts are small items which are required for the day to day use in resort. Such as housekeeping items of dustbins holders garbage dustbins etc are also held to be a capital expenditure. As the nature of expenditure incurred by the assessee no capital asset has come into existence but are the day today expenditure or minor expenditure for running business which is already in existence, such expenditure are incurred. According to us these expenditure cannot be held to be capital in nature and therefore we reverse the decision of Ld. CIT appeal in holding that the sum of ₹ 3192313/- is capital expenditure. In the result ground of the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of ?6,55,18,642/- on account of expenditure incurred on repairs of leased premises.
2. Disallowance of ?3,35,33,933/- on account of revenue expenses claimed on crockery, cutlery, utensils, etc.
3. Deletion of disallowance of ?10,00,51,049/- based on documents retrieved during survey proceedings.
4. Deletion of penalty under section 271(1)(c) amounting to ?2,33,55,000/-.

Detailed Analysis:

1. Disallowance of ?6,55,18,642/- on Account of Expenditure Incurred on Repairs of Leased Premises:
The assessee claimed this expenditure as revenue in nature, asserting that it was incurred for repairs and renovations on leased premises without making structural changes. The Assessing Officer (AO) treated it as capital expenditure, noting the substantial nature of the work, including masonry, electrical, and HVAC works. The CIT (A) upheld the disallowance, applying Explanation 1 to section 32(1)(ii), which allows depreciation on capital expenditure incurred on leased premises. The Tribunal found that the CIT (A) did not examine whether the expenditure was indeed capital in nature and set aside the issue to the CIT (A) for fresh examination, directing that if found to be capital expenditure, depreciation should be allowed; otherwise, it should be allowed as revenue expenditure under section 30(a)(i).

2. Disallowance of ?3,35,33,933/- on Account of Revenue Expenses Claimed on Crockery, Cutlery, Utensils, etc.:
The AO disallowed these expenses, treating them as capital expenditure. The CIT (A) partially upheld the AO's decision, disallowing ?31,92,313/- as capital expenditure. The Tribunal reversed the CIT (A)'s decision, noting that these items were consumables necessary for the day-to-day operations of the business and should be treated as revenue expenditure. The Tribunal emphasized that no capital asset came into existence from these expenses, and they were essential for running the business.

3. Deletion of Disallowance of ?10,00,51,049/- Based on Documents Retrieved During Survey Proceedings:
The AO made this disallowance based on discrepancies found in documents retrieved during a survey. The CIT (A) deleted the disallowance after the assessee provided a reconciliation statement that was not disputed by the AO. The Tribunal upheld the CIT (A)'s decision, noting that the reconciliation showed no discrepancies, and the AO did not provide any adverse comments on it.

4. Deletion of Penalty Under Section 271(1)(c) Amounting to ?2,33,55,000/-:
The AO imposed this penalty based on the disallowances of ?6,55,18,642/- and ?31,92,313/-. The CIT (A) deleted the penalty, citing decisions from the jurisdictional High Court and the Supreme Court. The Tribunal upheld the deletion of the penalty related to ?31,92,313/- as the corresponding disallowance was also deleted. For the penalty related to ?6,55,18,642/-, the Tribunal set aside the issue to the AO for fresh consideration after the CIT (A) re-examines the nature of the expenditure.

Conclusion:
The Tribunal provided detailed directions for re-examination of the nature of the disputed expenditures and upheld the deletion of certain disallowances and penalties, emphasizing the need for proper verification and adherence to legal precedents. The appeals were partly allowed, with specific issues remanded for further examination.