2017 (3) TMI 1324 - AT - Income Tax

Capitalization of expenditure under repair and maintenance account - whether entire expense is incurred to maintain existing assets and no new asset has come into existence ? - Held that - It is not in dispute that the assessee was already having the asset which was reconstructed and repaired. The matter of controversy has duly been covered by the above said law in which such kind of repair has been treated as revenue in nature. In view of the said circumstances we are of the view that the finding of the CIT(A) on this issue is wrong against law and facts and is not liable to be sustainable in the eyes of law, therefore, finding of the CIT(A) on this issue has been ordered to be set aside and the expenditure incurred by the assessee on account of repair and renovation etc. of the Mumbai office and the amount of which was paid to M/s. Romi Interior has been allowed as revenue expenditure. Accordingly, this issue is decided in favour of the assessee against the revenue. TDS u/s 195 - Disallowance u/s.40(a)(ia) - non deduction of TDS on professional fee - non taxability in India under India - U.K. DTAA - Held that - On appraisal of the Article 17 we are of the view that the same is nowhere applicable in the present case being Mr. Arnold Allen nowhere received the said amount in the capacity as a member of Board of Director of the company. He received the said amount on account of service rendered by him which is professional in nature. There is no iota of evidence on record to which it can be assumed that Mr. Arnold Allen was having fixed place in India. No doubt the said payment falls in view of Article 15 of the Double Taxation Avoidance Agreement and accordingly, this payment is not liable to be taxed in India. Accordingly, this issue is decided in favour of the assessee against the revenue.

Summary

Issues Involved:
1. Capitalization of repair and maintenance expenses.
2. Disallowance of professional fees under Section 40(a)(ia) of the Income Tax Act, 1961.

Detailed Analysis:

ISSUE NO.1: Capitalization of Repair and Maintenance Expenses
The assessee contested the addition of ?11,98,339/- after allowing depreciation of ?2,11,471/-. The Assessing Officer (AO) capitalized ?14,09,811/- of repair and maintenance expenses, treating it as capital in nature. The assessee argued that these expenses were for maintaining existing assets and should be treated as revenue expenses. The expenses included repairs of sliding windows, painting, fixing blinds, and flooring, paid to M/s. Romi Interior for the Mumbai office.

The Tribunal noted that similar expenses have been treated as revenue in nature by the Hon'ble Bombay High Court in CIT Vs. Talathi and Panthaky Associated Pvt. Ltd. and CIT Vs. Hede Consultancy Pvt. Ltd., as well as by the ITAT Chandigarh bench in M/s. IDS Infotech Ltd. Vs. DCIT. It was established that the assessee was maintaining existing assets, and no new asset came into existence. Consequently, the Tribunal concluded that the CIT(A)'s finding was incorrect and not sustainable in law. Therefore, the expenditure incurred by the assessee was allowed as revenue expenditure, and this issue was decided in favor of the assessee against the revenue.

ISSUE NO.2: Disallowance of Professional Fees Under Section 40(a)(ia)
The assessee challenged the disallowance of professional fees of ?3,90,025/- paid to Mr. Arnold Allen under Section 40(a)(ia) of the Act. The assessee argued that under Article 15 of the Double Taxation Agreement (DTA) between India and the U.K., the professional fees were not taxable in India since Mr. Arnold Allen did not stay in India for more than 90 days.

The Tribunal examined Article 15 of the DTA, which states that income from professional services is taxable in the resident state unless the individual stays in the other state for more than 90 days or has a fixed base there. Since Mr. Arnold Allen did not meet these conditions, the fees were not taxable in India. The Tribunal also referred to the Supreme Court's decision in CIT Vs. P.V.A.L. Kulandagan Chettiar, which held that DTA provisions override the Act's provisions. The Tribunal found no evidence suggesting that Mr. Arnold Allen had a fixed place in India. Therefore, the Tribunal concluded that the fees were not taxable in India under Article 15 of the DTA, and this issue was decided in favor of the assessee against the revenue.

ITA NO.6438/MUM/2014:
The facts and issues in this appeal were similar to those in ITA No.5808/M/2013, with the only difference being the amount of professional fees disallowed, which was ?3,81,200/-. The Tribunal applied the same reasoning and decided this issue in favor of the assessee against the revenue.

Conclusion:
Both appeals filed by the assessee were allowed, with the Tribunal ruling in favor of the assessee on both issues: the capitalization of repair and maintenance expenses and the disallowance of professional fees under Section 40(a)(ia) of the Income Tax Act, 1961. The order was pronounced in the open court on 23rd March 2017.