2017 (7) TMI 817 - HC - Income Tax

Depreciation claim - holding the Capital Expenditure incurred by the Assessee on leased premises as Revenue Expenditure - Held that - This Court has observed that in order that Explanation I is attracted, it is necessary that any capital expenditure is incurred by the assessee. It is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32. It is trite that explanation cannot read dehors the provision. The explanation is in aid to the provision. The expenses as are culled out in the order of the Tribunal are sufficient to imply that same are Revenue in nature and not capital. The expenses are in the nature of building maintenance charges to the society, labour charges, charges for carpenter work, plumbing work, masonry work, pending labour charges and provisional fees. Tribunal has rightly considered the expenses as Revenue in nature

Summary

Issues:
Interpretation of Explanation 1 to Section 32(1) of the Income Tax Act, 1961 regarding capital expenditure on leased premises being treated as revenue expenditure.

Analysis:
The appeal in question pertains to the Assessment Year 2008-09 and revolves around the interpretation of Explanation 1 to Section 32(1) of the Income Tax Act, 1961. The Appellant's counsel argues that the expenses incurred by the Assessee, who is a tenant over the premises, are capital in nature due to legal fiction deeming the tenant as the owner under Explanation 1. The Appellant contends that the Tribunal erred in treating the expenses as revenue expenditure, emphasizing that the expenses are clearly capital in nature. The Appellant's position is that the Tribunal did not properly consider Explanation 1 in its decision-making process.

On the other hand, the Respondent's counsel supports the Tribunal's order and cites a judgment of the Division Bench of the Court in a similar case. The Respondent argues that the expenses in question, such as building maintenance charges, labour charges, and other related costs, are revenue in nature, not capital. The Respondent relies on the precedent set by the Division Bench judgment to support their stance.

The Court, after considering the arguments presented by both parties, delves into the interpretation of Explanation 1 to Section 32(1) of the Act. The Court refers to the previous judgment in the case of Talathi and Panthaky Associates Pvt. Ltd., where it was established that Explanation 1 creates a deeming fiction allowing capital expenditure to be treated as depreciation for the benefit of the assessee. The Court emphasizes that the explanation cannot be read separately from the provision; it exists to aid the provision. The Court concludes that the expenses listed in the Tribunal's order, including building maintenance charges and various labor-related costs, are indicative of revenue nature rather than capital.

Ultimately, the Court upholds the Tribunal's decision, ruling that the expenses in question are revenue in nature based on the detailed breakdown provided. The Court finds no substantial question of law warranting further consideration and dismisses the appeal accordingly, without imposing any costs on either party.