2018 (10) TMI 854 - AT - Income Tax

Disallowance on account of Repair and Maintenance expenses - nature of expenses - revenue or capital - Held that - We find that assessee has incurred expenditure on repairs and renovation in its existing premises. 76 existing make-up rooms have been repaired and renovated. From this it is evident that no new asset has come into existence. The existing make-up rooms have been renovated. The authorities below have found that the repairs are substantial, that they result in enduring benefit and that they are not current repairs. We find that as noted no new asset has come into existence. What the assessee has done is that existing make-up rooms have been renovated . This included replacement of urinal pans , removal of plaster, replacement of doors and windows, waterproofing treatment etc. In our considered opinion these expenditure cannot be said to be capital in nature and hence they are duly qualified for revenue expenditure. - decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of Repair and Maintenance expenses as capital expenditure.

Issue 1: Disallowance of Repair and Maintenance expenses as capital expenditure:

Analysis:
The Assessing Officer disallowed a sum of ?1,48,87,798 claimed as Repair and Maintenance expenses by the assessee, stating that the repairs related to existing 76 make-up rooms were of enduring nature and not recurring, hence should be treated as capital expenditure. The Assessing Officer relied on the concept of enduring benefit and allowed depreciation at 10% on the expenses. The CIT(A) upheld the disallowance, emphasizing that the renovation of make-up rooms resulted in substantial upgradation with enduring benefits, making them ineligible for treatment as current repairs.

The ITAT Mumbai, upon hearing both parties, observed that no new asset was created through the repairs and renovation; rather, existing make-up rooms were renovated. The tribunal noted that the repairs were substantial, resulting in enduring benefits and not falling under the category of current repairs. Referring to legal precedents, the tribunal highlighted that the nature of expenditure should be determined based on whether it preserves an existing asset or creates a new one. Citing the case of CIT vs. Oxford University Press, the tribunal emphasized that the mere prolongation of a building's life does not automatically classify the expenditure as capital. Additionally, referencing the case of CIT vs. Kalyanji Mavji and Co., the tribunal clarified that repair costs, even if enhancing durability, can be treated as revenue expenditure under section 37(1) and are not restricted by sections 30 and 31.

Consequently, the ITAT Mumbai allowed the assessee's appeal, ruling that the expenditure incurred for repairing and renovating existing make-up rooms qualified as revenue expenditure as it did not create a new asset or advantage, but rather maintained the existing premises for the business purpose. The tribunal deemed the expenses as wholly and exclusively laid out for business, thus eligible for deduction as revenue expenditure.

In conclusion, the ITAT Mumbai pronounced the order in favor of the assessee on 10th October 2018, allowing the appeal and overturning the disallowance of Repair and Maintenance expenses as capital expenditure.