2019 (7) TMI 223 - AT - Income Tax

Disallowing hoarding construction charges - capital expenditure OR revenue expenditure - construction of hoardings per sq. ft. is as high as ₹ 200/ - huge expenses were made for construction of hoarding, the same should be giving usefulness / utility for more than one financial year - income from display charges - on enquiry Inspector's report the hoarding at 113, Dilkhusha Street near Park Circus was approximately of 1200 sq. ft, huge structure, made with angles of steel and the hoarding had been there for almost 2 years similarly the other hoardings HELD THAT - The hoardings are temporary structures and are made with angles of steel and iron rods to affix them to the ground since these are vulnerable to rain, storm, theft and other damages. As such, affixation of the same using steel angles and iron rods was a necessity else the assessee would have not received any advertising orders. To receive advertising orders, these hoardings were required to be maintained by the assessee in a good quality condition. Further, in order to avoid corrosion of the structure and other adverse weathering effects, replacement of parts and other incidental expenses is regularly required to be done. It is also relevant to note that such expenditure is a recurring expenditure which is required to be incurred by the assessee regularly and the same therefore cannot be said to have given any enduring benefit to the assessee in capital field. The Inspector has based his findings in the impugned report by watching a hoarding after a time gap of three years. The said hoardings had underwent changes in this long time span of three years. Repair works and replacement of parts had taken place in the last few years as per the demand of the advertising business. As such, the structure existing on the date the Inspector visited the site can in no circumstances be compared with the structure which existing in the relevant AY, being AY 2012-13. We note that the assessee has been following this practice of claiming the hoarding expenses as revenue expenses in all the earlier years also and the same was not disturbed by the learned AO in any of the preceding years. There is no change in the accounting policies of the assessee in the current year vis a vis the earlier years, hence consistency should be maintained by the assessing officer. Apart from this, on identical facts, Coordinate Bench of Mumbai ITAT in the case of M/s Empress Advertising 2014 (7) TMI 1191 - ITAT MUMBAI has held such expenditure is a recurring expenditure which is required to be incurred by the assessee regularly and the same therefore cannot be said to have given any enduring benefit to the assessee in capital field. Applying the ratio of the above noted judicial precedents, to the facts of the assessee s case, it is abundantly clear that hoarding expenses incurred by the assessee are revenue in nature and are not capital in nature. Disallowance u/s 40A(2)(b) - salary to the wife of assessee - HELD THAT - We note that Nidhi Kejriwal, being a BSC. Graduate, has benefitted the company in a number of ways and hence, the salary of ₹ 16,000/- per month was commensurate with the type of services provided by her to the assessee firm and was not unreasonable. The AO made addition purely on surmises and conjectures without bringing comparable persons having same education and experience on record to judge fair market value of Nidhi Kejriwal services. No finding was recorded by the AO that the sum of ₹ 50,000/- is unreasonable u/s 40A(2)(b). - we delete the addition

Summary

Issues Involved:
1. Whether hoarding construction expenses are capital or revenue in nature.
2. Disallowance of ?50,000 under Section 40A(2)(b) of the Income Tax Act.

Detailed Analysis:

1. Hoarding Construction Expenses: Capital vs. Revenue Nature

Facts and Arguments:
- The assessee, engaged in the advertisement business, claimed hoarding construction charges as revenue expenditure. The Assessing Officer (AO) treated these expenses as capital expenditure, arguing that the hoardings, given their high construction cost per sq. ft. (?200), provided enduring benefits beyond one financial year. Consequently, the AO disallowed the deduction but allowed depreciation at 15%, leading to a net addition of ?14,79,000 and ?7,76,500 for two different concerns (Balaji Ads and Balaji Construction).
- The assessee argued that the hoardings were temporary structures, subject to regular maintenance and adverse weather conditions, thus justifying the expenses as revenue in nature. The AO's reliance on an Inspector's report, which was not furnished to the assessee, was also contested as a denial of natural justice.

Tribunal's Findings:
- The Tribunal noted that the AO's decision was based on the high construction cost per sq. ft., which implied durability and benefits extending beyond a year. However, the Tribunal emphasized that the hoardings were temporary and required regular maintenance due to exposure to weather and other factors.
- The Tribunal highlighted the principle of consistency, noting that similar expenses had been treated as revenue in previous years without objection from the AO.
- Citing the Apex Court's judgment in Andaman Timber Industries, the Tribunal underscored the necessity of providing the assessee an opportunity to counter the Inspector's report, which was not done, thus violating principles of natural justice.
- The Tribunal also referenced the Mumbai ITAT's decision in M/s Empress Advertising, which supported the classification of similar hoarding expenses as revenue expenditure.

Conclusion:
- The Tribunal concluded that the hoarding construction expenses were revenue in nature, facilitating business operations without acquiring any capital asset. Therefore, the additions made by the AO were deleted.

2. Disallowance under Section 40A(2)(b):

Facts and Arguments:
- The AO disallowed ?50,000 out of the total salary of ?1,92,000 paid to the assessee's wife, Smt. Nidhi Kejriwal, under Section 40A(2)(b), arguing that it was excessive compared to other employees.
- The assessee contended that Smt. Kejriwal, being the only graduate (B.Sc. Preliminary in Home Science), handled significant administrative responsibilities, justifying her salary.

Tribunal's Findings:
- The Tribunal referred to the CBDT Circular dated 06.07.1968, which advises fair and reasonable examination of expenses under Section 40A(2) to prevent tax evasion through excessive payments to relatives.
- It was noted that the AO did not determine the fair market value of the services rendered by Smt. Kejriwal or provide a basis for deeming the salary excessive.
- The Tribunal cited the Delhi High Court's judgment in CIT vs. Modi Revlon Pvt. Ltd., emphasizing that the AO must establish the fair market value and disallow only the excessive portion, which was not done in this case.

Conclusion:
- The Tribunal found that the salary paid to Smt. Kejriwal was reasonable given her qualifications and responsibilities. The disallowance of ?50,000 was deemed arbitrary and was deleted.

Final Order:
- The appeal of the assessee was allowed, with the Tribunal deleting the additions made by the AO regarding hoarding construction expenses and the disallowance under Section 40A(2)(b).