2022 (5) TMI 539 - AT - Income Tax

Nature of expenditure - expenses of loss on account of fire - revenue or capital expenditure - HELD THAT - In the present case it is not in dispute that the assessee was not the owner of the building in which fire took place rather he is the lessee and the building premises was taken on lease. Assessee was responsible for any wear and tear, maintenance and other repairs of the building. Since the building was destroyed by the fire, so, it was the responsibility of the assessee to bring the building in the same position, therefore, the expenses incurred were revenue in nature as far as the assessee was concerned and in case any claim is received from the insurance company the same is to be reduced from these expenses or in case it will be received on later date then it is to be shown as an income at the time of receipt. For the year under consideration the assessee has incurred the expenses on account of repairs of building and electrical fittings to bring the old asset in the working condition and the other expenses which were capital in nature had already been capitalized as has been explained by the assessee to the Ld. CIT(A) vide reply dt. 13/12/2019 which has been incorporated at page no. 3 to 5 of the impugned order and has also been reproduced in former part of this order. The total expenses incurred by the assessee were amounting to Rs. 33,54,993/- against which the insurance claim settled to be received was amounting to Rs. 4,88,424/- which had been reduced by the assessee from the total expenses and net amount of Rs. 28,66,569/- was claimed as revenue expenses. In the present case the assessee is not the owner of the building and it was its duty to maintain building in the same position in which it was occupied. The assessee incurred the expenses to bring the building in the same form and no new asset came into existence rather the old building and electrical fitting were brought into workable condition, therefore, the expenses incurred by the assessee were revenue in nature and not capital in nature. We, therefore, by considering the totality of the facts set aside the impugned order and direct the AO to treat the expenses under consideration as revenue in nature. - Decided in favour of assessee.

Issues Involved:
1. Whether the expenditure of Rs. 28,66,569/- incurred by the assessee on account of fire loss should be treated as capital expenditure or revenue expenditure.

Issue-wise Detailed Analysis:

1. Nature of Expenditure (Capital vs. Revenue):
The primary issue in this appeal is whether the expenditure of Rs. 28,66,569/- incurred by the assessee due to fire loss should be treated as capital expenditure or revenue expenditure. The assessee contended that the expenditure was revenue in nature, incurred to repair the leased building and electrical fittings damaged by fire. The Assessing Officer (AO) treated this expenditure as capital in nature, citing that the damage to the building and electrical fittings was a capital loss and not a revenue loss. The AO's view was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who also considered the expenditure as capital in nature based on Sections 30 and 31 of the Income Tax Act, 1961.

2. Lease Agreement Clauses:
The assessee argued that as per Clause 8 of the lease deed, the assessee was responsible for any wear and tear, maintenance, and other repairs of the building, including losses due to calamities. The lease agreement explicitly stated that the second party (assessee) would bear the cost of repairs if any calamity or loss occurred. The CIT(A) acknowledged the lease agreement but held that the legal provisions in Sections 30 and 31 took precedence over the lease deed clauses.

3. Supporting Evidence:
The assessee provided various documents to support their claim, including the FIR lodged, fire brigade report, newspaper cuttings, intimation letter to the insurance company, insurance policy, claim form, surveyor report, claim finalization letter, and copies of major bills for repair work. These documents were submitted to substantiate that the expenditure was incurred due to fire damage and was necessary to bring the leased building back to its original condition.

4. Previous Year’s Additions:
The assessee pointed out discrepancies in the figures mentioned by the AO, stating that the additions of Rs. 43,88,370/- in the building account and Rs. 95,36,788/- in the electrical fittings account pertained to the previous assessment year (2016-17) and not the year under consideration (2017-18). The correct figures for the year under consideration were Rs. 1,14,30,197/- for the building and Rs. 35,43,567/- for electrical fittings, as per the balance sheet and depreciation chart.

5. Judicial Precedents:
The assessee cited the judgment of the Honorable Supreme Court in the case of Commissioner of Income Tax, Tamil Nadu, Madras vs. Madras Auto Service (P) Ltd. (233 ITR 468), where it was held that expenditure bringing enduring benefit but not creating a capital asset for the company should be treated as revenue expenditure. The assessee also referred to the judgment of the Honorable Madras High Court in Commissioner of Income Tax & ORS vs. Janakiram Mills Ltd. & ORS, supporting their claim that the expenditure was revenue in nature.

6. Tribunal’s Conclusion:
The Tribunal considered the submissions and evidence provided by both parties. It noted that the assessee was not the owner of the building but a lessee, and the lease deed clearly stated the assessee's responsibility for repairs. The Tribunal found that the expenses were incurred to bring the old asset back to working condition and no new asset was created. Therefore, the expenses were deemed revenue in nature. The Tribunal set aside the impugned order and directed the AO to treat the expenditure of Rs. 28,66,569/- as revenue expenditure.

Judgment:
The appeal of the assessee was allowed, and the expenditure of Rs. 28,66,569/- was directed to be treated as revenue expenditure. The order was pronounced in the open court on 19.04.2022.

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