2006 (9) TMI 219 - AT - Income Tax

Disallowance of a sum u/s 37 - Expenses incurred on repairs and maintenance of lease-hold premises is Capital Or Revenue - leased out for a period of three years - applicability of section 32(1A) - Addition u/s 115JA - Provision for Assets versus Provision for Liability - HELD THAT - In the case before us the expenditure is predominantly related to what is by virtue of the provisions of Explanation 1 to section 32(1), a fixed capital asset of the assessee and indeed so described in the accounts of the assessee. This distinction is quite clearly demarcated by Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT 1980 (5) TMI 1 - SUPREME COURT . Once the expenditure is at the root of a fixed capital asset, the pertinent question to ask is whether the expenditure is on maintenance, repairs or restoration of the asset already in existence or the expenditure is with the objective to enhance or value add to that asset. In the instant case the expenditure has been incurred in the very first year of the acquisition of the premises. The expenditure has been incurred by the assessee so as to make the premises more posh and impressive befitting the business profile of the assessee-company. The expenditure has been incurred with a view to bring a fresh advantage that is not already there. Such an expenditure would be an expenditure in the nature of capital expenditure, as held by Hon'ble Bombay High Court in the case of New Shorrock Spg. Mfg. Co. Ltd. v. CIT 1956 (2) TMI 54 - BOMBAY HIGH COURT . We find that the expenditure has been incurred as a part of overall enhancement and improvement of the available premises with a view to acquire a fresh benefit or advantage. For that purpose the assessee has incurred an expenditure by way of interior work at Delhi and by way of interior work at Bombay. Besides an expenditure has been incurred on roof insulation. Apart from these expenses the other expenses cannot be said to be related to building premises, except that they have been installed at the leased premises. The expenditure is on new installation for the purpose of heating and cooling of the premises and for the purpose of communication network and demarcation of the premises among employees. The expenditure is in the nature of new installation and not in the nature of repairs and renovation. During the course of hearing before us the assessee has argued that the expenditure was on wires, hubs, switches, modems, etc . We do not agree. The expenditure is to bring into existence a sophisticated communication system to bring about connectivity of the assessee's office in Delhi and Bombay with other establishments of the assessee in India and abroad. The expenditure is not merely on wires and cables etc. but expenditure is on installation of sophisticated network. Taking into consideration all these aspects we hold that the assessee was not at all justified in treating such expenditure as part of repairs and renovation. Thus, we reverse the order of the learned CIT (Appeals) and restore the treatment given by the Assessing Officer in the assessment order in relation to expenditure. Expenditure paid for building of compound wall of the school and the provision of chairs, tables and stationery - In the case of Bharat Commerce Industries Ltd 1989 (8) TMI 30 - DELHI HIGH COURT , allowed deduction to that assessee of donation made to the school because majority of the children studying in that school were children of the employees of that assessee. In the instant case the learned A.R. of the assessee has orally said so during the course of hearing before us; but he has placed reliance on no material whatsoever in that behalf. We, therefore, restore this issue to the file of the learned Assessing Officer with the direction to grant the assessee an opportunity to establish that majority of the students in that school were children of assessee's employees. Thereafter the learned Assessing Officer may decide this issue afresh in accordance with law. As to the contributions made by the assessee for sponsoring International Conference on clean technologies and for hiring a stall at India Paint Conference and for membership fee of Crop Protection Association , these are expenses related to the business being carried on by the assessee and, therefore, the expenditure was incurred for the purposes of the business of the assessee. There is no reason to hold that these expenses were incurred for considerations other than business purpose of the assessee. Expenditure for purchase of jerseys bearing assessee's logo is also an expenditure in the nature of advertisemen t and, therefore, allowable as business expenditure. We hold that the learned CIT (Appeals) erred in allowing the expenditure paid towards Garba festival in Barodaas business expenditure. The expenditure was in the nature of donation. We hold accordingly. Tax liability u/s 115JA - Disallowance of the sum being provision for doubtful debts and being provision for damage in stock - We find that the learned Assessing Officer has proceeded on an entirely incorrect basis because both the provisions related to the assets and not any liabilities incurred by the assessee. Therefore, there was no question of these amounts representing any unascertained liability. The learned Assessing Officer otherwise did not enquire into the matter and there is no material to hold that these amounts have been arbitrarily provided for by the assessee. Thus, we hold that addition of these amounts to book profit is without any basis. We, therefore, decline to interfere in the order of the learned CIT (Appeals) in this behalf. In the result, this appeal is partly allowed.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 3,19,93,825/- as expenses incurred on repairs and maintenance of lease-hold premises.
2. Disallowance of Rs. 6,88,150/- claimed as business expenditure.
3. Disallowance of Rs. 4,00,178/- as provision for doubtful debts and Rs. 41,73,107/- as provision for damaged stock while computing book profit under section 115JA.

Detailed Analysis:

1. Deletion of the addition of Rs. 3,19,93,825/- as expenses incurred on repairs and maintenance of lease-hold premises:
The assessee claimed a deduction of Rs. 3,19,93,825/- under 'Repairs and maintenance on lease-hold premises', relying on the Supreme Court judgment in CIT v. Madras Auto Services (P.) Ltd. The Assessing Officer (AO) found that the expenditure had been capitalized in the books and allowed depreciation instead, rejecting the 100% deduction claim. The CIT (Appeals) held the expenditure as revenue, facilitating better utilization of lease-hold premises, citing various judgments including L.H. Sugar Factory & Oil Mills (P.) Ltd. and Shriram Refrigeration Industries Ltd. The ITAT upheld the AO's treatment, emphasizing that the expenditure was capital in nature as it brought new assets into existence and was not merely for repairs. The Tribunal noted that the premises were leased for nine years with possible renewals, and the expenditure was to enhance the premises, thus capital in nature.

2. Disallowance of Rs. 6,88,150/- claimed as business expenditure:
The AO disallowed Rs. 6,88,150/- paid to various entities, including educational institutes and conferences, on the ground that they had no direct bearing on the business. The CIT (Appeals) allowed the expenditure, relating it to business promotion and advertisement, citing the Delhi High Court judgment in CIT v. Bharat Commerce & Industries Ltd. The ITAT restored the issue of Rs. 1,50,000/- paid to Navrachan Education Institute to the AO for verification of the nexus with the assessee's business. Other expenditures were upheld as business-related, except Rs. 10,000/- for the Garba festival, which was treated as a donation.

3. Disallowance of Rs. 4,00,178/- as provision for doubtful debts and Rs. 41,73,107/- as provision for damaged stock while computing book profit under section 115JA:
The AO added these provisions to the net profit under clause (c) of Explanation to section 115JA, treating them as unascertained liabilities. The CIT (Appeals) reversed this, holding them as ascertained liabilities, citing the Bombay High Court judgment in CIT v. Echjay Forgings (P.) Ltd. and the Supreme Court judgment in Apollo Tyres Ltd. v. CIT. The ITAT upheld the CIT (Appeals), noting that the provisions related to assets, not liabilities, and the AO did not provide a basis to treat them as unascertained.

Conclusion:
The ITAT partly allowed the appeal, upholding the AO's treatment of the Rs. 3,19,93,825/- expenditure as capital and restoring the issue of Rs. 1,50,000/- payment to Navrachan Education Institute to the AO. Other business expenditures were upheld as allowable, except the Rs. 10,000/- donation. The ITAT also upheld the CIT (Appeals) on the treatment of provisions for doubtful debts and damaged stock in computing book profit under section 115JA.