2024 (6) TMI 73 - HC - Income Tax

Nature of expenses - claim for deduction of the cost of repairs and additions incurred on buildings in leasehold premises - AO and FAA found that based on the description of the expenditure as given by the appellant/assessee, the expenditure was more in the nature of capital expenditure and not revenue expenditure - HELD THAT - We find force in the submission of Income Tax Department for we find that the assessing authority and the First Appellate Authority have clearly relied on the written submissions given by the assessee to find that the nature of the expenses incurred by the assessee was capital in nature. We also find that neither in the grounds of appeal before the First Appellate Authority nor before the Tribunal was there any material produced by the assessee to show that the expenses incurred by them were revenue in nature. If the assessee had in fact a case that the expenditure incurred by it was revenue in nature, then it was for the assessee to produce materials that would clearly demonstrate that the expenditure was revenue in nature. This not having been done at any stage before the First Appellate Authority or the Appellate Tribunal, we see no reason to interfere with the impugned order of the Tribunal which merely endorses the views taken by the said authorities. We reiterate that the applicability of Explanation-1 to Section 32 (1) of the IT Act has to follow an independent finding by the Assessing Authority on whether the expenditure incurred by an assessee is capital or revenue in nature. This is the ratio of the decision of the Full Bench of this Court in Indus Motors Co.P Ltd 2016 (5) TMI 472 - KERALA HIGH COURT and it is binding on all the authorities under the IT Act. Decided in favour of revenue.

Summary

Issues Involved:
The judgment involves the assessment of a claim for revenue expenditure amounting to Rs. 101.87 lakhs by M/s. Hotel & Allied Trades Pvt. Ltd. for the assessment year 2009-10, which was disallowed by the Income Tax Tribunal. The appellant raised questions regarding the justification of disallowance and the availability of evidence to support the claim.

Assessment of Revenue Expenditure Claim:
The primary issue was whether the claim of Rs. 101.87 lakhs as revenue expenditure by the appellant was allowable. The Assessing Authority and the First Appellate Authority deemed the expenditure as capital rather than revenue, disallowing the claim. The Appellate Tribunal affirmed this decision, stating that the expenditure on buildings and electrical fittings on leasehold premises was capital in nature. The Tribunal directed the allowance of depreciation on the capital component of the expenditure, partially allowing the claim.

Interpretation of Explanation-1 to Section 32 (1) of the IT Act:
The appellant contended that the Tribunal mechanically applied Explanation-1 to Section 32 (1) of the IT Act without considering the nature of the expense. The appellant referred to a previous judgment emphasizing the need to ascertain whether the expenditure was capital or revenue before applying the provision. The appellant requested a remand for a fresh consideration of the issue.

Judicial Analysis and Decision:
The Court found that the Assessing Authority and the First Appellate Authority had correctly determined the nature of the expenses based on the appellant's submissions, concluding them to be capital in nature. The Court noted the absence of evidence from the appellant to establish the revenue nature of the expenditure. Emphasizing the need for an independent finding on the nature of expenses before applying Explanation-1 to Section 32 (1) of the IT Act, the Court dismissed the appeal in favor of the revenue, upholding the Tribunal's decision. The Court reiterated the importance of following the precedent set by a Full Bench decision in similar cases under the IT Act.