2006 (10) TMI 117 - HC - Income Tax

Expenditure incurred on flooring and partitions, etc - Newly extended area of space - Revenue Or Capital - co-owners of the property and the directors of the assessee-company are same persons? - HELD THAT - The co-owners were admitting the rental income. They were also paying tax on the profits arising out of the hospital. The lease deed spoke of the normal requirements which the co-owners provide. The assessee was putting the building to a special use. No landlord would ever incur or undertake to bear the expenditure. Here the expenditure was incurred by the assessee on a leased property and the same has to be allowed as revenue expenditure. The Tribunal has correctly followed the judgment in the case of CIT v. Madras Auto Service P. Ltd. 1998 (8) TMI 1 - SUPREME COURT held that the expenditure incurred on construction of a leased premises by the assessee was deductible as revenue expenditure. The nature of the expenditure indicates that it is only revenue expenditure for the purpose of carrying on business. Thus, it is clear that if the lessee incurs capital expenditure on the building of the nature mentioned above, the said provision treats the building as if owned by the assessee. The Explanation is an exceptional one which permits depreciation in cases were the assessee does not own a building. In the present case, the Tribunal had given a finding that it is a revenue expenditure on the ground that the expense is incurred only towards painting, re-laying of the damaged floors, partitions, etc. This expenditure can never be considered to be a capital expenditure of the nature mentioned in the above Explanation. Hence, we find no error or legal infirmity in the order of the Tribunal and the same does not require interference. Thus, we answer the questions of law in favour of the assessee and against the Revenue and the tax case is dismissed.

Summary

Issues:
1. Whether the expenditure incurred on flooring and partitions for the newly extended area of space is revenue or capital expenditure?
2. Whether the co-owners of the property and the directors of the assessee-company being the same persons affect the nature of the expenditure?

Analysis:

Issue 1:
The Revenue appealed against the Tribunal's decision allowing the expenditure on flooring and partitions as revenue expenditure. The Revenue argued that the expenditure should be considered capital, as new infrastructures were provided, increasing the hospital's space and capacity. The Revenue contended that the Tribunal should have applied the proviso under Explanation 1 to Section 32(1) of the Income Tax Act. However, the assessee maintained that tenant-incurred expenditure is revenue and that the mentioned Explanation does not apply. The Court noted that the expenditure was towards painting, re-laying damaged floors, and partitions on a leased property. The Court cited the Supreme Court's judgment in CIT v. Madras Auto Service P. Ltd., where such expenditure on a leased premises was considered deductible as revenue expenditure. The Court concluded that the nature of the expenditure indicated it was for carrying on business, thus allowing it as revenue expenditure.

Issue 2:
The Revenue also argued that the co-owners of the property and the directors of the assessee-company being the same individuals implied collusion to evade assessability of capital expenditure. Additionally, the Revenue invoked Explanation 1 to Section 32(1) of the Act, treating the building as owned by the assessee for capital expenditure incurred. However, the Court observed that the Tribunal correctly determined the expenditure as revenue, as it was for painting, re-laying floors, and partitions, not falling under the capital expenditure specified in Explanation 1. The Court upheld the Tribunal's decision, finding no legal infirmity, and dismissed the tax case in favor of the assessee, with no costs awarded.

This detailed analysis of the judgment provides a comprehensive understanding of the issues raised, arguments presented by both parties, and the Court's reasoning leading to the final decision in favor of the assessee.