2013 (8) TMI 751 - AT - Income Tax

Revenue or Capital expenditure - Expenditure on renovation work - CIT allowed depreciation - Whether the said expenditure incurred by the assessee to renovate the said premises is to be allowed as capital expenditure or as a revenue expenditure - Held that - On perusal of the agreement entered by the assessee, it is observed from the Clause 3.1 that none of the party is entitled to terminate this agreement during the said lock-in-period of 24 months beginning from 9.2.2007 till 8.2.2009. The above terms and conditions of the agreement itself establishes that the first lease agreement entered into by the assessee with its sister concern, a partnership firm to take the said premises on rent on monthly rent of ₹ 3000/- and thereafter spent the said amount of ₹ 59,65,000/- in the Financial Year relevant to the year under consideration and let out the said premises at monthly rent of ₹ 15,00,000/- appears to be a colourable device - expenditure has been incurred by the assessee for complete renovation of the building to suit the requirement of licensee - Said expenditure cannot be said to be a revenue expenditure but it is a capital expenditure giving enduring benefits to the assessee in the form of regular receipt of monthly rent and interest free refundable security deposits - CIT(A) has rightly held that the said expenditure incurred by the assessee in relation to the premises under consideration for complete renovation to suit the requirements of licencee is a capital expenditure and the assessee is entitled to depreciation - Explanation to section 32(1) of the Act also stipulates that all the expenditures incurred by the assessee in relation to lease premises for renovation or extension or improvement is entitled to depreciation as is shown by the assessee - Decided against Assessee. Disallowance of expenditure incurred on repairs to Air conditioner - Held that - expenditure has been incurred by the assessee towards cost of new compressor and to replace old damaged one, therefore, no new asset has come into existence. The said expenditure is revenue in nature as expenditure has been incurred to replace the damaged compressors of existing Air- conditioners - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of expenditure incurred on repairs to the premises taken on rental.
2. Disallowance of expenditure incurred on repairs to air conditioners.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure on Repairs to Premises:

The primary issue revolves around the disallowance of Rs. 56,67,543/- claimed by the assessee as revenue expenditure for repairs on rented premises. The assessee, engaged in manufacturing drug/pharma products, had its total turnover increased by 13.8%, while "other operating expenses" surged by 27.27%. The AO scrutinized these expenses and found that the assessee had claimed capital expenditure as revenue expenditure. Specifically, the assessee debited Rs. 49,52,153/- for building repairs and Rs. 20,61,093/- for other repairs under "Other Operation Expenses." The AO concluded that the repairs were capital in nature, providing enduring benefits, and thus, should be capitalized. Consequently, the AO allowed depreciation at 5% on the capitalized amount and disallowed the remaining Rs. 56,67,543/-, adding it back to the assessee's total income.

Upon appeal, the CIT(A) upheld the AO's decision, stating that the expenses were major repairs and renovations, making the premises suitable for the licensee. The CIT(A) cited Explanation 1 to Section 32(1), which allows depreciation on expenditures for renovation or improvement of leased premises.

The Tribunal observed that the assessee had taken the premises on lease from a sister concern for Rs. 3,000/- per month and later renovated it for Rs. 59,65,835/-. Post-renovation, the premises were leased to S. Kumar Nationwide Ltd. for Rs. 15,00,000/- per month. The Tribunal concluded that the expenditure was capital in nature, providing enduring benefits in the form of substantial rental income and refundable security deposits. The Tribunal upheld the CIT(A)'s decision, noting that the cited cases by the assessee were not relevant as they involved expenditures for business advantages, not for creating income sources.

2. Disallowance of Expenditure on Repairs to Air Conditioners:

The second issue pertains to the disallowance of Rs. 32,230/- for repairs to air conditioners, specifically for replacing damaged compressors. The Tribunal found that the expenditure was for replacing old, damaged compressors and did not result in a new asset. Therefore, the expenditure was deemed revenue in nature. The Tribunal allowed this ground of appeal, directing the AO to withdraw the depreciation allowed on this amount.

Conclusion:

The appeal was allowed in part. The Tribunal upheld the disallowance of the expenditure on premises repairs as capital expenditure, while it allowed the expenditure on air conditioner repairs as revenue expenditure. The order was pronounced in the open court on 5th July, 2013.