2014 (4) TMI 117 - HC - Income Tax

Rejection of revision petition u/s 264 of the Act Claim of expenses disallowed by the AO Held that - The owners of the property are the partners in their individual capacity and as such the enduring benefit of conversion from residential to commercial enures to the owners the advantage and benefit that the property has acquired by payment of conversion charges will continue to enure to the individual partners irrespective of the assessee discontinuing to do the business of guest house from the said property - Since the advantage of enduring nature is attached to the property the benefit of the same will enure to the owners of the property - The expenditure for acquiring the advantage is an expenditure incurred purely for the individual partners - There is no justification and reason why the assessee firm made the payment and on what terms/ basis payment was made - The expenditure cannot be treated as running business expenditure and cannot be claimed as a deduction u/s 37 of the Act by the assessee. Individual owners and the partnership firm are two distinct tax entities for the purpose of the Act and are liable to pay income tax on their income after reducing revenue expenditure - the nature of expenditure is clearly capital and incurred on account of the individual partners and is neither a capital nor revenue expenditure of the partnership firm respondent assessee thus there is no infirmity in the order rejecting the application of the assessee u/s 264 of the Act Decided against Assessee.

Summary

Issues:
1. Disallowance of expenses under Section 264 of the Income Tax Act, 1961.
2. Claiming conversion charges and property tax as revenue expenditure.
3. Determination of enduring benefit and nature of expenditure - capital or revenue.

Analysis:

Issue 1: Disallowance of expenses under Section 264 of the Income Tax Act, 1961
The petitioner, a partnership firm, challenged the order disallowing expenses of Rs. 12,26,508 under Section 264 of the Income Tax Act, 1961. The Commissioner of Income Tax partly allowed the revision petition, permitting the annual property tax as an expenditure but disallowing the conversion charges. The petitioner contested this decision, arguing that the conversion charges should also be considered as revenue expenditure.

Issue 2: Claiming conversion charges and property tax as revenue expenditure
The petitioner claimed that the conversion charges and property tax were booked as revenue expenditure in their accounts. The property, a residential building, was used for operating a guest house, and the expenditure related to its maintenance was considered as revenue expenditure. However, the Assessing Officer disallowed the conversion charges, leading to the petitioner filing a revision petition under Section 264 of the Act.

Issue 3: Determination of enduring benefit and nature of expenditure - capital or revenue
The Court analyzed the nature of the expenditure, focusing on the enduring benefit derived from the conversion of the property from residential to commercial use. It was highlighted that the conversion charge was a one-time payment resulting in an enduring advantage attached to the property. The Court emphasized that the enduring benefit enured to the individual partners who owned the property, not the partnership firm. Therefore, the expenditure was deemed as capital expenditure, benefiting the individual partners rather than the firm. The Court concluded that the nature of the expenditure was capital and not a revenue expense of the partnership firm. It was emphasized that the advantage acquired through the conversion charges was attached to the property and would benefit the owners individually, even if the firm discontinued its business operations.

In the final judgment, the Court dismissed the petition, stating that the expenditure incurred on conversion charges was capital in nature and not a revenue expense of the partnership firm. The Court emphasized the distinction between the individual owners and the partnership firm for tax purposes, highlighting that the enduring benefit of the conversion charges was linked to the property owners. The decision under Section 264 of the Act, disallowing the expenditure, was upheld based on the capital nature of the expense incurred by the individual partners.