2014 (6) TMI 80 - HC - Income Tax

Deduction u/s 37 of the Act Expenses on premises taken on lease towards repairs, fixtures etc. assessee was compulsorily required to build a new shop on land which was not his own property - Held that - The nature of business prior to expenditure in question and afterwards being the same without any change, except some improvements to augment more profits in order to compete with the other competitors in the business regarding new interior designs etc. it cannot be termed as capital expenditure - There was no fresh venture by the assessee so far as the business is concerned - Intended object and the effect must be with reference to business realities - Whether advantage or benefit is for a shorter or longer period, it is immaterial - character of expenditure is alone the deciding factor thus, the stand of the revenue that the Tribunal was justified in rejecting the claim of the assessees has to be rejected - the business expenditure irrespective of creating enduring benefit or advantage even if it is a profit earning effort unless at the end of the term of lease the items on which expenditure was spent could be retrieved by the appellants-assessees, it shall not amount to capital expenditure but it can be termed only as revenue expenditure. Transfer pricing adjustment Held that - There is no justification for the revenue to ignore certain comparable cases only on the ground that those two assessees sustained losses in some years - In comparable cases produced by the assessee with respect of international transactions, the revenue has to bear in mind the case of the assessees based on the computations made in the comparable cases Decided in favour of Assessee.

Issues Involved:
1. Deduction of expenditure under Section 37 of the Income Tax Act.
2. Classification of expenditure as capital or revenue.
3. Transfer pricing adjustments for international transactions.

Detailed Analysis:

1. Deduction of Expenditure under Section 37 of the Income Tax Act:
The appellants-assessees claimed that the expenditure incurred on refurnishing, repairs, and improvements of leased premises used for business purposes should be considered as revenue expenditure and not capital expenditure. The improvements made were of a temporary nature and could not be retrieved at the end of the lease term. The Tribunal, however, confirmed the disallowance of the expenditure as capital expenses.

2. Classification of Expenditure as Capital or Revenue:
The appellants contended that the expenditure consisted of two types:
- Expenditure creating distinct capital assets like air conditioners, display cases, cupboards, removable light fittings, which could be taken away at the end of the lease.
- Expenditure on improvements like flooring, plastering, painting, electrical wiring, plumbing, and sanitary facilities, which could not be retrieved and did not result in any asset owned by the appellants.

The Tribunal's decision was challenged based on several judicial precedents. The court referred to various cases, including Empire Jute Co. Ltd. v. Commissioner of Income-Tax, Alembic Chemical Works Co. Ltd. v. Commissioner of Income-Tax, and CIT v. Infosys Technologies Ltd., to determine whether the expenditure should be classified as capital or revenue. The court concluded that the nature of the advantage in a commercial sense is the determining factor, and if the expenditure facilitates trading operations without creating a permanent asset, it should be considered revenue expenditure.

3. Transfer Pricing Adjustments for International Transactions:
The appellant in I.T.A.230 of 2013 also challenged the addition made on account of transfer pricing adjustments. The Tribunal had ignored comparable cases produced by the appellant solely on the ground that those assessees had losses in some years. The court held that the revenue should consider all comparable cases without discrimination based on the financial outcomes of the assessees.

Conclusion:
The court concluded that the expenditure incurred on improvements to leased premises, which could not be retrieved and did not result in any asset owned by the appellants, should be considered as revenue expenditure. The Tribunal's decision to classify the expenditure as capital expenditure was set aside. Additionally, the court ruled that the revenue should consider all comparable cases for transfer pricing adjustments without discrimination. All substantial questions of law were answered in favor of the assessees, and the appeals were allowed. The assessing authorities were directed to recompute the tax payable accordingly.

← Previous Next →