2014 (8) TMI 104 - AT - Income Tax

Expenses incurred on temporary repairs and maintenance on leased premises treated as capital expenses Held that - The expenditure incurred by the assessee was in order to meet these business requirements - renovation expenses were in connection with modifying the cabins, cubicles, laying good marbles, painting and other related expenditure - repair / renovation work carried out at the premises which were not owned by the assessee but were taken on lease - The expenditure incurred has not created any capital asset nor it has given the benefit of enduring nature - None of the expenditure entails any structural change or extension or improvement of the building, therefore, Explanation 1 to section 32(1) will not be applicable. The nature of expenditure incurred by the assessee on the premises taken on rent was in the nature of revenue since no new asset has been created and the changes were made by the assessee for efficiently carrying on its business and the items on which expenditure was made could not be reused on vacation of premises - it cannot be said that the expenditure incurred by the assessee on repair and renovation was in the nature of capital - The premises belonged to the directors of the company who had more than 50 percent share. Whether on the basis of explanation-1 to Section 32(1) it can be said that despite being expenditure in the nature of revenue the assessee will only be entitled for depreciation Held that - Sub-section (1A) and subsequent omission of Sub-section (1A) and insertion of explanation-1 after the second proviso to Section 32(1)(iii) are brought to the statute only for the reason that in a case where capital expenditure is incurred by the assessee in respect of building not owned by him in that case there was no provision in the Act for grant of depreciation or any other deduction and to meet such hardship faced by such assessee, the benefit of depreciation was provided - The pre-condition to invoke the provision of explanation-1 after the second proviso to Section 32(1)(iii) is that expenditure itself should be capital in nature - If the expenditure by its nature itself is not capital in nature and its nature is revenue then provisions of explanation-1 after second proviso to section 32(1)(iii) will not be applicable at all - It has already been pointed out that the nature of expenditure incurred by the assessee in respect of renovation, or extension or improvement to the building not belonging to assessee are in the nature of revenue - even on the basis of explanation 1 after the second proviso to Section 32(1)(iii), the assessee cannot be denied for the deduction of impugned expenses which are revenue in nature Decided in favour of Assessee.

Summary

Issues Involved:
1. Whether the expenditure of Rs. 86,48,765/- incurred by the appellant for temporary repairs and maintenance on leased premises should be treated as capital expenditure or revenue expenditure.
2. Whether the society maintenance charges of Rs. 6,78,015/- included in the total repairs and maintenance expenses should be allowed as revenue expenditure.

Detailed Analysis:

1. Treatment of Expenditure on Repairs and Maintenance:

The primary issue is whether the expenditure of Rs. 86,48,765/- incurred by the appellant for temporary repairs and maintenance on leased premises should be categorized as capital expenditure or revenue expenditure. The Assessing Officer (AO) treated these expenses as capital expenditure based on Explanation 1 to Section 32, which pertains to depreciation on buildings. The AO allowed depreciation of Rs. 4,32,438/- and disallowed the remaining amount of Rs. 82,16,327/-. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, referencing the Tribunal's decision in the case of Free India Assurance Services Ltd. v. DCIT.

The appellant contended that these expenses were of a revenue nature, citing several precedents where similar expenditures were allowed as business expenses. The appellant argued that no new asset was created, and the expenses were necessary for effectively carrying on business activities. The leave and license agreement was for a term of 33 months, and the renovations were not reusable upon vacating the premises.

The Tribunal considered various case laws to determine the nature of the expenditure, including:
- HEDE Consultancy Pvt. Ltd.: Renovation expenses on leased premises were allowed as revenue expenditure.
- Talathi And Panthaky Associates P. Ltd.: Contribution towards repair and restoration of leased premises was considered revenue expenditure.
- CIT v. Amway India Enterprises: Expenses on improvements to leasehold premises were treated as revenue expenditure.
- CIT v. Ayesha Hospitals P. Ltd.: Expenditure on flooring, partition, etc., in leased premises was held as revenue expenditure.
- CIT v. Mehta Transport Company: Construction of a loft in leased premises was considered revenue expenditure.
- CIT v. Oxford University Press: Expenditure on repairs that did not create a new asset or advantage was treated as revenue expenditure.

The Tribunal found that the appellant did not carry out any structural changes to the building, and the nature of the expenditure was for internal modifications necessary for business operations. The Tribunal concluded that these expenses were in the nature of revenue expenditure, as no new asset or enduring benefit was created.

2. Society Maintenance Charges:

The appellant also contended that the society maintenance charges of Rs. 6,78,015/- should be allowed as revenue expenditure. Since the Tribunal decided that the entire expenditure of Rs. 86,48,765/- was revenue in nature, the question of separately allowing the society maintenance charges became redundant.

Conclusion:

The Tribunal allowed the appeal, holding that the entire expenditure of Rs. 86,48,765/- incurred by the appellant for repairs and maintenance on leased premises was revenue in nature and thus allowable as a business deduction. Consequently, the alternative ground regarding the society maintenance charges became infructuous. The Tribunal's decision was based on the principle that the expenditure did not create any new asset or enduring benefit and was necessary for the appellant's business operations.