2014 (12) TMI 299 - AT - Income Tax

Assessment u/s 153A - Additions and disallowance made No incriminating material found during search Jurisdiction - Held that - Section 153A starts with a non-obstante clause relating to normal assessment procedure which is covered by Sections 139, 147, 148, 149, 151 and 153 of the Act in respect of searches carried out after 31.5.2003 - These sections, the applicability of which has been excluded, relate to returns of income, assessment and reassessment provisions - as per the provisions of section 153A of the Act, the AO is bound to issue notice to the assessee to furnish returns for each AY falling within six AYs immediately preceding the assessment year relevant to the previous year in which the search u/s 132 of the Act or requisition u/s 132A of the Act, was made as held in CIT Versus ANIL KUMAR BHATIA 2012 (8) TMI 368 - DELHI HIGH COURT - where a search is carried out u/s 132 or a requisition u/s 132A of the Act, the AO shall issue notice requiring the person searched to furnish his return of income in respect of each AY relevant to the previous year in which such search is conducted or requisition is made - the AO gets jurisdiction for passing orders u/s 153A of the Act, once search action is initiated, whether or not any incriminating material is found during the course of search action. Scope of assessment u/s 153A Held that - The jurisdiction to issue notices u/s 153A cannot be equated with the scope of assessment as held in Assistant Commissioner of Income-tax (CC) 45 Versus Pratibha Industries Ltd. 2012 (12) TMI 760 - ITAT MUMBAI - where incriminating material relating to the earning of income not declared to the Department is found in the course of search, then there is no dispute as to the jurisdiction as well as the scope of assessment where an assessment proceedings for any AY is pending on the date of search, then proceedings relating to that assessment will abate and the scope of assessment will be wide enough to include issues emerging from abated proceedings as well as issues emerging from seized incriminating material Following the decision in M/s CANARA HOUSING DEVELOPMENT COMPANY Versus THE DEPUTY COMMISSIONER OF INCOME TAX 2014 (8) TMI 642 - KARNATAKA HIGH COURT - once the assessment is reopened, the AO can take note of the income disclosed in the earlier return, any undisclosed income found during the course of search and also any other income which is not disclosed in the earlier return of income OR which is not unearthed in the course of search u/s 132 of the Act, in order to find out and determine what is the total income of each year and then pass the order of assessment Decided against assessee. Treatment of expenses on renovation and cost of improvement of building leased Capital or revenue expenses Held that - The assessee has taken the hotel on lease - the assessee has incurred expenditure on renovation of plant design system, computer cabling, fire detection and alarm system, card access system, plumbing and air conditioning work, electrical works, fixing of carpets, interior work, etc. - after incurring the expenditure on the leased premises, the assessee has neither obtained any enduring benefit nor has any new capital asset has come into existence - The assessee continued to run the hotel in the very same leased premises - expenses incurred was only for carrying on the business and was an integral part of the profit earning process - The nature of the work undertaken by the assessee is to carry on the business and not obtain any asset - no capital asset of an enduring nature came into existence - the assessee has not acquired any asset / income earning apparatus - the expenditure incurred for acquisition of an asset is a capital expenditure and expenditure incurred in the process of earning profit is revenue expenditure - the assessee incurred the expenditure for efficient running of the business and therefore the expenditure incurred is revenue in nature - the expenditure incurred by the assessee, the hotel remains a hotel and the capacity does not increase - assessee has not obtained any enduring advantage in the capital field - Therefore, the expenditure incurred facilitated the assessee to carry on its business effectively and more profitably - the expenditure incurred by the assessee has to be treated as revenue in nature. Whenever an expenditure was incurred in the process of earning profits it has to be allowed as revenue expenditure - the expenditure was incurred for renovation - These expenses were incurred only for the purpose of carrying on day to day business and earn profits and do not result in the bringing into existence of any capital asset - CIT(A) was not right in upholding the disallowance of the expenditure by holding it as capital in nature the order of the CIT(A) is set aside and the assessee s claim for deduction of expenditure incurred towards renovation of plant design system, computer cabling, fire detection and alarm system, plumbing, air conditioning work, electrical works, interior work etc. on the hotel / building taken on lease is allowed Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer under section 153A in the absence of incriminating material.
2. Treatment of expenditure on renovation and improvement of leased buildings as capital or revenue expenditure.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer under section 153A in the absence of incriminating material:

4.1 The assessee challenged the jurisdiction of the Assessing Officer (A.O.) to make additions/disallowances under section 153A of the Income Tax Act, 1961, in the absence of any incriminating material found during the search. The assessee contended that since no incriminating evidence was found at the time of search relating to the renovation and improvement expenditures, the additions/disallowances were not warranted.

4.2 The assessee argued that no assessments for the years 2005-06 to 2008-09 were pending on the date of the search (20.11.2009). Therefore, without any incriminating material, the A.O. was not justified in making additions/disallowances. The assessee relied on various judicial pronouncements, including CIT v. Anil Kumar Bhatia (2012) and Jain Steel v. ACIT (2013), to support this contention.

4.3 The Departmental Representative argued that the A.O. was empowered to make additions/disallowances under section 153A, irrespective of the presence of incriminating material, as per the provisions of the Act.

4.3.1 The Tribunal considered the decision of the Hon'ble High Court of Karnataka in Canara Housing Development Co. v. DCIT, which held that the A.O. can assess or reassess the total income for the six assessment years immediately preceding the search, irrespective of whether any incriminating material was found. The Tribunal noted that section 153A starts with a non-obstante clause, overriding other sections like 139, 147, 148, 149, 151, and 153.

4.3.9 Respectfully following the decision of the Hon'ble High Court of Karnataka, the Tribunal held that the A.O. can take note of the income disclosed in earlier returns, any undisclosed income found during the search, and any other income not disclosed earlier or unearthed during the search, to determine the 'total income' for each year. Therefore, the grounds of appeal raised by the assessee challenging the jurisdiction of the A.O. were dismissed for all four assessment years.

2. Treatment of expenditure on renovation and improvement of leased buildings as capital or revenue expenditure:

5.1 The assessee contended that the expenditure incurred on the renovation and improvement of leased hotel buildings should be treated as revenue expenditure. The assessee argued that the expenditure was necessary for carrying on its business efficiently and did not result in the creation of any new asset or enduring benefit.

5.2.1 The A.O. treated the expenditure as capital in nature, invoking Explanation 1 to section 32 of the Act, and allowed depreciation on the capitalized amount. The CIT(A) upheld this view, noting that the expenditure resulted in enduring benefits and was therefore capital in nature.

5.3.1 The assessee argued that the expenditure was incurred in the process of earning profits and did not create any new capital asset. The assessee relied on judicial pronouncements, including CIT v. Madras Auto Services (P) Ltd. (1998) and CIT v. Haridas Bhagath & Co. (P) Ltd. (1999), which held similar expenditures as revenue in nature.

5.4.1 The Tribunal considered the legislative history and purpose of Explanation 1 to section 32, which was introduced to allow depreciation on capital expenditure incurred on leased premises. The Tribunal noted that if the expenditure is revenue in nature, it should be allowed as such, irrespective of Explanation 1 to section 32.

5.4.7 The Tribunal found that the expenditure incurred by the assessee did not result in any enduring benefit or new asset. The expenditure was necessary for the efficient running of the business and was integral to the profit-earning process. Therefore, the Tribunal held that the expenditure should be treated as revenue in nature.

5.4.9 The Tribunal concluded that the CIT(A) was not right in upholding the disallowance of the expenditure as capital in nature. The Tribunal allowed the assessee's claim for deduction of the expenditure incurred on the renovation and improvement of the leased hotel buildings as revenue expenditure for the assessment years 2005-06 to 2008-09.

Conclusion:

6. In the result, the assessee's appeals for Assessment Years 2005-06 to 2008-09 were partly allowed. The Tribunal dismissed the grounds challenging the jurisdiction of the A.O. under section 153A but allowed the grounds related to the treatment of renovation and improvement expenditure as revenue expenditure.

Order pronounced in the open court on 5th Dec., 2014.