2016 (1) TMI 706 - AT - Income Tax

Expenditure incurred on leased out premises - CIT(A) treated as capital in nature liable to be disallowed - Held that - As decided in assessee s own case for the assessment years 2005-06 and 2008-09 2013 (2) TMI 265 - ITAT CHENNAI it is essential that the expenditure incurred on the construction of any structure on the leased premises should result in saving of the revenue expenditure at the subsequent stage. In the present case, from the pleadings of both the sides, it cannot be ascertained whether the assessee is getting enduring benefit of revenue nature from the additional structure or renovation/repairs undertaken by the assessee on the leased out premises. Thus, the case of the assessee very much falls within the ambit of Explanation 1 of section 32(1) of the Act. Respectfully following the said decision of the Tribunal, we uphold the order of the Commissioner of Income Tax (Appeals) in holding that expenditure incurred by the assessee on leasehold land is capital expenditure - Decided against assessee

Summary

Issues Involved:
1. Whether the expenditure incurred on leased premises should be treated as capital expenditure or revenue expenditure.

Issue-wise Detailed Analysis:

1. Treatment of Expenditure on Leased Premises:
The primary issue in both appeals was whether the expenditure incurred by the assessee on leased premises should be classified as capital expenditure or revenue expenditure. The expenditure in question amounted to Rs. 10,39,58,102/- and Rs. 15,03,51,310/- for the assessment years 2010-11 and 2011-12, respectively.

The Assessing Officer disallowed the expenditure, treating it as capital expenditure under the head "construction of building on leasehold land." The assessee contended that this expenditure was revenue in nature, as it was incurred for conducting business on leasehold land. However, the Commissioner of Income Tax (Appeals) upheld the assessment order, citing the decision of the coordinate bench in the assessee's own case for the assessment years 2005-06 and 2008-09.

The Tribunal examined whether the expenditure incurred by the assessee on the construction, renovation, and repairs of buildings on leased land should be considered capital or revenue expenditure. The Commissioner of Income Tax (Appeals) referenced Explanation 1 to Section 32(1) of the Income Tax Act, 1961, which states that any capital expenditure incurred on leased premises should be treated as if the structure or work is a building owned by the assessee.

The Tribunal noted that the expenditure incurred on repairs and minor renovations amounting to Rs. 1,94,35,296/- was allowed as revenue expenditure. However, the remaining Rs. 15,03,51,310/- was disallowed as it was deemed capital expenditure for constructing new permanent structures, which provided the assessee with an enduring benefit.

The Tribunal also considered the assessee's argument that the expenditure should be treated as revenue expenditure based on the judgment of the Hon'ble Madras High Court in the case of CIT Vs. TVS Lean Logistics Limited. However, it was found that this judgment did not support the assessee's case. The Tribunal upheld the disallowance, referencing its own decision for the assessment years 2005-06 and 2008-09, where similar expenditures were treated as capital in nature.

Conclusion:
The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals), concluding that the expenditure incurred by the assessee on leasehold land was capital in nature. Consequently, the appeals filed by the assessee were dismissed. The Tribunal's decision was based on the enduring benefit derived from the expenditure and the applicability of Explanation 1 to Section 32(1) of the Income Tax Act, 1961. The order was pronounced in the open court on 29th October, 2015.