2016 (5) TMI 158 - AT - Income Tax

Grant of Depreciation on advertising hoarding structures - treated as Plant or Building - Held that - These hoarding structures which are permanent structures embedded in the building having foundation which were constructed and erected by the assessee firm do not satisfy functional test and it cannot be said that these hoarding structures are tools or apparatus with which the assessee firm is carrying on the business rather these hoarding structures are building simplicitor which are constructed and erected by the assessee firm and which has been given for advertisement by the assessee firm to Creation Publicity Private Limited who in turn has given these hoarding structures to the entities for putting their advertisements on these hoarding structures. Thus it cannot be said that these hoarding structures play any operative role as apparatus or tool in the carrying of the trade by the assessee firm or in the functioning of the assessee firm s business but rather these hoarding structures constructed and erected by the assessee firm are building simplicitor constructed and erected for entities to put their advertisements and erected by the assessee firm for entities to put their advertisment. Thus functional test also is not satisfied in the case of these hoarding structures and it cannot be treated as Plant and are merely a Building constructed and erected by the assessee firm which are given on commercial terms and conditions for ultimate user as a space by the entities who are desirous of putting their advertisement of products and / or services on these hoarding structures.Thus in our considered view these advertising hoarding structures which are permanent structures embedded in the building having foundation being erected and constructed by the assessee firm are in-fact Building and the assessee firm is entitled for depreciation @ 10% Claim of interest by the assessee firm - Held that - We have observed that the assessee firm has borrowed funds which were utilized for the purpose of its business. The assessee has made turnover of 54.23 lacs which was with respect to transactions with M/s Creations Publicity P. Ltd. assessee s group concern and this is the only sale made by the assessee firm during the assessment year . The assessee firm stated that the said sale has been made based on commercial expediency. Thus we allow the claim of interest expenditure of the assessee company which was disallowed by the CIT(A) Allowance of hoarding expenses - treated as capital expenditure or revenue expenditure - Held that - The assessee firm has undertaken repairs of the hoarding structures with respect to the existing structure. We find that the issue has already been decided in favour of the tax-payer by the co-ordinate Bench of this Tribunal in the case of Empress Advertising being sister concern of the assessee firm on identical facts and issue s in the appeal to held the assessee is entitled to deduction on account of hoarding expenditure being in the nature of revenue expenditure.

Summary

Issues Involved:
1. Depreciation of hoarding structures.
2. Interest on loan.
3. Hoarding expenses.

Issue-Wise Detailed Analysis:

1. Depreciation of Hoarding Structures:
The primary issue was whether the hoarding structures should be classified as "Building" or "Plant" for depreciation purposes. The assessee firm claimed depreciation at 15% under "Plant and Machinery," while the AO and CIT(A) allowed only 10% under "Building."

The Tribunal analyzed the nature of the hoarding structures, which were permanent structures embedded in the building with a foundation. It concluded that these structures do not satisfy the functional test to be considered as "Plant." The Tribunal referred to the Supreme Court decision in CIT v. Anand Theatres, which clarified that buildings used for specific business purposes do not qualify as "Plant." Consequently, the Tribunal upheld the classification of hoarding structures as "Building" and allowed depreciation at 10%.

2. Interest on Loan:
The second issue concerned the disallowance of a portion of the interest expense claimed by the assessee firm. The AO disallowed 25% of the interest expense, attributing it to funds advanced to group concerns without business exigency. The CIT(A) reduced the disallowance to ?34,932, based on the average cost of funds and the proportion of receivables from group concerns.

The Tribunal referred to the Mumbai Tribunal's decision in the case of the assessee's group concern, M/s Creasons, where it was held that interest expenses incurred for business purposes should be allowed in full. The Tribunal also cited the Supreme Court decision in S.A. Builders Ltd. v. CIT, which emphasized that interest expenses incurred for business purposes should be allowed. Accordingly, the Tribunal allowed the entire interest expense of ?34,932 claimed by the assessee firm.

3. Hoarding Expenses:
The third issue was whether the hoarding expenses incurred by the assessee firm should be treated as capital or revenue expenditure. The AO treated the entire expense of ?14.05 lakhs as capital expenditure, while the CIT(A) allowed 50% of the expenses as revenue expenditure.

The Tribunal referred to the Mumbai Tribunal's decision in the case of the assessee's sister concern, M/s Empress Advertising, where similar hoarding expenses were treated as revenue expenditure. The Tribunal noted that the expenses were incurred for maintaining existing structures and did not result in any enduring benefit. Therefore, the Tribunal concluded that the hoarding expenses should be treated as revenue expenditure and allowed the entire expense claimed by the assessee firm.

Conclusion:
The Tribunal ruled in favor of the assessee firm on all three issues:
1. Depreciation on hoarding structures was confirmed at 10% under "Building."
2. The entire interest expense of ?34,932 was allowed.
3. The hoarding expenses were treated as revenue expenditure, and the entire expense was allowed.