2016 (5) TMI 426 - AT - Income Tax

Disallowance of leasehold improvement expenditure - Held that - We have noted from the details of expenses produced before us that the expenditure in question pertains inter alia for interior designing, for metal, cement & bricks for mockup, for replacing of tiles and allied expenses. In our considered view, these expenses cannot be treated as capital expenditure, particularly when, given facts of this case, they have limited useful life. As regards the Assessing Officer s reliance upon Explanation-1 to section 32, it could come into play only when the capital expenditure is incurred in connection with a leased premises, but then, merely because it is an expense incurred in connection with the leased premises, it cannot be inferred that it is a capital expenditure. The authorities below have been thus swayed by the considerations which are not relevant. Section 30(a) categorically provides that when a premises used for the purposes of the business or profession, is occupied by the assessee as a tenant and when the assessee has undertaken to bear the cost of repairs to the business, the amounts paid on such repairs is to be allowed as deduction under section 30(a)(i) of the Act. As regards the restriction to the effect that only current repairs can be allowed, it is set out in section 30(a)(ii). It refers to a situation when the premises are occupied by the assessee otherwise than as a tenant. Clearly section 30(a)(ii) does not apply to the facts of the case. The assessee was occupying the premises as a tenant. In this view of the matter, it cannot be said that the repair expenses which are to be allowed as deduction when the assessee is restricted to only current repairs. As stated earlier, on a careful perusal of the material before us, we are satisfied that the repair expenses incurred by the assessee, which have been termed as leasehold improvement, are revenue expenditure in nature. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of leasehold improvement expenditure
2. Addition on account of transfer pricing adjustment

Issue 1: Disallowance of Leasehold Improvement Expenditure:
The appellant challenged the disallowance of leasehold improvement expenditure of ?8,55,485 by the CIT(A) under section 143(3) of the Income Tax Act, 1961 for the assessment year 2009-10. The Assessing Officer disallowed the claimed expenditure as capital expenditure under section 32, citing that the expenditure was incurred on construction, renovation, or improvement of the leased premises. The appellant argued that the expenditure was for repairs to make the premises conducive to business activity and should be allowed as a deduction under section 30(a)(i). The CIT(A) upheld the disallowance, stating that the expenditure was substantial and not akin to current repairs. However, the ITAT Mumbai, comprising Pramod Kumar AM and Pawan Singh JM, disagreed. They noted that the expenses were for interior designing, mockup materials, and repairs with limited useful life, hence qualifying as revenue expenditure. The tribunal held that the repairs were not capital in nature as per section 30(a) and deleted the disallowed amount of ?8,55,485, providing relief to the assessee.

Issue 2: Addition on Account of Transfer Pricing Adjustment:
The appellant contested the addition of ?13,49,009 on account of transfer pricing adjustment. The ITAT referred to a previous decision in the appellant's own case for the assessment year 2008-09, where technical services were availed from an associated enterprise (AE) due to the appellant's initial stage of business and lack of in-house expertise. The tribunal found that the services were essential for the business activity, and the TPO's denial of the claim was unjustified. Relying on the precedent, the ITAT allowed the appellant's claim, deleting the addition of ?13,49,009. The tribunal upheld the appellant's grievance, providing relief accordingly.

In conclusion, the ITAT Mumbai allowed the appeal partly, overturning the disallowance of leasehold improvement expenditure and the addition on account of transfer pricing adjustment. The judgment provided detailed reasoning for each issue, emphasizing the distinction between capital and revenue expenditure and the necessity of services for business expediency.