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2016 (11) TMI 663 - AT - Income TaxNature of expense - substantial repairs - revenue or capital expenditure - Held that - The ratio of decision of Hon ble Bombay High Court in RPG Enterprises Limited (2016 (7) TMI 71 - BOMBAY HIGH COURT ) is directly applicable in the instant case , and by undertaking of this substantial repairs , it could not be said that no enduring benefit has resulted to the assessee as the said major and substantial renovation work has led to improvements in its trading operations which would bring enduring benefit to the assessee for long period of time and hence is capital in nature. The assessee would be entitled and qualified for availing depreciation in view of the Explanation 1 to Section 32 of the Act despite the fact that the assessee is not the owner of the said premises wherein in the assessee has taken the said premises on leave and license basis. The assessee would be entitled for treatment of expenses such as breaking old plaster, carting away, plastering, POP etc as revenue expenses which are in nature of current repairs in view of provisions of Section 30 of the Act. The AO shall verify the contentions of the assessee on facts and in the light of the afore-stated decision of Hon ble Bombay High Court in the case of RPG Enterprises Limited(supra) on merits. The issue is therefore set aside and restored to the file of the AO for de-novo adjudication of the issue by the AO on merits.
Issues Involved:
1. Classification of renovation expenses as capital or revenue expenditure. Detailed Analysis: Issue 1: Classification of Renovation Expenses as Capital or Revenue Expenditure The primary issue in this case was whether the renovation expenses amounting to ?37,56,259/- incurred by the assessee should be classified as capital expenditure or revenue expenditure. The assessee argued that these expenses were of a revenue nature since they were incurred on items that cannot be removed from the premises, such as floor marbles, civil work, flooring, and painting. The assessee had already capitalized ?57,05,072/- of the total renovation expenditure of ?94,61,331/-. The Assessing Officer (AO) did not accept the assessee's explanation, stating that the segregation of expenses was artificial. The AO observed that the expenditure was not for regular repairs but for capital additions such as partitions, marble flooring, tables, and civil works, and included ?7,95,548/- paid as architect fees. The AO cited Explanation to Section 30 of the Income Tax Act, 1961, which excludes capital expenditure from current repairs, and concluded that the renovation expenses were capital in nature. Consequently, the AO allowed depreciation and added the remaining amount of ?35,68,446/- to the assessee's total income. Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the renovation brought enduring benefits to the assessee and relied on various judicial precedents, including decisions from the Hon'ble Bombay High Court and Andhra Pradesh High Court. The CIT(A) emphasized that the substantial renovation expenditure resulted in a new asset and an enduring benefit to the assessee. Further aggrieved, the assessee appealed to the Tribunal. The Tribunal examined the submissions and the material on record. The Tribunal referenced a recent decision by the Hon'ble Bombay High Court in RPG Enterprises Limited v. DCIT, which discussed similar issues. The High Court had held that substantial renovation expenses resulting in enduring benefits are capital in nature, even if incurred by a tenant, and allowed for depreciation under Explanation 1 to Section 32 of the Act. The Tribunal concluded that the substantial renovation work undertaken by the assessee led to enduring benefits, qualifying the expenses as capital in nature. However, the Tribunal noted that expenses such as breaking old plaster, carting away, plastering, and POP work could be treated as revenue expenses under Section 30 of the Act. The Tribunal set aside the issue and restored it to the AO for de-novo adjudication, allowing the assessee to submit relevant evidence and explanations. Conclusion: The Tribunal allowed the appeal for statistical purposes, directing the AO to re-evaluate the classification of renovation expenses, distinguishing between capital and revenue expenditures, and ensuring compliance with the principles of natural justice. Order pronounced in the open court on 7th September, 2016.
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