2017 (1) TMI 894 - AT - Income Tax

Revision u/s 263 - nature of modification and improvement expenditure leasehold Workshop - CIT observed that in view of the Explanation 1 to Section 32(1) inserted with effect from 01/04/1988, the assessee-firm s claim of allowance of said sum under revenue expenditure is not correct and the expenditure is however eligible for depreciation in accordance with the Explanation 1 to Section 32(1) - Held that - The assessee has taken on lease the semifinished building with other structure and the assessee had made the modification and improvement to the semi-finished structure to suit the requirement of work shop (refer page 21 of paper book). Hence the assessee has only modified and improved the leased property to suit the requirement of its business. Hence, the explanation 1A to section 32 will apply to the assessee s case and the findings of ld. CIT is proper. Accordingly, we are inclined to uphold the order of CIT passed u/s 263 of the Act. - Decided against assessee

Summary

Issues:
1. Correctness of order passed by CIT under section 263 of the Income Tax Act.
2. Allowability of deduction for expenditure incurred on leased land.
3. Determination of expenditure as capital or revenue in nature.
4. Applicability of Explanation 1 to Section 32(1) regarding depreciation on assets.

Analysis:
1. The appeal was filed against the CIT's order for the assessment year 2011-12, challenging the correctness of the order passed under section 263 of the Income Tax Act. The appellant contended that the order was contrary to facts and provisions of law. The CIT observed that the Assessing Officer allowed deduction for expenditure incurred on leased land, which the CIT deemed as erroneous and prejudicial to revenue's interests.

2. The assessee claimed an amount as revenue expenditure under Workshop Constructions, relying on a Supreme Court judgment. The CIT, however, noted that the expenditure was capital in nature and not eligible for deduction as revenue expenditure. The CIT issued a notice under section 263, directing the AO to re-do the assessment, disallowing the claimed amount and allowing depreciation on the asset created.

3. The CIT's decision was based on the introduction of Explanation 1 to Section 32(1), clarifying that expenditure on construction of structures on leased premises is eligible for depreciation. The CIT found the Assessing Officer's failure to disallow the expenditure as revenue expenditure during assessment, leading to an erroneous assessment. The CIT directed reassessment in line with the Explanation, considering the expenditure as capital in nature.

4. The Tribunal upheld the CIT's order, emphasizing the applicability of Explanation 1A to Section 32 in cases where modification or improvement is made to leased property for business purposes. The Tribunal distinguished a previous case where only land was leased from the current scenario where a semi-finished building was leased and modified for business needs. Consequently, the Tribunal supported the CIT's decision under section 263, affirming the eligibility for depreciation on the modified property.

In conclusion, the Tribunal dismissed the appeal, endorsing the CIT's order under section 263 of the Income Tax Act, emphasizing the proper application of Explanation 1 to Section 32 and the distinction in scenarios regarding leased properties and modifications made for business purposes.