2019 (4) TMI 702 - AT - Income Tax

Admission of additional evidences - Rule 46A compliance - submitted first time before CIT(A) - no remand report was called by learned CIT(A) - HELD THAT - The Ld. CIT(A) also did not refer/forwarded these additional evidences to AO for verification and comments as no remand report was called by learned CIT(A) from the AO. This is a breach of sub-rule 3 of Rule 46A Rules owing to non forwarding of these additional evidences by learned CIT(A) to the AO for its verification and comments. The principles of natural justice are clearly breached. The procedures as are contemplated are not meant to stifle justice but they cannot be simply given go-bye otherwise there will be break down of Rule of Law . Rule of Law is an important ingredient of basic structure doctrine engrained in our Constitution . The assessee ought to have explained before learned CIT(A) as to what prevented it from submitting these additional evidences before the AO as is required under sub-rule 1 of Rule 46A of the 1962 Rules. There is no explanation given by the assessee for non production of these additional evidences before the AO during the course of assessment proceedings nor learned CIT(A) considered appropriate to record reasons and justification for admitting these additional evidences as is required under sub-rule 1 of Rule 46A. It is not the case of the assessee that learned CIT(A) directed assessee to produce these additional evidences as is contemplated vide sub-rule 4 of Rule 46A. Neither it is a case of the assessee where learned CIT(A) has suo moto directed inquiry as is contemplated u/s 250(4). The instant case before us is not covered by these exceptions. There is no dispute as to proposition canvassed by the assessee that powers of learned CIT(A) are co-terminus with the powers of the AO but Rule 46A cannot be simply given go bye other wise it will become otiose . This is never the intention of law makers. We are afraid that decision of Hon ble Supreme Court in the case of Kanpur Coal Syndicate 1964 (4) TMI 18 - SUPREME COURT cannot come to rescue of the assessee as there is no dispute to the proposition that learned CIT(A) powers are co-terminus with powers of the AO but Rule 46A of the 1962 cannot be given a simple go bye. We are afraid that the decision of Hon ble Bombay High Court in the case of Rallies India Limited 2015 (4) TMI 940 - BOMBAY HIGH COURT relied upon by the assessee cannot also come to rescue of the assessee. The principles of natural justice are breached in the instant case by learned CIT(A) by not calling for remand report from the AO as well non recording of reasons and justification for admitting these additional evidences which is fatal to sustaining of appellate order passed by learned CIT(A). Addition on account of extensive repairs - leased premises - current repairs - AO alleged that repairs and renovation/improvement of shop/bakery at Bandra is capital in nature giving enduring benefits - Plant and Machinery which was acquired for being installed at Jalal Bakery at Bandra was already capitalized - HELD THAT - keeping in view the entire factual matrix of the case as elaborated by us in preceding para s of this order , end of justice will be met in this case if the issues in these appeals are set aside and restored to the file of learned CIT(A) for fresh adjudication of these issues after complying with Rule 46A and by following ratio of judgment of Hon ble Bombay High Court in the case of RPG Enterprises Limited 2016 (7) TMI 71 - BOMBAY HIGH COURT . The assessee is directed to file all necessary evidences and explanations before learned CIT(A) in its defence including complete details of renovation work undertaken by it. The learned CIT(A) is directed to give proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law and all relevant explanations/evidence submitted by the assessee before learned CIT(A) in set aside proceedings shall be admitted by learned CIT(A) in the interest of justice and dealt with in accordance with law on merits . The appeal of the Revenue is allowed for statistical purposes.

Issues Involved:
1. Deletion of addition on account of extensive repairs and renovation of leased premises.
2. Nature of expenses as capital or revenue.
3. Admission of additional evidence by CIT(A) without granting opportunity to AO under Rule 46A.

Detailed Analysis:

1. Deletion of Addition on Account of Extensive Repairs and Renovation:
The primary issue revolves around whether the expenses incurred by the assessee on extensive repairs and renovation of leased premises should be treated as capital expenditure or revenue expenditure. The AO had classified these expenses as capital in nature, leading to the disallowance of the claimed revenue expenditure and allowing depreciation instead. The CIT(A), however, treated these expenses as revenue in nature and allowed the appeal in favor of the assessee.

2. Nature of Expenses as Capital or Revenue:
The AO observed that the assessee incurred significant expenses on repairs and renovation of its leased bakery premises, which were considered to provide enduring benefits. The AO referenced Explanation 1 to Section 32 of the Income Tax Act, 1961, to classify these expenses as capital in nature. The CIT(A), on the other hand, held that these expenses did not create any new asset of enduring benefit and were necessary for the business operations, thus classifying them as revenue expenses under Section 37(1) of the Act.

The CIT(A) relied on several judgments, including:
- Empire Jute Co. Ltd. v. CIT: The Supreme Court emphasized that the nature of the advantage in a commercial sense is crucial, and if the advantage is in the capital field, the expenditure would be disallowable. However, if it facilitates trading operations without touching the fixed capital, it would be on revenue account.
- Madras Auto Service (P) Ltd. v. CIT: The Supreme Court held that expenditure on renovation of a leasehold building should be treated as revenue in nature, as the assessee did not acquire any capital asset but derived a business advantage.

The CIT(A) concluded that the expenses were for facilitating the trading operations and did not result in the acquisition of a capital asset, thus allowing them as revenue expenses.

3. Admission of Additional Evidence by CIT(A) without Granting Opportunity to AO under Rule 46A:
The Revenue contended that the CIT(A) admitted additional evidence (invoices and bills) without providing the AO an opportunity to verify these documents, thereby breaching Rule 46A of the Income Tax Rules, 1962. The tribunal noted that the CIT(A) did not record reasons for admitting the additional evidence as required under sub-rule (1) of Rule 46A, nor did it forward these to the AO for verification as mandated by sub-rule (3) of Rule 46A, thus breaching principles of natural justice.

The tribunal emphasized that procedures are essential to uphold the rule of law and cannot be disregarded. The tribunal cited the case of RPG Enterprises Ltd. v. DCIT, where the Bombay High Court held that extensive renovation leading to enduring benefits should be treated as capital expenditure, and the assessee is entitled to depreciation under Explanation 1 to Section 32.

Conclusion:
The tribunal set aside the CIT(A)'s order and remanded the matter for fresh adjudication, directing the CIT(A) to comply with Rule 46A and follow the principles laid out in the RPG Enterprises Ltd. case. The CIT(A) was instructed to provide the AO with an opportunity to verify the additional evidence and to record reasons for admitting such evidence. The appeal of the Revenue was allowed for statistical purposes, ensuring that the principles of natural justice were upheld.

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