2019 (4) TMI 1127 - HC - Income Tax

Expenditure on construction of building in a leasehold premises - substantial expenditure towards renovation leading to enduring benefit - revenue or capital expenditure - Explanation 1 to Section 32(1) - current repair u/s 30 - HELD THAT - We are of the considered view that the expenditure incurred by the Assessee in the present case are Capital in nature and come within the mischief of Explanation 1 to Section 32(1). The alternate submission advanced by Mr.M.P.Senthil Kumar that the repairs to the premises cannot be capitalised in view of Section 30(a)(i) is rejected since the renovations made are Capital in nature in the first Assessment Year and only further repairs may attract the provisions under Section 30(a)(i). In the present case, the Assesses had incurred substantial expenditure towards renovation leading to enduring benefit. They are not merely repairs. The Assessees had also incurred expenditures towards improvement and construction of the building. These cannot be termed as 'repairs'. Consequently, this alternate submission is rejected by us. The second alternate submission advanced by Mr.M.P.Senthil Kumar that the case should be remitted back to the Assessing Officer is also rejected since the fact have been addressed and settled by the Authorities below and it had been concurrently found that the expenditure were capital in nature. The issue of bifurcating the said expenses as capital and revenue would therefore not arise. - Decided in favour of the Revenue.

Summary

Issues Involved:
1. Whether the expenditure on construction of building in a leasehold premises amounts to revenue expenditure.
2. Whether the Tribunal's reliance on prior judgments without considering Explanation 1 to Section 32(1) of the Income-tax Act was appropriate.

Issue-wise Analysis:

1. Expenditure on Construction in Leasehold Premises:
The primary issue was whether the expenditure incurred by the assessee on the construction of a building on a leased premise should be considered as revenue or capital expenditure. The assessee claimed the expenditure as revenue, arguing that since they did not own the premises, they did not enjoy a capital asset. The Joint Commissioner of Income Tax initially supported this view, directing that the expenditure be considered as revenue. However, the CIT (Appeals) disagreed, holding that Explanation 1 to Section 32(1) specifically deems such expenditure as capital, treating the structure as owned by the assessee. The CIT (Appeals) emphasized that the nature of the expenditure, rather than the ownership of the premises, was crucial, and since the expenditure led to the creation of an asset with enduring benefits, it should be classified as capital.

2. Tribunal's Reliance on Prior Judgments:
The Tribunal allowed the assessee's appeal, relying on the High Court's decision in CIT vs. Hari Vignesh Motors (P) Ltd., which followed the Supreme Court's judgment in CIT vs. Madras Auto Service (P) Ltd. However, these cases did not consider Explanation 1 to Section 32(1), which was introduced after the relevant assessment years in those cases. The Tribunal noted that the directions of the Joint Commissioner under Section 144A were binding on the Assessing Officer and that the CIT's revisionary power under Section 263 did not extend to correcting such directions. The Tribunal quashed the CIT's revisionary orders, emphasizing adherence to the jurisdictional High Court's decisions.

High Court's Judgment:
The High Court scrutinized the Tribunal's reliance on prior judgments, noting that Explanation 1 to Section 32(1), effective from 01.04.1988, was not considered in those cases. The Court highlighted that the assessee had undertaken significant construction and renovations, resulting in enduring benefits, thus falling under the capital expenditure category as per the amended law. The Court dismissed the argument that unregistered lease agreements could not be examined, stating that the agreements were relevant to determining the nature of the expenditure. The Court also rejected the notion that the expenses were merely repairs, emphasizing the substantial nature of the renovations and improvements.

Conclusion:
The High Court concluded that the expenditure incurred by the assessee was capital in nature, covered by Explanation 1 to Section 32(1). The Court upheld the CIT's view, rejecting the Tribunal's decision and the assessee's arguments regarding repairs and the need for bifurcation of expenses. The appeals filed by the Revenue were allowed, with the substantial questions of law answered in favor of the Revenue and against the assessee.