2019 (8) TMI 932 - HC - Income Tax

Nature of expenses - expenditure incurred in respect of renovation of leased premises - revenue or capital expenditure - HELD THAT - the extensive repairs and renovations carried out by the assessee cannot be said to be incurred to preserve and maintain an already existing asset since many new objects have been brought into as could be seen from the list of construction made and thus, the object of expenditure made by the assessee is definitely to bring a new asset into existence to obtain new advantage further giving enduring benefit to the assessee. Tribunal committed an error by allowing the expenditure incurred on repairs of the rented building as taxable expenditure under Section 37(1) of the Act ignoring Explanation 1 to Section 32 - See MADURA COATS 2011 (12) TMI 293 - MADRAS HIGH COURT Entire details of the expenditure incurred by the assessee for all the branch offices spread over the country were produced before the Assessing Officer. The expenses incurred were for providing furniture, interior decoration and office equipment and also consultation charges. These details were once again placed before the CIT(A), when the assessee filed appeal against the assessment order. The CIT(A) took note of the various categories of expenses incurred by the assessee and from the details given in paragraph 5 of the order passed by the CIT(A) dated 09.7.2007, it is clear that the assessee had spent substantial funds in creating office space with a particular design to suit their requirement. In fact, the assessee had also admitted that they were granted agency by M/s.Malaysian Airlines and that they had to design the showroom with a particular design as instructed by the said Airlines. The expenses, which were incurred, clearly show that they are fixed and are capital in nature and that the test applied by the CIT(A) to state that the assessee cannot remove the same at the time of vacating the premises is an incorrect test applied by the CIT(A) because the CIT(A) did not take note of Explanation 1 to Section 32 of the Act. In the light of the said Explanation, it has become immaterial as to whether the assessee is the owner of the building or the lessee and there is no scope left for any interpretation since, by legal fiction, the assessee is treated as the owner of the building for the period of their occupation. Assessee submits that the matter may be remanded to the Assessing Officer or the CIT(A) to enable the assessee to once again canvass the factual details. No such remand is warranted in the instant case as we have found that the entire details were made available by the assessee to the Assessing Officer as well as to the CIT(A) and that they examined all the factual details. Had the CIT(A) taken note of Explanation 1 to Section 32 of the Act in all probabilities, the result of the appeal would have been different. Thus, on account of not applying the correct legal principle to the facts, an erroneous order was passed by the CIT(A), which was affirmed by the Tribunal without assigning any reasons. - Decided in favour of revenue

Issues Involved:
1. Whether the expenditure incurred in respect of renovation of leased premises is to be treated as revenue expenditure in spite of Explanation 1 to Section 32 of the Income Tax Act, 1961.
2. Whether the expenditure incurred on vasthu consultancy for setting up a new office is to be treated as revenue expenditure.

Detailed Analysis:

Preliminary Objection on Maintainability:
The respondent-assessee raised a preliminary objection regarding the maintainability of the appeal based on a circular issued by the Central Board of Direct Taxes (CBDT) stating that the tax effect in the appeal was below the prescribed limit of ?50,00,000/-. The court rejected this objection, noting discrepancies in the tax effect figures provided by both parties and stating that it could not compel the Revenue to withdraw the appeal.

Merits of the Case:

1. Renovation of Leased Premises:
The assessee, a travel agency, incurred expenses on the renovation of leased premises and claimed these as revenue expenditure. The Assessing Officer treated these expenses as capital expenditure. The CIT(A) partly allowed the appeal, treating a portion of the expenses as revenue expenditure and directing the Assessing Officer to modify the assessment order. The Tribunal upheld the CIT(A)'s order without providing independent reasons.

The High Court noted that Explanation 1 to Section 32 of the Income Tax Act creates a legal fiction, treating the assessee as the owner of the building for the period of occupation if any capital expenditure is incurred on the leased premises. The court cited several judgments, including CIT Vs. Madura Coats and CIT Vs. Viswams, which held that extensive repairs and renovations leading to enduring benefits should be treated as capital expenditure. The court concluded that the CIT(A) and the Tribunal erred in not applying Explanation 1 to Section 32, and thus, the expenses should be treated as capital expenditure.

2. Vasthu Consultancy Charges:
The assessee incurred consultancy charges for setting up a new office and claimed these as revenue expenditure. The CIT(A) allowed this claim, stating that the expenses did not represent any expenditure towards creating a capital asset or obtaining an enduring benefit. The Tribunal upheld the CIT(A)'s order.

The High Court, however, held that the consultancy charges incurred for setting up a new office should also be treated as capital expenditure. The court reiterated that any expenditure leading to an enduring benefit, even if incurred on leased premises, falls under the purview of Explanation 1 to Section 32 and should be treated as capital expenditure.

Conclusion:
The High Court allowed the appeal filed by the Revenue, set aside the orders passed by the CIT(A) and the Tribunal, and restored the order passed by the Assessing Officer. The court held that both the renovation expenses and the vasthu consultancy charges should be treated as capital expenditure in light of Explanation 1 to Section 32 of the Income Tax Act. The substantial questions of law were answered in favor of the Revenue.

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