2020 (10) TMI 422 - HC - Income Tax

Expenditure incurred on the lease premises towards civil works, furniture, etc. - revenue expenditure OR capital expenditure - HELD THAT - 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. 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. Substantial questions of law have to be answered in favour of the Revenue and against the Assessee

Summary

Issues:
Interpretation of Section 32(1) of the Income Tax Act, 1961 regarding expenditure incurred on lease premises for civil works, furniture, etc.

Analysis:
The appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal regarding the nature of expenditure incurred by the assessee on lease premises. The substantial question of law raised was whether such expenditure should be considered as revenue expenditure or capital expenditure under Explanation 1 to Clause (ii) of Sub-Section (1) of Section 32 of the Act.

The respondent, as the legal heir of a previous assessee, sought to distinguish their case from previous judgments based on the "low tax effect" and factual differences. The Tribunal had previously allowed similar appeals based on the interpretation of the relevant provisions of the Act.

The primary contention revolved around whether the expenditure incurred by the assessee on lease premises for construction, renovation, and improvement should be treated as capital expenditure as per Explanation 1 to Section 32(1) of the Act. The Tribunal had relied on precedents and the specific wording of the Explanation to determine the nature of the expenses.

The judgment extensively discussed the implications of Explanation 1 to Section 32(1) introduced in 1988, emphasizing that the expenditure incurred for enduring benefits such as construction, renovation, and improvement should be considered capital in nature. It distinguished cases where repairs were involved, highlighting that the expenses in question were not mere repairs but significant enhancements to the property.

The court rejected arguments that the expenses could be treated as revenue expenditure under Section 30(a)(i) of the Act, emphasizing the enduring nature and capital implications of the expenditures made by the assessee. It further dismissed the suggestion to remit the case back to the Assessing Officer, as the nature of the expenses had been conclusively determined by the authorities below.

Ultimately, the court held in favor of the Revenue, concluding that the substantial questions of law favored treating the expenses as capital in nature. The appeals filed by the Revenue were allowed, and the tax case appeals were decided in favor of the Revenue, with no costs awarded.