2021 (9) TMI 245 - AT - Income Tax

Nature of expenditure - Expenditure incurred by the assessee towards repairs and renovation of the premises to house the branch - revenue or capital expenditure - HELD THAT - The mere fact that enduring benefit ensure to the assessee by itself would not be a factor to be decided as to whether it is a capital or revenue expenditure. Tribunal concluded that the amount could not be said to be a capital expenditure and was only a revenue expenditure. On appeal, the Hon ble High Court confirmed the ITAT s order. Hon ble High Court held that the premises had been taken on lease by the assessee and the repairs that were carried out for the purpose of business to create the ambience and to carry out repairs to use the premises as the office of the assessee as there was stiff competition in the business of the assessee and the expenditure of the amount of ₹ 15,89,613 which would come to ₹ 9 per sq.ft. in respect of 17113 sq.ft. could not be said to be capital expenditure. The mere fact that it was taken on lease for six years would not itself render the expenditure capital in nature . Explanation 1 to section 32(1) of the I.T.Act relied on by the CIT(A) is of no help to the revenue. Explanation 1 to section 32(1) of the I.T.Act only permits the assessee to claim depreciation on capital expenditure incurred on leased premises taken by the assessee. On the other hand, if the expenditure incurred by the assessee is on the revenue front, whether the premises is taken on lease or not is immaterial and the same is always an allowable deduction - CIT(A) misinterpreted Explanation 1 to section 32(1) of the I.T.Act - we hold that the assessee is entitled to deduction as revenue expenditure. Ex-gratia payment payment made to the employees is not a statutory payment, and hence, not liable for disallowance u/s 43B - CIT(A) rejected the plea of the assessee since the assessee has not filed a revised return - HELD THAT - It is an admitted position of law that powers of the CIT(A) are coterminous with that of the Assessing Officer can exercise. CIT(A) while hearing an appeal has all the powers which an Assessing Officer can exercise. CIT(A) ought to have independently considered the issue raised before him de hors the fact that the issue was not considered by the Assessing Officer. In this context, we rely on the judgment of the Hon ble Apex Court in the case of Jute Corporation of India Ltd. 1990 (9) TMI 6 - SUPREME COURT - judgment of the Hon ble Supreme Court in the case of Goetze (India) Limited 2006 (3) TMI 75 - SUPREME COURT only impinge upon the powers of the AO to consider a claim which is not made in the return of income, whereas, such restriction is not there with regard to power of an Appellate Authority. We are of the view that the issue of ex-gratia payment, whether it can be subjected to disallowance u/s 43B of the I.T.Act needs examination by the Assessing Officer.

Summary

Issues:
1. Disallowance of expenditure amounting to ?12,95,867
2. Ex-gratia payment of ?56,94,720

Issue 1: Disallowance of expenditure amounting to ?12,95,867

The case involved the disallowance of expenditure incurred on repairs and renovation of a leased branch office premises. The Assessing Officer treated the expenditure as capital expenditure, disallowing it. The CIT(A) upheld this decision, relying on the judgment of the Madras High Court and Explanation 1 to section 32(1) of the Income Tax Act. The assessee contended that the expenditure was revenue in nature, necessary for operating the branch office. The Tribunal reviewed the details of the expenditure and relevant case laws. It was noted that the repairs were essential for business operation and did not result in any addition to the premises. Citing precedents, the Tribunal concluded that the expenditure was revenue in nature and allowed the deduction.

Issue 2: Ex-gratia payment of ?56,94,720

The assessee made ex-gratia payments to employees not covered by the Payment of Bonus Act, 1965. The Assessing Officer mistakenly disallowed this payment under section 43B of the Income Tax Act. The assessee informed the Assessing Officer of the error, but it was not addressed in the assessment order. The CIT(A) rejected the plea to rectify the error, stating that the assessee did not file a revised return in time. The Tribunal noted that the CIT(A) has powers equivalent to the Assessing Officer and should have considered the issue independently. Relying on relevant case law, the Tribunal directed the Assessing Officer to re-examine the issue of disallowance of ex-gratia payment under section 43B, providing the assessee with a fair hearing. The appeal was partly allowed for statistical purposes.

In conclusion, the Tribunal ruled in favor of the assessee on both issues, allowing the deduction for the expenditure and directing a re-examination of the disallowance of ex-gratia payment by the Assessing Officer.