2022 (2) TMI 215 - AT - Income Tax

Depreciation @ 10% on improvements carried out in the lease hold premises - Assessee claimed 100% depreciation on the leasehold improvements as the improvements were of the nature falling within the ambit of part-A in Appendix-I to the Income Tax Rules, 1962 (Rules) under the head Tangible assets entry (4) Purely temporary erections such as wooden structure - HELD THAT - As rightly observed by the CIT(A), the very fact that the assessee has claimed depreciation on the lease hold improvements only means that the assessee has treated the expenditure incurred on lease hold improvements as capital expenditure. Learned Counsel however made a submission that the treatment in the books of accounts is not final and determinative. While we agree with this proposition that treatment in the books of accounts is not conclusive but we observe that the issue whether the expenditure is capital or revenue is nature has not been examined by the lower authorities. In this regard, we find that though a specific ground viz., ground No.8 was raised by the assessee before the CIT(A) in this regard, the CIT(A) did not examine this issue specifically. The ingredients and prerequisites of a capital expenditure or revenue expenditure would remain the same, and not undergo any change depending on whether the building is owned or occupied as lessee or other occupancy rights leased premises. As already stated this issue though raised by the assessee before the CIT(A) and the grounds of appeal No.9 to 12 before the Tribunal as an alternative ground has not been examined by the CIT(A). In these circumstances, we are of the view that the issue needs to be set aside for fresh consideration by the CIT(A) as to whether the expenditure in question is capital or revenue in nature. We therefore allow this appeal for statistical purposes by remanding the said issue for consideration by the CIT(A). In this regard we find that the decision cited by the learned Counsel for the assessee in assessee s own case for Assessment Year 2001-02 which relates to issue whether the improvements to lease hold premises were capital or revenue in nature, would become relevant. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of the nature of improvements made to leasehold premises (temporary vs. permanent).
2. Eligibility for 100% depreciation on leasehold improvements.
3. Classification of various expenditures (capital vs. revenue).
4. Consideration of prior Tribunal decisions in similar cases.
5. Examination of whether the expenditure qualifies as purely temporary erections under Income Tax Rules.

Detailed Analysis:

Nature of Improvements Made to Leasehold Premises:
The primary issue in this appeal is whether the improvements made to the leasehold premises by the assessee qualify as temporary erections eligible for 100% depreciation. The assessee argued that the improvements were temporary, as per the lease agreements, which required the premises to be returned to their original condition upon lease termination. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the improvements provided enduring benefits and were not purely temporary.

Eligibility for 100% Depreciation:
The assessee claimed 100% depreciation on leasehold improvements, citing that the improvements fell under the category of "purely temporary erections" as per Appendix-I of the Income Tax Rules, 1962. The AO, however, allowed only 10% depreciation, arguing that the improvements provided lasting benefits. The CIT(A) upheld the AO's decision, noting that the improvements, including civil works, electrical fittings, and interior modifications, were not temporary and thus did not qualify for 100% depreciation.

Classification of Various Expenditures:
The CIT(A) meticulously examined each item of expenditure to determine whether it constituted a temporary erection. The expenditures included civil works, interiors, air conditioners, electrical fittings, and fire and access control systems. The CIT(A) concluded that most of these expenditures provided enduring benefits and thus were not temporary erections. The CIT(A) allowed 15% depreciation on air conditioners and 10% on other items, classifying them as part of the building or furniture and fittings.

Consideration of Prior Tribunal Decisions:
The assessee relied on a prior Tribunal decision in its own case for the Assessment Year 2001-02, where similar expenditures were deemed temporary and eligible for 100% depreciation. However, the Tribunal in the present case agreed with the CIT(A)'s findings, noting that the nature of improvements could not be regarded as purely temporary erections.

Examination of Whether the Expenditure Qualifies as Purely Temporary Erections:
The Tribunal examined the detailed breakup of expenditures and the nature of improvements. Items such as air conditioners, electrical fittings, and civil works were deemed to provide lasting benefits and thus did not qualify as purely temporary erections. The Tribunal agreed with the CIT(A)'s conclusion that these expenditures should be depreciated at standard rates applicable to buildings and furniture/fittings.

Alternative Ground: Capital vs. Revenue Expenditure:
The Tribunal noted that the issue of whether the expenditures were capital or revenue in nature was not adequately examined by the lower authorities. The Tribunal remanded this issue to the CIT(A) for fresh consideration, emphasizing that the nature of the expenditure should be determined based on the specifics of each item and its contribution to the business operations.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to allow only partial depreciation on the leasehold improvements, rejecting the assessee's claim for 100% depreciation. The Tribunal remanded the issue of whether the expenditures were capital or revenue in nature to the CIT(A) for further examination. The appeal was allowed for statistical purposes, with directions for a fresh assessment of the nature of the expenditures.