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TMI Blog2006 (9) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts and circumstances of the case, the Ld. CIT(A) has erred in law while not considering the Explanation 1 to section 32 of the Income-tax Act which clearly provides that for the purpose of section 32, even if the assessee is not the owner of the building then also for the purpose of any expenditure in the nature of capital expenditure in this building, he will be treated as the owner of the building." 3. Briefly stated facts are that during the year the assessee had occupied a lease premise in Corporate Park, DLF Qutab Enclave, Phase III, Gurgaon from where it was carrying on its business. The lease was for an initial period of three years tenure with a right to the lessee to renew the lease at sole discretion beyond the initial lease term of three years for two consecutive terms of three years each [clause 10(c) of the Lease Agreement]. The assessee had incurred certain expenses for customizing the leased premises for its use and an amount of Rs. 1,70,51,608 was debited to the Profit and Loss Account and considered as revenue in nature. According to the assessee all these expenses were in the nature of revenue as these expenses were incurred in the premises taken on le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to be merely a part of current repair. Similarly, an expense of Rs. 37.57 lacs incurred on a carpet which was imported from USA was in nature of capital expenditure forming part of fixtures. The other expenses for air-conditioning, fire detection system, electric works etc. and software were also in nature of capital expenditure. Thus, he held that all these expenses of Rs. 1,70,31,292 shall be treated as capital expenditure and depreciation for half of the year at the rate of 5% on civil work and cost of the carpet and at the rate of 12.5 at the rate of on remaining expenses (total depreciation Rs. 14,75,915) would be allowed. Even otherwise, if these expenses were to be treated as revenue expenditure in nature, same were to be allowed on deferment basis over the period of the lease, because benefit of these expenses was not confined to this year only and allowing deduction for these expenses in one year would distorted the profit of the year, reliance in this regard was placed on decision of Hon'ble Supreme Court in case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 . 5. On appeal, the Ld. CIT(A) had held thus : "(14) I have gone through the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the expenses incurred pertain to the year under consideration. Consequently, the Assessing Officer is directed to allow the expense on this account. In fact the issue is clinched in favour of the appellant in view of Hon'ble Supreme Court decision in the case of Madras Auto Services Pvt. cited Sup." 6. Before us the ld. DR has submitted that assessee has acquired the premises in question for a period of 3 years and extendable for two consecutive terms of three years. Thus the assessee has entered into the premises with intention to stay for a longer period. This could be the reason for incurring such huge expenditure of 1.7 crores on the leased premises. The expenditure was incurred in relation to fixed assets i.e., leased building premises resulting into durable value advantage to the fixed assets and long-term advantage to the assessee. Thus he has supported the order passed by the Assessing Officer. On the other hand, ld. counsel for the assessee has submitted that the assessee had incurred certain expenditure on repair/renovation inclined it to use the premises for the purpose of carrying on its business. The premises required repairs/ renovation to develop and facilitate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of capital expenditure. He has further referred to the decision in the case of B&A Plantations & Industries Ltd. v. CIT [2000] 242 ITR 22 (Gauhati) and pointed out that in that case the Hon'ble Gauhati High Court, following the judgment of Hon'ble Supreme Court in the case of CIT v. Madras Auto Services (P.) Ltd. [1998] 233 ITR 468 held that by way of expenditure on wall papers, partition wall, marble flooring etc. was not in the nature of capital expenditure. 9. The learned counsel placed reliance upon the judgment of Hon'ble Supreme Court in the case of Madras Auto Services (P.) Ltd. (supra). In that case the assessee had constructed new building after demolishing old building. The premises had been taken on rent by the assessee. By the expenditure the assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rate. The Hon'ble Supreme Court held that whatever substituted the revenue expenditure should normally be considered as revenue expenditure and held that in that case the assessee had not got any capital asset by spending the amount. The learned counsel for the assessee also placed heavy reliance upon the judgment of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the premises were owned by the assessee. Before us the learned counsel for the assessee has placed reliance on the judgment of Hon'ble Delhi High Court in the case of Modi Spg. & Wvg. Mills Co. Ltd. (supra). In that judgment the Hon'ble Delhi High Court have not accepted the contention of the assessee that the expenditure of Rs. 34,606 on repairs and renovations of the administrative block of the assessee's building was admissible as current repairs under section 30(a)( ii) of the Act. The Hon'ble Delhi High Court have held that the fact that the building required repairs which were long overdue made it apparent that the amount was not spent on current repairs. The Hon'ble High Court, however, observed as under :-- "One of the ingredients of the amount being allowed as a deduction under section 30(a)(ii ) is that the amount must be spent for purposes of carrying out current repairs. The facts as found by the Tribunal are that the administrative block had been built in 1948 and required repairs and improvement in the relevant assessment year in question. As the amount was spent for carrying out repairs which were long overdue, it is evident that the amount was not spent on curren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." 14. It may mention that in the case of Empire Jute Co. Ltd. (supra), the Hon'ble Apex Court considered the question as to whether expenditure incurred by that assessee-company on purchase of loom hours from another signatory member constituted a revenue expenditure. The revenue contended that as loom hours acquired were in the nature of long-term advantage acquired, the expenditure should be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been considered at length by Hon'ble Supreme Court in their judgment in the case of Ballimal Naval Kishore v. CIT [1997] 224 ITR 414 (SC) in the following words :-- "The expression used in section 10(2)( v) is 'current repairs' and not mere 'repairs'. The same expression occurs in section 30(a)( ii) and in section 31(i) of the Income-tax Act, 1961. The question is what is the meaning of the expression in the context of section 10(2). In New Shorrock Spinning and Manufacturing Co. Ltd.'s case [1956] 30 ITR 338 (Bom.), Chagla C.J., speaking for the Division Bench, observed that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc., requires repairs and when the need arises must be decided not by any academic or theoretical tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the said repairs qualify as 'current repairs' within the meaning of section 10(2)(v). It was a case of total renovation and has rightly been held by the High Court to be capital in nature. Indeed, the finding of the High Court is that as against the sum of Rs. 17,000 for which the assessee had purchased the factory in 1937, the expenditure incurred in the relevant accounting year was in the region of Rs. 1,20,000. The appeal accordingly fails and is dismissed. No costs." 17. The expression "repairs" implies a necessity i.e., something, which is required to be done in order to bring the asset to its original functionality in proper order. Such repairs may or may not be urgent but are certainly called for to restore the asset to its full original functionality. Where the repair is immediately attended to, the same can be construed as current repairs and where it is allowed to be accumulated, such repairs would not be current repairs but at the same time allowable as an expenditure under section 37(1) provided that the fundamental condition of the ..... 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