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TMI Blog2014 (8) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... aid that the expenditure incurred by the assessee on repair and renovation was in the nature of capital - The premises belonged to the directors of the company who had more than 50 percent share. Whether on the basis of explanation-1 to Section 32(1) it can be said that despite being expenditure in the nature of revenue the assessee will only be entitled for depreciation – Held that:- Sub-section (1A) and subsequent omission of Sub-section (1A) and insertion of explanation-1 after the second proviso to Section 32(1)(iii) are brought to the statute only for the reason that in a case where capital expenditure is incurred by the assessee in respect of building not owned by him in that case there was no provision in the Act for grant of depreciation or any other deduction and to meet such hardship faced by such assessee, the benefit of depreciation was provided - The pre-condition to invoke the provision of explanation-1 after the second proviso to Section 32(1)(iii) is that expenditure itself should be capital in nature - If the expenditure by its nature itself is not capital in nature and its nature is revenue then provisions of explanation-1 after second proviso to section 32(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises; (ii) without prejudice to what is stated above, to allow society maintenance charges of ₹ 6,78,015/-; and to modify the assessment in accordance with the provisions of the Act. 4. Each of the above grounds of appeal are independent and without prejudice to each other. 3. The assessee is engaged in the business of investment manager / advisor. During the year under consideration the assessee has taken a new premises on rent and has incurred total expenses of ₹ 86,48,765 on repair renovation etc. as follows:- Sr. No. Name of the supplier Address of the supplier Total (Rs.) Purpose A Building and Other maintenance 1. Free Press House Limited Free Press House, 215, Nariman Point Mumbai-400 021. 4,71,171 Quarterly building maintenance charges to the society 2. Mittal Tower Premises Coop. Society Ltd. Basement, Mittal Towers, 210, Narim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied / floor tiles. 12 Anurup Designs Pvt.Ltd. Anurup House, plot 96, Lane 3, Hindu Colony, Dadar (E) Mumbai 400 014. 2,64,222 Professional fees. Total (B) 79,70,750 Total (A) + (B) 86,48,765 3.1 The A.O. required the assessee to show cause as to why the office renovation expenses should not be capitalized. Vide letter dated 25th November, 2010, it was submitted that these expenses are incurred on tiling, plumbing, false ceiling, etc. which could not be reused on vacation of premises. However, resorting to Explanation 1 to section 32, the A.O. observed that the expenses are in respect of civil work, tiling work, marble work, fittings, fixtures, interior work, etc. cannot be taken as revenue expenditure as claimed by the assessee as these are major renovation expenses in the nature of capital and since the property was taken on lease on 7th December, 2007, the assessee entitled to depreciation at the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee got the business advantage of using modern business premises at a low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was held to be perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure. (ii) Talathi And Panthaky Associates P.Ltd. [(2012) 343 ITR 309 (Bom.)] In the said case, the assessee was a tenant in a building and was in the occupation of an area admeasuring 5,000 sq.ft. The building was declared by the Municipal Corporation to be unsafe for occupation and an eviction notice was served on the occupants. A suit was instituted for partition between the owners of the property. A developer came to be impleaded as a party respondent and was a party to the consent terms. Under the consent terms, the developer agreed to repair and reconstruct the building at his cost. Under the agreement, the tenancy of the assessee in respect of the sixth floor in its possession was confirmed and the assessee assumed an obligation to contribute a sum of ₹ 1.50 crore for the work of repair and restoration of the structure. It was agreed that there would be no increa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round that the expenditure is incurred only towards painting, re-laying of the damaged floors, partitions, etc., which can never considered to be capital expenditure of the nature mentioned in the above Explanation and thus the appeal filed by the Revenue was dismissed. (v) CIT v. Mehta Transport Company [(1986) 160 ITR 35 (Guj)] An expenditure of ₹ 16,748 was laid out on construction of loft admeasuring about 350 sq.ft. on the ground floor office premises taken on lease in Bombay. The said amount was disallowed on the ground that it is in the nature of capital expenditure. As per the finding given by the Tribunal, construction of loft was not in the nature of renovation but was a new construction. However, the Tribunal held that the expenditure incurred by the assessee was with a view to make the leased premises more suitable for business purposes and they could not be treated as capital expenditure. Their Lordship observed that the expenditure incurred for construction of loft was neither for extending nor for addition to the premises. The assessee was putting the available office space to its optimum use for accommodating a large staff of 30 members which wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Simply because of repairs the life of the building was prolonged for at least 15 years, it could not be said that the expenditure was in the nature of a capital expenditure and thus, it was held that the said amount was allowable as business expenditure. 5. The learned AR further distinguished the decision of the Tribunal relied upon by the learned CIT(A) in the case of Free India Assurance Services Ltd. v. DCIT (supra). The learned AR produced before us the copy of the said decision and it was submitted that the following facts distinguishable from the decision. (i) The expenditure was incurred before the assessee started business in its office and these expenses were not of routine nature but of one time expenditure. (ii) The wooden partitions, cabins, cubicles, desks are in the nature of permanent furniture and fixtures for starting the business. (iii) The said premises was owned by the Directors of the company who had more than 50 per cent of the shares of the company. This premises was going to be remained with the assessee permanently for all practical purposes. Thus, it had resulted in enduring benefit of the company. It was pleaded by him that the facts of the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a good standard. The expenditure incurred by the assessee was in order to meet these business requirements. The renovation expenses were in connection with modifying the cabins, cubicles, laying good marbles, painting and other related expenditure. These expenditure were incurred and were necessary for the purpose of business to carry it more efficiently and also for creating good environment for the staff as well as the clients. These expenditure were incurred wholly and exclusively for the purpose of business. The repair / renovation work carried out at the premises which were not owned by the assessee but were taken on lease. The expenditure incurred, as can be seen from the details furnished, has not created any capital asset nor it has given the benefit of enduring nature. None of the expenditure entails any structural change or extension or improvement of the building, therefore, Explanation 1 to section 32(1) will not be applicable. These submissions of the assessee are recorded by the Ld. CIT(A) in para 6.2 of the impugned order. 7.1 If the above submissions of the assessee are considered in the light of the details of expenses submitted in the aforementioned chart, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et or new advantage has been brought into existence by the assessee, it cannot be said that the assessee has incurred capital expenditure and quantum of expenditure alone also cannot be considered sufficient to arrive at a conclusion that the expenditure is in the nature of capital. What is necessary to see is as to whether the expenditure is in the nature of capital or it is in the nature of revenue. 7.2 In the case of CIT v. Talathi and Panthaky Associates P.Ltd. (supra), despite making payment of ₹ 1.5 crore towards reconstruction of the tenanted premises, their Lordship have held that the expenditure was not in the nature of capital. The assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of capital asset and the occupation of the assessee continued in the character of tenancy, the expenditure was in the nature of capital. In the present case also the assessee did not acquire any capital asset but made the leased premises more suitable for its business. 7.3 In the case of CIT v. Amway India Enterprises (supra) Their Lordship have considered the earlier decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cope was explained in Circular No.56 dated 19/3/1971. It was described that under the existing provisions of Income Tax Act, the assessee was not entitled to depreciation or any other deductions in respect of capital expenditure incurred by him on extension or renovation or improvement of a building not belonging to him which is used for the purpose of business or profession. Therefore, new sub-section (1A) is being inserted w.e.f. 1/4/1971. Later on sub-section (1A) was omitted and explanation-1 was inserted after the second proviso to section 32(1)(iii) of the Act in view of switch over to block concept by the Taxation Laws (Amendment and Miscellaneous provisions) Act 1986 and the reason for amending sub-section (1A) of section 32 and insertion of explanation has been stated in the Circular No.469 dated 23/9/1986. 7.6 The relevant part of both aforementioned Circulars are reproduced below. CIRCULAR NO.56, dated 19/03/1971. Amortisation of expenditure on renovation or extension of, or improvement to, leased business premises. 56. Under the existing provisions of the IT Act, an assessee is not entitled to depreciation or any other deduction in respect of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ension of or improvement to a building which an assessee does not own but in respect of which he holds a lease or other right of occupancy. As a result of the switch over to the block concept, this provision has been omitted. By the newly inserted Expln. 1 after the second proviso to s. 32(1)(iii) of the IT Act, it has been provided that depreciation will be allowed in respect of such a structure or work as if it is a building owned by the assessee. The reading of above explanatory notes will make it clear that Sub-section (1A) and subsequent omission of Sub-section (1A) and insertion of explanation-1 after the second proviso to Section 32(1)(iii) are brought to the statute only for the reason that in a case where capital expenditure is incurred by the assessee in respect of building not owned by him in that case there was no provision in the Act for grant of depreciation or any other deduction and to meet such hardship faced by such assessee, the benefit of depreciation was provided. The pre-condition to invoke the provision of explanation-1 after the second proviso to Section 32(1)(iii) is that expenditure itself should be capital in nature. If the expenditure by its nature i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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