2013 (9) TMI 1064 - HC - Income Tax

Expenditure on leased building repair deemed capital by court. Upheld decisions of revenue authorities.

M/s Liberty Group Marketing Division, Versus C.I.T

The court upheld the concurrent findings of the revenue authorities that the appellant's expenditure on repair and maintenance of a leased building was ... Allowability of expenditure - revenue v/s capital - Held that:- The appellant has expended money not merely to preserve and maintain an existing building but to obtain a fresh advantage by creating cabins, rooms etc. by the use of cement, iron, saria etc. as opposed to mere maintenance and preservation of the premises. The Assessing Officer has allowed expenses on account of renovation of toilets, painting etc. as a revenue expenditure but where the expense involves capital expenditure, it has not been allowed under Section 30(a)(i) of the Act. We find no error in the course adopted by the revenue. In the absence of any error of law or of fact in the impugned orders, we find no reason to hold that the assessee is entitled to deduction under Section 30(a)(i) of the Act. The questions of law are, therefore, answered against the appellant. Issues Involved:1. Whether the ITAT was justified in rejecting the appellant's claim under 'Building Repair Expenses' and treating it as Capital Expenditure.2. Whether the ITAT's findings are perverse and against the evidence on record.3. Whether the ITAT misdirected itself by being influenced by irrelevant factors and applying erroneous criteria under the Income Tax Act, 1961.Detailed Analysis:Issue 1: Justification of ITAT in Treating Expenditure as Capital ExpenditureThe assessee challenged the order of the ITAT which affirmed the decision of the Assessing Officer (AO) and the CIT (Appeals) treating the expenditure on repair and maintenance of a leased building as capital expenditure. The appellant argued that the expenses were for creating temporary partitions and not for creating a new asset or obtaining a new advantage. The AO, however, found that the expenditure led to the creation of a new asset and provided a new advantage, thus classifying it as capital expenditure. The CIT (Appeals) and ITAT upheld this view, relying on the Supreme Court judgment in CIT v. Sarvana Spinning Mills P. Ltd., which emphasized that expenditure leading to the creation of a new asset or advantage is capital in nature.Issue 2: Perversity and Evidence on RecordThe appellant contended that the ITAT's findings were unsupported by evidence and based on contradictory facts. The AO's report indicated that the expenditure was capital in nature due to the creation of new structures and the use of substantial materials like teak, plywood, and iron sheets. The CIT (Appeals) and ITAT found that the expenditure was not merely for preservation and maintenance but for creating new assets, thereby supporting the AO's findings. The AO allowed some expenses as revenue expenditure but classified significant expenditures as capital due to the nature of the work done.Issue 3: Misapplication of Criteria under Income Tax Act, 1961The appellant argued that the ITAT misapplied the criteria for determining capital versus revenue expenditure. The court examined Section 30(a)(i) of the Act, which allows deductions for repairs to tenanted premises unless the expenditure is capital in nature. The court referred to the judgments in New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT and Ballimal Naval Kishore & Another v. CIT, which set the test for distinguishing between capital and revenue expenditure. The expenditure should preserve and maintain an existing asset, not create a new one or provide a new advantage. The court found that the ITAT correctly applied these principles, determining that the appellant's expenditure led to the creation of new assets and advantages, thus classifying it as capital expenditure.Conclusion:The court upheld the concurrent findings of the AO, CIT (Appeals), and ITAT that the expenditure incurred by the appellant was capital in nature. The appellant's expenditure was not limited to preserving and maintaining the existing asset but included creating new structures and obtaining new advantages. The court found no error in the decisions of the revenue authorities and dismissed the appeal, answering all questions of law against the appellant.