2010 (4) TMI 726 - AT - Income Tax

Tribunal upholds AO's assessment, allows leasehold improvement costs & rental advances written off.

United Motors (India) Ltd. Versus ITO

United Motors (India) Ltd. Versus ITO - TMI Issues Involved:1. Validity of the CIT's action under section 263 of the Income Tax Act.2. Allowance of Rs. 16,46,917/- on account of 'cost of improvement of leasehold assets written off'.3. Allowance of Rs. 40,20,388/- on account of 'advances against rental properties written off'.4. Allowance of prior period expenses of Rs. 7,42,653/-.Issue-Wise Detailed Analysis:1. Validity of the CIT's Action under Section 263:The CIT issued a notice under section 263 proposing to revise the assessment on the grounds that the assessment order was erroneous and prejudicial to the interest of the revenue. The CIT contended that certain allowances made by the Assessing Officer (AO) were not justified. The assessee argued that the assessment order was neither erroneous nor prejudicial to the interest of the revenue and cited the Supreme Court's judgment in CIT Vs. Max India Ltd., which states that if the AO adopts one of the two possible views, the assessment cannot be deemed erroneous or prejudicial. The Tribunal agreed with the assessee, stating that the AO's view was sustainable and supported by judicial precedents.2. Allowance of Rs. 16,46,917/- on Account of 'Cost of Improvement of Leasehold Assets Written Off':The assessee had incurred expenses for improvements on leasehold assets, which were capitalized and depreciated over the years. Upon surrendering the leasehold assets, the remaining balance of Rs. 16,46,917/- was written off and claimed as a deduction. The CIT argued that this represented a capital loss. The Tribunal noted that the agreements were leave and license agreements, not leases, and the expenditure was for business purposes. The Tribunal referenced the Supreme Court's judgment in CIT Vs. Madras Auto Service (P.) Ltd., which supports the claim that such expenses, even if capitalized, can be considered business expenses. The Tribunal concluded that the AO's allowance of this amount was not erroneous or prejudicial to the revenue.3. Allowance of Rs. 40,20,388/- on Account of 'Advances Against Rental Properties Written Off':The assessee had made interest-free deposits for rental properties, which were written off when not returned. The CIT argued that these were capital losses. The Tribunal examined various agreements and found that the deposits were for obtaining permissive use of the premises and did not create any enduring advantage or capital asset. The Tribunal referenced the Bombay High Court's judgment in IBM World Trade Corporation Vs. CIT and the Supreme Court's judgment in CIT Vs. Madras Auto Service (P.) Ltd., which support the view that such deposits, when lost, can be considered business losses. The Tribunal held that the AO's allowance of this amount was a possible and sustainable view.4. Allowance of Prior Period Expenses of Rs. 7,42,653/-:The CIT also considered the allowance of prior period expenses as erroneous. The Tribunal noted that the CIT had restored this issue to the AO for factual verification. Since the CIT did not conclusively determine the error but rather sought further verification, the Tribunal did not find this part of the CIT's order to be conclusive.Conclusion:The Tribunal set aside the CIT's order under section 263, holding that the AO's assessment was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal allowed the appeal of the assessee with no order as to costs.