2014 (3) TMI 585 - HC - Income Tax

High Court rules disputed sum as revenue expenditure, allows 100% depreciation on temporary constructions.

The High Court ruled in favor of the assessee on both issues. It held that the disputed sum of Rs. 5 lakhs was revenue expenditure, not capital in nature, ... Nature of Expenses - Whether the Tribunal was justified in holding that the sum was capital in nature and was not revenue expenditure that could properly be deducted – Held that:- The ITAT has not adequately dealt with the reasoning of the CIT(A) who had carried out the site inspection after which he held that the entire expenses had to be treated as revenue expenditure - the ITAT does not clearly point to the creation of any new asset - Rather, it is only the sitting capacity of the existing bar that was increased with the renovation carried out – Relying upon Empire Jute Company Limited Versus Commissioner of Income-Tax [1980 (5) TMI 1 - SUPREME Court] - an action that merely facilitates the assessee’s business (making it more profitable), whilst leaving the fixed capital untouched, is revenue in nature – Decided in favour of Assessee. 100% claim of depreciation on temporary constructions – Held that:- The materials on record show that the construction was not authorised and appears to have been put up only for the convenience of workers who were engaged by the assessee - The record also indicates that the constructions were subsequently demolished – although after the Commissioner’s order – thus, the depreciation claimed to the tune of 100% cannot be termed so unreasonable as to warrant reversal of the CIT(A)’s view – Decided in favour of Assessee. Issues:1. Whether the Tribunal was justified in holding that a sum of Rs. 5 lakhs was capital in nature and not revenue expenditureRs.2. Whether the Tribunal was justified in holding that no depreciation was allowable on a sum of Rs. 3,59,803 claimed as expenditure on temporary constructionsRs.Analysis:Issue 1: The assessee, engaged in the hospitality business, claimed a sum towards building repairs and expenses. The Assessing Officer accepted part of the explanation but added Rs. 5 lakhs as capital expenditure. The CIT(A) found the expenditure to be revenue expenditure, setting aside the Assessing Officer's findings. However, the ITAT disagreed, relying on precedent and reinstated the disallowance. The assessee contended that the entire expenses should be treated as revenue expenditure, enhancing income generation without creating new assets. The High Court observed that the ITAT did not adequately address the CIT(A)'s reasoning, emphasizing that the renovation only increased the sitting capacity without creating new assets. Citing relevant case laws, the Court ruled in favor of the assessee, holding the expenditure as revenue.Issue 2: The assessee claimed 100% depreciation on temporary constructions, which the AO disallowed due to the use of marble and false ceiling. The Tribunal upheld this decision based on similar reasoning. The High Court noted that the constructions were unauthorized and later demolished, indicating they were for workers' convenience. Considering the circumstances, the Court found the depreciation claim reasonable and upheld the CIT(A)'s view. Consequently, the Court ruled in favor of the assessee against the Revenue on this issue as well.In conclusion, the High Court allowed the appeal without costs, holding in favor of the assessee on both issues.