2016 (6) TMI 182 - HC - Income Tax

High Court affirms ITAT decision on categorizing maintenance expenses as revenue expenditure

Pr. Commissioner of Income Tax, Panchkula Versus Housing Board Haryana, Panchkula

The High Court upheld the ITAT's decision to categorize expenses incurred by the respondent assessee-Board for the maintenance of colonies as revenue ... Disallowance of expenses incurred as maintenance of colonies - revenue or capital expenditure - Held that:- The assessee's business was to provide housing to the general public in the State of Haryana after development of housing colonies. The maintenance work was to be carried out by the respective municipal committees or local authorities. With regard to particular colonies at South Vihar and Narnaul, as per decision of the Board, the assessee had to carry out the maintenance work like upgradation of roads, park, street light, boundary wall etc. The enduring benefit did not accrue to the appellant but to the allottee. Further, the assets did not belong to the assessee. Thus, the expenditure incurred by the assessee on maintenance work was held to be revenue in nature and, therefore, the judgment relied upon by the learned counsel for the appellantrevenue in Arvind Mills Limited's case (1992 (7) TMI 2 - SUPREME Court ) is distinguishable - Decided in favour of assessee. Issues Involved:1. Whether the ITAT erred in deleting the addition made on account of disallowance of expenses incurred as maintenance of colonies.2. Whether the expenditure incurred by the respondent assessee-Board towards maintenance of colonies is a capital expenditure and not allowable under Section 37 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deletion of Addition Made on Account of Disallowance of Expenses:The revenue appealed against the ITAT's decision to delete the addition of Rs. 3,25,96,429/- made by the Assessing Officer (AO) on account of disallowance of expenses incurred for the maintenance of colonies. The AO had disallowed this expenditure, categorizing it as capital expenditure. The CIT(A) reversed this decision, categorizing the expenditure as revenue in nature, which the ITAT upheld.2. Nature of Expenditure Incurred for Maintenance of Colonies:The respondent-assessee Board, engaged in providing housing to the general public in Haryana, incurred expenses for maintaining colonies that did not fall within municipal limits. The AO contended that these expenses should be capitalized, arguing that they created enduring assets. However, the CIT(A) found that the expenditure was for repair and maintenance, not for creating new assets, thus qualifying as revenue expenditure under Section 37 of the Act.Detailed Analysis:Facts and Proceedings:The respondent-assessee filed its return declaring an income of Rs. 69,46,65,250/-. During scrutiny, the AO disallowed the claimed maintenance expenses, categorizing them as capital expenditure. The CIT(A) reversed this decision, holding the expenses as revenue in nature, which the ITAT confirmed. The revenue's appeal to the High Court contended that the ITAT erred in its judgment.Arguments by Revenue:The revenue relied on the Supreme Court judgment in Arvind Mills Limited vs. Commissioner of Income Tax, arguing that the expenditure was capital in nature since it created enduring assets. The revenue emphasized that the expenses should be capitalized as they provided long-term benefits.Arguments by Respondent-Assessee:The respondent-assessee cited the Supreme Court judgment in L.H. Sugar Factory and Oil Mills (P) Limited vs. Commissioner of Income Tax, arguing that the expenditure was revenue in nature as it did not create any tangible or intangible assets for the assessee. The maintenance was necessary for operational efficiency and did not result in capital asset creation.Findings by CIT(A):The CIT(A) found that the expenses were for maintaining existing infrastructure and did not create new assets. The expenses were necessary for business operations and provided benefits to the allottees, not the assessee. The CIT(A) directed the AO to delete the addition, categorizing the expenses as revenue in nature.Findings by ITAT:The ITAT concurred with the CIT(A), noting that the expenses were for maintenance of colonies, which did not belong to the assessee. The ITAT emphasized that the assessee did not derive enduring benefits from these expenses, and they were necessary for maintaining the business.High Court's Conclusion:The High Court found no illegality or perversity in the findings of the CIT(A) and ITAT. It distinguished the case from Arvind Mills Limited, noting that the assessee's business was to provide housing, and the maintenance work was necessary for operational efficiency. The enduring benefit accrued to the allottees, not the assessee, making the expenditure revenue in nature.Judgment:The High Court dismissed the appeals, concluding that no substantial question of law arose. The expenses incurred by the assessee for the maintenance of colonies were held to be revenue in nature and allowable under Section 37 of the Income Tax Act, 1961.