Revenue repair expenditure and treaty-protected non-resident fees escaped disallowance under income-tax law.

Repair and renovation of an existing Mumbai office, including window repair, painting, flooring and skirting, was held to be revenue expenditure because no new asset came into existence and the work was only restoration and maintenance. Professional fees paid to a U.K. non-resident consultant were also held not to attract disallowance under section 40(a)(ia) because the payment was not taxable in India under the applicable DTAA, the recipient had no fixed place of business or permanent establishment in India, and the income fell within the treaty provision for independent personal services rather than directors' fees.

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Issues: (i) whether expenditure incurred on repair and renovation of the Mumbai office was capital in nature or allowable as revenue expenditure; (ii) whether professional paid to a non-resident consultant was liable to disallowance under section 40(a)(ia) of the Income-tax Act, 1961, when the payment was not taxable in India under Article 15 of the applicable DTAA.

Issue (i): whether expenditure incurred on repair and renovation of the Mumbai office was capital in nature or allowable as revenue expenditure.

Analysis: The expenditure was incurred on items such as sliding window repair, painting, flooring, skirting and allied office repairs in an existing asset. No new asset came into existence and the work was in the nature of restoration and maintenance of the existing premises. Such expenditure falls within the category of revenue outlay and is not to be treated as capital merely because it involved replacement or improvement of parts of the premises.

Conclusion: The addition made by treating the repair expenditure as capital was deleted and the claim was allowed as revenue expenditure.

Issue (ii): whether professional fees paid to a non-resident consultant was liable to disallowance under section 40(a)(ia) of the Income-tax Act, 1961, when the payment was not taxable in India under Article 15 of the applicable DTAA.

Analysis: The payment was made for professional services and not in the capacity of directors fees. The recipient was a resident of the U.K., did not stay in India for the relevant threshold period, and there was no material to show a fixed place of business or permanent establishment in India. In that setting, the payment fell under Article 15 governing independent personal services and not Article 17 governing directors fees. Since the amount was not taxable in India under the treaty, the disallowance for failure to deduct tax at source could not survive.

Conclusion: The disallowance under section 40(a)(ia) was deleted and the payment was held not taxable in India.

Final Conclusion: Both appeals were allowed, and the assessee succeeded on both the repair expenditure issue and the treaty-based disallowance issue.

Ratio Decidendi: Expenditure on repair and renovation of an existing asset, without creation of a new asset, is revenue expenditure; and where a non-resident's professional income is taxable only under the treaty provision applicable to independent personal services and is not taxable in India, a disallowance for non-deduction of tax at source cannot be sustained.

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