2022 (12) TMI 575 - AT - Income Tax

Renovation expenses deemed revenue in nature by ITAT, Ahmedabad.

The ITAT upheld the CIT(A)'s decision, confirming that the renovation expenses incurred were revenue in nature. The expenses were deemed necessary for ... Nature of expenditure - expenses on repairs under renovation - capital expenditure or revenue expenditure - HELD THAT:- On perusal of the material and the facts is the case in Landmark Automobiles Pvt. Ltd. [2014 (12) TMI 753 - ITAT AHMEDABAD] are identical in nature. The Coordinate Bench followed jurisdictional High Court judgment in the case of Desai Bros.[1974 (9) TMI 9 - GUJARAT HIGH COURT] and other High Court judgments. In our considered view this issue is no more res integra. Therefore, respectfully following the ratio of the judgment rendered by the Coordinate Bench in the case of Landmark Automobiles Pvt. Ltd.. [2014 (12) TMI 753 - ITAT AHMEDABAD] we have no hesitation in confirming the order passed by the CIT(A) holding that the expenditure incurred by the assessee for renovating its four business showrooms are revenue in nature. Appeal filed by the Revenue is dismissed. Issues Involved:1. Classification of renovation expenses as capital or revenue expenditure.2. Appropriateness of the Assessing Officer's decision to allow partial depreciation and treat the remaining expenses as capital expenditure.3. Validity of the CIT(A)'s decision to treat the entire renovation expenses as revenue expenditure.4. Examination of relevant case laws and judicial precedents.Issue-wise Detailed Analysis:1. Classification of Renovation Expenses:The core issue revolves around whether the renovation expenses incurred by the assessee for its four showrooms should be classified as capital or revenue expenditure. The assessee argued that the expenses were for repairs and maintenance, necessary to comply with Skoda Company's Corporate Identity Look Policy, and did not result in the creation of a new asset or structural change to the building. The Assessing Officer, however, treated these expenses as capital expenditure and allowed only partial depreciation.2. Assessing Officer's Decision:The Assessing Officer issued a show-cause notice questioning why the renovation expenses should not be treated as capital expenditure. Despite the assessee's explanation, the AO allowed depreciation of Rs. 81,08,525/- and added the balance amount of Rs. 10,48,11,003/- to the income of the assessee, initiating penalty proceedings under Section 271(1)(c) of the Act. The AO's decision was based on the belief that the expenses resulted in the acquisition of a new asset, thus warranting capital treatment.3. CIT(A)'s Decision:Upon appeal, the CIT(A) held that the expenses were for efficiently using the existing space and meeting the principal's requirements without adding new floor area or creating a new capital asset. The CIT(A) referenced the judgment in the case of ACIT (OSD)-I vs. Landmark Automobiles Pvt. Ltd., where similar expenses were treated as revenue expenditure. The CIT(A) emphasized that the expenses were for renovation and repairs, not for acquiring a new capital asset, thus classifying them as revenue expenditure.4. Examination of Case Laws and Judicial Precedents:The CIT(A) and the ITAT relied on several judicial precedents to support their decision. Key cases included:- ACIT vs. Desai Bros. (1977) 108 ITR 14 (Guj.): Replacement of a petrol engine with a diesel engine was considered current repairs, not resulting in a new asset.- CIT vs. Rameshwar Prasad Kejriwal & Sons (P.) Ltd. (1994) 74 taxman 124 (Cal.): Replacement of machine parts, even if costly, did not create a new asset and qualified as revenue expenditure.- Alembic Chemical Works Co. Ltd. V/s. CIT 177 ITR 377: Highlighted the need for flexibility in distinguishing between capital and revenue expenditure, especially in rapidly advancing fields.- CIT V/s. Bharat Suryoday Co. Ltd. 202 ITR 942: Expenses for rebuilding a wall due to municipal requirements were treated as revenue expenditure.- Ahmedabad Mfg. & Calico Pvt. Ltd. V/s. CIT 162 ITR 800: Expenses for reconditioning a room to accommodate new machinery were considered revenue expenditure.The ITAT concluded that the expenses were for maintaining and preserving an existing asset, aligning with the principles laid out in the cited cases. The ITAT found no justification for the AO's arbitrary treatment of part of the expenses as capital and part as revenue.Conclusion:The ITAT upheld the CIT(A)'s decision, confirming that the renovation expenses incurred by the assessee were revenue in nature. The appeal filed by the Revenue was dismissed, and the order pronounced on 23.11.2022 at Ahmedabad confirmed that the expenses did not result in the creation of a new asset and were necessary for the efficient use of existing space.