1988 (1) TMI 67 - AT - Income Tax

Tribunal affirms repairs as revenue expenditure under Income Tax Act, department's appeal dismissed

Third Income-Tax Officer. Versus Favourite Book Cloth & Paper Mart.

The Tribunal upheld the Commissioner's decision, ruling that the expenditure on repairs by the assessee constituted revenue expenditure under sections ... Business Expenditure, Repairs, Building, Tenant Issues:1. Whether the expenditure incurred by the assessee for repairs to the business premises is revenue or capital in nature.2. Whether the repairs undertaken by the tenants, including the assessee, on the building qualify as revenue expenditure under the Income Tax Act.3. Whether the expenses on repairs can be allowed under section 30 or section 37 of the Income Tax Act without a formal contract with the landlord.Detailed Analysis:1. The appeal before the Appellate Tribunal ITAT Bombay-B relates to the assessment year 1981-82, concerning the nature of expenditure incurred by the assessee for repairs to the business premises. The Income-tax Officer initially treated the expenditure as capital in nature, allowing depreciation under section 32(1A) of the Act. However, the Commissioner of Income-tax (Appeals) accepted the plea of the assessee, directing the Income-tax Officer to treat the expenditure as revenue expenditure. The primary issue is whether the repairs undertaken by the assessee fall under revenue or capital field.2. The Tribunal analyzed the nature of repairs carried out by the tenants on the building. It was observed that the repairs were essential to maintain the existing asset and did not result in the creation of a new asset or advantage. Referring to the decision of the Bombay High Court in CIT v. Oxford University Press, the Tribunal emphasized that the distinction between repair, renewal, and restoration is crucial. The repairs were extensive but aimed at preserving the already existing asset. The Tribunal rejected the argument that the life of the premises was extended as a new advantage, as even ordinary repairs would extend the structure's life.3. The Tribunal further cited the Supreme Court decision in CIT v. Kalyanji Mavji & Co., where expenditure on renovating a colliery for resuming mining operations was allowed as business expenditure under section 37(1) of the Income Tax Act. Drawing parallels, the Tribunal concluded that the expenditure on repairs in the present case was necessary to carry on the existing business and earn profits, thus falling under the ambit of section 37(1) of the Act. Additionally, the Tribunal addressed the argument that repairs could only be allowed under section 30 of the Act with a contractual obligation on the assessee. However, the Tribunal clarified that when the landlord fails to make repairs, and the premises are at risk of becoming unusable for business, the tenant undertaking repairs independently makes the expenses allowable under section 30(1) or section 37(1) of the Act.In conclusion, the Tribunal upheld the Commissioner's order, confirming that the expenditure on repairs by the assessee was allowable as revenue expenditure under section 30(1) or section 37(1) of the Income Tax Act. The appeal by the department was dismissed.