TaxTMI 
TaxTMI 
2019 (4) TMI 702
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.... 1. " Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition on account of extensive repairs and renovation of the leased premises without appreciating the fact that these expenses were capital in nature and that the Explanation to section 30 also provides for treatment of expenses as Capital Expenditure for rented premises." 2. " Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the expenses on repairs and renovation, as per para 1 above, were of enduring nature and were not in the form of current repairs" 3. " Whether on the facts and circumstances of the case and in law, the Ld. CIT{A) has erred in admitting additional evidences in form of invoices/ bills and not granting opportunity to the AO under Rule 46A to give comments" 4. "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored." 5. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. The brief facts of the case are that the assessee is e....
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....iture is capital in nature incurred by the assessee for enduring benefits. The AO observed that expenditure was incurred for repair/ improvements and renovation of Jalal Bakery at Bandra. The AO referred to Explanation 1 to Section 32 of the 1961 Act to hold the said expenditure was capital in nature. The AO , thus held that repair and maintenance expenditure of Rs. 77,17,043/- pertaining to Jalal bakery at Bandra be treated as capital expenditure and the same was not allowed as Revenue Expenditure as claimed by the assessee. However, the AO allowed depreciation u/s. 32(1) of the 1961 Act. 3.3 The AO further observed from ledger account of Repair and Maintenance Expenditure Account that the assessee has incurred an amount of Rs. 10,26,725/- for setting up of kitchen equipments/ renovation of kitchen at Jalal Bakery at Bandra and outlet at Colaba. The AO also held the said expenditure to be capital in nature as in the opinion of the AO the said expenditure was having benefit of enduring nature. The said expenditure was classified by the AO as Plant and Machinery being kitchen equipment and depreciation at an applicable rates was allowed by the AO, vide assessment order dated 3....
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..... In support of the issues raised, the Appellant would like to make the following submissions before Your Honour: a) It is submitted that the Ld. AO erred in disallowing the expenditure incurred by the Appellant on repairs and maintenance by holding that the said expenses have not been incurred in the ordinary course of business but for the purpose of receiving enduring benefit for subsequent years. The Ld. AO further erred in holding that the expenses are in the nature of capital expenditure and not revenue expenditure when admittedly, the Appellant only pays a rent of Rs. 1,00,000/- (Rupees one lakh) for the tenanted premises at Bandra, and thus, for the renovation expenses incurred at the said premises, the rent payable by the Appellant stands reduced, which benefit is in the revenue field, and therefore, the expenses should have been allowed as being purely revenue in nature. b) It is submitted that during AY 2012-13, the Appellant had two outlets at Colaba and Bandra, which had been operational since the year 2004 and 2009 respectively. The Appellant was in the process of opening other outlets across Mumbai for sale of its bakery and confectionery products at....
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....ce these expenses were incurred wholly and exclusively by the Assessee for the purpose of its business, the same are allowable under S. 37(1) of the Income Tax Act, 1961. e) In support of the Appellant-Assessee's contention that these are revenue expenses, a detailed schedule listing out and providing narration for all the expenses incurred by the Assessee for the AY under consideration and treated as revenue expenses, including the expenses amounting to Rs. 92,66,827/- which were disallowed by the Ld. AO, is hereto annexed as Annexure B. Attention of Your Honour is more specifically invited to the entries in the said Annexure B at Serial No. 6 and Serial No. 10, as these pertain to the Bandra shop and the Bandra bakery expenses disallowed by the Ld. AO. f) It is submitted that the Ld. AO has completely failed to apply his mind to the facts and circumstances surrounding the claim of the Assessee that the expenses incurred by it are revenue in nature. The same can be very clearly illustrated as follows, by listing out some of the expenses which the AO has treated as capital expenses in nature - i. Payments made by the Assessee towards society maintenan....
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....no enduring benefit in the capital field. The test of enduring benefit is not a conclusive test for determining any disallowing of repairs and renovation which has also been stated by the Apex Court in the landmark case of Empire Jute Co. Ltd. v. CIT, [{1980) 124 ITR 1 (SC)] wherein the Hon'ble Apex Court explained as to how the test of enduring benefit is not conclusive: " What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." i) Even in the present case....
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....essor of the premise that it has taken on a leasehold basis. In this regard, in addition to the above decision of the Apex Court, other High Courts have also taken a similar view, including the Hon'ble Jurisdictional Bombay High Court in the cases of CIT v. Hede Consultancy Pvt. Ltd., [(2002) 258 ITR 380 (Bom)], and the landmark case of CIT v. Talathi and Panthaky Associated Pvt. Ltd., [(2012) 343 ITR 309 (Bom)]. A copy of the judgement in Talathi and Panthaky Associated Pvt. Ltd. is hereto annexed for Your Honour's perusal as Annexure H. I) The Hon'ble Delhi High Court has also taken a similar view inter alia in Instalment Supply P. Ltd. v. CIT, [(1984) 149 ITR 52 (Del)] and CIT v. Hi Line Pens Pvt. Ltd., [306 ITR 182 (Del)]. m) Based on the above factual and legal submissions, it is reiterated that expenses of the Appellant on repairs and maintenance of the business premises of the Appellant are revenue expenses and not capital expenses and hence, deduction in respect thereof should be allowed by deleting the addition made by the Ld. AO. The claim of the Assessee 7. Thus, it is respectfully submitted that the findings arrived at by the Ld. A....
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....unt was mainly for setting up kitchen equipments/renovation of kitchen at Jalal Bakery. This amount was also treated as capital in nature and disallowed after allowing applicable rate of depreciation @ 15%. Thus, a disallowance of Rs. 9,49,721/-was made. 5.2.3 It is noted that during the year, the appellant had taken over an additional bakery called Jalal Bakery to meet the increased demand of its bakery products. This was taken on lease hold for 5 years period with a monthly rental of Rs. 100.000/-. As per the agreement dated 26/05/2011, clause 10, the appellant was permitted to install assets, articles, amenities, furniture, fixtures, air-conditioning plants, industrial ovens and other equipments and to renovate the premises including tiling, flooring etc. Further, as per clause 12 of the agreement the appellant was prohibited to carry out any construction or erection except wall, partitions, toilets etc., and was permitted to carry out repairs, renovation and interior work. 5.2.4 The basic contention of the appellant is that the entire expenditure of Rs. 92,66,827/- did not lead to creation of new asset of enduring benefit and hence, it was allowable under sect....
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....uld be regarded as a business expense. Contrariwise if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. The Supreme Court noted that by expending money for the purposes of construction, the assessee did not acquire any capital asset and the only advantage which it had obtained was the lease of a new building at low rent. After adverting to the earlier judgments of the Court in Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT[1971] 82 ITR 376 (SC) , L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293/4 Taxman 5 ($C) and CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 /38 Taxman 11OA (SC) the Supreme Court observed as follows: "All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of....
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....e Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1 April 1988. Explanation I stipulates that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation 1 is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation 1 brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owne....
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....f its business would not be able to take off. The building premises do not belong to the appellant and the improvements made are for meeting the higher standards of hygiene and baking that is followed by the appellant. Under the circumstances, in view of the ratios of the case laws cited above, expenditure in relation to such additions/improvements cannot-be considered as creation of capital asset having enduring benefit for the appellant. The ratios of the following decisions also support the above conclusion: * CIT Vs. Hede Consultancy Pvt. Ltd. (2002) 258 ITR 380 (Bom) * Nila Products Ltd. vs. CIT (1984) 148 ITR 99 (Bom) * MDCIT V/s Sandoz (P.) Ltd. (2012) 137 ITD 326(Mum.) * Cymroza Art Gallery V/s ACIT (2013) 21 ITR (Trib) 262 (Mum) * DCIT V/s Bijesh Thakkar (2012) 49 SOT 502 (Mum.) * Instalment Supply P.Ltd V/s CIT (1984) 149 ITR 52 (Del) * CIT V/s Dr.A.M.Singhvi (2008)302 ITR 26 (Raj) * CIT V/s Ayesha Hospitals P.Ltd (2007) 292 ITR 266 (Mad) * ACIT V/s M.M.Publications Ltd. (2011) 43 SOT 59 (Cochin) 5.2.7 In view of the above facts and circumstances, the net disallowance of Rs. 82,09,91....
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....ndate of Rule 46A of the 1962 Rules. 6.2 The Ld. counsel for the assessee on the other hand submitted that the only issue in this appeal is whether the expenses incurred by the assessee on repairs and renovation are revenue in nature or are capital expenditure. It was submitted that new premises was taken on lease hold basis at Bandra and renovations and repairs work was undertaken on this lease hold premises to make it a functional bakery and hence it was submitted that these are nature of routine repair and renovation expenses on a rental premises such as wall partition, cabins etc. which should be allowed as revenue expenditure. It was submitted that powers of Ld. CIT(A) powers are co-terminus with powers of the AO and hence he could have made the inquiries with respect to additional evidences filed by assessee and it is not necessary that remand report from the AO be called by learned CIT(A) in every case on additional evidences submitted for the first time before learned CIT(A). The learned counsel for the assessee would rely on following case laws: a) Hon'ble Bombay High Court decision in the case of Rallis India Limited v. CIT reported in (2015) 374 ITR 462(Bom.)....
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....an expenses to be business expenses, the same need to be incurred wholly and exclusively for the purposes of business of the assessee and the said expenses should not be personal in nature nor it be capital expenditure. Section 37(1) is reproduced hereunder: "General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [ [Explanation 1.]-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activiti....
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....ted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission. (3) The [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall not take into account any evidence produced under sub-rule (1) unless the [Assessing Officer] has been allowed a reasonable opportunity- (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or (b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant. (4) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.]" Th....
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....y given go bye other wise it will become otiose . This is never the intention of law makers. We are afraid that decision of Hon'ble Supreme Court in the case of Kanpur Coal Syndicate (supra) cannot come to rescue of the assessee as there is no dispute to the proposition that learned CIT(A) powers are co-terminus with powers of the AO but Rule 46A of the 1962 cannot be given a simple go bye. We are afraid that the decision of Hon'ble Bombay High Court in the case of Rallies India Limited(supra) relied upon by the assessee cannot also come to rescue of the assessee. This case deals with power of learned CIT(A) to refer valuation of property to DVO u/s 55(4) of the 1961 Act which is not the issue here before us. There is no dispute so far as powers of the learned CIT(A) to be co-terminus with the powers of the AO. The instant case before us is also not a case where an enquiry is initiated by learned CIT(A) suo moto or directions are issued to the AO to conduct inquiry by invoking powers u/s 250(4) of the 1961 Act. The case before us is where additional evidences are submitted by the assessee of its own for the first time before learned CIT(A). The Said sub-section 4 of Section 250 is ....
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....for a period of five years on a monthly rental of Rs. 1,00,000/- and claim is made that since the assessee is not owning the premises but the premises is taken on leasehold basis, these renovation expenses are to be held to be revenue in nature . We are afraid explanation 1 to Section 32(1) is applicable and this contention of the assessee cannot be accepted. We are reproducing explanation1 to Section 32(1) for ready reference, as under: "[Explanation 1.-Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee." The terms and conditions of the lease agreement entered into by the assessee becomes relevant as to whether the lease agreement is renewable after five years or not and secondly, ....
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.... reliance upon Explanation-I to Section 32 of the Act, which allows depreciation to a tenant in case of any capital expenditure incurred for renovation/improvement to the building in the hands of the tenant by deeming the tenant to be the owner of the premises. In this case the benefit of depreciation has been given to the appellant on the capital expenditure incurred for renovation. 6. Mr. Jhaveri, learned Counsel for the appellant-assessee then submits that on an identical fact situation expenditure incurred by tenant has been allowed as revenue expenditure by this Court. Therefore it is submitted that the entire issue is no longer open to debate as it stands concluded in favour of the appellant by the decisions of this Court in Talathi & Panthaki Associates (P.) Ltd. (supra) and Hede consultancy (P.) Ltd. (supra). In Talathi & Panthaki Associates (P.) Ltd. (supra) the tenant of the premises had contributed a sum of Rs. 1.50 crores to the work of repairs and restoration/reconstruction of the building in which it was a tenant. The entire amount of Rs. 1.50 crores was claimed as revenue expenditure. The assessee therein had entered into an agreement with the devel....
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....as plastering etc. This allowing of 25% was on the basis of an estimate. Nothing has been shown to us that the estimation by the authorities on the basis of facts found was in any way arbitrary or perverse. Thus we find no merit in the above submission. 9. In the view taken by us that the expenditure of 75% of Rs. 31.32 lacs i.e. Rs. 23.49 lakhs is on capital account, the submission to claim deduction on account of Section 30 of the Act made by the Appellant need not be examined. Nor the decision of the Delhi High Court in CIT v. Hi Line Pens (P.) Ltd. [2008] 306 ITR 182/175 Taxman 132 (Delhi) relied upon for interpretation of Section 30 of the Act need be examined. This for the reason that the Explanation to Section 30 of the Act itself provides that the amount paid on the cost of repairs would not include any expenditure which is in the nature of capital expenditure. Although this Explanation to Section 30 of the Act was introduced in 2004 w.e.f. 1st April, 2004, the Explanation itself clarifies that it has been introduced for removal of doubts. Therefore, it would be applicable even for the period prior 1st April, 2004 including the subject Assessment year. It ....