1. This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-16, Mumbai ('CIT(A)' for short) dated 02.1.2015, dismissing the Assessee's appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2011- 12 vide order dated 16.12.2013.
2. The sole issue arising in this appeal, on the basis of the Ground raised as well as the arguments presented, is the deductibility in law of the assessee's claim for repair and maintenance expenditure, preferred at Rs. 1,33,914/-, under the Act. The assessee, a company engaged in the business of development of software products and providing regulatory content services for BFSI sector, explained in the assessment proceedings that it incurred an expenditure of Rs. 8,39,482/- on setting up its' business premises at Unit Nos. 638 and 639, 6th Floor, Laxmi Plaza, Laxmi Industrial Estate, New Link Road, Andheri (W), Mumbai, a leased premises, transferring its furniture and fixture and other equipment from its' erstwhile premises (at Unit Nos. 607 & 630 in the same building). Apart from and incidental to the said transfer, expenditure was required to and, accordingly, incurred toward installation of work stations, Furniture and Fixture, flooring, electric wiring, false ceiling, painting, etc. Further, as the lease, which did not have any renewal clause, was for a period of 24 months, beginning 18.12.2010, it had debited the proportionate expenditure in its operating statement for the year. The Assessing Officer (A.O.) was of the view that the accounting treatment cannot determine the deductibility, which was to be guided by the provision/s of law, relying for the purpose on the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC), reproducing there-from. Capital expenditure, where incurred on or in relation to a building, qua which the assessee has lease hold or other right of occupancy, would only be entitled to depreciation u/s. 32(1) r/w Explanation 1 thereto, which reads 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.'
Accordingly, disallowing the claim for expenditure, he allowed the assessee depreciation on expenditure of Rs. 8,39,482/-, i.e., at Rs. 41,974/-. In appeal, the assessee emphasized that the expenditure was not capital expenditure, being required to be incurred for the smooth conduct of its operations, leaving the capital structure untouched. Two, the premises was not a leased premises, but in fact a leave and license arrangement. The provision of Explanation 1 to section 32(1) would therefore not apply. In view of the ld. CIT(A), the assessee's claims were not factually correct, with it itself admitting vide its letter dated 04.10.2013 to the premises being leased. The said provision had been rightly invoked. The disallowance being confirmed thus, the assessee is in second appeal.
3. I have heard the parties, and perused the material on record, giving a careful consideration to the matter.
3.1 Before, however, proceeding to discuss the matter, it may be clarified that it was at the outset inquired from the ld. Authorized Representative (AR), the assessee's counsel, if any subsequent year - the treatment having implication there-for, was decided by the tribunal, or even before it, and who confirmed in the negative.
3.2 The issue at hand, as discerned, is if the impugned expenditure is a capital expenditure or is in the nature of repairs - the two being mutually exclusive (also refer Explanation to s. 30). While the Revenue regards it as a capital expenditure, the assessee's claims it to be only repairs, further emphasizing the same to be a term of wide import, i.e., than 'current repairs', with reference to which deduction is allowed qua own building only (u/s. 30(a)(ii)), while the premises in the instant case was a tenanted premises, covered u/s. 30(a)(i), employing, in contradistinction, the expression 'repairs'. Repairs, even if broadly construed, would only imply existence of an asset, on the preservation (in a good operating state) or maintenance of which the expenditure is incurred, as explained in New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom.), relied upon by the A.O. (refer para 4.4, 5 of the assessment order). It may, however, be clarified here that there is no concept of a deferred revenue expenditure under the Act. As such, where the expenditure is found as not capital in nature, the same shall be, per contra, and the entire of it, revenue in nature and, accordingly, exigible to deduction for the year in which it is incurred irrespective of the period over which benefit from it is likely to arise, which, future being uncertain, is indefinite. Also, it is not a contractual arrangement, whereby the benefit enures as a function of time, so as to adopt the matching principle, which has been upheld by the Hon'ble Courts.
In the facts of the present case, the premises had been acquired in a semi- finished state; it requiring further work being performed thereon to make it fit for use. Surely, an occupier would do so in the manner he deems fit and proper. This explains the expenditure on flooring, electric wiring, work stations, etc. How, it is wondered, could premises in a raw or semi-finished state be used by the assessee for its purposes, i.e., the development of software, requiring, besides skilled human resource and intangible assets, all the necessary physical infrastructure. It is not the case of the premises being used by the assessee earlier, making changes only to enable a better user, wherein again it shall have to be seen, if any asset or advantage of an enduring nature enures as a result of the said expenditure. Total renovation is, after all, only capital expenditure Ballimal Naval Kishore v.CIT [1997] 224 ITR 414/90 Taxman 402 (SC). How could, for example, the assessee work without work stations, electric cables, proper flooring, etc. which is required as much as (say) furniture and fixture, computers, etc. Why, even expenditure on plastering and painting, normally regarded as maintenance expenditure, where for the first time, would have to be regarded as a part of the set-up cost - the premises being made ready only for its intended user. The same, together with the furniture and fixture and plant and machinery (comprising computer systems, etc.) forms part of the capital structure or the profit-making apparatus - each with a distinct purpose/function, required for operating in the manner deemed fit and proper. It is neither necessary nor required to isolate the expenditure incurred in relation to building, housing the work operations, for a separate treatment, merely because the same is not owned. The character of expenditure, after all, depends on its nature, i.e., whether for maintenance or sustenance of an asset or advantage, already acquired or obtained, or toward acquiring or obtaining the same. The case law in the matter is legion, and toward which one may profitably cite some, viz.Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC); Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC); Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC). As famously and succinctly put inAssam Bengal Cement Co. Ltd. (supra) (pg.44):
'You do not use it for the purpose of your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.'
This is also in agreement with the accounting definition of a fixed asset, i.e., an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business (refer para 6.1 of the Accounting Standard 10 issued by the Institute of Chartered Accountants of India). The Apex Court in Challapalli Sugars Ltd. (supra), among others, clarified that the accounting definition or the rule of accountancy, as understood by the men of commerce, shall obtain in the absence of any statutory definition or any indication to the contrary. This would also meet the assessee's reliance on CIT v. Hi Line Pens (P.) Ltd. [2008] 306 ITR 182/175 Taxman 132 (Delhi); the relevant expenditure (Rs. 8.39 lacs) having been found in the nature of a set-up cost.
True, the building is not owned by the assessee, who has only a right of occupancy in its respect, but then that is precisely what Explanation 1 to section 32(1), incorporated in the statute book w.e.f. 01.4.1988, seeks to explain and clarify, making ownership not necessary, so that capital expenditure would nonetheless be regarded as subject to depreciation despite being in or in relation to a building not owned by the assessee. In other words, Explanation 1 to s. 32(1) is an enabling provision, extending the allowance of depreciation on a capital asset not owned by the assessee by carving an exception for a building for which it holds a right of occupancy. This would also meet the argument of the ld. AR, made relying on the decision in the case of CIT v. Dr. A. M. Singhvi [2008] 302 ITR 26/168 Taxman 136 (Raj.), of the redundancy of such expenditure on the expiry of the lease in-as-much as electric fittings, flooring, ceiling, paneling, etc., get - in whole or in part, attached to the building and are not removable. Implicit in the argument is a tacit admission of the life of these assets, forming part of the building, exceeding in terms of the period of user the term of the lease arrangement. That consideration, appealing at first blush, in- as-much as the expenditure is rendered unproductive or of no use after the time period of the lease, is misleading. The same in fact is applicable to any capital expenditure for that matter. It is incurred on an assessment of the cost-benefit analysis, formal or non-formal, with benefits likely to arise over future. Future is always uncertain, so that it could be that the assets or the rights acquired by incurring the expenditure remain no longer beneficial in view of the changed circumstances, viz. market conditions, technological obsolescence, etc. A machinery, for example, is bought to produce an item X. Soon after, another product Y, technically superior and/or cost/price efficient, hits the market, displacing X there-from, even as the firm had by then exhausted only a fraction of the productive capacity of the machinery. This example, in varying degrees, obtains as a regular feature in trade and industry, so that such changes form a continuum, with old products yielding to new ones, including the manner of or the technology adopted in producing the same, or in undertaking the relevant processes or rendering the related services. Coming back to our example, the machinery is, as a result, rendered otiose, and is to be discarded. While this represents one scenario, it may be rendered largely redundant or operative at a much lower capacity utilization level, et. el. The discarded machinery though remains on the books of the assessee, also forming part of its block of assets and, accordingly, depreciation would continue to be exigible thereon (section 43(6)(c)). Prior to the introduction of the concept of block of assets, terminal depreciation was allowed under such circumstances. Any monies realized on the sale of such machinery, no longer viable and discarded, or its' scrapping, gets reduced from its written down value (WDV) of the relevant block of assets. All such fittings/materials as are embedded in the building, which cannot be used at a different place and, therefore, is to be discarded (viz. work stations), shall, in the facts and circumstances, continue to be subject to depreciation. Surely, it is not for us or the Revenue to comment or assess as to why such expenditure, unsustainable in terms of the productive time with reference to the lease period, assuming so, was incurred in the first place. That is the business decision of the assessee as a businessman. Why, he may be confident of recouping the cost and, in fact, generating profit, over the lease term, or of bargaining an extension at the end of the term, etc. The fact of the matter is that if any asset forming part of block of assets gets discarded, depreciation thereon on its unabsorbed cost continues to be available till the same gets totally charged or realized by way of sale/scrap, etc. In other words, the circumstances adversely impacting the realization of the benefit/advantage envisaged from the capital expenditure, even if unrealized - in whole or in part, would not render it as of revenue nature, and the law provides for a complete absorption of such expenditure, i.e., as that which does not suffer from such an impact.
3.3 The next limb of the assessee's argument is that it is not a lease but a leave and license arrangement. That is, in fact, the only aspect highlighted by the assessee per its sole ground raised, as under:—
'1. Sustaining the addition made by the AO for Repairs & Maintenance Expenses of Rs. 1,33,914/- on the ground that the Office Premises is taken on Lease and NOT on leave and License and therefore the said expenditure is of Capital Nature.'
It may be clarified that, even so, all the relevant aspects of the case have been discussed in view of the arguments as made during hearing. Toward the said ground, firstly, there is no basis for us to determine or hold either way - the assessee's case being sans any material on record. Once, therefore, the Revenue authorities have held it to be a lease, i.e., as the arrangement was described (which though is not binding) by the assessee before the A.O., it was incumbent on the assessee to furnish a copy of the relevant agreement (dated 18.12.2010). Be that as it may, even as posed during hearing, to an agreement by the ld. AR: How does it matter? That is, whether what the assessee holds qua its work premises is a lease hold right, or is a leave and license arrangement. This is in view of Explanation 1 to section 32(1), which is broadly worded, and clearly states of a lease or other right of occupancy. Lease is a transfer under the Transfer of Property Act, while a leave and license arrangement is definitely not. But, surely, the leave and license arrangement gives the assessee a right of occupancy, so that the precise nature - in the technical sense, of the said right, is of little moment.
3.4 Then, again, it is open to be argued and, in any case, a consideration, that the lease or the right of occupancy is only for 24 months. How will, however, it may be asked, the period of right of occupancy relevant. That it obtains at the time of incurring the expenditure; in fact, during the relevant year, is not in dispute. Explanation 1supra does not provide any stipulation with regard thereto, i.e., the said period, and which in the admitted facts of the case subsists for 20 months after the end of the relevant year, i.e., going by the current arrangement. The assessee may well be able to secure its renewal. The same, in any case, i.e., irrespective of extension, is not to be confused with the nature of the expenditure incurred - capital or revenue. In other words, the fallacy in the argument lies in determining the nature of the expenditure based on or with reference to the period of the right of occupancy. The two are independent of each other. In the instant case, it has already been indicated that the entire expenditure is in the nature of a set-up cost of the business. Even assuming, for which there is nothing on record to suggest so, that the business was already set up at the previous location, dislocation is disruptive of its business and would accordingly be required to be set up again. To the extent this entails additional expenditure, the same only implies a higher capital expenditure in-as-much as the capital work or assets discarded (at the old location) cannot be put to use again. Such discarded assets shall, however, continue to be subject to depreciation under law, as explained earlier.
3.5 The foregoing would also meet the assessee's reliance on other decisions before the ld. CIT(A), which we have perused. The decision arrived at is consistent with facts as found and the law as laid down in the binding decisions cited supra. Reference in this regard may also be made to the decision by the tribunal in Vardhman Developers Ltd. v. ITO [2015] 55 taxmann.com 370/68 SOT 107 (Mum.) wherein the issue is dealt with at length, referring to decisions inter alia in the case of CIT v. Saravana Spg. Mills (P.) Ltd. [2007] 293 ITR 201/163 Taxman 201 (SC); Ballimal Nawal Kishore (supra), besides New Shorrock Spg. & Mfg. Co. Ltd.(supra).
4. In view of the foregoing, the assessee's claims cannot be acceded to, and the treatment accorded by the Revenue is to be upheld. It may also be clarified that though the assessee has impugned the entire expenditure claimed (Rs. 11.34 lacs), the net (of depreciation) disallowance is only for Rs. 91,940/- (1,33,914 - 41,974). An acceptance of the assessee's claim (at any further appellate stage) would entail withdrawal of depreciation and, as explained earlier, an allowance of the entire expenditure incurred for Rs. 8.39 lacs. I decide accordingly.
5. In the result, the assessee's appeal is dismissed.