IT APPEAL NO. 8397 (MUM.) OF 2011

I.P. BANSAL, JUDICIAL MEMBER AND N.K. BILLAIYA, ACCOUNTANT MEMBER

Percy Pardiwala and Nitesh Joshi for the Appellant. 
Ravi Prakash for the Respondent.

ORDER

I.P. Bansal, Judicial Member - This appeal is filed by the assessee. It is directed against the order passed by the Commissioner of Income-tax (Appeals) - 41, Mumbai, dated 26.09.2011 for assessment year 2008-2009.

2. Grounds of appeal read as under: —

"1(a) The learned Commissioner of Income-tax (Appeals) erred in upholding the action of the learned Deputy Commissioner of Income-tax - CC - 39, Mumbai (hereinafter referred to as "the Assessing Officer") in treating an expenditure of a sum of Rs.86,48,765/- incurred by the appellant for temporary repairs and maintenance on leased premises as capital expenditure.

(b) The appellant submits that the learned Commissioner of Income-tax (Appeals) ought to have held that the aforesaid expenditure of a sum of Rs.86,48,765/- is an allowable revenue expenditure following the decision of the Income Tax Appellate Tribunal in the case of DCIT v. Lazard India P. Ltd. [(2010) 41 SOT 72 (Bom)] & other cases relied upon by the appellant, wherein on similar facts, the expenses were held to be of revenue nature and hence allowable as a deduction.

2. Without prejudice to what is stated above, the learned Commissioner of Income-tax (Appeals) erred in not directing the Assessing Officer to allow a sum of Rs.6,78,015/- being society maintenance charges (included in the total repairs and maintenance expenses of Rs.86,48,765/-), which are clearly of routine repair and maintenance nature.

3. The appellant submits that the Assessing Officer is directed :

and to modify the assessment in accordance with the provisions of the Act.

4. Each of the above grounds of appeal are independent and without prejudice to each other.'

3. The assessee is engaged in the business of investment manager / advisor. During the year under consideration the assessee has taken a new premises on rent and has incurred total expenses of Rs.86,48,765 on repair & renovation etc. as follows:—

3.1 The A.O. required the assessee to show cause as to why the office renovation expenses should not be capitalized. Vide letter dated 25th November, 2010, it was submitted that these expenses are incurred on tiling, plumbing, false ceiling, etc. which could not be reused on vacation of premises. However, resorting to Explanation 1 to section 32, the A.O. observed that the expenses are in respect of civil work, tiling work, marble work, fittings, fixtures, interior work, etc. cannot be taken as revenue expenditure as claimed by the assessee as these are major renovation expenses in the nature of capital and since the property was taken on lease on 7th December, 2007, the assessee entitled to depreciation at the rate of ½ of the normal depreciation. In this manner the learned A.O. allowed the depreciation to the extent of Rs.4,32,438 and disallowed balance amount of Rs.82,16,327. The disallowance has been sustained by the learned CIT(A) mainly on the basis of Explanation 1 to section 32 and relying upon the decision of the Mumbai Bench of the Tribunal in the case of Free India Assurance Services Ltd. v. Dy. CIT [2011] 132 ITD 60/12 taxmann.com 424. The assessee is aggrieved, hence has filed the aforementioned grounds of appeal.

4. After narrating the facts and referring to the nature of expenditure as described in the aforementioned table, it was submitted by the learned Senior Counsel for the assessee that Rs.6,78,015 described in serial nos.1 to 3 of the table cannot be disallowed at all as these charges pertain to maintenance charges which in any case is allowable even in respect of leased premises. Referring to the above details it was submitted by him that these expenses are in revenue nature. No new asset has been created which can be said to have been given any enduring benefit. It was submitted that the leave and license agreement entered into by the assessee with the owner of the premises was only for a term of 33 months and all the renovation was done by the assessee to effectively carry on its business activity. None of the items on which the expenses incurred could be reused. Thus, it was submitted by the learned Senior Counsel that the A.O. as well as the learned CIT(A) have committed an error in making and upholding the disallowance. The learned AR relied on the following decisions to contend that keeping in view the nature of these expenses, all these expenses were allowable as business expenditure:—

5. The learned AR further distinguished the decision of the Tribunal relied upon by the learned CIT(A) in the case of Free India Assurance Services Ltd. (supra). The learned AR produced before us the copy of the said decision and it was submitted that the following facts distinguishable from the decision. (i) The expenditure was incurred before the assessee started business in its office and these expenses were not of routine nature but of one time expenditure. (ii) The wooden partitions, cabins, cubicles, desks are in the nature of permanent furniture and fixtures for starting the business. (iii) The said premises was owned by the Directors of the company who had more than 50 per cent of the shares of the company. This premises was going to be remained with the assessee permanently for all practical purposes. Thus, it had resulted in enduring benefit of the company. It was pleaded by him that the facts of the present case are entirely different and keeping in view the nature of expenses, it cannot be said that any enduring benefit has been derived by the assessee by incurring these expenses.

6. On the other hand, the learned Departmental Representative referring to the order passed by the learned CIT(A), submitted that the expenditure incurred by the assessee was in the nature of capital. He submitted that the assessee carried out major renovation work by replacing the floor tiles etc. and making cabins. Thus it was submitted by him that the learned CIT(A) has rightly held that these expenses were in the nature of capital and his order should be upheld and the appeal filed by the assessee should be dismissed. The learned DR also referred to the provisions of Explanation 1 to section 32(1) and contended that the assessee for the purpose of depreciation has be considered as the owner of the premises in view of the nature of expenditure made by the assessee on the leased premises.

7. We have heard both the parties and their contentions have carefully been considered. The assessee is engaged in the business of investment manager / advisor. As per the submissions made by the assessee before the CIT(A), it acquired office in the locality of Nariman Point with a view to enhance its business. Accordingly the assessee had taken on lease two adjacent premises viz. B-11 and B-12 Mittal Towers, Nariman Point, Mumbai, from where it started carrying on its business operation. The total rent payable for the premises was Rs.1,97,40,000 per annum. As per the lease agreement the assessee was not permitted to structural alterations, changes in the leased premises and lease agreement was submitted. It was submitted that the assessee did not do any construction / improvement of building structure and the said expenses did not bring into existence any new asset and are allowable as deduction u/s 30. In order to make the premises conclusive to the business needs, it was required to make some renovation / changes including refurnishing. The nature of business of the assessee needs a posh office as the visitors / clients are normally corporate executives and high net-worth individuals. It was submitted that during the course of its business, the assessee had to cater high profile clients both Indian as well as foreign. In the circumstances, the office premises are required to be kept to a good standard. The expenditure incurred by the assessee was in order to meet these business requirements. The renovation expenses were in connection with modifying the cabins, cubicles, laying good marbles, painting and other related expenditure. These expenditure were incurred and were necessary for the purpose of business to carry it more efficiently and also for creating good environment for the staff as well as the clients. These expenditure were incurred wholly and exclusively for the purpose of business. The repair / renovation work carried out at the premises which were not owned by the assessee but were taken on lease. The expenditure incurred, as can be seen from the details furnished, has not created any capital asset nor it has given the benefit of enduring nature. None of the expenditure entails any structural change or extension or improvement of the building, therefore, Explanation 1 to section 32(1) will not be applicable. These submissions of the assessee are recorded by the Ld. CIT(A) in para 6.2 of the impugned order.

7.1 If the above submissions of the assessee are considered in the light of the details of expenses submitted in the aforementioned chart, which is reproduced in para 3 of this order, it will be revealed that the assessee did not carry out any structural change in the building. The nature of expenditure is labour charges, breaking of walls and clearing of flooring etc; labour charges for removing old floor breaking, marble fixing on floor and wall; Interior and allied work includes wooden carpenter work, false ceiling, plumbing work, masonry work, flooring work, paint and polish, labour expenses etc; Interior and allied work including painting carpenter material, civil, plumbing, masonry work and labour expenses; supply of vitrified tiles; marble slabs, bathroom flooring and wall tiles, and professional fees. All these changes are made in the internal part of the structure. It is not the case of the department that this expenditure has not been genuinely incurred by the assessee. As per the submission of the assessee, these changes were made in connection with the modifying cabins, cubicles, laying good marbles, painting and other related expenditure in order to meet its business requirements of keeping a good standard office. No capital asset has been created and no enduring benefit has been derived. According to the facts of the present case, we see justification in the case of the assessee. The learned A.O. as well as learned CIT(A) have failed to properly appreciate the facts of the case and have incorrectly arrived at a conclusion that these expenses were in the nature of capital. The case laws relied upon by the learned AR supports the case of the assessee. By incurring these expenses the assessee did not bring into existence an asset of a permanent nature. Therefore, the expenditure cannot be called into the nature of capital as per the decision of the Hon'ble Bombay High Court in the case of Oxford University Press (supra). Their Lordship observed that "repair" must be understood in contradistinction of renewal or restoration and the test to be applied is to see whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset or whether as a result of the expenditure a new asset or a new advantage is being brought into existence. Their Lordship also observed that the mere quantum of expenditure is not by itself decisive of the question whether the expenditure is in the nature of revenue or capital. Since in the present case no new asset or new advantage has been brought into existence by the assessee, it cannot be said that the assessee has incurred capital expenditure and quantum of expenditure alone also cannot be considered sufficient to arrive at a conclusion that the expenditure is in the nature of capital. What is necessary to see is as to whether the expenditure is in the nature of capital or it is in the nature of revenue.

7.2 In the case of Talathi and Panthaky Associates (P.) Ltd. (supra), despite making payment of Rs.1.5 crore towards reconstruction of the tenanted premises, their Lordship have held that the expenditure was not in the nature of capital. The assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of capital asset and the occupation of the assessee continued in the character of tenancy, the expenditure was in the nature of capital. In the present case also the assessee did not acquire any capital asset but made the leased premises more suitable for its business.

7.3 In the case of Amway India Enterprises (supra) Their Lordship have considered the earlier decision of the Delhi High Court in the case of CIT v. Hi Line Pens (P.) Ltd. [2008] 306 ITR 182/175 Taxman 132, where the expression "repairs of the premises" was interpreted. It was held that "repairs" was wider than "current repairs". What would be relevant to bear in mind will be that what is the nature of expenditure whether it is incurred for maintenance or renovation of an asset or was it expended otherwise and the order of the Tribunal was upheld and the expenses incurred on flooring, partition, wiring false ceiling, roofing was held to be in the nature of revenue expenditure.

7.4 Therefore, in view of the aforementioned position of law, it has to be held that the nature of expenditure incurred by the assessee on the premises taken on rent was in the nature of revenue since no new asset has been created and the changes were made by the assessee for efficiently carrying on its business and the items on which expenditure was made could not be reused on vacation of premises. The contention that the items on which the expenditure was made could not be reused on vacation was even raised before AO in the assessment order. Therefore, it cannot be said that the expenditure incurred by the assessee on repair and renovation was in the nature of capital. The decision ITAT in the case of Free India Assurance Services Ltd. (supra), relied upon by Ld. CIT(A) also does not support the case of the Revenue as the facts in that case were entirely different from the facts of the present case. The premises in that case belonged to the directors of the company who had more than 50 percent share. In the present case no such case is made out by the Revenue.

7.5 Now we are left with the question that whether on the basis of explanation-1 to Section 32(1) it can be said that despite being expenditure in the nature of revenue the assessee will only be entitled for depreciation as it has been the case of AO and Ld. CIT(A) that due to application of explanation-1 to section 32(1) the assessee is entitled to claim only depreciation on the expenditure incurred by it. We have carefully considered such submission of Ld. DR. Similar provisions as these are contained in explanation-1 to section 32(1) were incorporated into the statute for the first time by the Taxation Laws (Amendment) Act 1970 by inserting new Sub-section (1A) in section 32 by section 5 of the Amending Act w.e.f. 1/4/1971. Its scope was explained in Circular No.56 dated 19/3/1971. It was described that under the existing provisions of Income Tax Act, the assessee was not entitled to depreciation or any other deductions in respect of capital expenditure incurred by him on extension or renovation or improvement of a building not belonging to him which is used for the purpose of business or profession. Therefore, new sub-section (1A) is being inserted w.e.f. 1/4/1971. Later on sub-section (1A) was omitted and explanation-1 was inserted after the second proviso to section 32(1)(iii) of the Act in view of switch over to block concept by the Taxation Laws (Amendment and Miscellaneous provisions) Act 1986 and the reason for amending sub-section (1A) of section 32 and insertion of explanation has been stated in the Circular No.469 dated 23/9/1986.

7.6 The relevant part of both aforementioned Circulars are reproduced below.

"CIRCULAR NO.56, dated 19/03/1971.

Amortisation of expenditure on renovation or extension of, or improvement to, leased business premises.

56. Under the existing provisions of the IT Act, an assessee is not entitled to depreciation or any other deduction in respect of capital expenditure incurred by him on renovation or extension of, or improvements to, a building not belonging to him which is used for the purpose of his business or profession. Under a new sub-s. (1A), inserted ins. 32 by s. 5 of the Amending Act, w.e.f. 1st April, 1971, provision has been made for the grant of depreciation on capital expenditure incurred by the assessee for the purpose of his 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, any building which is used for the purpose of the business or profession, where such building is not owned by the assessee but in respect of which the assessee holds a lease or other right of occupancy. The depreciation will be allowed only in respect of capital expenditure incurred after 31st March, 1970 and it will be allowed with reference to the written down value of the structure or work at rates to be prescribed iii the IT Rules. Where the structure or work is sold, discarded, demolished, destroyed or surrendered as a result of the determination of the lease or other right of occupancy in respect of the building (in any previous year other than the previous year in which it was constructed or done), the assessee will be entitled to a "terminal allowance" equal to the shortfall of the moneys payable taken together with the scrap value, if any, from the written down value of the structure or work. The term "moneys payable", in respect of any structure or work, has been defined to include any insurance or compensation moneys payable in respect thereof and, where the structure or work is sold, the price for which it is sold. The word "sold" will have the same meaning as it has under the existing provisions of s. 32, i.e. it will include a transfer by way of exchange or a compulsory acquisition under any law but would not include a transfer from a company to an Indian company in a scheme of amalgamation. [Emphasis ours]

57. The following consequential amendments have also been made to the other provisions of the IT Act in this connection:

CIRCULAR NO. 469, dated 23/09/1986.

6.4 The amendments relating to depreciation allowance are as follows:—

(h) Sec. 32(1A) of the IT Act provides for depreciation allowance in respect of any addition, renovation or extension of or improvement to a building which an assessee does not own but in respect of which he holds a lease or other right of occupancy. As a result of the switch over to the block concept, this provision has been omitted. By the newly inserted Expln. 1 after the second proviso to s. 32(1)(iii) of the IT Act, it has been provided that depreciation will be allowed in respect of such a structure or work as if it is a building owned by the assessee."

The reading of above explanatory notes will make it clear that Sub-section (1A) and subsequent omission of Sub-section (1A) and insertion of explanation-1 after the second proviso to Section 32(1)(iii) are brought to the statute only for the reason that in a case where capital expenditure is incurred by the assessee in respect of building not owned by him in that case there was no provision in the Act for grant of depreciation or any other deduction and to meet such hardship faced by such assessee, the benefit of depreciation was provided. The pre-condition to invoke the provision of explanation-1 after the second proviso to Section 32(1)(iii) is that expenditure itself should be capital in nature. If the expenditure by its nature itself is not capital in nature and its nature is revenue then provisions of explanation-1 after second proviso to section 32(1)(iii) will not be applicable at all. It has already been pointed out that the nature of expenditure incurred by the assessee in respect of renovation, or extension or improvement to the building not belonging to assessee are in the nature of revenue. Therefore, it is held that even on the basis of explanation - 1 after the second proviso to Section 32(1)(iii), the assessee cannot be denied for the deduction of impugned expenses which are revenue in nature.

7.7 In view of above discussion, the issue is decided in favour of the assessee. Therefore, Ground No.1 is allowed. Since entire expenses have been held to be allowable, the alternative ground raised by the assessee in respect of a sum of Rs.6,78,015/- has become infructuous.

8. In the result, the appeal filed by the assessee is allowed in the manner aforesaid.