Associated Engineers V. Commissioner of Income Tax, Income Tax Office, Aaykar Bhavan, Amritsar

ITA/82/2005

AI Insights

The case revolves around the appeal by M/s Associated Engineers against the decision of the Income Tax Appellate Tribunal, which had classified their renovation expenditures as capital in nature, thus non-deductible. The renovations were made to a rented showroom to enhance its appeal and functionality as part of a dealership agreement with LML Limited, competing against Bajaj Limited. The primary legal contention was whether these expenditures should be classified as capital or revenue expenses under the Income Tax Act. The High Court, referencing the Delhi High Court's decision in CIT vs. Hi Line Pens (P) Limited, found that such expenditures, aimed at maintaining and improving the business's operational capacity without creating new assets, should be considered revenue expenditures.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 795411 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 16-07-2014
• Assessment Year: misc
• Other Referred Cases: CIT vs. Hi Line Pens (P) Limited, Ballimal Naval Kishore and another v. CIT, New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT, CIT, Patiala v. Bharat Cinema, Allied Metal Products vs. CIT, Patiala II, Empire Jute Company's case, L. H. Sugar Factory's case, Hi Line Pens (P) Limited's case
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: ASHISH KASHYAP; DENESH GOYAL
• Assessee Lawyers: RAJIV SHARMA
• Keywords: Capital expenditure; Dealership Agreement; Renovation; Revenue expenditure; Showroom
• Section: 260A; 30(a)(i)

Judgement Text

"ITA No.82 of 2005 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.82 of 2005 (O&M) Date of decision:16.7.2014 M/s Associated Engineers ...Appellant Versus Commissioner of Income Tax, Income Tax Office, Aaykar Bhavan, Amritsar ...Respondent CORAM: HON'BLE MR.JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE JASPAL SINGH Present: Mr. Rajiv Sharma, Advocate for the appellant. Mr. Ashish Kashyap, Advocate for Mr. Denesh Goyal, Advocate for the respondent. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the assessee-appellant under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 17.9.2004, Annexure A.1, passed by the Income Tax Appellate Tribunal, Chandigarh Bench in ITA No.529/ASR/2000 for the assessment year 1997-98, claiming following substantial questions of law:- “A. Whether on the facts and in the circumstances of the case the Income tax Appellate Tribunal was justified in law in reversing the action of CIT(A) by holding that the expenditures incurred by the appellant are capital in nature? B. Whether on the facts and in the circumstances of the case, GURBAX SINGH 2014.08.16 12:17 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.82 of 2005 (O&M) 2 the findings of the Income Tax Appellate Tribunal in accepting the appeal of the department are perverse and coloured by irrelevant considerations and erroneous criteria? 2. Briefly, the facts necessary for adjudication of the controversy involved, as narrated in the appeal, may be noticed. The assessee is a partnership firm. During the year under consideration, the firm was dealer of LML scooters manufactured and supplied to it by LML Limited as per the dealership agreement entered into. The assessee was carrying out the said dealership business in rented premises. The major competitor of M/s LML Limited was considered to be M/s Bajaj Limited who had a very wide sales network through its dealers throughout the country having the most ultra modern showrooms. M/s LML Limited realizing the significance of having attractive showrooms as a marketing strategy persuaded its dealers to make some changes in their showrooms.The assessee also received advice from M/s LML Limited for making modification in the showroom by changing the flooring and having marble flooring, plaster of paris, painting etc. These were got done by the assessee as it was compulsory for continuation of the dealership agreement and thus was a business necessity. At the time of finalization of accounts and before filing the return in mid of September 1997, the assessee left those premises alongwith all the modifications and shifted to a new showroom constructed by him. The expenditure was thus for modernization and better conduct of business and improving the sales. The renovation expenditure amounting to ` 2,37,572/- was claimed as revenue in the income tax return filed on 24.10.1997 and income of ` 5,33,880/- was disclosed therein after this claim. The Assessing Officer vide order dated 18.2.2000, Annexure A.2 held that the expenditure was of GURBAX SINGH 2014.08.16 12:17 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.82 of 2005 (O&M) 3 enduring benefit to the assessee and was of capital in nature. As a result, the amount of ` 2,37,572/- was disallowed. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income tax (Appeals) [CIT(A)]. Vide order dated 11.10.2000, Annexure A.3, the appeal was allowed. Not satisfied with the order, the revenue filed appeal before the Tribunal. Vide order dated 17.9.2004, Annexure A.1, the Tribunal partly allowed the appeal holding that the expenditure was capital in nature. Hence the present appeal by the assessee. 3. Learned counsel for the appellant-assessee submitted that the appellant had carried out expenditure which was incurred towards marble flooring, plaster of paris, painting, wood work etc. Relying upon judgment of the Delhi High Court in CIT vs. Hi Line Pens (P) Limited, (2008) 13 DTR Judgments 233, it was urged that the expenditure fell under Section 30 (a) (i) of the Act and therefore cost of renovation incurred by the assessee in respect of the said premises was revenue expenditure. 4. We find force in the submissions made by learned counsel for the appellant. 5. It would be expedient to reproduce Section 30 of the Act:- “Section 30 RENT, RATES, TAXES, REPAIRS & INSURANCE FOR BUILDINGS. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed - (a)Where the premises are occupied by the assessee - (i) as a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; (ii) Otherwise than as a tenant, the amount paid by him on GURBAX SINGH 2014.08.16 12:17 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.82 of 2005 (O&M) 4 account of current repairs to the premises; (b) Any sums paid on account of land revenue, local rates or municipal taxes; (c) The amount of any premium paid in respect of insurance against risk of damage or destruction of the premises.” 6. The case of the assessee herein falls under Section 30(a) (i) of the Act as the assessee has taken the premises on rent and had claimed deduction of the amount paid on account of repairs. The assessee had expended amount on marble flooring, plaster of paris, painting and wood work etc. so that the rented premises i.e. Showroom was made more attractive as a marketing strategy and to meet the challenge of competition from their major competitor M/s Bajaj Limited. According to plain reading of Section 30(a) (i) of the Act, any expenditure incurred by the assessee towards repairing the premises taken on rent if he has undertaken to bear the cost of the repairs so as to make it more conducive to its business activity falls within the expression 'repairs to the premises' and the cost of such repairs is allowable as deduction under the said provision. 7. The following observations recorded in Hi Line Pens (P) Limited's case (supra) would be relevant:- “What the assessee has done in the present case has been construed to be repairs by the Tribunal as a finding of fact. It has not brought about any new asset and more importantly it was not the intention of the assessee to bring about any new capital asset. The expenses that were incurred by the assessee were towards repairing the premises taken on lease so as to make it more conducive to its business activity. Such expenses would clearly fall within the expression of repairs to the premises as appearing in Section 30(a)(i). The legislature has made a distinction between expenses incurred by a tenant for GURBAX SINGH 2014.08.16 12:17 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.82 of 2005 (O&M) 5 “repairs” of the premises and expenses incurred by a person who is not a tenant towards “current repairs” to the premises. This distinction has to be given meaning. Perhaps the logic behind the distinction was that a tenant would, by the very nature of his status as a tenant, not undertake expenditures as would endure beyond his likely period of tenancy or create a new asset. Whereas, an owner may undertake expenditures so as to even bring about new assets of capital nature.” 8. Further, the Tribunal had relied upon judgment of Apex Court in Ballimal Naval Kishore and another v. CIT, (1997) 224 ITR 414 which was distinguished by the Delhi High Court in Hi Line Pens (P) Limited's case (supra) in the following terms:- “12. The learned counsel for the revenue also placed reliance on the Supreme Court decision in Ballimal Naval Kishore and Another v. Commissioner of Income Tax: 224 ITR 414. This decision is also noted in Saravana Spinning Mills P.Ltd. (supra). The decision in Ballimal Naval Kishore approved the test formulated by Chagla, CJ in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT : (1956) 30 ITR 338 (Bombay) as to when could an expenditure be said to have been incurred on “current repairs”. In New Shorrock Spinning and Manufacturing Co. Ltd. (supra), it was observed that the expression “current repairs” means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or ITA No.1202-2006 restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. It was further observed that „current repairs‟ are such repairs as one attended to as and when the need arises and that the question as to when a building etc. required repairs and when the need arises must be decided not by any academic or GURBAX SINGH 2014.08.16 12:17 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.82 of 2005 (O&M) 6 theoretical test but by the test of commercial expediency. 13. However, the decision in Ballimal Naval Kishore (supra) was also with regard to the expression “current repairs” appearing in Section 10(2)(v) of the 1922 Act which is similar to the expression appearing in Section 30(a)(ii) and Section 31(i) of the Income Tax Act, 1961. Whereas it is Section 10(2)(ii) of the 1922 Act which is similar to the provisions of Section 30(a)(i), which is applicable in the present case. Both, Section 10(2)(ii) of the 1922 Act and Section 30(a)(i) of the 1961 Act, speak only of “repairs” and not “current repairs”. Thus, the decision in Ballimal Naval Kishore (supra) would also be of no help to the revenue in as much as the facts are entirely different.” 9. In CIT, Patiala v. Bharat Cinema, (1980) 121 ITR 165 (P&H), this Court had held that amount spent on the cost of replacement of false ceiling was an expenditure of revenue nature. Following the aforesaid decision, another Division Bench of this Court in Allied Metal Products, vs. CIT, Patiala II, (1982) 437 ITR 689 (P&H) observed as under:- “In the case in hand, the assessee was not the owner of the premises, but was only a lessee for a period of five years. Even if the repairs of the roof be taken as an accretion of an enduring nature, it did not acquire any interest of a permanent nature in it. The AAC found that the roof was leaky. The landlord, for the meagreness or insufficiency of the rate of rent, did not seem to be in favour of investing a sizeable amount of nearly Rs. 23,000 on the repairs. Such a business, as the assessee was doing, cannot be advantageously carried out under a leaking roof and the assessee in the best interests of his business had to undertake it. Business is always done for the best and the maximum attainment of profits. A lessee, the period of whose lease is limited, has to strive to get the maximum profit during the continuance of his lease in the premises. The assessee in this case, therefore, had two options open to it, either to carry out the repairs and get the GURBAX SINGH 2014.08.16 12:17 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.82 of 2005 (O&M) 7 maximum return or remain content with the disadvantageous condition of the premises. The interest of the business being paramount, the assessee went in to invest the amount for the repairs and incurred this expenditure, which was wholly and exclusively for the purpose of its business. In view of the decision of the Supreme Court in Empire Jute Company's case [1980] 124 ITR 1 and L. H. Sugar Factory's case [1980] 125 ITR 293 (SC), and the decisions of this court in Bharat Cinema [1980] 121 ITR 165 (P&H) and Bhagat Industries Corporation [1980] 126 ITR 645 (P & H), the benefit even if it is taken to be of an enduring nature, though it was not, does not fall within the realm of capital expenditure for taxation. It was revenue expenditure wholly and exclusively spent for the business of the assessee and is thus an expenditure of revenue nature. The assessee was entitled to claim its exemption and the decision of the Tribunal was not correct.” 10. In view of the above, the substantial question of law is answered in favour of the assessee and against the revenue. Consequently, the appeal stands allowed. (Ajay Kumar Mittal) Judge July 16, 2014 (Jaspal Singh) ‘gs’ Judge GURBAX SINGH 2014.08.16 12:17 I attest to the accuracy and integrity of this document High Court Chandigarh "