Chakiat Agencies Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 134/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96021 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-07-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 19-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Assessee Lawyers: R G N PRICE
• Keywords: Capital asset; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B B ENCH, CHENNAI . , ' $ % , & ' BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 134/MDS/2015 ( / ASSESSMENT YEAR: 2007-08) M/S. CHAKIAT AGENCIES PVT.LTD. 40,RAJAJI SALAI, 3 RD FLOOR, P.B.NO.1880, CHENNAI-600 001. VS ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3) CHENNAI-34. PAN:AABCC6281F ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : M/S..R.G.N.PRICE & CO. C.A. /RESPONDENT BY : DR. B.NISCHAL, JCIT /DATE OF HEARING : 14 TH JULY, 2015 /DATE OF PRONOUNCEMENT : 11 TH SEPTEMBER, 2015 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, CH ENNAI DATED 20.10.2014 FOR THE ASSESSMENT YEAR 2007-08. 2. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFI ED IN TREATING RENOVATION EXPENSES INCURRED ON LEASED PRE MISES AS CAPITAL EXPENDITURE. THE ASSESSEE DURING THE ASSESS MENT YEAR 2007-08 INCURRED EXPENDITURE OF ` 26,63,531/- TOWARDS RENOVATION EXPENSES IN ITS LEASED PREMISES BEING EX PENSES 2 ITA NO.134/MDS/2015 TOWARDS WOODEN PARTITION, FALSE CEILING, PAINTING, CARPENTRY, FLOORING WORKS UNDER CURRENT REPAIRS AND CLAIMED 10 0% DEPRECIATION FOR THE EXPENDITURE AS REVENUE EXPEND ITURE. THE ASSESSING OFFICER TREATED THE SAID EXPENSES AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION @ 10% . ON APP EAL, THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE ORDER OF THE ASSESSING OFFICER IN TREATING THE SAID EXPENDITURE AS CAPITAL EXPENDITURE AND ALLOWING 10% DEPRECIATIO N ON SUCH EXPENDITURE. COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSEE HAD TAKEN A BUILDING ON LEASE AND CARRIED OUT RENOVATION WORKS TO SUIT THE NEEDS OF THE BUSINESS OF THE ASSESSEE. COUNSEL SUBMITS THAT RENOVATION WORK CARR IED OUT WERE IN THE NATURE OF PUTTING UP WORK STATIONS, PAR TITIONS ETC.. COUNSEL SUBMITS THAT ASSESSEE HAS NOT CREATED ANY A SSET BUT ONLY MODIFIED THE LEASED PREMISES TO CARRY OUT ITS BUSINESS MORE EFFECTIVELY AND EFFICIENTLY. IN THE PROCESS, THE ASSESSEE INCURRED EXPENDITURE FOR WOODEN PARTITION, FALSE CE ILING, CARPENTRY, FLOORING WORKS. COUNSEL SUBMITS THAT IN SIMILAR CIRCUMSTANCES, THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1993-94 ALLOWED THE EXPENDITURE AS REVENUE EXPENDITURE. A COPY OF THE O RDER IS 3 ITA NO.134/MDS/2015 PLACED AT PAGE 36 OF THE PAPER BOOK. COUNSEL FOR TH E ASSESSEE ALSO PLACES RELIANCE ON THE DECISION OF TH E MADRAS HIGH COURT IN THE CASE OF THIRU AROORAN SUGARS LTD. VS. DCIT (350 ITR 324) AND CO-ORDINATE BENCH OF THIS TRIBUNA L IN THE CASE OF SUNDARAM ASSET MANAGEMENT CO.LTD. VS. DCIT (145 ITD 17) IN SUPPORT OF HIS CONTENTION THAT EXPENDITU RE INCURRED ON RENTAL BUILDING FOR RENOVATION IS ONLY REVENUE E XPENDITURE NOT CAPITAL EXPENDITURE. 3. DEPARTMENTAL REPRESENTATIVE PLACES RELIANCE ON T HE ORDERS OF THE LOWER AUTHORITIES. 4. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISIONS RELIED ON. AN IDENTICAL ISSUE CAM E UP BEFORE THE CO-ORDINATE BENCH IN THE CASE OF ACIT V S. M/S.FRASER & ROSS IN ITA NO.2240/MDS/2013 DATED 29 TH JULY, 2015, WHEREIN THE TRIBUNAL HELD THAT EXPENSES INCUR RED BY THE ASSESSEE ON THE RENTED PREMISES TOWARDS FALSE C EILING, WOODEN PARTITION AND OTHER TEMPORARY STRUCTURES ARE ONLY REVENUE EXPENDITURE ALLOWABLE FOR 100% DEPRECIATION . WHILE HOLDING SO, THE TRIBUNAL HELD AS UNDER:- 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES AND THE DECISIONS RELIED ON. THE ASSESSEE INCURRED 4 ITA NO.134/MDS/2015 EXPENDITURE TOWARDS FALSE CEILING, WOODEN PARTITION , GLASS / WOODEN PANES AND OTHER TEMPORARY STRUCTURES IN THE LEASEHOLD PREMISES OCCUPIED BY IT FOR ITS PROFESSIO N AND CLAIMED 100% DEPRECIATION ON SUCH EXPENDITURE. TH E ASSESSING OFFICER DISALLOWED THE SAME TREATING IT A S CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION @ 15%. ON APPE AL, THE COMMISSIONER OF INCOME TAX (APPEALS) FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF THIRU AROORAN SUGARS LTD. VS. DCIT (350 ITR 324) ALLOWED THE CLAIM OF THE ASSESSEE HOLDING THAT IN THE INSTANT CASE FALSE CEILING, WOODEN PARTITION ERECTED IN THE LEASEHOLD PREMISES ARE TO BE CLASSIFIED AS TEMPORARY STRUCTURES AND TH E EXPENDITURE INCURRED TOWARDS THE SAME IS NOT CAPITA L EXPENDITURE IN VIEW OF THE DECISION OF HIGH COURT I N THE CASE OF THIRU AROORAN SUGARS LTD. (SUPRA), WHEREIN IT WA S HELD THAT TEMPORARY STRUCTURES BY MEANS OF FALSE CEILING AND OFFICE RENOVATION HAS NOT RESULTED INTO CAPITAL EXPENDITUR E . ON GOING THROUGH THE DECISIONS RELIED ON, WE FIND THAT THE ISSUE HAS BEEN DECIDED BY THE CO-ORDINATE BENCH OF THIS T RIBUNAL IN FAVOUR OF THE ASSESSEE IN THE CASE OF VICTORY FI NANCIAL SERVICES P.LTD. VS. ACIT (SUPRA) WHEREIN ON SIMILAR CIRCUMSTANCES, THE CO-ORDINATE BENCH FOLLOWING THE DECISION OF THIRU AROORAN SUGARS LTD. (SUPRA) AND THE DECISI ONS OF OTHER HIGH COURTS HELD THAT EXPENDITURE INCURRED ON TEMPORARY STRUCTURES TOWARDS WOODEN AND INTERIOR WO RKS FOR OFFICE PURPOSES IS ALLOWABLE AS REVENUE EXPENDITURE AND WHILE HOLDING SO, THE TRIBUNAL HELD AS UNDER:- 7. THE NEXT ISSUE IN THE GROUNDS OF APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEAL S) ERRED IN UPHOLDING THE ADDITION MADE OF ` 4,78,054/- TREATING THE EXPENSES INCURRED FOR IMPROVEMENT OF LEASEHOLD BUIL DING AS CAPITAL EXPENDITURE. THE ASSESSING OFFICER WHILE C OMPLETING THE ASSESSMENT NOTICED THAT ASSESSEE SPENT ` 5,03,220/- FOR IMPROVEMENT OF LEASE HOLD BUILDING AND HAS BEEN CL AIMED AS REVENUE EXPENDITURE. HE OBSERVED THAT ASSESSEE COMP ANY MOVED TO NEW PREMISES WHICH WAS TAKEN ON LEASE AND INCURRED EXPENDITURE FOR WOODEN AND OTHER INTERIOR WORKS. THE ASSESSING OFFICER DISALLOWED THE SAID EXPENSES TREA TING THE EXPENDITURE AS CAPITAL EXPENDITURE AND ALLOWED DEPR ECIATION @ 10% ON SUCH WOODEN AND INTERIOR WORKS. ON APPEAL , COMMISSIONER OF INCOME TAX (APPEALS) UPHELD THE DISALLOWANCE OBSERVING THAT ASSESSEE IS STILL OCCUP YING THE LEASED PREMISES AND THE EXPENDITURE RESULTED IN END URING BENEFIT. 8. COUNSEL FOR THE ASSESSEE SUBMITS THAT EXPENDITUR E WAS INCURRED FOR WOODEN AND INTERIOR WORKS AND TO MAKE THE LEASED PREMISES SUITABLE FOR OFFICE/BUSINESS PURPOSES. HE SUBMITS THAT ASSESSEE IS NOT DERIVING ANY ENDURING BENEFIT BY INCURRING 5 ITA NO.134/MDS/2015 SUCH EXPENSES. COUNSEL PLACES RELIANCE ON THE DECIS IONS OF THE HONBLE MADRAS HIGH COURT IN THE FOLLOWING CASE S:- I) THIRU AROORAN SUGARS LTD. VS. DCIT (2013) (31 TAXMANN.COM 3) II) CIT VS. HARIDAS BHAGATH & CO.P.LTD., (240 ITR 1 69) III) CIT VS. AYESHA HOSPITALS P.LTD. (292 ITR 266) 9. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDERS OF LOWER AUTHORITIES AND HE PLACES RELIANCE ON THE DECISION OF HIGH COURT OF PUNJAB IN THE CASE OF UTT AR BHARAT EXCHANGE LTD. VS. CIT (55 ITR 550). 10. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES AND THE DECISIONS RELIED ON. ON GOING THROUGH THE A SSESSMENT ORDER, WE FIND THAT THE ASSESSEE HAS INCURRED EXPEN SES ON LEASED PREMISES TOWARDS WOODEN AND INTERIOR WORKS F OR OFFICE PURPOSES. IN THE CASE OF THIRU AROORAN SUGARS LTD. VS. DCIT (SUPRA) THE HONBLE HIGH COURT HELD THAT EXPENDIT URE INCURRED ON TEMPORARY STRUCTURES BY MEANS OF FALSE CEILING A ND OFFICE RENOVATION ON LEASED PREMISES ARE DEDUCTIBLE AS REV ENUE EXPENDITURE. IN THE CASE OF CIT VS. HARIDAS BHAGA TH & CO.P.LTD., (SUPRA) THE HONBLE HIGH COURT HELD THA T EXPENDITURE PROVIDED ON EXTRA AMENITIES IN LEASEH OLD PREMISES I.E. SOME CONSTRUCTION WORK TO MAKE THE PROPERTY SUITABLE FOR BUSINESS PURPOSES IS REVENUE EXPENDITU RE AND NO CAPITAL ASSET BROUGHT INTO EXISTENCE. IN THE CASE OF CIT VS. AYESHA HOSPITALS P.LTD. (SUPRA), THE HONBLE HIGH C OURT HELD THAT EXPENDITURE ON PAINTING, RELAYING OF DAMAGED F LOORS, PARTITIONS ETC. IN LEASEHOLD PREMISES ARE ALLOWABL E AS REVENUE EXPENDITURE. THE HIGH COURT FURTHER HELD THAT SUCH EXPENDITURE CANNOT BE CONSIDERED TO BE A CAPITAL EX PENDITURE OF THE NATURE MENTIONED IN EXPLANATION 1 TO SECTION 32(1) OF THE ACT. ALL THESE DECISIONS SUPPORT THE CONTENTION OF THE ASSESSEE THAT EXPENDITURE ON WOODEN AND INTERIOR WO RKS ON THE LEASED PREMISES INCURRED FOR OFFICE PURPOSES IS ALLOWABLE AS REVENUE EXPENDITURE. THUS, RESPECTFULLY FOLLOWIN G THE ABOVE CITED DECISIONS, WE DIRECT THE ASSESSING OFFICER TO ALLOW THIS EXPENDITURE AS REVENUE EXPENDITURE. 6. SIMILARLY, CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF VISUAL GRAPHICS COMPUTING SERVICES INDIA PV T LTD. VS. DCIT IN ITA NO.617/MDS/2011 DATED 29.05.2015 H ELD AS UNDER:- 6. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE M ATERIAL ON RECORD. THE ASSESSEE, IN THIS CASE, INCURRED EXPEND ITURE TOWARDS IMPROVEMENT TO LEASEHOLD PREMISES WHICH INC LUDE FALSE CEILINGS, DISMANTLING EXISTING GRANITE FLOORI NG, INTERIOR WORKS AT TECHNOPARK OFFICE, PROVIDING TEAK WOOD FOR DOOR FRAMES, LAYING CERAMIC TILES, PARTITION WORK, SUSP ENDED CEILING SYSTEM, WALL AND COLUMN PANELLING, SANITARY WORK, P AINTING AND 6 ITA NO.134/MDS/2015 CLEANING WORK, DATA AND VOICE CABLING WORK ETC. AND CONSIDERED THE SAME AS TEMPORARY STRUCTURES AND CLA IMED 100% DEPRECIATION. THERE IS NO DISPUTE THAT THE EXP ENDITURE INCURRED FOR RENOVATING THE EXISTING LEASEHOLD PREM ISES. THE ASSESSEE HAS NOT EXTENDED ANY CONSTRUCTION IN TH E LEASEHOLD PREMISES. IT INCURRED THE EXPENDITURE FOR BEAUTIFYING THE EXISTING LEASEHOLD PREMISES. BEING SO, IT CANNO T BE SAID THAT THE EXPENDITURE IS RESULTED IN CREATION OF ANY NEW CAPITAL ASSET. IN OUR OPINION, THE EXPENDITURE INCURRED BY THE ASSESSEE ON PROVIDING WOODEN PARTITION, PAINTINGS, INTERIOR WORKS AND OTHER REPAIRS TO THE LEASEHOLD PREMISES E TC. ARE TO BE CONSIDERED AS REVENUE EXPENDITURE. THIS VIEW IS FORTIFIED BY THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF CIT V. ESCORTS FINANCE LTD. (205 CTR 574), WHICH WAS FOLLO WED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN ITA NO.1254/MDS/2012 FOR THE ASSESSMENT YEAR 2008-09 V IDE ORDER DATED 22.11.2012 IN THE CASE OF DR. AGARWALS EYE HOSPITAL. FURTHER, THE SAME VIEW WAS TAKEN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF THE CASE O F CIT V. ARMOUR CONSULTANTS P. LTD. (85 DTR 361), WHEREIN IT WAS HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE FOR D ESIGN, LAYOUT AND MATERIAL CONSTRUCTION, FABRICATION WORKS IN LEASED PREMISES ARE DEDUCTIBLE AS REVENUE EXPENDITURE. IT ALSO CLARIFIED BY THE JURISDICTIONAL HIGH COURT IN THE C ASE OF M/S. THIRU AROORAN SUGARS LTD. IN TAX CASE (APPEAL) NO. 197 OF 2005 DATED 26.7.2011, THAT EXPLANATION (1) TO SEC.3 2(1) OF THE INCOME-TAX ACT,1961, WHICH WAS INSERTED WITH EFFECT FROM 1.4.1988, IS AN EXCEPTIONAL ONE WHICH PERMITS DEPRE CIATION IN CASES WHERE THE ASSESSEE DOES NOT OWN A BUILDING IN RESPECT OF WHICH, THE ASSESSEE INCURS CAPITAL EXPENDITURE O N 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. FURTHER, IT WAS HELD T HAT THE TEMPORARY STRUCTURE BY MEANS OF FALSE CEILING AND O FFICE RENOVATION HAD NOT RESULTED IN ANY CAPITAL EXPENDIT URE. THE BENEFIT OF THE ABOVE DECISION, APPLIES TO THE FACTS OF THE PRESENT CASE. ACCORDINGLY, WE ARE INCLINED TO DISMI SS THIS GROUND TAKEN BY THE REVENUE. 7. RESPECTFULLY FOLLOWING THE SAID DECISIONS, WE U PHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) I N ALLOWING THE CLAIM OF THE ASSESSEE AND REJECT THE GROUNDS RA ISED BY THE REVENUE. 5. RESPECTFULLY FOLLOWING THE SAID DECISION, WE ALL OW THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ON THIS IS SUE. 7 ITA NO.134/MDS/2015 6. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN SUSTA INING THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT DISALLOWED 10% OF THE DIVIDEND INCOME EARNED BY THE ASSESSEE AS EXPENSES ATTRIBUTABLE FOR EARNING EXEMP T INCOME UNDER SECTION 14A OF THE ACT. THE COMMISSION ER OF INCOME TAX (APPEALS) RESTRICTED THE DISALLOWANCE TO 5% OF EXEMPT INCOME. 7. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE TRIBUN AL IS CONSISTENTLY HOLDING THAT 2% OF EXEMPT INCOME IS RE ASONABLE EXPENDITURE FOR DISALLOWANCE UNDER SECTION 14A AND HE PLACES RELIANCE ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. BIMETAL BEARING LTD. IN ITA NO.89 & 90/MD S/2015 DATED 22.05.2015. 8. DEPARTMENTAL REPRESENTATIVE PLACES RELIANCE ON T HE ORDERS OF LOWER AUTHORITIES. 9. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISION RELIED ON. THIS TRIBUNAL IS CONSIS TENTLY HOLDING THAT 2% OF THE EXEMPT INCOME IS REASONABLE 8 ITA NO.134/MDS/2015 DISALLOWANCE FOR MEETING THE EXPENDITURE FOR EARNIN G EXEMPT INCOME UNDER SECTION 14A PRIOR TO INSERTION OF RULE 8D. ADMITTEDLY, PROVISIONS OF RULE 8D HAVE NO APPLICATI ON IN THIS CASE BEING THE ASSESSMENT YEAR 2007-08 AS THE SAID RULE CAME INTO OPERATION ONLY IN THE YEAR 2008. RESPECTF ULLY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. BIMETAL BEARING LTD. IN ITA NOS.89 & 90/MDS/2015 DA TED 22.05.2015 WE DIRECT THE ASSESSING OFFICER TO RESTR ICT THE DISALLOWANCE UNDER SECTION 14A TO 2% OF EXEMPT INCO ME. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH SEPTEMBER, 2015. SD/- SD/- ( . ) ( ( *+ ) ( A.MOHAN ALANKAMONY ) ( CHALLA NAGENDRA PRASAD ) - / ACCOUNTANT MEMBER * - / JUDICIAL MEMBER * /CHENNAI, / /DATED 11 TH SEPTEMBER, 2015 SOMU 12 32 /COPY TO: 1. APPELLANT 2. RESPONDENT 3. 4 () /CIT(A) 4. 4 /CIT 5. 2 7 /DR 6. /GF .