The Jt.CIT(OSD), Circle-7, Ahmedabad V. Shri Nirmal Bhandari, Ahmedabad

ITA 1395/AHD/2006

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0311 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 15-09-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 29-05-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOVIND SINGHAL
• Keywords: Capital asset; Gift; Business expenditure; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI T.K.SHARMA, JUDICIAL MEMBER AND SHRI D.C.AGRAWAL, ACCOUNTANT MEMBER DATE OF HEARING : 17/09/2009 DRAFTED ON: 08 /10/2009 ITA NO.1395/AHD/2006 ASSESSMENT YEAR : 2003-04 THE JCIT (OSD) CIRCLE-7 AHMEDABAD VS. NIRMAL BHANDARI F-51, WESTERN PARK B/H. GURUDWARA SARKHEJ HIGH-WAY AHMEDABAD PAN/GIR NO. : AATPB 6323 Q (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI GOVIND SINGHAL, DR RESPONDENT BY: SHRI PRAKASH D.SHAH, CA O R D E R PER D.C.AGRAWAL , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE LEARNED CIT(APPEALS)-XIII, AHMEDABAD DATED 30/03/2 006 PASSED FOR ASSESSMENT YEAR 2003-04, BY RAISING FOL LOWING EFFECTIVE GROUNDS: 1. THE LD. CIT(A)-XIII AHMEDABAD HAS ERRED IN LAW AND ON FACTS WHILE GIVING DIRECTION TO CONSIDER THE EXPENDITURE ON SHED DEVELOPMENT AS REVENUE EXPENDITURE. 2. THE LD. CIT(A)-XIII HAS ERRED IN LAW AND ON FACTS W HILE DELETING THE DIWALI EXPENSES OF RS.21,475/- OUT OF EXPENDITURE INCURRED ON WATCHES GIFTED TO SUPPLIERS. ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 2 - 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A MANUFACTURER AND EXPORTER OF HANDCRAFT GOODS. DURING THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS DEBITED A SUM OF RS.12,71,298/- UNDER THE HEAD SHED DEVELOPM ENT. WHEN ASKED TO EXPLAIN, THE ASSESSEE SUBMITTED THAT HE HAS AC QUIRED THE PLOT OF LAND ON RENT AND DEVELOPED THE SHED THEREON. SINCE THE SHED WAS BUILT ON A RENTED PLOT, THE COST OF CONSTRUCTION OF THE SHED FOR HOUSING THE MACHINERIES AND OFFICE WAS TREATED AS REVENUE EXPEN DITURE. THE ASSESSEE ALSO RELIED ON THE FOLLOWING JUDGEMENTS: SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. GIRDHARI DASS AND SONS 105 ITR 339 (ALL.) 2. HOTEL DIPLOMAT VS. CIT (1980) 125 ITR 781 (DELHI) 3. EMPIRE JUTE CO.LTD. VS. CIT (1980) 124 ITR 01 (SC) 3. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLAN ATION AND TREATED THE EXPENDITURE AS CAPITAL IN NATURE AS IT IS PROVI DING ENDURING BENEFIT TO THE ASSESSEE. HE HELD THAT EXPENDITURE IS CAPITAL IN NATURE EVEN IF IT IS INCURRED ON THE LAND OF THIRD PARTY AND NOT UPON HI S OWN LAND. HE REFERRED TO FOLLOWING THREE DECISIONS:- ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 3 - SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. BOYCE VS. WHITWICK COLLARY CO.LTD. (1934) 18 TAX CAS 655 2. TAJMAHAL HOTEL VS. CIT 66 ITR 303 3. MODI SPINNING & WEAVING MILLS LTD. 200 ITR 545 4. THE LEARNED CIT(APPEALS) DELETED THE ADDITION BY HOLDING THAT PREMISES DOES NOT BELONG TO THE ASSESSEE, IT BELONG ED TO RAJASTHAN STATE INDUSTRIAL AND MINERAL DEVELOPMENT CORPORATION LTD. WHO IS LESSOR AND WHO HAS LEASED THE PREMISES TO M/S.R.K.FABRICS, JO DHPUR WHO HAS SUB- LEASED THE PREMISES TO THE ASSESSEE. HE REFERRED TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MADRAS AUTO SE RVICE PVT.LTD. (233 ITR 468) (SC). 5. AGAINST THIS, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUBMITTED THAT THE ASSESSEE HAS TAKEN THE PLOT ON LEASE FOR 9 9 YEARS AND ASSESSEE IS GETTING ENDURING BENEFIT FROM THAT LEASE. THE ASSE SSEE HAS DEVELOPED LEASE-HOLD RIGHTS AND, THEREFORE, ANY CONSTRUCTION MADE THEREON WOULD BE CAPITAL IN NATURE AND SO THE EXPENDITURE INCURRED T HEREON. ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 4 - 6. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE, ON THE OTHER HAND, SUBMITTED THAT EXPLANATION U/S.31 OF TH E I.T. ACT, 1961 CAME IN THE STATUTE BOOK W.E.F. 01/04/2004. IT PROVIDED THAT AMOUNT PAID ON ACCOUNT OF CURRENT REPAIRS SHALL NOT INCLUDE ANY EX PENDITURE IN THE NATURE OF CAPITAL EXPENDITURE. THE LEARNED AUTHORISED REP RESENTATIVE OF THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE HAS, I N FACT, NOT PAID ANY AMOUNT, IT HAS ONLY INCURRED EXPENDITURE. THEREFOR E, ANY EXPENDITURE ON REPAIRS WHICH MIGHT BE A CAPITAL IN NATURE COULD NO T BE DISALLOWED. HE REFERRED TO THE DECISION OF HON'BLE SUPREME COURT I N THE CASE OF MADRAS AUTO SERVICES PVT.LTD., 233 ITR 468 (SC) FOLLOWED BY THE HON'BLE MADRAS HIGH COURT IN THE CASE OF HARI VIGNESH MO TORS PVT.LTD. (2006) 282 ITR 338 (MAD.), WHEREIN IT HAS HELD THAT EXPENDITURE ON CONSTRUCTION IN A PROPERTY TAKEN ON LEASE WOULD BE EXPENDITURE ALLOWABLE U/S.37 OF THE I.T. ACT, 1961. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IT IS UNDISPUTED FACT THAT THE ASSESSEE HAS TAKEN THE LAND ON SUB-L EASE FOR A LONG PERIOD. EXACT DETAILS AS TO THE PERIOD FOR WHICH SUB-LEASE EXIST IS NOT PROVIDED. IN ANY CASE, THE PLOT IS ON RENT ON WHICH SOME SUPE RSTRUCTURE WAS EXISTING ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 5 - WHICH WAS DEMOLISHED AND NEW SUPERSTRUCTURE WAS CRE ATED TO HOUSE THE PLANT AND MACHINERY AND THE OFFICE OF THE ASSESSEE. THE EXPENDITURE SO INCURRED HAS BEEN DEBITED UNDER THE HEAD SHED DE VELOPMENT. THE ISSUE IS SQUARELY COVERED BY THE DECISION OF HON'BL E SUPREME COURT IN THE CASE OF MADRAS AUTO SERVICES FOLLOWED BY HON'BL E MADRAS HIGH COURT IN THE CASE OF HARI VIGNESH MOTORS PVT.LTD.(S UPRA). HON'BLE SUPREME COURT OBSERVED AS UNDER (HEAD NOTES):- THE GENERAL PRINCIPLES APPLICABLE IN DETERMINING W HETHER A PARTICULAR EXPENDITURE IS CAPITAL OR REVENUE EXPEND ITURE ARE AS FOLLOWS : (1) OUTLAY IS DEEMED TO BE CAPITAL WHEN IT IS MADE FOR THE INITIATION OF A BUSINESS, FOR EXTENSION OF A B USINESS, OR FOR A SUBSTANTIAL REPLACEMENT OF EQUIPMENT ; (2) EXPENDIT URE MAY BE TREATED AS PROPERLY ATTRIBUTABLE TO CAPITAL WHEN I T IS MADE NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT OF A TRADE. IF WHAT IS GOT RID OF BY A LUMP SUM PAYMENT IS AN ANNU AL BUSINESS EXPENSE CHARGEABLE AGAINST REVENUE, THE LUMP SUM PA YMENT SHOULD EQUALLY BE REGARDED AS A BUSINESS EXPENSE, BUT IF THE LUMP SUM PAYMENT BRINGS IN A CAPITAL ASSET, THEN TH AT PUTS THE BUSINESS ON ANOTHER FOOTING ALTOGETHER ; (3) WHETHE R FOR THE PURPOSE OF THE EXPENDITURE, ANY CAPITAL WAS WITHDRA WN, OR, IN OTHER WORDS, WHETHER THE OBJECT OF INCURRING THE E XPENDITURE WAS TO EMPLOY WHAT WAS TAKEN IN AS CAPITAL OF THE BUSI NESS. 7.1. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF H ARI VIGNESH MOTORS PVT.LTD.(SUPRA) HELD AS UNDER:- THE ASSESSEE WAS A DEALER IN TWO-WHEELERS MANUFACT URED BY TVS SUZUKI LTD. AND WAS DOING BUSINESS IN LEASEHOLD PRE MISES. DURING THE RELEVANT PERIOD, THE ASSESSEE CONSTRUCTED A GRO UND FLOOR OVER ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 6 - THE EXISTING BASEMENT FLOOR AT A COST OF RS.4,82,68 8 ACCORDING TO THE SPECIFICATIONS GIVEN BY TVS SUZUKI LTD. TO ALL ITS DEALERS. THE ASSESSEE CLAIMED THE SAID SUM AS REVENUE EXPENDITUR E FOR THE ASSESSMENT YEAR 1997-98. THE ASSESSING OFFICER DISA LLOWED THE CLAIM BUT THE TRIBUNAL ALLOWED IT. ON APPEAL : HELD, _ DISMISSING THE APPEAL, THAT THE ASSESSEE HAD PUT UP THE GROUND FLOOR OVER THE EXISTING BASEMENT FLOOR ONLY TO HAVE THE BUSINESS PREMISES ACCORDING TO THE SPECIFICATIONS P UT FORTH BY TVS SUZUKI LTD. AND, FURTHER, THERE WAS A CLEAR-CUT STI PULATION IN THE LEASE DEED THAT REIMBURSEMENT OF THE EXPENDITURE WA S NOT POSSIBLE FROM THE OWNER OF THE PREMISES. HENCE, IN VIEW OF T HE BUSINESS EXIGENCIES, THE ASSESSEE HAD PUT UP THE CONSTRUCTIO N IN AND BY WHICH THE ASSESSEE WOULD NOT GET ANY CAPITAL ASSET. THE EXPENDITURE WAS, THEREFORE, DEDUCTIBLE. [CIT V. MADRAS AUTO SERVICE P. LTD. [1998] 233 ITR 468 (SC) APPLIED]. 8. EVENTHOUGH THE ASSESSEE HAS CONSTRUCTED A BUILDI NG IN THE NAME OF SHED, BUT THE ASSET SO CREATED COULD NOT BE SAID TO BE BELONGING TO THE ASSESSEE AS PLOT OF LAND IS ON RENT. NORMALLY, AN EXPENDITURE IF INCURRED FOR CREATING A LONG TERM ASSET AND FOR ENDURING BEN EFIT COULD BE TREATED AS CAPITAL EXPENDITURE, BUT WHERE EXPENDITURE IS INCUR RED ON A LEASED PREMISES, THEN IT HAS TO BE SEEN WHETHER LEASE AGRE EMENT SPEAKS OF HANDING OVER OF THE POSSESSION OF THE PROPERTY TO T HE ORIGINAL OWNER AS IT ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 7 - IS OR WHETHER THE ASSESSEE HAS ANY RIGHT OVER THE CONSTRUCTED PROPERTY. IT HAS TO BE FURTHER SEEN WHETHER THE ASSESSEE HAS, PARTICULARLY UNDER SUB- LEASE, ANY TRANSFERABLE RIGHTS OVER THE LAND OR H E IS MERELY A LICENSEE AND CAN ENJOY THE POSSESSION ON THE LAND AND THERE BEING NO TRANSFERABLE RIGHTS OVER THE LAND OR THE CONSTRUCTION SO MADE. NORMALLY, CURRENT REPAIRS WOULD MEAN BRINGING CERTAIN EXISTING ASSET INTO WORKING CONDITION IN THAT YEAR. THE WORD CURRENT DOES NOT ENVISAG E REPAIRS OF LONG TERM DURATION OR GIVING LONG TERM ADVANTAGE. THEREFOR E, EXPENDITURE ONLY TO THE EXTENT WHICH COULD BE SAID TO BE OF THE PERIODI CAL NATURE FOR RESTORING THE PROPERTY TO ITS WORKING CONDITION WOULD BE ALL OWABLE UNDER THE HEAD CURRENT REPAIRS. THE HON'BLE SUPREME COURT IN BULL IMAL NAVAL KISHORE VS. CIT (1997) 224 ITR 414 (SC) HAS OBSERVED THAT EXPENDITURE ON TOTAL RENOVATION OF A THEATRE OR THE EXPENSES INCURRED FOR PURCHASING NEW MACHINERY, NEW FURNITURE, NEW FITTINGS OR NEW ELECT RICAL GADGETS WOULD NOT BE CURRENT REPAIRS. IN THE CASE OF MADRAS AU TO SERVICES (SUPRA), THE LESSEE WAS REQUIRED TO PAY A MONTHLY RENT OF RS.1,0 00/- PER MONTH FOR THE FIRST 15 YEARS WITH SLIGHT INCREASE FROM TIME TO T IME. THE LEASE-DEED ALSO PROVIDED THAT NEW CONSTRUCTION SHALL FROM THE COMMENCEMENT OF THE WORK WOULD BE THE PROPERTY OF THE LESSOR. THE LESS EE COULD NOT BE ENTITLED TO ANY COMPENSATION IN THE EVENT OF THE LA ND REVERTING BACK TO THE ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 8 - LESSOR. IN THE BACKGROUND OF THESE FACTS, THE EXP ENSES INCURRED ON CONSTRUCTION OF NEW BUILDING WAS TREATED AS BUSINES S EXPENDITURE OR AS EXTRA RENT FOR THE LEASE. IT WAS HIGHLIGHTED BY TH E HON'BLE APEX COURT THAT WHAT IS GOT RID OF BY LUMP-SUM EXPENDITURE WE RE MINOR EXPENSES TO BE INCURRED FROM YEAR-TO-YEAR CHARGEABLE AGAINST TH E REVENUE. THEREFORE, THE LUMP-SUM AMOUNT SO INCURRED SHOULD EQUALLY BE REGARDED A BUSINESS EXPENSES. IN THAT CASE, AS PER THE LEAS E AGREEMENT, THE BUILDING CONSTRUCTED BY THE LESSEE WOULD BELONG TO LESSOR AND THAT ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET. BY C ONSTRUCTING THE BUILDING THAT ASSESSEE SAVED CONSIDERABLE REVENUE EXPENDITUR E FOR THE NEXT 39 YEARS. THEREFORE, THE EXPENDITURE OF RS.1,62,835/ - WAS TREATED AS REVENUE EXPENDITURE. 9. IN THE DECISION OF HON'BLE DELHI HIGH COURT I N THE CASE OF BIGJOS INDIA LTD. VS. CIT (2007) 293 ITR 170 (DELHI) IT W AS HELD THAT THE ASSESSEE HAD INCURRED EXPENDITURE ON REPAIRS AND MA INTENANCE OF AIR CONDITIONERS WHICH WAS CLAIMED AS REVENUE EXPENDITU RE BY RELYING ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF CIT V S. MADRAS AUTO SERVICES PVT.LTD. SINCE THE OWNERSHIP OF THE GADG ETS ON WHICH EXPENDITURE WAS INCURRED REMAINED VESTED WITH THE A SSESSEE, THE EXPENDITURE SO INCURRED WAS TREATED AS CAPITAL EXPE NDITURE. SIMILARLY, IN ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 9 - THE CASE OF CIT VS. HEDGE CONSULTANCY PVT.LTD. 127 TAXMAN 597, THE EXPENDITURE WAS INCURRED ON CONVERSION OF GODOWN PR EMISES TO OFFICE PREMISES BY RENOVATING IT HON'BLE BOMBAY HIGH COURT HELD THAT ASSETS SO CREATED DID NOT BELONG TO THE ASSESSEE. WHAT THE A SSESSEE GOT WAS BUSINESS ADVANTAGE OF USING MODERN BUSINESS PREMISE S AT LOW RENT. THIS WAS TREATED AS REVENUE EXPENDITURE. 10. WHAT COMES OUT FROM THE READING OF THESE DECISI ONS IS THAT OWNERSHIP OVER THE PREMISES SO CONSTRUCTED DID NOT VEST IN THE ASSESSEE BUT VESTED WITH THE LESSOR AND NO TRANSFERABLE RIG HTS WAS ACQUIRED BY THE ASSESSEE. IT HAS ALSO TO BE SHOWN BY THE ASSESSEE THAT BY INCURRING EXPENDITURE ON SUCH RENOVATION AND BY CREATING A NE W PREMISES HOUSING MACHINERIES AND OFFICE, THE ASSESSEE HAS GOT REDUCT ION/BENEFIT IN RENT. IT HAS TO BE SHOWN THAT THE LEASE AGREEMENT HAD A CLAU SE TO THE EFFECT THAT THE SUPERSTRUCTURE CONSTRUCTED BY THE ASSESSEE WOU LD BELONG TO THE LESSOR AND FOR ERECTING SUCH SUPERSTRUCTURE, THERE IS NO C HANGE IN THE RENT PAYABLE BY THE ASSESSEE OR THAT HE GOT A BENEFIT IN REDUCTION OF RENT. 11. ACCORDINGLY, WE RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO S HOW THAT THE FACTS OF THIS CASE SQUARELY FITS INTO THE CASE OF MADRAS AUT O SERVICES PVT.LTD.(SUPRA) AND OTHER DECISIONS REFERRED TO BY US AS ABOVE. ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 10 - 12. AS A RESULT, THIS GROUND OF REVENUE IS TREATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. 13. NEXT GROUND RELATES TO DELETING THE DIWALI EXPE NSES OF OF RS.21,475/- INCURRED ON WATCHES GIFTED TO SUPPLIER. WHILE ALLOWING THIS GROUND, THE LEARNED CIT(APPEALS) OBSERVED AS UNDER: - 5.1. THE ASSESSING OFFICER HAS DISALLOWED RS.21,47 5/- BEING EXPENDITURE INCURRED ON WATCHES GIFTED TO SUPPLIERS , ETC. ON THE GROUND THAT THE SAID EXPENDITURE CANNOT BE CONSIDER ED TO BE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS. DISPUTING THE SAID DISALLOWANCE THE AUTHORISED REPRESENTATIVE OF THE APPELLANT SUBMITTED THAT THE SAID EXPENDITURE WAS I NCURRED PURELY FOR THE BUSINESS PURPOSE AND THE AUDITOR IN REPORT U/S.44AB OF THE ACT, HAS ALSO NOT CERTIFIED IT AS A PERSONAL EXPEND ITURE. FURTHER, THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE ON THE PRESUMPTION BASIS. IN VIEW OF THE SAID FACTS, THE SAME IS ALLOWABLE EXPENSES AND THE ASSESSING OFFICER SHOULD BE DIRECT ED TO ALLOW THE SAME. ITA NO.1395/AHD /2006 JCIT VS. SHRI NIRMAL BHANDARI ASST.YEAR 2003-04 - 11 - 14. AFTER HEARING THE PARTIES, WE DO NOT FIND ANY R EASON TO INTERFERE IN THE DECISION OF THE LD.CIT(A), WHICH IS CONFIRMED. THE SAID EXPENDITURE WAS INCURRED FOR BUSINESS PURPOSE AS PER AUDITORS REPORT US/.44AB OF THE I.T. ACT, 1961. THEREFORE, THIS GROUND OF REVE NUE IS REJECTED. 15. IN THE RESULT, THE APPEAL OF THE REVENUE IS TR EATED AS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 16/10/2009. SD/- SD/- ( T.K.SHARMA ) ( D.C.AGRAWAL ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 16 / 10 /2009 T.C. NAIR COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT.2. THE RESPONDENT 3. THE CIT CONCERNED.4. THE LD. CIT(APPEALS)-XIII, AHMEDABAD 5. THE DR, AHMEDABAD BENCH.6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD