DCIT, V. M/s W.S. Test Systems P. Ltd.,

ITA 1731/BANG/2013

• Counselvise Citation: 173121114 RSA 2013
• Duration Of Justice: 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 23-09-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 09-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR K SHANKAR PRASAD JT
• Assessee Lawyers: K SESHADRI
• Keywords: Depreciation; Business expenditure; Proportionate interest; Commercial expediency; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO. 1731/BANG/2013 ASSESSMENT YEAR : 2008-09 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(5), BANGALORE. VS. M/S. W S TEST SYSTEMS (P) LTD., MWB INDIA LTD., 27 TH KM, BELLARY ROAD, DODDAJALA POST, BANGALORE 562 157. PAN : AABCM 3218Q APPELLANT RESPONDENT APPELLANT BY : DR. K. SHANKAR PRASAD, JT. CIT(DR) RESPONDENT BY : SHRI K. SESHADRI, C.A. DATE OF HEARING : 23.09.2014 DATE OF PRONOUNCEMENT : 30.09.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER DATED 10.9.2013 OF THE CIT(APPEALS)-III, BANGALORE RELATING TO ASSESSM ENT YEAR 2008-09. 2. GROUND NOS. 1, 4 & 5 ARE GENERAL IN NATURE AND CALL FOR NO SPECIFIC ADJUDICATION. ITA NO. 1731/BANG/2013 PAGE 2 OF 9 3. GROUND NO.2 RAISED BY THE REVENUE READS AS UNDER :- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN DELETING THE ADDITIO N MADE ON REPAIRS AND MAINTENANCE WITHOUT APPRECIATING THE FA CT THAT THE EXPENDITURE INCURRED TOWARDS CONSTRUCTION OF WOOD P ACKING AND STORAGE SHED AMOUNTS TO CREATION OF AN ASSET OF END URING NATURE. 4. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN MAN UFACTURING ENGINEERING GOODS. IN THE COURSE OF ASSESSMENT PRO CEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD INCURRED A SUM OF RS. 11,42,371 ON ACCOUNT OF REPAIRS AND MAINTENANCE. THE NATURE OF THESE EX PENSES WAS EXPLAINED BY THE ASSESSEE AS EXPENDITURE INCURRED ON CONSTRUC TING A TEMPORARY STRUCTURE FOR USE AS WOOD PACKING AND STORAGE YARD. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD TAKEN THE LAND AND BUILDING ON LEA SE IN WHICH THE FACTORY PREMISES OF THE ASSESSEE WAS LOCATED. IT IS ALSO N OT IN DISPUTE THAT AS PER THE TERMS OF THE LEASE, THE ASSESSEE AS A LESSEE, W AS PERMITTED TO MAKE ADDITIONS/ALTERATIONS TO THE EXISTING STRUCTURE IN THE LEASED PREMISES SPACE PROVIDED TO THE LESSEE AT THEIR COST. THE LEASE DE ED ALSO PROVIDES THAT LESSEE SHALL NOT MAKE ANY CLAIM OF ANY OWNERSHIP ON THE STRUCTURE BUILT BY THEM ON TERMINATION OF THE LEASE. IT IS ALSO NOT I N DISPUTE THAT THE WOOD PACKING AND STORAGE YARD CONSTRUCTED BY THE ASSESSE E AT A COST OF RS.11,42,371 HAS A SHELL LIFE OF ONLY 1 YEARS AND HAD BEEN DESTROYED BY THE ASSESSEE AFTER 1 YEARS. IT IS ALSO NOT IN DI SPUTE THAT THIS WOOD PACKING AND STORAGE YARD HAD BEEN CONSTRUCTED BY TH E ASSESSEE ON THE VACANT LAND APPURTENANT TO THE BUILDING, WHICH WAS TAKEN ON LEASE BY THE ITA NO. 1731/BANG/2013 PAGE 3 OF 9 ASSESSEE. IT IS IN THESE CIRCUMSTANCES THAT A QUES TION AROSE AS TO WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE IN CONSTRU CTION OF WOOD PACKING AND STORAGE YARD CONSTITUTED A CAPITAL OR REVENUE E XPENDITURE. 5. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE E XPENDITURE IN QUESTION CONFERRED AN ENDURING BENEFIT FOR MORE THA N ONE YEAR AND THEREFORE WAS A CAPITAL EXPENDITURE. HE ACCORDINGL Y DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION AS REVENUE EXPENDITURE. HE, HOWEVER, ALLOWED DEPRECIATION @ 5% ON THE CAPITALIZED VALUE OF THE E XPENDITURE. 6. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) WAS OF THE VIEW THAT STORAGE YARD HAD BEEN CONSTRUCTED AS PER THE REQUIR EMENTS OF THE ASSESSEES BUSINESS AND THAT STRUCTURE HAD BEEN DEM OLISHED WITHIN A SHORT SPAN OF 1 YEARS. HE WAS THEREFORE OF THE VIEW TH AT EXPENDITURE WAS INCURRED FOR TEMPORARY NEEDS OF THE BUSINESS. HE A LSO FOUND THAT AS PER TERMS OF THE LEASE, THE ASSESSEE HAD A RIGHT TO CAR RY OUT CONSTRUCTION AND ANY CONSTRUCTION CARRIED OUT BY THE ASSESSEE WILL E NURE TO THE BENEFIT OF THE LESSOR. THE CIT(A) MADE A REFERENCE TO THE DECISIO N OF THE HONBLE SUPREME COURT IN CIT V. MADRAS AUTO SERVICE (P) LTD., 233 ITR 468 (SC) AND CAME TO THE CONCLUSION THAT THE EXPENDITURE IN QUESTION WAS A NORMAL BUSINESS EXPENDITURE AND DID NOT RESULT IN ANY ENDURING ADVANTAGE TO THE ASSESSEE. THE ADDITION MADE BY TH E AO WAS ACCORDINGLY DELETED BY THE CIT(A). ITA NO. 1731/BANG/2013 PAGE 4 OF 9 7. BEFORE US, THE LD. DR DREW OUR ATTENTION TO EXPL ANATION 1 TO SECTION 32(1) OF THE ACT, WHICH READS AS UNDER:- EXPLANATION 1. WHERE THE BUSINESS OR PROFESSION OF THE ASSESSEE IS CARRIED ON IN A BUILDING NOT OWNED BY H IM BUT IN RESPECT OF WHICH THE ASSESSEE HOLDS A LEASE OR OTHE R RIGHT OF OCCUPANCY AND ANY CAPITAL EXPENDITURE IS INCURRED B Y THE ASSESSEE FOR THE PURPOSES OF THE BUSINESS OR PROFESSION ON T HE CONSTRUCTION OF ANY STRUCTURE OR DOING OF ANY WORK IN OR IN RELA TION TO, AND BY WAY OF RENOVATION OR EXTENSION OF, OR IMPROVEMENT T O, THE BUILDING, THEN, THE PROVISIONS OF THIS CLAUSE SHALL APPLY AS IF THE SAID STRUCTURE OR WORK IS A BUILDING OWNED BY THE A SSESSEE. 8. ACCORDING TO THE LD. DR, THE FACT THAT ASSESSEE WAS A LESSEE OF THE PREMISES FOR WHICH HE CARRIED OUT CONSTRUCTION WILL NOT MAKE IT A REVENUE EXPENDITURE IN THE LIGHT OF EXPLANATION 1 TO SECTIO N 32(1) REFERRED TO ABOVE. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF HON BLE HIGH COURT OF KARNATAKA IN THE CASE OF SENAPATHY SYNAMS INSULATIONS (P) LTD. V. CIT, 248 ITR 656 (KAR) , WHEREIN THE HONBLE HIGH COURT TOOK THE VIEW THAT WHERE A COMPOUND WALL IS CONSTRUCTED AFTER DEM OLISHING THE EXISTING COMPOUND WALL AND ALSO AFTER REMOVING THE EXISTING FOUNDATION AND REPLACING IT WITH A NEW FOUNDATION, IT AMOUNTS TO B RINGING INTO EXISTENCE A NEW ASSET AND THE EXPENDITURE INCURRED WAS A CAPITA L EXPENDITURE. 9. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, WHILE RELYING ON THE ORDER OF THE CIT(APPEALS), BROUGHT TO OUR NOTIC E THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V. TVS LEAN LOGISTICS LTD., 293 ITR 432 (MAD) . IN THE AFORESAID CASE, EXPLANATION 1 TO SECTION 32(1) AND INTERPRETATION THEREON CAME UP FO R CONSIDERATION. THE ITA NO. 1731/BANG/2013 PAGE 5 OF 9 HONBLE HIGH COURT HELD THAT EXPLANATION APPLIES ON LY WHERE RENOVATION, EXTENSION OR IMPROVEMENT IS CARRIED OUT TO A BUILDI NG TAKEN ON LEASE BY THE LESSEE AND WILL NOT APPLY TO CONSTRUCTION PUT UP ON THE LAND HELD ON LEASE. SUCH EXPENSES WERE HELD TO BE REVENUE EXPENDITURE. IT WAS ALSO POINTED OUT BY THE LD. COUNSEL THAT THE DEPARTMENTAL APPEAL AGAINST THE SAID DECISION HAS ALSO BEEN DISMISSED BY THE HONBLE SUP REME COURT AS REPORTED IN 308 ITR 3 (SC) . 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN O UR VIEW, THE ORDER OF CIT(APPEALS) HAS TO BE UPHELD FOR THE FOLLOWING REA SONS. FIRSTLY, THE ASSESSEE WAS A LESSEE OF THE PREMISES AND COULD NOT MAKE ANY CLAIM OF ANY CONSTRUCTIONS DONE BY HIM OVER THE LEASED PREMI SES AS PER TERMS OF THE LEASE. SECONDLY, THE SHELL LIFE OF THE CONSTRU CTION WAS 1 YEARS AND IT CANNOT BE SAID THAT THE ASSESSEE DERIVED ANY ENDURI NG BENEFIT AS THE STRUCTURE WAS PURELY A TEMPORARY STRUCTURE CONSTRUC TED FOR THE PURPOSE OF BUSINESS. THIRDLY, THE NATURE OF CONSTRUCTION THAT IS COVERED BY EXPLANATION 1 TO SECTION 32(1) IS RENOVATION, EXTENSION OR IMPR OVEMENT. IN THE PRESENT CASE, A NEW STRUCTURE PUT UP BY THE ASSESSEE ON VAC ANT LAND APPURTENANT TO THE BUILDING AND THEREFORE IT CANNOT BE SAID TO BE RENOVATION, EXTENSION OF IMPROVEMENT TO THE BUILDING THAT WAS TAKEN ON LEASE . FOURTHLY, AS HELD BY THE HONBLE MADRAS HIGH COURT IN TVS LEAN LOGISTICS LTD. (SUPRA) , EXPLANATION 1 WILL BE ATTRACTED ONLY WHEN THE ASSES SEE CARRIES OUT RENOVATION OR EXTENSION OR IMPROVEMENT TO THE BUILD ING TAKEN ON LEASE. IN THE PRESENT CASE, ADMITTEDLY, THE ASSESSEE HAD NOT CARRIED OUT ANY ITA NO. 1731/BANG/2013 PAGE 6 OF 9 RENOVATION, EXTENSION OR IMPROVEMENT TO THE BUILDIN G TAKEN ON LEASE. A TEMPORARY STRUCTURE HAD BEEN PUT UP ON THE VACANT L AND APPURTENANT TO THE BUILDING THAT HAD BEEN TAKEN ON LEASE. THE VACANT LAND APPURTENANT TO THE BUILDING WAS ALSO PART OF THE LEASE. FOR THE ABOVE REASONS, WE DO NOT FIND ANY GROUNDS TO INTERFERE WITH THE ORDER OF THE CIT( APPEALS). CONSEQUENTLY GROUND NO.2 RAISED BY THE REVENUE IS DISMISSED. 11. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FOL LOWS:- 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN LAW IN DELETING THE ADDITION OF RS. 1,25,040 ON ADVANCES MADE TO A DIRECTOR OF THE ASSESSEE COMPANY WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WAS NOT ABL E TO ESTABLISH THAT THE INTEREST FREE FUNDS WERE USED FOR GIVING I NTEREST FREE LOANS TO DIRECTOR AND THE ASSESSEE HAS ALSO NOT OBTAINED ANY CONVINCING REASONS FOR COMMERCIAL EXPEDIENCY FOR ADVANCING INT EREST FREE LOANS TO A DIRECTOR. 12. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD AVAILED OF SECURED AND UNSECURED LOANS TO THE EXTENT OF RS.86,45,605, ON WHICH THE ASSESSEE HAD PAID INTERE ST OF RS.10,82,778 DEBITED TO THE PROFIT & LOSS ACCOUNT. THE DETAILS OF THE WERE ARE AS FOLLOWS:- RS. IN LAKHS FACILITY 31 MARCH 2008 31 MARCH 2007 INCREASE/(DECREASE) CASH CREDIT 47.42 39.91 7.51 TERM LOAN 21.25 10.00 11.25 HIRE PURCHASE 17.78 29.00 (11.22) 13. THE AO ALSO NOTICED THAT DURING THE PREVIOUS YE AR, THE ASSESSEE HAD LENT A SUM OF RS.10 LAKHS TO DR. S. GOPAL, EXECUTIV E DIRECTOR OF THE ITA NO. 1731/BANG/2013 PAGE 7 OF 9 COMPANY AND NO INTEREST WAS CHARGED. ACCORDING TO THE AO, INTEREST EXPENDITURE DEBITED IN THE P&L ACCOUNT PROPORTIONAT E TO THE INTEREST FREE LOAN GIVEN TO DR .S. GOPAL, EXECUTIVE DIRECTOR OF T HE COMPANY SHOULD BE DISALLOWED, AS THE BORROWED FUNDS ON WHICH INTEREST WAS PAID HAD NOT BEEN USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. SUBMISSION OF THE ASSESSEE BEFORE THE AO WAS THAT BORROWED FUNDS HAD NOT BEEN USED FOR GIVING INTEREST FREE LOAN. ACCORDING TO THE AO, IT WAS NECESSARY TO LOOK AT THE FLOW OF FUNDS AND ONCE THE LOANS LENT TO EXECUT IVE DIRECTOR WAS AVAILABLE FOR BUSINESS, THERE WOULD HAVE BEEN REDUCTION IN TH E INTEREST EXPENDITURE OF THE ASSESSEE. IN THAT VIEW OF THE MATTER, THE AO D ISALLOWED PROPORTIONATE INTEREST OF RS.1,25,240. 14. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) DEL ETED THE ADDITION MADE BY THE AO FOR TWO REASONS. FIRSTLY, HE FOUND T HAT THE LOANS BORROWED BY THE ASSESSEE WERE SPECIFIC LOANS WHICH COULD NOT BE USED FOR ANY OTHER PURPOSE, OTHER THAN THE PURPOSE FOR WHICH IT WAS GI VEN. THE CIT(A) THEREFORE HELD THAT THE CONCLUSIONS OF THE AO THAT BORROWED FUNDS WERE USED FOR GIVING INTEREST FREE LOAN TO THE EXECUTIVE DIRECTOR WAS ERRONEOUS. SECONDLY, THE CIT(A) WAS OF THE VIEW THAT GIVING IN TEREST FREE LOAN TO THE EXECUTIVE DIRECTOR, WHO WAS HIGHLY QUALIFIED AND CO NTRIBUTED TO THE GROWTH OF ASSESSEES BUSINESS HAD TO BE CONSIDERED AS OWIN G COMMERCIAL EXPEDIENCY AND THEREFORE NO INTEREST DISALLOWANCE C OULD BE MADE. 15. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), REV ENUE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. ITA NO. 1731/BANG/2013 PAGE 8 OF 9 16. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WH O RELIED ON THE ORDER OF THE AO. LD. COUNSEL FOR THE ASSESSEE RELI ED ON THE ORDER OF THE CIT(APPEALS). 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE A RE OF THE VIEW THAT THE ORDER OF THE CIT(APPEALS) CALLS FOR NO INTERFER ENCE. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD SHARE CAPITAL AND RESOURCES O F RS.2.01 CRORES WHICH WAS FAR IN EXCESS OF RS.10 LAKHS ADVANCED AS INTERE ST FREE LOAN TO THE EXECUTIVE DIRECTOR. SECONDLY, FACTUALLY IT IS NOT IN DISPUTE THAT LOANS ON WHICH INTEREST WAS PAID AND CLAIMED AS REVENUE EXPE NDITURE, WERE SPECIFIC LOANS WHICH HAD A BEARING ON THE BUSINESS OF THE AS SESSEE AND COULD NOT HAVE BEEN USED BY THE ASSESSEE FOR ANY OTHER PURPOS E. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE ORDER OF THE LD. CIT(APPEALS) DOES NOT CALL FOR ANY INTERFERENCE. CONSEQUENTLY, GROUND NO.3 RAISED BY THE REVENUE IS DISMISSED. 18. IN THE RESULT, APPEAL BY THE REVENUE IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 30 TH SEPTEMBER , 2014 . /D S/ ITA NO. 1731/BANG/2013 PAGE 9 OF 9 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.