The DCIT, Circle-9, Ahmedabad V. M/s. Vishwanath Developers, Ahmedabad

ITA 2574/AHD/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 2004 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 04-02-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 27-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 205

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M DY. CIT, CIRCLE-9, AHMEDABAD. VS. M/S VISHWANATH DEVELOPERS, 1-TAPOVAN SOCIETY, S.O. ROAD, AMBAWADI, AHMEDABAD. PAN AADFV 1950 D (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI K. MADHUSUDAN, SR.DR RESPONDENT BY:- NONE O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THE APPEAL IS FILED BY THE REVENUE AND THE CROSS O BJECTION IS FILED BY THE ASSESSEE. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUND IN I TS APPEAL :- (1) THE LD. CIT(A)-XV, AHMEDABAD HAS ERRED IN LAW AND O N FACTS IN DELETING THE ADDITIONS OF RS.10,60,582/- ON ACCO UNT OF OFFICE RENOVATION AND OF RS.4,25,000/- ON ACCOUNT OF LEGAL FEE AND ARCHITECTS FEE MADE BY THE AO. 3. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN ITS CROSS OBJECTION :- (1) THE LD. ACIT HAS FAILED TO APPRECIATE THE FACTS THA T THE REPAIRS TO THE BUILDING & FIXED FURNITURE ETC. ALLOWED BY LD. CIT(A) OF RS.10,60,582/- IS IN RESPECT OF TENANTED PREMISES A ND THAT THE REPAIRS ARE CARRIED OUT AS PER AGREED TENANCY TERMS AND ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 2 CONDITIONS AND THE EXPENDITURE IS NOT OF ENDURING B ENEFIT IN NATURE. FURTHER, THE LD. ACIT HAS FAILED TO APPRECI ATE THE PROVISIONS OF SECTION 30(A)(I) WHEREBY THE EXPENDIT URE HAS BEEN HELD TO BE ALLOWABLE BY THE LD. CIT(A). THEREFORE, THE APPEAL OF ACIT IS NOT TENABLE IN LAW. (2) THE LD. CIT(A) HAS CORRECTLY ALLOWED THE CLAIM OF E XPENDITURE OF RS.4,25,000/- TOWARDS LEGAL FEES & ARCHITECT FEE S INCURRED BY THE RESPONDENT. THERE IS NO MATERIAL EVIDENCE ON RE CORD FOR THE DISALLOWANCE OF THE CLAIM AS DONE BY THE ACIT. 4. THE ONLY COMMON ISSUE INVOLVED IN THE APPEAL AND THE CROSS OBJECTION IS WHETHER EXPENDITURE INCURRED FOR RENOV ATION OF THE HOUSE CAN BE ALLOWED AS REVENUE EXPENDITURE IF THE HOUSE IS N OT LEGALLY OWNED BY THE ASSESSEE. THE FACTS OF THE CASE ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOUND THAT ASSESSEE HAS INCU RRED AN EXPENDITURE OF RS.14,62,797/- UNDER THE HEAD OFFICE RENOVATION. ON BEING ASKED ASSESSEE EXPLAINED THAT THE BUILDING PROPERTY IS VE RY OLD HAVING AGE OF MORE THAN 30 YEARS AND IT IS OWNED BY LANDOWNER MR. MANISHANKAR PANDYA. IT IS TAKEN ON RENT BY PARTNERSHIP FIRM. SI NCE THE PROPERTY WAS IN ITS DETERIORATED CONDITION DUE TO EARTH QUAKE, IT R EQUIRED MAJOR REPAIRS. IT WAS ALSO EXPLAINED THAT WITHOUT REPAIRS IT WAS NOT POSSIBLE TO CARRY OUT BUSINESS THEREFROM. FURTHER WHEN THE BUILDING WAS T AKEN ON HIRE THE FURNITURE SITUATED THEREIN WAS ALSO INCLUDED IN THE HIRE CHARGES. THE AO, HOWEVER, DID NOT AGREE AND TREATED THE EXPENDITURE AS CAPITAL IN NATURE BECAUSE ASSESSEE HAD INSTALLED GRANITE FLOOR AND CA RRIED OUT OTHER COSTLY RENOVATION. AFTER ALLOWING DEPRECIATION, HE PROPOSE D AN ADDITION OF RS.13,61,515/-. IN ADDITION TO THIS THE AO ALSO DIS ALLOWED LEGAL FEES, ARCHITECT FEES OF RS.2,50,000/- AND RS.1,75,000/- T REATING THEM ALSO AS CAPITAL EXPENDITURE. THE EXPLANATION OF THE ASSESSE E THAT LEGAL FEES WAS INCURRED NOT IN CONNECTION WITH THE PURCHASE OF LAN D, IN CONNECTION WITH THE EXECUTION OF THE BUSINESS ACTIVITIES AND ARCHIT ECT FEES AND CONSULTATION ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 3 FEES WERE NOT IN CONNECTION WITH THE REGISTRATION O F CONVEYANCE DEED BUT WERE DIRECTLY REQUIRED FOR BUSINESS PURPOSES BY THE ASSESSEE FIRM, WERE REJECTED. 5. THE LD. CIT(A) ALLOWED THE CLAIM OF REPAIRS TO T HE RENTAL PREMISES TO THE EXTENT OF RS.10,50,582/- BY FINDING THAT CLA USE 8 OF THE TENENANCY AGREEMENT TITLED LEAVE AND LICENCE AGREEMENT DATE D 1.10.2005 PROVIDED THAT MAJOR REPAIRS WOULD BE UNDERTAKEN BY THE ASSES SEE WHEREAS THE CURRENT DAY TO DAY REPAIRS BY THE LICENSOR. RELYING ON THE DECISION OF HON. DELHI HIGH COURT IN THE CASE OF CIT VS. HI LINE PEN S (P) LTD. (2008) 306 ITR 182 (DEL) THE ADDITION WAS DELETED. SIMILARLY, THE LD. CIT(A) ALLOWED THE CLAIM OF LEGAL FEES AND ARCHITECT FEES ON THE G ROUND THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF LAND DEVELOPMENT AND CON STRUCTION AND IT HAS TO ENTER INTO SEVERAL AGREEMENTS WITH THE SOCIETIES FOR WHICH PROFESSIONAL CHARGES ARE REQUIRED TO BE PAID. 6. THE LD. DR HAS RELIED ON THE DECISION OF THE TRI BUNAL, DELHI IN THE CASE OF ACIT VS. E.L. DUPONT INDIA LTD. (2007) SOT 688 (DEL) WHEREIN THE TRIBUNAL HELD THAT EXPENDITURE INCURRED BY WAY OF REPAIRS ON LEASEHOLD PREMISES SHOULD BE TREATED AS CAPITAL NAT URE. IN VIEW OF THIS DECISION HE SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN THE PRESENT CASE SHOULD BE TREATED AS CAPITAL NATURE. 7. NONE APPEARED ON BEHALF OF THE ASSESSEE. WE HAVE HEARD THE LD. DR AND CAREFULLY PERUSED THE MATERIAL ON RECORD. IN TH E DECISION OF THE TRIBUNAL IN THE CASE OF ACIT VS. E.I. DUPONT INDIA LTD. (SUPRA) A FINDING IS GIVEN IN THAT CASE THAT ASSESSEE SHOULD BE VIEWE D AS OWNER OF THE PREMISES AND LEASEHOLD RIGHTS MUST BE IGNORED. THER E IS NO MATERIAL IN THE ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 4 PRESENT CASE TO HOLD THAT ASSESSEE SHOULD BE DEEMED TO BE OWNER OF THE PREMISES. ACCORDINGLY, THIS AUTHORITY HAS NO APPLIC ATION. 8. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTE RFERENCE IN THE ORDER OF LD. CIT(A). THE REASONS ARE THAT THE REPAIRS EVE N THOUGH MAJOR WERE CARRIED OUT IN THE PREMISES NOT OWNED BY THE ASSESS EE, THEREFORE, NO BENEFIT OF ANY ENDURING NATURE OR ANY OWNERSHIP RIG HT ARE ACQUIRED BY THE ASSESSEE. THE TITLE OF THE ASSESSEE OVER THE ASSETS REMAINED THE SAME AS THEY WERE PRIOR TO CARRYING OUT THE RENOVATION. IN OTHER WORDS THERE IS NO INCREASE IN LEGAL OWNERSHIP OF THE ASSETS TO THE AS SESSEE. THEREFORE, IT CANNOT BE SAID THAT EXPENDITURE SO INCURRED ARE OF CAPITAL NATURE. AFTER THE REPAIRS WERE CARRIED OUT IN THE RENTED PREMISES THE RE IS NEITHER EXTENSION NOR INCREASE IN AREA OCCUPIED BY THE ASSESSEE. WHAT THE ASSESSEE IN FACT GOT WAS A BETTER AND PROFICIENT MANAGEMENT AND A BE TTER LIVING CONDITION FOR ITSELF AND FOR ITS EMPLOYEES. IT WOULD ONLY ENH ANCE THE EFFICIENCY AND EFFECTIVENESS OF THE ASSESSEE IN CARRYING OUT THE B USINESS. IN ADDITION TO THE DECISION OF HON. DELHI HIGH COURT IN CIT VS. H I LINE PENS (P) LTD.(SUPRA) REFERRED TO BY THE LD. CIT(A) THERE ARE OTHER AUTHORITIES LIKE IN THE CASE OF CIT VS. ESCORTS FINANCE LTD. (2006) 205 CTR 57 (DEL) AND INSTALMENT SUPPLY CO. (P) LTD. (1984) 149 ITR 52 (D EL) WHEREIN ALSO THE HON. COURT HAS TAKEN THE SAME VIEW. HON. CALCUTTA H IGH COURT IN CIT VS. DEWARS GARAGE (INDIA) (P) LTD. (1993) 204 ITR 763 (CAL) HELD THAT SO LONG AS EXPENDITURE IS INCURRED FOR MAINTAINING OR TO MEET THE INCOME EARNING APPARATUS AND NO ASSET AS SUCH IS ACQUIRED THEN EXPENDITURE SO INCURRED WOULD BE OF REVENUE NATURE. EVEN THOUGH EX PENDITURE HOWSOEVER LARGE IT MAY BE, IT COULD NOT BUT BE ALLOWED AS RE VENUE EXPENDITURE. EVEN IF IT WAS CALLED RENOVATION, ITS PURPOSE WAS TO ENS URE ITS BETTER USE AS A SOURCE OF REVENUE. HON. DELHI HIGH COURT IN CIT VS. JAY ENGINEERING WORKS (1988) 172 ITR 341 (DEL) AND HON. ALLAHABAD H IGH COURT IN ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 5 GIRDHARI DASS & SONS VS. CIT (1976) 105 ITR 339 (AL L) HAVE ALSO TAKEN THE SAME VIEW. HON. ALLAHABAD HIGH COURT HELD THAT WHEN AN HONEST EXPENDITURE IS INCURRED ON ADDITION OR ALTERATION I N A BUILDING WHICH ENHANCES THE VALUE THE EXPENDITURE CAN BE OF A CAPI TAL NATURE BUT A TENANT BY INCURRING AN EXPENDITURE ON A RENTED BUILDING FO R ITS RENOVATION OR ALTERATION DOES NOT ACQUIRE ANY CAPITAL ASSET BECAU SE THE HUILDING DOES NOT BELONG TO HIM. ORDINARILY SUCH AN EXPENDITURE IS OF A REVENUE NATURE. TO HOLD IT OTHERWISE WOULD AMOUNT TO DENYING ANY BENEF IT OF A DEDUCTION OF THE EXPENDITURE AND THE SAME TIME HE WOULD NOT BE E NTITLED TO ANY DEPRECIATION ALLOWANCE BECAUSE THE BUILDING WOULD N OT BELONG TO HIM. IN THIS REGARD, WE REFER TO THE RELEVANT PART OF HEAD NOTES FROM THE JUDGMENT OF HON. ALLAHABAD HIGH COURT AS UNDER :- HELD,_ THAT EXPENDITURE INCURRED BY AN ASSESSEE ON RENOVATING, FURNISHING OR REMODELLING OF A BUSINESS PREMISES CA N BE ALLOWED AS DEDUCTION UNDER SECTION 37, IF THE EXPENDITURE IS N OT OF CAPITAL NATURE. WHEN AN OWNER INCURS EXPENDITURE ON ADDITION OR ALT ERATION IN A BUILDING WHICH ENHANCES ITS VALUE, THE EXPENDITURE CAN BE OF A CAPITAL NATURE. BUT IF A TENANT INCURS AN EXPENDITURE ON A RENTED BUILD ING FOR ITS RENOVATION OR ALTERATION, HE DOES NOT ACQUIRE ANY CAPITAL ASSE T, BECAUSE THE BUILDING DOES NOT BELONG TO HIM. ORDINARILY, SUCH AN EXPENDI TURE WILL BE A REVENUE NATURE. TO HOLD OTHERWISE WOULD AMOUNT TO DENYING H IM THE BENEFIT OF DEDUCTION OF THE EXPENDITURE AT ALL BECAUSE HE WILL NOT BE ENTITLED TO ANY DEPRECIATION ALLOWANCE. CLEARLY, THE ASSESSEE HAD N OT ACQUIRED AN ASSET BY INCURRING AN EXPENDITURE ON THE RENTAL SHOP. THE NEXT QUESTION IS WHETHER HE ACQUIRED A BENEFIT OF AN ENDURING NATURE. THE WORD 'ENDURING' MEANS 'ENDURING IN THE WAY THAT FIXED CAPITAL ENDURES' AND IT DOES NOT CONNOTE A BENEFIT THAT END URES IN THE SENSE THAT FOR A GOOD NUMBER OF YEARS IT RELIEVES THE ASSESSEE OF A REVENUE PAYMENT. IN THE INSTANT CASE, THE EXPENDITURE INCURRED MIGHT HAVE RELIED THE ASSESSEE OF A RECURRING EXPENDITURE FOR A GOOD NUMB ER OF YEARS. BUT THAT BY ITSELF DOES NOT RENDER THE EXPENDITURE AS BEING OF A CAPITAL NATURE. IT STILL RETAINS ITS QUALITY OF REVENUE EXPENDITURE. T HE FINDING IN THIS CASE WAS NOT THAT THE ASSESSEE HAD MADE ANY ADDITION TO THE SHOP. THE FINDING ON THE OTHER HAND WAS THAT THE ASSESSEE MIGHT HAVE MADE SOME STRUCTURAL CHANGES INSIDE THE SHOP. SUCH STRUCTURAL CHANGES DO NOT CREATE A CAPITAL ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 6 ASSET OR BRING INTO EXISTENCE AN ADVANTAGE OF ENDUR ING NATURE. IT COULD BE SAFELY HELD THAT THE EXPENDITURE INCURRED ON THE ST RUCTURAL CHANGES MADE IN THE SHOP DID NOT BRING INTO EXISTENCE ANY CAPITA L ASSET FOR THE ASSESSEE OR ANY BENEFIT OF ENDURING NATURE. THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF FACILITATING THE CARRYING ON OF ITS BUSI NESS AND MUST, THEREFORE, BE HELD TO BE OF A REVENUE NATURE. AS A RESULT, FOLLOWING ABOVE DECISIONS, WE AFFIRM T HE ORDER OF LD. CIT(A) ON THIS ISSUE. 7. REGARDING THE OTHER ISSUE THE LD. CIT(A) OBSERVE D AS UNDER :- 10. GROUND NO.3 IS THAT THE AO HAS ERRED IN DISALL OWING THE EXPENDITURE OF RS.4,25,000/- AS NOT RELATING TO THE BUSINESS. THIS ADDITION HAS BEEN MADE AS PER PARA 6 OF THE AS SESSMENT ORDER. THIS EXPENDITURE IS INCURRED ON LEGAL FEE AND ARCHITECT S FEE. DISALLOWANCE IS ON THE GROUND THAT THIS HAD BEEN ADJUSTED IN THE BO OKS OF THE SOCIETY ON WHICH THE PROJECT WERE DEVELOPED BY THE APPELLANT. WRITTEN SUBMISSION FURNISHED BY THE APPELLANT IS PLACED ON RECORD. 11. AFTER GOING THROUGH RIVAL SUBMISSIONS I AM OF T HE VIEW THAT THE EXPENSE INCURRED ON LEGAL FEE AND ARCHITECTS FEE B Y THE APPELLANT SHOULD BE ALLOWED. FIRST BECAUSE THE APPELLANT IS ENGAGED IN THE BUSINESS OF CONSTRUCTION AND SECONDLY BECAUSE AS PER SUB-CLAUSE 22 OF THE DEVELOPMENT AGREEMENT DATED 29.11.2005 ENTERED INTO BY THE APPELLANT WITH THE HOUSE CO-OPERATIVE SOCIETY THE APPELLANT H AD TO BEAR THE PROFESSIONAL CHARGES FOR DEVELOPMENT OF THE SCHEME. THE AO IS DIRECTED TO DELETE THE ADDITION. 8. WE HAVE HEARD THE LD. DR AND CAREFULLY PERUSED T HE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). IT IS NOT POINTED OUT BY THE R EVENUE THAT THIS EXPENDITURE WAS SPECIFICALLY INCURRED FOR A PARTICU LAR PROJECT WHICH WOULD FALL IN THE CAPITAL FIELD. IF LEGAL FEES AND ARCHIT ECT FEES ARE INCURRED IN DAY TO DAY MANAGEMENT OF AFFAIRS OF THE BUSINESS THEN T HEY CANNOT BE DISALLOWED ON THE GROUND THAT IT IS CAPITAL IN NATU RE. IN ANY CASE THERE IS ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 7 NO OTHER MATERIAL TO HOLD THAT SUCH EXPENDITURE CAN BE DISALLOWED. ACCORDINGLY, THIS GROUND OF REVENUE IS REJECTED. AS A RESULT, APPEAL FILED BY THE REVENUE IS DISMISSED. 9. THE CROSS OBJECTION OF THE ASSESSEE SEEMS TO BE IN SUPPORT OF THE ORDER OF THE ORDER OF LD. CIT(A). SINCE WE HAVE DIS MISSED THE APPEAL OF THE REVENUE, THE CROSS OBJECTION FILED BY THE ASSES SEE BECOMES ACADEMIC AND IS ALSO DISMISSED. 10. IN THE RESULT, BOTH THE APPEAL OF REVENUE AND T HE CROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 11//2/11. SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 11.2.11. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD ITA NO.2574/AHD/2010 ALONG WITH CO NO.303/AHD/2010 ASST. YEAR 2007-08 8 1.DATE OF DICTATION 7/2/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 9/2/ 2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER ..