VARDHMAN DEVELOPERS LTD, MUMBAI V. ITO WD 2(3)(4), MUMBAI

ITA 6820/MUM/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9331 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 29-05-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 07-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PAWAN KU MAR BEERLA
• Assessee Lawyers: AWDHESH KUMAR
• Keywords: Business income; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUM BAI , , BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARO RA, AM ./I.T.A. NO. 6820/MUM/2012 ( / ASSESSMENT YEAR: 2009-10) VARDHMAN DEVELOPERS LTD. 113, COMMERCE HOUSE, 140, N. M. ROAD, FORT, MUMBAI-400 001 / VS. ITO, WARD-2(3)(4), MUMBAI ./ ./PAN/GIR NO. AAACV 1745 Q ( /APPELLANT ) : ( !' / RESPONDENT ) # $ / APPELLANT BY : SHRI AWDHESH KUMAR !' # $ / RESPONDENT BY : SHRI PAWAN KUMAR BEERLA % &'( # )* / DATE OF HEARING : 02.12.2014 +,- # )* / DATE OF PRONOUNCEMENT : 04.02.2015 . / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-6, MUMBAI (CIT(A) FOR SHO RT) DATED 07.09.2012, DISMISSING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT U/S .143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A. Y.) 2009-10. 2. THE APPEAL RAISES FOUR GROUNDS, WHICH WE SHALL T AKE UP IN SERIATIM. THE FIRST GROUND IS IN RESPECT OF DISALLOWANCE OF ARCHITECT & ENGINEERING FEES (RS.1,1500/-); TENDER & SURVEY EXPENSES (RS.1,70,950/-); AND ADVERTISEMEN T & SPONSORSHIP AND BRAND BUILDING EXPENSES (RS.17,71,347/-), I.E., AT AN AGGREGATE OF RS.20,57,297/-, BY TREATING THEM AS A PART OF THE CONSTRUCTION WORK IN PROCESS; THE ASSES SEE-COMPANY BEING A BUILDER AND 2 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO DEVELOPER. THE BASIS OF THE ASSESSEES CLAIM IS THA T THE RELEVANT EXPENSES WERE INCURRED IN RELATION TO REDEVELOPMENT/CONSTRUCTION PROPOSALS TH AT DID NOT MATERIALIZE OR WERE OTHERWISE NOT RELATABLE TO ANY SPECIFIC PROJECT AT HAND. THE SAME, THUS, EITHER REPRESENT A LOSS OR A SELLING COST, NOT RELATABLE DIRECTLY TO A NY PARTICULAR PROJECT. THE SAID COST WOULD THUS NOT QUALIFY TO BE INCLUDED IN THE VALUATION OF THE WORK-IN-PROGRESS (WIP) AS AT THE YEAR-END. THE REVENUES CASE, ON THE OTHER HAND, IS THAT THE ENTIRE EXPENDITURE IS IN RELATION TO THE ASSESSEES CONSTRUCTION BUSINESS, W HICH REPRESENTS ITS PRINCIPAL ACTIVITY. THE ASSESSEE HAS AT THE RELEVANT YEAR-END 13 PROJEC TS, THE COST OF WHICH STAND CAPITALIZED UNDER WIP; THE ASSESSEE FOLLOWING PROJECT COMPLETIO N METHOD. FURTHER, ANALYZING EACH OF THE SEVERAL INCOMES EARNED BY THE ASSESSEE, AS CRED ITED TO ITS PROFIT AND LOSS ACCOUNT AT A TOTAL OF RS.229.49 LACS, IT IS FURTHER CLARIFIED TH AT THE SAID EXPENDITURE CANNOT BE RELATED TO ANY OF THE SAID INCOMES, SO THAT THE ASSESSEES CLA IM IS NOT MAINTAINABLE ON MATCHING PRINCIPLE AS WELL. 3. THE ASSESSEE BEFORE US RELIED ON ITS WRITTEN SUB MISSIONS DATED 18.03.2014 AND 12.05.2014, APPEARING AT PGS.1-10 OF ITS PAPER-BOOK (PB), WHILE THE LD. DEPARTMENTAL REPRESENTATIVE (DR) WOULD RELY ON THE ORDERS OF THE AUTHORITIES BELOW. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE ASSESSEE IS A BUILDER/DEVELOPER ENGAGED SINCE 1990 PRIMARILY IN E XECUTING PROJECTS, I.E., AFTER BIDDING FOR AND TAKING SUCH PROJECTS FROM VARIOUS HOUSING S OCIETIES. THE NATURE OF THE EXPENDITURE IS NOT IN DISPUTE. THE SAME TO THE EXTENT OF RS.2,8 5,950/- IS ON ARCHITECT & ENGINEERING FEES, TENDER & SURVEY EXPENSES AND OTHER MISCELLANE OUS EXPENSES INCURRED FOR THE PROJECT OF GALA NAGAR CHSL, THAT WAS NOT AWARDED TO IT. HOW WE WONDER COULD IT BE ALLOCATED TO ANY OF THE PROJECTS, WORK IN RESPECT OF WHICH IS UN DER EXECUTION AS AT THE YEAR-END. SIMILARLY, ADVERTISEMENT, SPONSORSHIP AND BRAND-BUI LDING EXPENSES ARE ONLY IN THE NATURE OF SELLING COSTS, I.E., OF THE CONSTRUCTION BUSINES S, AND WHICH WOULD NOT THEREFORE STAND TO BE CAPITALIZED, IN-AS-MUCH AS THE SAME COULD ONLY B E IN RESPECT OF A DIRECT COST WHICH ADDS VALUE TO OR OTHERWISE ADDS TO ITS COST OF PROD UCTION TO THE ASSESSEE. AS REGARDS THE ARGUMENT OF THERE BEING NO CORRESPONDING INCOME, OR IT BEING NOT RELATABLE TO ANY REVENUE 3 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO STREAM, THE SAME IS TO OUR MIND OF LITTLE CONSEQUEN CE. AS LONG AS THE ASSESSEE IS CARRYING A PARTICULAR BUSINESS DURING THE YEAR, INCOME THERE -FROM HAS TO BE COMPUTED U/S.28 OF THE ACT, ALLOWING IT ALL PERMISSIBLE DEDUCTIONS, I.E., IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS 30 TO 43D (REFER SECTION 29). WHETHER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE, I.E., THE PROJECT COMPLETION METHOD, IS A CORRECT METHOD IN ACCORDANCE WITH THE LAW, I.E., GIVEN THAT IT FOLLOWS MERCANTILE METHOD OF ACCOUNTING, IS ANOTHER MATTER ALTOGETHER, WHICH HAS NOT BEEN IMPUGNED BY THE REVE NUE IN ANY MANNER. WE, ACCORDINGLY, FIND NO MERIT IN THE REVENUES CASE. T HE ASSESSEES PLEA MERITS ACCEPTANCE, AND IS UPHELD. WE DECIDE ACCORDINGLY, ALLOWING ITS GROUND # 1 (ALSO REFER PARA 8). 5. THE ASSESSEES SECOND GROUND IS IN RESPECT OF DI SALLOWANCE OF REPAIR AND MAINTENANCE EXPENSES OF A RENTED PREMISES AT RS. 42 .66 LACS. THE ASSESSEE, IT WAS EXPLAINED, HAD TAKEN AN OFFICE PREMISES ON RENT IN OCTOBER, 2007 FOR A PERIOD OF FIVE YEARS. AS THE SAID PREMISES WAS OLD AND NOT IN USE FOR A LONG TIME, IT INCURRED THE IMPUGNED EXPENDITURE TOWARDS REPAIR AND RENOVATION OF THE SAID PREMISES. THE SAME WAS ONLY TOWARD ACHIEVING ITS FUNCTIONAL UTILITY. NO C APITAL ASSET HAD COME INTO EXISTENCE THEREBY. FURTHER, IT NEEDED TO BE BORNE IN MIND THA T THE SAME IS IN RESPECT OF RENTED PREMISES AND, ACCORDINGLY, ALLOWABLE U/S.30(A)(I), WHICH EMPLOYS THE WORD REPAIRS, IN CONTRADISTINCTION TO THE WORDS CURRENT REPAIRS, I .E., IN RESPECT OF NON-TENANTED HOUSE PROPERTY, WHICH FALLS U/S. 30(A)(II). THE REVENUES OBJECTION, ON THE OTHER HAND, IS BASED ON THE PREMISE THAT THE NATURE AND THE VOLUME OF TH E EXPENDITURE WOULD NOT QUALIFY IT TO BE A REPAIR, WHICH ONLY COULD BE ALLOWED U/S.30 OF THE ACT. THE EXPENDITURE WAS ADMITTEDLY ON RENOVATION, CAPITAL IN NATURE, AND WO ULD THEREFORE STAND TO BE CAPITALIZED, ALBEIT ELIGIBLE FOR DEPRECIATION, REFERENCE FOR TH E PURPOSE IS MADE TO SEC.32 READ WITH NEW APPENDIX 1 OF INCOME TAX RULES, PART A-I(2). 6. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. AGAIN, WE OBSERVE NO DISPUTE WITH REGARD TO THE PRI MARY FACTS OF THE CASE, THE EXPENDITURE INCURRED BEING TOWARD FALSE CEILING; FI XING TILES/FLOORING; REPLACING GLASSES; WOODEN PARTITIONS; REPLACEMENT OF ELECTRICAL WIRING ; EARTHING; REPLACEMENT OF G.I. PIPES, 4 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO PLUMBING AND SANITATION LINES; PLASTER AND PAINTING OF WALLS. A PREMISES, IT MAY BE APPRECIATED, IS CONSTITUTED NOT MERELY BY, OR ONLY OF, CIVIL STRUCTURE, IN-AS-MUCH AS THE SAME BY ITSELF DOES NOT RENDER IT FUNCTIONAL FOR TH E STATED PURPOSE OF ITS USER. IN FACT, THE IMPUGNED EXPENDITURE INCLUDES LABOUR FOR CIVIL WORK ALSO, PAID TO ONE, AKSHAR CONSTRUCTION, AT RS.9.78 LACS, SO THAT THE WORK COU LD POSSIBLY INCLUDE SOME STRUCTURAL CHANGES AS WELL. THE ISSUE INVOLVED, THUS, REDUCES TO AS TO WHETHER THE EXPENDITURE ON EXTENSIVE REPAIRS AND RENOVATION COULD BE ALLOWED I N RESPECT OF A TENANTED PREMISES. THE SAME CAN BY NO MEANS BE REGARDED AS CURRENT REPAIR S, THE AMBIT OF WHICH IS FAIRLY RESTRICTED, DENOTING A REPAIR THAT IS REQUIRED TO B E ATTENDED TO AS SOON AS THE NEED FOR IT ARISES. REPAIRS, THOUGH A TERM OF WIDER SCOPE, YE T CANNOT EXTEND BEYOND THAT OF THE TERM ITSELF. A REPAIR, BY DEFINITION, IS TOWARD THE MAIN TENANCE AND PRESERVATION OF AN EXISTING ASSET. SURELY, THE ADVANTAGE OR ASSET, IN TERMS OF ITS FUNCTIONAL UTILITY AND CAPACITY FOR THE BUSINESS, NEEDS TO BE MAINTAINED, SO THAT EXPENDITU RE FOR RETAINING THE SAME IS ESSENTIALLY REVENUE EXPENDITURE, WHICH, AGAIN, BY DEFINITION, D OES NOT LEAD TO OR RESULT IN AN ENHANCEMENT OR IMPROVEMENT. THE PREMISES IN THE INS TANT CASE WAS ADMITTEDLY NOT IN USE FOR A LONG TIME AND, THUS, IN A DYSFUNCTIONAL, IF N OT DILAPIDATED, STATE PRIOR TO IT BEING ACQUIRED BY THE ASSESSEE. THE EXPENDITURE STANDS TH US INCURRED ON REFURBISHMENT AND RENOVATION OF AN OLD PREMISES, IN AN INOPERABLE STA TE, SO AS TO MAKE IT FIT FOR USE. IT IS THEREFORE WRONG TO CLASSIFY OR DESCRIBE IT AS REPA IRS. THE EXPENDITURE WAS INCURRED TO RENDER IT IN A FUNCTIONAL STATE AND, THEREFORE, IS CLEARLY IN THE CAPITAL FIELD. COULD, ONE MAY ASK BY WAY OF A TEST, THE ANSWER BE ANY DIFFERENT I F THE SAME WAS ACQUIRED ON OWN ACCOUNT? THE INGREDIENTS AND PREREQUISITES OF A CAP ITAL EXPENDITURE WOULD REMAIN THE SAME, AND NOT UNDERGO ANY CHANGE DEPENDING ON THE O BJECT MATTER OF THE EXPENDITURE, I.E., WHETHER AN OWNED OR LEASED PREMISES, AND WHICH ITSE LF IS THE PREMISE OF EXPLANATION 1 TO SECTION 32(1)(II), INVOKED BY THE REVENUE. TOTAL RENOVATION, LEADING TO SUBSTANTIAL IMPROVEMEN TS, IS ONLY CAPITAL EXPENDITURE, AS CLARIFIED BY THE APEX COURT IN BALLIMAL NAVAL KISHORE V. CIT [1997] 224 ITR 414 (SC). IT IS NOBODYS CASE, NOR COULD BE, THAT THE IMPROVE MENT IS NOT ENDURING OR SHALL NOT INURE IN FUTURE, PARTICULARLY UPON INCURRING REGULAR, MAI NTENANCE EXPENDITURE. REFERENCE MAY 5 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO ALSO BE MADE TO THE DECISION IN THE CASE OF CIT V. MADRAS CEMENTS LTD . [2002] 255 ITR 243 (MAD), RENDERED RELYING ON BALLIMAL NAVAL KISHORE (SUPRA) AND APPLYING NEW SHORROCK SPINNING & MFG. CO. LTD. V. CIT [1956] 30 ITR 338 (BOM). THE ASSET BEING ALSO NOT OWNED BY THE ASSESSEE, IT IS, STRICTLY SPE AKING, NOT A CASE OF REPLACEMENT, BUT OF ACQUISITION OF AN ADVANTAGE OF ENDURING NATURE - FO R THE FIRST TIME, AN ASSET BY DEFINITION. THE IMPUGNED EXPENDITURE IS IN FACT ONLY TOWARD EFF ECTUATING THE DECISION OF ACQUIRING THE PREMISES (BY WAY OF LEASE) IN THE FIRST PLACE, BY MAKING IT FIT FOR USE, BOTH IN TERMS OF CAPACITY AND CAPABILITY, IN-AS-MUCH AS IT HAS BOTH QUANTITATIVE AND QUALITATIVE ATTRIBUTES, SO AS TO CONSTITUTE AN IMPROVEMENT. IT IS NOT A CASE OF A LUMPSUM PAYMENT IN LIEU OF ANNUAL BUSINESS EXPENDITURE. THE BENEFIT ARISING OU T OF A CAPITAL EXPENDITURE, AGAIN, DOES NOT IMPLY PERMANENCE, IN WHICH CASE NO EXPENDITURE EVEN ON REGULAR MAINTENANCE, OR FOR KEEPING IT IN A STATE OF GOOD REPAIRS, A STIPULATIO N THAT MARKS MOST TENANCY AGREEMENTS, WOULD BE REQUIRED. THE SAID BENEFIT, THOUGH, CANNOT ALSO BE SAID TO BE LIMITED TO THE PERIOD OF LEASE, WHICH MAY WELL BE EXTENDED. FURTHE R, THAT THE SAME, I.E., CAPITAL EXPENDITURE, IS EXCLUDED, STANDS AMPLY CLARIFIED PE R EXPLANATIONS TO SECTIONS 30 AND 31 OF THE ACT, BROUGHT ON THE STATUTE BY FINANCE ACT, 200 3 W.E.F. 01.04.2004. THE EXPENDITURE, IN OUR VIEW, THUS STANDS RIGHTLY CONSIDERED BY THE LD. CIT(A) TO FORM A PART OF AN ADMISSIBLE ASSET IN VIEW OF EXPLANATION 1 BELOW SECTION 32(1)(II), CARVING AN EXCEPTION FOR DEPRECIATION, WHICH IS GENERALLY ALLOWED ONLY O N ASSETS OWNED BY AN ASSESSEE, ON A BUILDING NOT OWNED BY IT, BUT IN RESPECT OF WHICH I T HOLDS A LEASE OR OTHER RIGHT OF OCCUPANCY. A QUESTION MAY ARISE AS TO THE FATE OF T HE WRITTEN DOWN VALUE (WDV) OF THE RELEVANT BLOCK OF ASSETS ON THE TERMINATION OR EXPI RY OF THE LEASE OR RENT ARRANGEMENT, LEADING TO THE VACATION OF THE PREMISES. THE ASSESS EE IN SUCH A CASE WOULD CONTINUE TO BE ENTITLED TO ITS CLAIM FOR DEDUCTION ON THE RELEVANT BLOCK OF ASSETS, SUBJECT OF COURSE TO THE ADJUSTMENT IN RESPECT OF MONEYS PAYABLE, IF ANY, AS EXPLAINED BY THE TRIBUNAL IN METRO EXPORTERS PVT. LTD. (IN ITA NO. 7315/MUM/2012 DATED 30.09.2014, AS MOD IFIED BY ITS FURTHER ORDER DATED 30.01.2015), ON SUCH AN IS SUE ARISING BEFORE IT FOR ADJUDICATION. RELIANCE BY THE ASSESSEE ON THE DECISION IN THE CAS E OF CIT VS. HI LINE PENS (P.) LTD. [2008] 306 ITR 182 (DEL) IS IN OUR VIEW MISPLACED. THE ISSUE IN THE PRESENT CASE IN 6 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO OUR VIEW REDUCES TO OR RESTS IN THE NARROW COMPASS OF WHETHER THE IMPUGNED EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. WE HAVE ALREADY IS SUED A DEFINITE FINDING OF THE SAME AS BEING TOWARD MAKING THE PREMISES FUNCTIONAL; RATHER , TRANSFORMING IT FROM AN INOPERABLE STATE - AND, FURTHER, ONLY AS PER THE ASSESSEES RE QUIREMENTS, FOR THE FIRST TIME AND, THEREFORE, CAPITAL IN NATURE. THIS FINDING OF FACT IS IN RELATION TO THE NATURE OF EXPENDITURE, SO THAT NO PRESUMPTION WITH REGARD THERETO, AS WITH REFERENCE TO THE PREMISES BEING NOT OWNED, SHALL OBTAIN. RATHER, WHERE FOR AN EXTENDED PERIOD, THE LEASE-HOLD OR OTHER RIGHT OF OCCUPANCY COULD ITSELF BE REGARDED AS A CAPITAL ASS ET, EVEN AS CLARIFIED BY THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. KHIMLINE PUMPS LTD. [2002] 258 ITR 459 (BOM). THE HONBLE COURT IN THE CITED CASE, AS A READING OF IT S DECISION WOULD SHOW, ALLOWED THE ASSESSEES CLAIM FOR SIMILAR EXPENDITURE ON THE BAS IS THAT THE SAME WAS ADMISSIBLE U/S. 30(A)(I), WHICH USES THE WORD REPAIRS, THE SCOPE OF WHICH IS WIDER THAT CURRENT REPAIRS, COVERED U/S. 30(A)(II). THE APEX COURT IN CIT VS. SARAVANA SPG. MILLS (P.) LTD . [2007] 293 ITR 201 (SC) WAS CONCERNED WITH A CLAIM U/S. 31(I), DISTINGUISHING THE SAID DECISION ON THAT BASIS. THE HONBLE COURT, WITH RESPECT, HOWEVE R, DID NOT EXAMINE OR DILATE ON THE SCOPE OF THE TERM REPAIRS, EITHER WITH REFERENCE TO JUDICIAL PRECEDENTS OR EVEN OTHERWISE. TRUE, THE HONBLE APEX COURT IN SARAVANA SPG. MILLS (P.) LTD . (SUPRA) WAS CONCERNED WITH A CLAIM U/S. 31(I), WHICH DEALS WITH CURRENT REPAI RS OF PLANT, MACHINERY AND FURNITURE. SO, HOWEVER, AS A READING OF ITS DECISION, BINDING ON ALL COURTS IN INDIA, WOULD SHOW, IT CLARIFIES THE SCOPE AND AMBIT OF THE WORD REPAIRS TO EXCLUDE CAPITAL EXPENDITURE. THIS IN FACT REPRESENTS ITS CONSISTENT VIEW IN THE MATTER, APPLYING ITS EARLIER DECISION IN BALLIMAL NAVAL KISHORE (SUPRA), AFFIRMING THE DECISION BY THE HONBLE JURI SDICTIONAL HIGH COURT REPORTED AT [1979] 119 ITR 292 (BOM). THE APEX COUR T APPLIED THE TEST OF CAPITAL OR REVENUE EXPENDITURE, WHICH IT NOTED THE HIGH COURT HAD FAILED TO, REPRODUCING THE TEST LAID DOWN IN THE MATTER BY C.J. CHAGLA, SPEAKING ON BEHA LF OF THE HONBLE JURISDICTIONAL HIGH COURT IN NEW SHORROCK SPINNING & MFG. CO. LTD. (SUPRA), WHEREIN IT, AND IN THE CONTEXT OF S. 10(2)(V) (OF THE INCOME TAX ACT, 1922), WHICH CO RRESPONDS TO S. 31(I) OF THE 1961 ACT ONLY, CLARIFIED THAT REPAIRS HAS TO BE UNDERSTOOD I N CONTRADISTINCTION TO RENEWALS AND RESTORATION, AS UNDER: 7 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO THE SIMPLE TEST THAT MUST BE CONSTANTLY BORNE IN M IND IS THAT AS A RESULT OF THE EXPENDITURE WHICH IS CLAIMED AS AN EX PENDITURE FOR REPAIRS WHAT IS REALLY BEING DONE IS TO PRESERVE AND MAINTA IN AN ALREADY EXISTING ASSET. THE OBJECT OF THE EXPENDITURE IS NOT TO BRIN G A NEW ASSET IN TO EXISTENCE, NOR IS ITS OBJECT THE OBTAINING OF A NEW OR FRESH ADVANTAGE. THIS CAN BE THE ONLY DEFINITION OF REPAIRS BECAUSE IT IS ONLY BY REASON OF THIS DEFINITION OR REPAIRS THAT EXPENDITURE IS A REVENUE EXPENDITURE . IF THE AMOUNT SPENT WAS FOR THE PURPOSE OF BRINGING INTO EXISTENCE A NEW ASSET OR OBTAINING A NEW ADVANTAGE, THEN OBVIOU SLY SUCH AN EXPENDITURE WOULD NOT BE AN EXPENDITURE OF REVENUE NATURE BUT IT WOULD BE A CAPITAL EXPENDITURE AND IT IS CLEAR THAT THE DEDU CTION WHICH THE LEGISLATURE HAS PERMITTED UNDER S.10(2)(V) IS A DEDUCTION WHERE THE EXPENDITURE IS A REVENUE EXPENDITURE AND NOT A CAPITAL EXPENDITURE. (PARA 14, AT PAGE 210) [EMPHASIS, OURS] AS THUS EVIDENT, THE CONCEPT OF REPAIRS AND REVE NUE EXPENDITURE WERE CONSIDERED AS PARI MATERIA AND CO-EXTENSIVE IN-AS-MUCH AS IN THE VIEW OF THE HONBLE COURT, SINCE APPROVED BY THE APEX COURT, REPAIR COU LD NOT, BY DEFINITION, INCLUDE CAPITAL EXPENDITURE. THE HONBLE COURT IN THE SAID CASE, LI KE-WISE, DID NOT EXAMINE THE EXPENDITURE FROM THE STAND POINT OF IT BEING REVENU E OR CAPITAL. THIS COULD PERHAPS BE FOR THE REASON THAT THE YEAR UNDER REFERENCE BEFORE IT WAS A.Y. 1997-98. THE AMENDMENTS TO SS. 30 AND 31 W.E.F. 01.04.2004, BY WAY OF EXPLANATIONS THERETO, TO THE EFFECT THAT THE COST OF REPAIRS AND, AS THE CASE MAY BE, CURRENT REPAIRS , SHALL NOT INCLUDE ANY EXPENDITURE IN THE NATURE OF CAPITAL EXPENDITURE, BECOME NOW INCUM BENT TO CONSIDER, EVEN AS POINTED OUT BY THE HONBLE APEX COURT. THE SAME HAVE A DIRECT I MPACT ON THE DECISION IN THE CASE OF HI LINE PENS PVT. LTD. (SUPRA). RATHER, IN VIEW OF THE FOREGOING SETTLED P OSITION OF LAW, AS CLARIFIED BY THE DECISIONS WHICH STAND APPROVED BY THE APEX COURT IN SARAVANA SPG. MILLS (P.) LTD . (SUPRA), IT MAY NOT BE INCORRECT TO SAY THAT THE SAID EXPLANATIONS ARE CLARIFICATORY AND, THUS, RETROSPECTIVE. THE SAID DECISION, THUS, APART FROM THE FACT THAT IT DOES NOT REVIEW THE BINDING JUDICIAL PRECEDENTS EXPLAINING THE SCOP E OF THE TERM REPAIRS, IS ALSO INAPPLICABLE IN VIEW OF THE EXTANT LAW, I.E., AS IN FORCE A.Y. 2004-05 ONWARDS, AND, ACCORDINGLY, RELIANCE THEREON BY THE ASSESSEE WOULD BE OF NO MOMENT. IN VIEW OF THE FOREGOING, WE UPHOLD THE IMPUGNED OR DER ON THIS GROUND, DISMISSING THE ASSESSEES GROUND # 2 BEFORE US. 8 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO 7. THE ASSESSEES THIRD GROUND RELATES TO THE CAPIT ALIZATION OF 80% OF THE GENERAL, ADMINISTRATIVE EXPENSES, INCLUDING ON EMPLOYEE AND DIRECTOR REMUNERATION, TOWARD WORK- IN-PROGRESS (WIP). THE SAME, WHICH THOUGH EXCLUDES THE COSTS COVERED BY THE ASSESSEES GROUND # 1 (RS. 20.57 LACS), STAND CLAIMED BY THE A SSESSEE ON THE BASIS THAT THESE REPRESENTING GENERAL, ADMINISTRATIVE COSTS, ARE NOT ALLOCABLE TO ANY SPECIFIC PROJECT. THE REVENUES CASE, ON THE OTHER HAND, IS THAT THE ASSE SSEE, A BUILDER AND DEVELOPER, HAD THIRTEEN (13) PROJECTS UNDER PROGRESS DURING THE RELEVANT YEAR. UNDERSTANDABLY, THE EXPENSES INCURRED WOULD PREDOMINANTLY BE IN RELATIO N TO THE SAID ACTIVITY, WHICH ALSO CONSTITUTES THE ASSESSEES PRINCIPAL ACTIVITY FOR T HE YEAR. THE ASSESSEES OTHER INCOMES FOR THE YEAR, AT A TOTAL OF RS. 229.49 LACS, COMPRISE I NTEREST (RS. 147.87 LACS); SALE OF DEVELOPMENT RIGHTS (RS. 42.75 LACS); PROFIT ON DERI VATIVE TRADING (RS. 14.55 LACS); AND OTHER INCOMES (RS. 24.31 LACS), TOWARD WHICH NO SPE CIFIC COSTS, WHICH WOULD EVEN OTHERWISE BE MINIMAL, HAVE BEEN SPECIFIED. THE CLAI M IS THUS NOT ALLOWABLE EVEN ON GROUND OF MATCHING PRINCIPLE. FURTHER, THE ALLOCATI ON OF 80% OF THE ESTABLISHMENT COSTS TOWARD WIP WAS THUS JUSTIFIED INASMUCH AS DOING SO YET RESULTS IN ALLOWANCE OF EXPENDITURE AT RS.32.55 LACS, INCLUDING RS. 4.27 LA CS BY WAY OF DEPRECIATION ON THE RENOVATION COST, WHICH FORMS THE SUBJECT MATTER OF THE ASSESSEES GROUND # 2. 8. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. WITHOUT DOUBT, THE ASSESSEE BEING ENGAGED PRINCIPAL LY IN CONSTRUCTION ACTIVITY, THE STANDARD, COMMERCIALLY ACCEPTED PRINCIPLES OF ACCOU NTANCY, SHALL APPLY, BOTH WITH REGARD TO REVENUE RECOGNITION AS WELL AS INVENTORY VALUATI ON, I.E., QUA THE PROJECTS UNDERWAY AS THE YEAR-END. THIS WOULD BE IRRESPECTIVE OF THE QUA NTUM OF THE INCOME ARISING ON SUCH PROJECTS, AS DISCLOSED OR RECOGNIZED. THE ASSESSEE S ENTIRE INCOME FOR THE YEAR BEING BUSINESS INCOME, ALL THE EXPENDITURE NOT ALLOCABLE TO ANY PROJECT WOULD, IRRESPECTIVE OF ITS QUANTUM, STAND TO BE ALLOWED AS BUSINESS EXPENDITUR E, OF-COURSE SUBJECT TO THE CONDITION OF IT BEING INCURRED WHOLLY OR EXCLUSIVELY FOR BUSI NESS PURPOSES. IN FACT, WE DO NOT OBSERVE ANY DISPUTE OR ADVERSE FINDING IN THIS REGA RD; THE REVENUE ITSELF ALLOCATING THE IMPUGNED EXPENDITURE BETWEEN THE PROJECT COST AND T HAT ADMISSIBLE AS BUSINESS 9 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO EXPENDITURE. IT WOULD BE THEREFORE INCORRECT TO BE GUIDED BY THE VOLUME OF SUCH EXPENDITURE, I.E., WHICH IS BEING ALLOWED, AS APPEA RS TO HAVE PREVAILED WITH THE LD. CIT(A); THE SAME BEING ADMITTEDLY INCURRED WHOLLY A ND EXCLUSIVELY FOR THE PURPOSES OF THE ASSESSEES BUSINESS. WE MAY HOWEVER ADD THAT TH E EXPENDITURE SINCE ALLOWED IS NOT RS.32.55 LACS, AS STATED BY THE LD. CIT(A), IN-AS-M UCH AS ANOTHER RS.20.57 LACS, WHICH FORMS THE SUBJECT OF THE ASSESSEES GROUND # 1 BEFO RE US, STANDS TO BE ALLOWED. THE REVENUES CASE IS THAT AS THE PRINCIPAL ACTIVITY DU RING THE YEAR IS TOWARD PROJECT EXECUTION; THE BALANCE UNDER THE WIP A/C INCREASING FROM RS.5.99 CR. AS AT THE BEGINNING OF THE YEAR TO RS.10.03 CR. AT ITS END, THE GENERAL , ADMINISTRATIVE EXPENDITURE WOULD ONLY BE DIRECTED TOWARD THE SAME AND, THUS, STAND TO BE ALLOCATED THERETO, AND HENCE THE ALLOCATION AT 80% THEREOF. THE ASSESSEE BEING A BUILDER AND DEVELOPER, ACCOUNT ING STANDARD 7 (AS-7), ISSUED BY THE ICAI, TITLED, CONSTRUCTION CONTRACTS, WOUL D NOT APPLY, SO THAT THE PRESCRIPTION OF AS-9 AND AS-2, BASED ON GENERAL PRINCIPLES THAT GOV ERN ANY BUSINESS, WOULD APPLY FOR THE REVENUE RECOGNITION AND INVENTORY VALUATION RES PECTIVELY. WE HAVE ALREADY, I.E., WHILE DISCUSSING THE ASSESSEES GROUND # 1, CLARIFIED THA T ONLY COSTS INCURRED TOWARD A PARTICULAR PROJECT, OR OTHERWISE RELATED TO CONSTRUCTION ACTIV ITY, WOULD STAND TO BE ALLOCATED AND, THUS, CAPITALIZED AS A PART OF THE PROJECT COST. C APITALIZED HERE IS NOT TO BE CONSTRUED IN THE REGULAR, CLASSICAL SENSE OF THE RELEVANT EXPEND ITURE BEING NOT OF REVENUE NATURE, BUT ONLY IN THE SENSE OF IT BEING ACCUMULATED UNDER A P ARTICULAR HEAD OF ACCOUNT (I.E., WIP), FOR BEING SET OFF, UNDER THE MATCHING PRINCIPLE, AT THE TIME THE CORRESPONDING REVENUE IS RECOGNIZED. INDIRECT COSTS COULD THEREFORE INCLUDE ONLY PRODUCT ION/PROJECT OVERHEADS, AND NOT GENERAL OFFICE AND ADMINISTRATIVE EXPENSES . THE ASSESSEE HAS NOT SPECIFIED THE DUTIES ALLOTTED TO DIFFERENT EMPLOYEES OR THE FUNCTIONAL R ESPONSIBILITY OF THE DIRECTORS. IDENTIFICATION OF INDIVIDUAL SITES, BESIDES WORK IN RELATION TO SITE PREPARATION, CLEARANCES, PROJECT SUPERVISION OR OVERSEEING PROJECT EXECUTION , ETC., WOULD UNDERSTANDABLY FORM PART OF THE DIRECTORS DUTIES. FURTHER, WE DO NOT OBSERV E ANY EMPLOYEE COSTS IN THE EXPENSES ALLOCATED TO THE VARIOUS PROJECTS, THE COST PROFILE OF WHICH STAND NOTED BY THE A.O. AT PAGES 6 TO 9 OF HIS ORDER. MANAGERIAL AND SUPERVISO RY COSTS ARE NECESSARY INPUTS TO PROJECT 10 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO EXECUTION. WE, ACCORDINGLY, CONSIDER 50% OF THE PER SONNEL COSTS, CLAIMED AT RS.40.22 LACS, I.E., INCLUDING DIRECTORS REMUNERATION, AS L IABLE FOR INCLUSION IN THE PROJECT COST, TO BE ALLOCATED ON SOME SYSTEMATIC OR RATIONAL BASIS W HICH WOULD CAPTURE PROJECT EXECUTION, WHICH IS A COMPOSITE ACTIVITY COMMENCING WITH SITE IDENTIFICATION TO THE CONSTRUCTION IN A DELIVERABLE STATE. NO SUCH PROPORTION COULD BE APPL IED TO RENT, RATES AND TAXES, WHICH, AT RS.70.53 LACS, CONSTITUTES THE SECOND MAJOR COMPONE NT OF THE IMPUGNED EXPENDITURE. THE SAME WOULD NEED TO BE EXAMINED WITH REFERENCE TO TH E PURPOSE FOR WHICH EACH ITEM COMPRISING THE SAME IS INCURRED, TO BE DECIDED ACCO RDINGLY. IF NOT FOR ANY SPECIFIC PROJECT, NO PART OF THE SAID COST COULD BE CAPITALI ZED. RENT FOR OFFICE PREMISES, HOWEVER, IF FORMING PART THEREOF, WOULD STAND TO BE ALLOCATED O N THE BASIS OF THE BALANCE EXPENDITURE OF RS.22.48 LACS. AGAIN, AS NO PARTICULARS IN RESPE CT OF THESE EXPENSES STAND SPECIFIED; THE ACCOUNT HEAD DESCRIBING ONLY THE NATURE OF THE EXPE NSE AND NOT ITS PURPOSE OR THE ACTIVITY IN RELATION TO WHICH IT IS INCURRED, WE CONSIDER 20 % OF SUCH EXPENDITURE TO BE ALLOCABLE TO WIP TOWARD PROJECT OVERHEAD COST, AGAIN ON THE SAME PARAMETER AS APPLIED TO THE PERSONNEL COSTS. FURTHER, RENOVATION EXPENSES (WHIC H IS THE SUBJECT MATTER OF GD. 1), INCLUDE RS.1.20 LACS PAID TO A VAASTU CONSULTANT, S H. KIRTI SHETH (PB PG. 30). THE SAME IS TOWARD CONSULTANCY FOR VARIOUS SITES AT MUMBAI. THE SAID EXPENDITURE, THUS, AS IT APPEARS, IS NOT TOWARD RENOVATION (AS CLAIMED) AND, RATHER, RELATABLE TO PROJECTS LOCATED AT DIFFERENT SITES, AND WOULD THEREFORE REQUIRE BEING CONSIDERED IN PROPER PERSPECTIVE. WE DECIDE ACCORDINGLY. 9. GROUND # 4, WHICH CONCERNS DISALLOWANCE U/S.14A, WAS SPECIFICALLY STATED AS NOT PRESSED AT THE TIME OF HEARING, AND IS ACCORDINGLY DISMISSED AS NOT PRESSED. 10. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. /-)0 &12/) # . ' 3 ) # ) 4 ORDER PRONOUNCED IN THE OPEN COURT ON FEBRUARY 04, 2015 SD/- SD/- (JOGINDER SINGH) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER 11 ITA NO. 6820/MUM/2012 (A.Y. 2009-10) VARDHMAN DEVELOPERS LTD. VS. ITO % 5( MUMBAI; 6& DATED : 04.02.2015 ' . & . ./ROSHANI , SR. PS ! ' #$%& '&$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT 3. % 7) ( ) / THE CIT(A) 4. % 7) / CIT - CONCERNED 5. 8'9 !)&1 , * 1- , % 5( / DR, ITAT, MUMBAI 6. :2 ;( / GUARD FILE ! ( / BY ORDER, ) / (* + (DY./ASSTT. REGISTRAR) , % 5( / ITAT, MUMBAI