M/s Arjay Agencies, Bangalore V. ITO, Bangalore

ITA 759/BANG/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8504 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-03-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 28-07-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V S SREELEKHA
• Assessee Lawyers: DINESH P
• Keywords: Depreciation; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 43; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBE R AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.759/BANG/2009 ASSESSMENT YEAR : 2004-05 M/S. ARJAY AGENCIES, NO.143, DAVIDOSS BUILDING, COMMERCIAL STREET, BANGALORE 560 001. : APPELLANT VS. THE INCOME TAX OFFICER, WARD 1(2), BANGALORE. : RESPONDENT APPELLANT BY : SHRI DINESH P. RESPONDENT BY : SMT. V.S. SREELEKHA O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE ARISES OUT OF THE OR DER ITA NO.19/20/W-11(2)/A-I/06-07 DATED 8.5.2009 PASSED BY THE CIT(APPEALS)-I, FOR THE ASSESSMENT YEAR 2004-05. 2. THE ASSESSEE IS A FIRM CONDUCTING BUSINESS AS A FRANCHISE OF MADURA TEXTILES . THE ASSESSEE FILED ITS RETURN OF INCOME ON 26.10.2004 FOR THE A.Y. 2004-05 DECLARING AN INCOME OF RS.9,78 2. SUBSEQUENTLY ON 31.1.2005, THE ASSESSEE FILED A REVISED RETURN DECL ARING AN ENHANCED ITA NO.759/BANG/09 PAGE 2 OF 8 INCOME OF RS.7,65,519. THE REVISED RETURN WAS PROC ESSED ON 2.2.2006. THE CASE WAS TAKEN FOR SCRUTINY AND ON 30.8.2006 OR DER U/S. 143(3) WAS PASSED BY THE AO. THIS ORDER WAS APPEALED BY THE A SSESSEE BEFORE THE CIT(APPEALS)-I, WHO DISPOSED OFF OF THE CASE ON 8. 5.2009. NOW THE ASSESSEE IS ON APPEAL BEFORE US. 3. THE ASSESSEE HAS RAISED SEVEN GROUNDS OF WHICH G ROUND NO.1 & 7 ARE GENERAL IN NATURE, WHICH IN OUR VIEW, DO NOT NE ED ADJUDICATION AND GROUND NO.6 IS ONLY CONSEQUENTIAL. THE ESSENCE OF THE OTHER GROUNDS ARE IN TWO FOLDS, AS FOLLOWS: (1) THE CIT(A)-I ERRED IN CONFIRMING THE DISALLOWA NCE MADE BY THE AO OF RS.13,26,835 WHICH THE APPELLANT HAD WRITTEN OFF BY APPLYING THE SECTION 32(1)(III) OF T HE ACT SINCE INTERIOR DECORATION MATERIALS TO THIS VALUE W AS DISCARDED AND SUCH DISCARDED MATERIALS COULD NEITHE R BE RESOLD NOR HAD ANY SCARP VALUE. (2) THE CIT(A)-I ERRED IN CONFIRMING THE ADDITION O F RS.3,42,151 MADE BY THE AO CONSIDERING IT TO BE RENOVATION EXPENDITURE WHICH IS OF CAPITAL NATURE A ND NOT REVENUE EXPENDITURE AS CONSIDERED BY THE APPELLANT. GROUND NO.1 4. THE LD. AR SUBMITTED BEFORE US THAT THE ASSESSEE BEING THE FRANCHISE DEALER OF MADURA TEXTILES HAD TO RENOVATE ITS SHOWROOM PREMISES AS PER THE DESIGN FURNISHED BY MADURA GARMENTS. DURING THE YEAR, MADURA GARMENTS HAD LAUNCHED VARIOUS NEW GARMENTS W HICH REQUIRED TO BE DISPLAYED IN THE SHOWROOM AS PER THE MODERN TREN D. IN ORDER TO DO SO, MADURA GARMENTS FURNISHED THE ASSESSEE WITH NEW DES IGNS TO EQUIP THE SHOWROOM. THUS, THE ASSESSEE WAS FORCED TO DISMANT LE A PORTION OF THE INTERIOR DECORATIONS CONSISTING OF WOODEN AND EXPEN SIVE VINYL FITTINGS, FIXTURES AND FURNITURE. THE EXISTING SUCH FIXTURES WERE REPLACED AND ITA NO.759/BANG/09 PAGE 3 OF 8 REFURBISHED WITH HANGING RACKS MADE OF STAINLESS ST EEL ETC. THE MATERIALS SO REPLACED, ACCORDING TO MODERN DESIGN, WAS LESS E XPENSIVE, ECONOMICAL AND SAVED MORE SPACE COMPARING TO THE EARLIER DESIG N OF WOODEN PARTITIONS, RACKS, ETC., WHICH WERE COSTLY DUE TO EXPENSIVE MATERIALS AND SKILLED CARPENTRY LABOUR COST. THE TOTAL AREA OF THE SHOWROOM WAS 4,840 SQ.FT., OUT OF WHICH THE RENOVATED AREA WAS 1,400 S Q.FT. THE TOTAL VALUE OF THE WHOLE INTERIOR DECORATIONS/FIXTURES/FURNITURE/F ITTINGS PERTAINING TO THE ENTIRE 4,840 SQ.FT. WAS RS.19,36,643, OUT OF WHICH RS.13,26,335 WAS ATTRIBUTABLE TO 1,400 SQ.FT.; THE SPACE WHICH WAS R ENOVATED AS PER THE DIRECTIONS OF MADURA GARMENTS. THE LD. AR VEHEMENTL Y PLEADED THAT THE ASSESSEE HAD DISCARDED THE INTERIOR DESIGN TO THE T UNE OF RS.13,26,335 AND THESE MATERIALS WERE DUMPED SINCE IT COULD NEITHER BE SOLD NOR HAVE ANY SCRAP VALUE. THE LD. AR, FURTHER, SUBMITTED THAT T HE ASSESSEE HAD RIGHTFULLY TAKEN RECOURSE UNDER THE PROVISIONS OF S ECTION 32(1)(III) OF THE ACT WHICH STIPULATE THAT ANY BUILDING, MACHINERY, PLANT OR FURNITURE ON WHICH DEPRECIATION IS CLAIMED AND ALLOWED AND SOLD, DISCA RDED, DEMOLISHED, OR DESTROYED IN THE PREVIOUS YEAR, THE AMOUNT BY WHICH MONIES PAYABLE IN SUCH BUILDING, MACHINERY, PLANT OR FURNITURE TOGETH ER WITH THE AMOUNT OF SCRAP VALUE, IF ANY, FALLS SHORT OF THE WDV AND IF SUCH DEFICIENCY IS WRITTEN OFF IN THE BOOKS OF ACCOUNTS, WILL BE ALLOWABLE AS DEDUCTION. 5. THE LD. DR OPPOSED TO THE PLEAS OF THE LD. AR AN D RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER AS UNDER: THE TOTAL EXPENDITURE INCURRED BY THE ASSESSEE FOR INTERIOR DECORATION FOR THE ENTIRE SPACE OF 4,840 SQ.FT. AMOUNTED TO RS .19,36,643 WHEREAS THE CLAIM OF THE ASSESSEE THAT RS.13,26,335 WAS ATT RIBUTABLE TO 1,400 SQ.FT. IS OUT OF PROPORTION I.E., 68% OF THE TOTAL VALUE OF INTERIOR ITA NO.759/BANG/09 PAGE 4 OF 8 DECORATION CANNOT BE CONSTRUED TO BE INCURRED ON ON LY 29% OF THE TOTAL AREA OF THE SHOWROOM; THE ASSESSEE HAD NOT SHOWN IN THE FIXED ASSETS SCHE DULE ANY ADDITIONS WHICH CLEARLY INDICATED THAT THE ASSESSEE HAD NOT M ADE ANY NEW ADDITIONS FOR RENOVATING A PART OF THE SHOWROOM, BU T ONLY REUSED THE SAME MATERIAL FOR ALTERATIONS; &. THE ASSESSEE HAS NOT SOLD ANY MATERIAL DISMANTLED W HICH ONLY LEADS TO THE BELIEF THAT IT HAD REUSED THE SAME. 6. THE LD. DR FURTHER RELIED ON THE FINDINGS OF THE CIT(APPEALS) AND CASE LAWS REFERRED BY HER ARE AS DETAILED BELOW: THERE IS NO EVIDENCE TO SUBSTANTIATE THAT THE ASSES SEE HAD DISMANTLED THE WOODEN PARTITIONS AND RACKS AND HAVE DISCARDED THE SAME. FROM THE FOLLOWING CASE LAWS IT IS EVIDENT THAT DED UCTION CAN BE CLAIMED ONLY IN THE YEAR IN WHICH THE ASSET IS SOLD , DISCARDED, DEMOLISHED OR DESTROYED AND NOT BY MERELY WRITING O FF THE VALUE THEREOF: CIT V. HEREDILLA CHEMICALS LTD. (1977) 225 ITR 532 (BOM) CO-OPERATIVE & TEA SOCIETY LTD. (1985) 154 ITR 405 (KER) T HE HONBLE MADRAS HIGH COURT IN THE CASE OF ASHOKA BETELNUT CO. PVT. LTD. (2003) 259 ITR 733 HELD THAT WHEN THE ASS ET IS DISCARDED IT CEASES TO BE PUT TO USE BUT IT STILL WILL BE AVAILA BLE TO THE ASSESSEE. SO ALSO THE SCRAP WHICH RESULTS FROM DEMOLITION OR DES TRUCTION OF THE ASSETS. THE DECISION OF THE ASSESSEE NOT TO CONVER T THAT SCRAP INTO MONEY BY SELLING THAT SCRAP OR BY MERELY GIVING AWA Y THAT SCRAP IN WHOLE OR IN PART TO OTHERS WITHOUT REALIZING ANYTHI NG IN RETURN FROM THEM DOES NOT HAVE THE EFFECT OF DEPRIVING THE SCRA P OF THE VALUE WHICH OTHERWISE HAPPEN. THE VALUE OF THE SCRAP IS REQUIR ED TO BE TAKEN INTO ACCOUNT WHILE DETERMINING THE EXTENT TO WHICH THE A SSESSEE CAN CLAIM THE BENEFIT U/S. 32(1)(III), EVEN THOUGH THE ASSESS EE CHOOSES NOT TO REALIZE THE PRICE OF SALVAGED MATERIAL. IN THE GI VEN CASE, NO SUCH SCRAP VALUE IS BROUGHT ON RECORD. 7. THE LD. DR PRAYED THAT THE FINDINGS OF LD. AO AN D LD. CIT(A) ARE IN ORDER AND THAT THE ASSESSEE DOESNT DESERVE ANY DED UCTION U/S. 32(1)(III) OF THE ACT BY WRITING OFF OF THE SUBSTANTIAL COST OF T HE INTERIOR DECORATIVE ITEMS TO THE TUNE OF RS.13,26,335. ITA NO.759/BANG/09 PAGE 5 OF 8 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD MINUTELY AND ALSO THE PAPERBOOK CONTAINING 1 TO 13 PAGES SUBMITTED BY THE ASSESSEE CONSISTING OF COPIES OF (I) CASH/CR EDIT VOUCHERS FOR THE EXECUTION OF WORK OF INTERIOR DECORATION; (II) INVO ICES OF VARIOUS COMPANIES FOR HAVING PURCHASED FURNITURE ETC., ON PERUSING THE INVOICE FURNISHED BY THE ASSESSEE ON PAPERBOOK PAGE NO.6 TO 13, IT IS EV IDENT THAT THE ASSESSEE HADE PURCHASED VARIOUS MATERIALS FOR MODERNIZING TH E SHOWROOM DURING THE PREVIOUS YEAR 2003-04 WHICH CAN BE LISTED AS FO LLOWS: POSTER SIGNS, WALL MODULES, GLASS SHELVES, CDU F OLDING, SIDE HANGING STAIRS, WALL MODULES WITH GLASS OF VAR IOUS TYPES, GLASS SHELVES AND BRACKETS OF VARIOUS SIZE, TROUSE R HANGING CDU, SIDE HANGING BRACKETS OF VARIOUS TYPES, STUDS FOR MIRROR FIXING SPACES, MIRROR SCREWS, S.S. RACKET, BRACKETS , VISUAL FRAMES, VARIOUS TYPE OF GLASSES AND LABOUR CHARGES FOR ON S ITE S.S. RE- POLISHING AND FINISHING. 9. FROM THESE PURCHASES ACCOUNTED BY THE ASSESSEE, IT IS APPARENT THAT SOME NEW KIND OF INTERIOR DECORATION IS EXECUT ED IN THE SHOWROOM. FURNISHING A PORTION OF THE SHOWROOM WITH THIS KIND OF MODERN MATERIALS IS NOT POSSIBLE UNLESS CERTAIN OLD FITTINGS AND FIX TURES OF WOODEN MATERIALS WERE DISCARDED. HOWEVER, THE ASSESSEE HAS NOT BRO UGHT OUT CLEARLY AS TO WHAT EXTENT THE EARLIER INTERIOR DECORATIVE MATERIA LS WERE DISCARDED IN A CLEAR TANGIBLE FORM. THE ONUS IS ON ASSESSEE TO E STABLISH HIS BONA FIDE CLAIM. AT THE SAME TIME, THE CLAIM OF THE ASSESSEE THAT 68.5% OF THE TOTAL VALUE OF FURNITURE AND FIXTURES FALLS IN THE AREA O F RENOVATED SPACE OF 1,400 SQ.FT. I.E. 29% OF THE TOTAL AREA OF THE SHOWROOM I S NOT QUITE CONVINCING. FURTHER THE ASSESSEE HAS NOT BROUGHT OUT ANY MATERI AL ON RECORD TO ESTABLISH THE SAME. IN SUCH A SITUATION, TO MEET B OTH ENDS OF JUSTICE, WE ITA NO.759/BANG/09 PAGE 6 OF 8 ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE SHOULD BE PERMITTED TO WRITE OFF THE VALUE OF EARLIER INTERIOR DECORATIVE MATERI ALS DISCARDED IN PROPORTION TO THE FLOOR AREA RENOVATED I.E., 29% ON RS.19,36,6 43 WHICH WORKS OUT TO RS.5,61,633. IT IS ORDERED ACCORDINGLY. GROUND NO.2 10. THE LD. AR CONTENDED THAT THE ASSESSEE HAD INCU RRED AN EXPENDITURE OF RS.3,43,161 TOWARDS RENOVATION AND T HE SAME WAS ALLOWABLE AS EXPENDITURE U/S. 37(1) OF THE ACT. TH E LD. AR SUBMITTED THAT THE AO WAS NOT CORRECT IN DISALLOWING THIS CLAIM WH ICH WAS FURTHER AFFIRMED BY THE LD. CIT(A) AS THESE PURCHASES CONSIST OF GLA SS MATERIALS REQUIRED FOR FURNITURE AND FIXTURES, WHICH IS OF CAPITAL NATURE . 11. THE LD. DR RELIED ON THE FINDINGS OF THE LD. AO AND THE LD. CIT(A). 12. WE HAVE HEARD THE DETAILED ARGUMENTS OF BOTH TH E PARTIES AND MINUTELY PERUSED THE MATERIALS ON RECORD. IN THIS REGARD, THE LD. CIT(A) MADE A DETAILED FINDING WHICH IS REPRODUCED HERE-BE LOW: 5. REGARDING THE GROUND RAISED FOR 2004-05 RELATED TO DISALLOWANCE OF RS.3,43,161/- BEING EXPENDITURE INC URRED ON FURNITURE & FIXTURES OUT OF A TOTAL EXPENDITURE OF RS.9,89,208/- INCURRED TOWARDS REPAIRS & MAINTENANCE FOR THE REAS ON THAT IT CONSTITUTED CAPITAL EXPENDITURE, THE APPELLANT C ONTENDED THAT SINCE IT WAS A FRANCHISEE OF M/S. MADURA TEXTILES, THE EXPENDITURE WAS INCURRED ON REMODELING THE INTERIORS OF THE GAR MENT SHOWROOM. HOWEVER, THE AO, ON VERIFICATION OF THE RELEVANT BILLS/VOUCHERS, ARRIVED AT THE CONCLUSION THAT PART OF THE EXPENDITURE WAS INCURRED TOWARDS PURCHASE OF GLASS AND MATERIALS REQUIRED FOR FURNITURE & FIXTURES. I AM INCLINED TO AGREE WITH THE AO THAT SUCH EXPENDITURE WAS CAPITAL IN NATURE FOR THE FOLLOWING REASONS: A) IT APPEARS THAT THE SHOWROOM DESIGNED BY MADURA GARMENTS IN THE YEAR 2000-01 REQUIRED RENOVATION TO MAKE PROVISION FOR DISPLAY OF SUITS WHICH WAS LAUNCHED I N A BIG ITA NO.759/BANG/09 PAGE 7 OF 8 WAY IN THE FY RELEVANT FOR A Y 2004-05 IN ACCORDANC E WITH THE SPECIFICATIONS AND DESIGN PROVIDED BY MADU RA GARMENTS. B) A SCRUTINY OF THE INVOICES RAISED BY THE SUPPLI ER, NAMELY, M/S. DISHA PRECISIONS PVT. LTD. ON THE APPELLANT, C OPIES OF WHICH WERE PROVIDED, REVEALED THAT THE ITEMS PURCHA SED WERE DESCRIBED BROADLY AS FURNITURE AND INCLUDED THE FOLLOWING: - WALL MODULES WITH FROSTED GLASS - GLASS SHELVES WITH BRACKETS - TROUSERS HANGING CDU/CDU-FOLDING. IT IS QUITE EVIDENT FROM THE DESCRIPTION OF THE IT EMS CATEGORIZED UNDER THE HEAD FURNITURE CLEARLY CONS TITUTED FURNITURE & FIXTURES. C) IN THIS CONNECTION IT IS PERTINENT TO REPRODUCE EXP LANATION I TO SEC. 32(1): WHERE THE BUSINESS OR PROFESSION OF THE ASSESSEE IS CARRIED ON IN A BUILDING NOT OWNED BY HIM BUT IN RE SPECT OF WHICH THE ASSESSEE HOLDS A LEASE OR OTHER RIGHT OF OCCUPANCY AND ANY CAPITAL EXPENDITURE IS INCURRED B Y THE ASSESSEE FOR THE PURPOSES OF THE BUSINESS OR PROFES SION ON THE CONSTRUCTION OF ANY STRUCTURE OR DOING OF ANY W ORK IN OR IN RELATION TO, AND BY WAY OF RENOVATION OR EXTE NSION OF, OR IMPROVEMENT TO, THE BUILDING, THEN, THE PROVISIO NS OF THIS CLAUSE SHALL APPLY AS IF THE SAID STRUCTURE OR WORK IS A BUILDING OWNED BY THE ASSESSEE. AS IS APPARENT FROM THE DESCRIPTION OF THE ITEMS PU RCHASED, A MAJOR PORTION OF THE EXPENDITURE WAS INCURRED TOW ARDS PURCHASE OF WALL MODULES, GLASS SHELVES AND OTHER F IXTURES AND CLEARLY SUCH ITEMS FALL UNDER THE HEAD FURNITU RE & FIXTURES. IN THE ABOVE CIRCUMSTANCES, CONSIDERING THE NATURE AND ITEMS OF EXPENDITURE, I AM OF THE VIEW THAT SINCE THE EXPEND ITURE INCURRED IS ON ITEMS THAT FALL WITHIN THE NOMENCLATURE OF F URNITURE & FIXTURES, THE APPELLANT IS ENTITLED TO DEPRECIATIO N ON THESE ITEMS WHICH THE AO HAS ACCORDINGLY ALLOWED. THIS GROUND OF THE APPELLANT ALSO FAILS.. ITA NO.759/BANG/09 PAGE 8 OF 8 13. THE ASSESSEE HIMSELF HAS ADMITTED THAT A NEW AS SET IS BROUGHT OUT IN THE SHOWROOM BY WAY OF MODERNIZING A PORTION OF THE SHOWROOM. THE OLD MATERIALS WERE DISCARDED AND A PORTION OF THE S HOWROOM WAS MODIFIED WITH FRESH DESIGN FURNISHED BY ITS PRINCIPAL. IN T HESE CIRCUMSTANCES AND BY CONSIDERING THE FINDINGS OF LD. AO AND THE DETAILED ORDERS OF LD. CIT(A), WE ARE INCLINED TO FOLLOW THE DECISION OF THE LOWER AU THORITIES. THIS GROUND OF THE ASSESSEE FAILS. 14. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MARCH, 2010. SD/- SD/- (SHAILENDRA KUMAR YADAV ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT ME MBER BANGALORE, DATED, THE 31 ST MARCH, 2010. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.