THE COMMISSIONER OF INCOME TAX V. M/S BANASHANKARI MEDICAL & ONCOLOGY RESEARCH

ITA/1071/2008

AI Insights

The case revolves around an appeal by the Commissioner of Income-Tax and the Assistant Commissioner of Income-Tax against M/s. Banashankari Medical & Oncology Research Centre Ltd. The core issue was whether the expenditure of Rs.82,71,210 incurred by the assessee on renovations and alterations to a leased building constituted capital expenditure or revenue expenditure. The Assessing Officer initially treated the expenditure as capital, but the Tribunal reversed this decision, classifying it as revenue expenditure. The revenue challenged this decision in the High Court, which upheld the Tribunal's decision, emphasizing that the alterations did not enhance the capital value of the property but were essential for the business operations.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 701403 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 17-11-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Vs. H.P.Global Soft Ltd., reported in 349 ITR 462 (Karn)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: CHYTHANYA
• Assessee Lawyers: K V ARAVIND
• Keywords: Building; Capital expenditure; Lease; Renovation; Revenue expenditure; Scrutiny assessment
• Section: 143(3); 143(2); 143(1); 37(1); 260-A; 30(a)(i)

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 17TH DAY OF NOVEMBER, 2014 PRESENT: THE HON'BLE Mr.JUSTICE N.KUMAR AND THE HON'BLE Mr.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.1071 OF 2008 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX C.R.BUILDING QUEENS ROAD BANGALORE 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-11(1) C.R.BUILDING QUEENS ROAD BANGALORE ...APPELLANTS (BY SRI.K.V.ARAVIND, ADV.) AND: M/S. BANASHANKARI MEDICAL & ONCOLOGY RESEARCH CENTRE LTD., NO.44-45, 2ND CROSS RAJARAM MOHAN ROY EXTENSION BANGALORE-560 207 ...RESPONDENT (BY SRI.CHYTHANYA K.K., ADV.) THIS APPEAL IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 31.07.2008 PASSED IN ITA NO.1287/BNG/2007, FOR THE ASSESSMENT 2 YEAR 2003-04, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: i. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THREIN, ii. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASED BY THE ITAT BANGALORE IN ITA NO.1287/BNG/2007, DATED 31.07.2008 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-11(1), BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. THIS APPEAL COMING ON FOR HEARING, THIS DAY, N.KUMAR, J., DELIVERED THE FOLLOWING: J U D G M E N T The revenue has preferred this appeal against the order passed by the Tribunal which has held that the expenditure is in the nature of revenue and not capital. 2. The assessee is a private limited company and is in the business of running the research hospital. The return filed by the assessee was accepted by the department under Section 143(1) of the Income Tax Act, 1961 (for short hereinafter referred to as ‘Act’). The case was selected for scrutiny assessment by issue of notice under Section 143(2) of the Act. The assessee appeared and put-forth his objections. The assessee company has 3 debited from Profit and Loss account, a sum of Rs.82,96,925/- as repairs and maintenance to building. Details were called for in respect of such expenditure. The Assessing Authority was of the view that except a sum of Rs.25,715/- was spent on house-keeping work and the assessee has spent a sum of Rs.82,71,210/- towards the construction cost. The assessee has renovated building by altering the structure of the building and constructed new portion of the building. These improvements are not minor repairs but actual expansion of the building resulting in long term and enduring benefit and therefore, needs to be capital expenditure. Therefore, he was of the view that the said amount is to be treated as capital expenditure and it was disallowed. Aggrieved by the said order, assessee preferred an appeal to the Commissioner of Income Tax (Appeals) who dismissed the appeal. Against the said order the assessee preferred a second appeal to the Tribunal. 3. The Tribunal on consideration of the entire materials on record held that the expenditure incurred by 4 the assessee for renovating the business premises is revenue in nature. The assessee did not acquire any capital asset as he was only the lessee of the building and therefore, costs of repairs carried out by the assessee will be deductible under Section 30(a)(i) of the Act, being in the nature of revenue expenditure. But it has been spent out fully for the purpose of business and will be deductible under Section 37(1) or 30(a)(i) of the Act. Aggrieved by the said order the revenue has preferred this appeal. 4. The substantial questions of law which have raised in this appeal in the appeal memo are as under: (i) Whether the Tribunal was correct in holding that a sum of Rs.82,71,210/- spent on renovation, addition to building would amount to a revenue expenditure and the same cannot be treated as capital in nature and depreciation allowed as held by the Assessing Officer? (ii) Whether the Tribunal was correct in holding that Explanation to Section 30 of the Act which came with effect from 5 01.04.2004 cannot be made applicable to the current assessment year 2003-04 as the same is not retrospective in nature? 5. Learned counsel appearing for the revenue assailing the impugned order contended that though the assessee is a tenant of the building in question, he has undertaken civil works which are permanent in nature and therefore, the expenditure incurred in this regard are of enduring benefit to the business, as such it is to be treated as capital expenditure. He relied on the judgment of this Court in the case of Commissioner of Income Tax Vs. H.P.Global Soft Ltd., reported in 349 ITR 462 (Karn) in support of his contention. 6. Per contra, learned counsel for the assessee submitted that the civil works undertaken by the assessee has not resulted in any increase of the floor area of 5 storied building which the assessee has taken on lease, nor has it has increased the bed capacity of the hospital. All the civil works done are in the nature of alterations and repairs and therefore, he submits that the order passed by 6 the Tribunal is unexceptionable and therefore, submits that the appeal has to be dismissed. 7. Before we decide as to whether the expenditure incurred by the assessee is revenue in nature or capital in nature, first, we have to find out what is the nature of civil works that he has undertaken. The nature of civil works undertaken by the assessee is as under: Sl. No. Name of the Contractor Purpose Amount 1 Athreya Associates Civil Engineering-Consultant Fees 80,000 2 Amba Ceramic and Granite Granite and Tiles 152,853 3 Datex Ohmeda Redoing of Oxygen Pipe line 170,668 4 Datex Ohmeda Redoing of Oxygen Pipe line 91,800 5 Maheshwari Marble House Marble for 4th floor Entrance 107,250 6 Maruti Plywoods Partition 73,440 7 Micron Interiors Consultant Fees 74,875 8 Murudeshwara Ceramics Ceramic Tiles for Toilets 552,961 9 National Plywood Industries Wooden Cabinets for accounts department 109,434 10 Pragathi Associates Outside Compound Tiles 4,585 11 Seros Ceramics Flooring for 1st Floor 103,609 12 Space Tech Consultant Fees 192,478 13 System Furniture Consultant Fees 789,488 14 Consteel Construction Civil Work-Demolition, clearing debris, repainting (Both interior and exterior) and Labour, Charges etc., 3,564,702 15 Beta Electricals Rewiring done on all the 4 floors 1,220,891 16 Other repairs, replacement of taps, muddy outside the premises 1,007,891 Total 8,296,925 7 8. The civil works undertaken are flooring of the first floor, demolition, clearing debris, repainting, labour charges, replacement of taps, ceramic tiles for toilets, granite and tiles and wooden partition. All these civil works are in the nature of repairs and alterations. It is not in the nature of an addition or an improvement to the existing construction. It has resulted neither in the increase of the floor area nor such construction has increased the bed capacity of the hospital. The premises in question is a 5 storied building which is taken on lease. For the first 10 years of lease, hardly any amount is spent on maintenance. As observed by the Assessing Authority, hardly, Rs.25,000/- is spent towards maintenance expenditure. Therefore, merely because a sum of Rs.82.00 lakhs is spent in subsequent years, which are in the nature of civil works, that by itself would not make it capital in nature, as held in the aforesaid judgment on which reliance is placed by the revenue. As all these alterations and additions are made for the purpose of carrying out business in an efficient manner. Assessee as a lessee is entitled to enjoy the property till the expiry of 8 the lease and during that period if he wants to carry on business and to make profit by utilizing the business premises and in order to achieve that object, civil works are done and therefore, the expenditure incurred is in the nature of revenue and not capital as rightly held by the Tribunal. 9. Therefore, we do not see any merit in this appeal. Therefore, the first substantial question of law is answered in favour of the assessee and against the revenue. 10. In view of the findings recorded in the first substantial question of law, it is unnecessary to answer the second substantial question of law. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE GH "