Admissibility of Additional evidence by CIT (Appeal) & contravention of rule 46A

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Admissibility of Additional evidence by CIT (Appeal) & contravention of rule 46A

Income Tax Act, 1961, Section 250(4)

Appeal [CIT(A)]—Additional evidence—Admissibility—Contravention of rule 46A

Conclusion: Principles of natural justice were breached by CIT(A) by not calling for remand report from the AO as well non-recording of reasons and justification for admitting additional evidences which was fatal to sustaining of appellate order passed by CIT(A). Thus, keeping in view the entire factual matrix of case and also to meet the ends of justice matter was restored to CIT(A) for fresh adjudication after complying with rule 46A.

Assessee, engaged in manufacturing and dealing with Food Products, had taken a bakery on lease for a period of five years. The said bakery was extensively renovated during the year under consideration by assessee to make it operational as a modern and well equipped bakery. Assessee claimed renovation expenses to be revenue expenditure. AO held the same to be of capital in nature as bakery was new one being set up by assessee for the first time which would give benefit and advantage of enduring nature to assessee in expanding its business. Assessee during the course of appellate proceedings before CIT(A) submitted for the first time additional evidences by way of invoices and bills concerning expenditure in question and same were admitted by CIT(A) while adjudicating appeal of the assessee in its favour. Revenue was aggrieved by decision of CIT(A) in admitting additional evidences without complying with rule 46A.

Held: View taken by AO could not be faulted as assessee had failed to establish that expenditure claimed was in the revenue field. Principles of natural justice were breached by CIT(A) by not calling for remand report from the AO as well non recording of reasons and justification for admitting additional evidences which was fatal to sustaining of appellate order passed by CIT(A). Thus, keeping in view the entire factual matrix of case and also to meet the ends of justice matter was restored to CIT(A) for fresh adjudication after complying with rule 46A.

Decision: Against the assessee.

Followed: RPG Enterprises Ltd. v. Dy. CIT (2016) 386 ITR 401 (Bom) : 2016 TaxPub(DT) 3217 (Bom-HC).

IN THE ITAT, MUMBAI BENCH

MAHAVIR SINGH, J.M. & RAMIT KOCHAR, A.M.

ITO v. Theobroma Foods (P) Ltd.

I.T.A. No. 765/Mum/2017

9 April, 2019

Assessee by: Rohan Deshpande

Revenue by: D.G Pansari (Departmental Representative)

ORDER

Ramit Kochar, A.M.

This appeal, filed by Revenue, being ITA No. 765/Mum/2017, is directed against appellate Order, dt. 28-10-2016 in Appeal No. Commissioner (Appeals)-8/IT-344/15-16, passed by learned Commissioner (Appeals)-8, Mumbai (hereinafter called “the Commissioner (Appeals)”), for assessment year (AY) 2012-13, the appellate proceedings had arisen before learned Commissioner (Appeals) from the assessment Order, dt. 31-3-2015 passed by learned assessing officer (hereinafter called “the AO”) under section 143(3) of the Income Tax Act, 1961 (hereinafter called “the Act”) for assessment year 2012-13.

  1. The grounds of appeal raised by Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under :–
  2. ” Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) was right in deleting the addition on account of extensive repairs and renovation of the leased premises without appreciating the fact that these expenses were capital in nature and that the Explanation to section 30 also provides for treatment of expenses as Capital Expenditure for rented premises.”
  3. ” Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in not appreciating the fact that the expenses on repairs and renovation, as per para 1 above, were of enduring nature and were not in the form of current repairs”
  4. ” Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in admitting additional evidences in form of invoices/bills and not granting opportunity to the assessing officer under rule 46A to give comments”
  5. “The appellant prays that the order of Commissioner (Appeals) on the above ground be set aside and that of the assessing officer be restored.”
  6. “The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
  7. The brief facts of the case are that the assessee is engaged in the business of manufacturing and sale of food products. During the course of assessment proceedings conducted by the assessing officer under section 143(3) read with section 143(2) of the 1961 Act, the assessing officer observed from the accounts of the assessee that it has incurred Repairs and Maintenance expenses which were debited to profit and loss account, as under :–
Sr. Particulars Amount (Rs.)
1. Repairs & maintenance to delivery van: Rs. 2,43,949
2 .Repairs & maintenance to computers; Rs. 63,824
3. Repairs & maintenance to others: Rs. 1,84,115
4. Repairs & maintenance to Plant & Machinery: Rs. 91,818
5. Repairs & maintenance to shop at Colaba: Rs. 2,88,489′
6. Repairs & maintenance to shop at Bandra Rs. 15,49,784
7. Repairs & maintenance to Pedder Road shop Rs. 1,09,791
8. Repairs & maintenance to kitchen Rs. 1,89,290
9. Repair & maintenance (Miscellaneous) Rs. 2,73,013
10. Repair & maintenance Jalal Bakery Rs. 77,17,043
TOTAL Rs. 1,07,11,116

3.2 The assessing officer observed that assessee has out of above Repairs and Maintenance expenses of Rs. 1.07 crores, incurred expenses of Rs. 92,66,827 toward renovation of shop/bakery at Bandra which in the opinion of the assessing officer was of capital in nature and the aforesaid repairs and renovation/improvement by way of repairs were for enduring benefits. The assessee was asked by the assessing officer to explain as to why the aforesaid Repairs and Maintenance expenses claimed as Revenue Expenditure be not disallowed as these expenses are capital in nature and therefore depreciation on applicable rates be allowed on the said capital expenditure. The assessee in reply explained before the assessing officer that it has taken over additional bakery to increase production for new outlets and hence Renovation of the bakery was done which expenditure is Revenue in nature. It was further submitted by the assessee that Plant and Machinery which was acquired for being installed at Jalal Bakery at Bandra was already capitalised by the assessee and depreciation was claimed on the same at an appropriate rates. It was submitted by the assessee before the assessing officer that all the premises were taken on lease hold basis for a period from 3 years to 5 years and in all there are presently seven outlets.

3.3 The assessing officer rejected the contentions of the assessee and held that an expenditure is capital in nature incurred by the assessee for enduring benefits. The assessing officer observed that expenditure was incurred for repair/improvements and renovation of Jalal Bakery at Bandra. The assessing officer referred to Explanation 1 to section 32 of the 1961 Act to hold the said expenditure was capital in nature. The assessing officer, thus held that repair and maintenance expenditure of Rs. 77,17,043 pertaining to Jalal bakery at Bandra be treated as capital expenditure and the same was not allowed as Revenue Expenditure as claimed by the assessee.

However, the assessing officer allowed depreciation under section 32(1) of the 1961 Act.

3.3 The assessing officer further observed from ledger account of Repair and Maintenance Expenditure Account that the assessee has incurred an amount of Rs. 10,26,725 for setting up of kitchen equipments/renovation of kitchen at Jalal Bakery at Bandra and outlet at Colaba. The assessing officer also held the said expenditure to be capital in nature as in the opinion of the assessing officer the said expenditure was having benefit of enduring nature. The said expenditure was classified by the assessing officer as Plant and Machinery being kitchen equipment and depreciation at an applicable rates was allowed by the assessing officer, vide assessment Order, dt. 31-3-2015 passed by the assessing officer under section 143(3) of the 1961 Act.

  1. The assessee filed first appeal with learned Commissioner (Appeals) challenging the additions to the income made by the assessing officer vide assessmentOrder, dt. 31-3-2015 passed under section 143(3) of the 1961 Act. It was submitted by assessee during the course of appellate proceedings before learned Commissioner (Appeals), as under :–

“1. The Appellant-Assessee-Theobroma Foods (P) Ltd. (“the Appellant”) is engaged in the business of manufacture and sale of food products, mainly in the nature of bakery and confectionery products.

  1. For the assessment year (“AY”) 2012-13 under consideration, the Appellant had filed its return of income on 28-9-2012 declaring income of Rs. 1,98,330. The Appellant’s case was selected for scrutiny and notices under section 143(2) and 142(1) were issued and served upon the Appellant in due course.
  2. The learned Income Tax Office 3(3)(3), Mumbai (“the learned assessing officer”) completed the assessment for assessment year 2012-13 and passed an order under section 143(3) of the Income Tax Act, 1961 (“the Act”) on 31-3-2015.
  3. Therein under, the Appellant’s income was determined to be Rs. 79,80,910 as against the aforesaid returned income, by making the impugned addition of Rs. 82,90,912 (less depreciation) on account of treating certain expenses incurred by the Appellant towards repairs/renovation/machinery as capital expenses in nature contrary to the claim of the Appellant that they were revenue expenses in nature.
  4. The present appeal is filed against thisOrder, dt. 31-3-2015for assessment year 2012-13 passed by the learned assessing officer. A separate document containing the Statement of Facts and Grounds of Appeal in the present matter has already been filed by the Appellant, but for Your Honour’s convenience, the questions involved in the present appeal are summarised herein below :–
  5. The learned assessing officer erred in not granting proper and sufficient opportunity of being heard to the Appellant while framing the assessment;
  6. Without prejudice to the aforesaid, the learned assessing officer erred in making addition of Rs. 82,90,912 to the income of the Appellant as alleged Capital Expenditure;

III. While doing so, the learned assessing officer erred in basing his action solely on surmises, suspicion, conjecture, extraneous and irrelevant considerations, and in ignoring relevant material and consideration as submitted by the Appellant.

  1. In support of the issues raised, the Appellant would like to make the following submissions before Your Honour :–

(a) It is submitted that the learned assessing officer erred in disallowing the expenditure incurred by the Appellant on repairs and maintenance by holding that the said expenses have not been incurred in the ordinary course of business but for the purpose of receiving enduring benefit for subsequent years. The learned assessing officer further erred in holding that the expenses are in the nature of capital expenditure and not revenue expenditure when admittedly, the Appellant only pays a rent of Rs. 1,00,000 (Rupees one lakh) for the tenanted premises at Bandra, and thus, for the renovation expenses incurred at the said premises, the rent payable by the Appellant stands reduced, which benefit is in the revenue field, and therefore, the expenses should have been allowed as being purely revenue in nature.

(b) It is submitted that during assessment year 2012-13, the Appellant had two outlets at Colaba and Bandra, which had been operational since the year 2004 and 2009 respectively. The Appellant was in the process of opening other outlets across Mumbai for sale of its bakery and confectionery products at additional locations, and to cater to the increased demand which would arise upon opening of such new outlets, the Appellant took over an additional bakery premises called ‘Jalal Bakery’ which was in an old and dilapidated state.

(c) This bakery was taken over by the Appellant on a leasehold basis and these premises required extensive renovation and repairs to be undertaken so as to facilitate commencement of production by the Appellant at the said bakery. A bare perusal of the Leave and License Agreement in respect of the said Jalal Bakery dated 26-5-2011 which is enclosed hereto as Annexure A shows that an area of 3,600 square feet in the premium locality of Bandra (West) was given on a 5 year license basis for a monthly rental amount of Rs. 1,00,000 only. In fact, it can be seen by perusing clauses of the said Leave and License Agreement dated 26-5-2011 that unlike standard-form leave and license agreements, the one entered into between the Assessee and the Licensor specifically permitted the Assessee to carry out repair and renovation works at the licensed premises of the bakery, which shows that it was incumbent upon the Assessee and not the Licensor to carry out the required renovation and repairs, and the monthly rent payable by the Assessee to the Licensor was adjusted to that extent.

(d) These expenses which were incurred by the Appellant for the assessment year in consideration at its Jalal Bakery and Bandra outlet together amounting to Rs. 92,66,827 were incurred solely for renovation, repairs and maintenance of the leasehold premises and no new asset of an enduring benefit was created out of the same. These expenses were incurred on account of facilitating the trading activities of the Appellant and for making the premises hygienic, clean, safe and structurally sound and as such, did not require capitalization and were rightly accounted for as revenue expenses in the Appellant’s books of accounts. In light of the aforesaid, it is humbly submitted that these expenses are allowable under the provisions of section 30(a)(i) of the Income Tax Act, 1961 which provides that when an assessee occupies premises from where business is carried out as a tenant, the amount paid on account of repairs undertaken by the assessee is allowable as revenue expenditure. In any event, and without prejudice to the aforesaid, it is submitted that since these expenses were incurred wholly and exclusively by the Assessee for the purpose of its business, the same are allowable under section 37(1) of the Income Tax Act, 1961.

(e) In support of the Appellant-Assessee’s contention that these are revenue expenses, a detailed schedule listing out and providing narration for all the expenses incurred by the Assessee for the assessment year under consideration and treated as revenue expenses, including the expenses amounting to Rs. 92,66,827 which were disallowed by the learned assessing officer, is hereto annexed as Annexure B. Attention of Your Honour is more specifically invited to the entries in the said Annexure B at Serial No. 6 and Serial No. 10, as these pertain to the Bandra shop and the Bandra bakery expenses disallowed by the learned assessing officer.

(f) It is submitted that the learned assessing officer has completely failed to apply his mind to the facts and circumstances surrounding the claim of the Assessee that the expenses incurred by it are revenue in nature. The same can be very clearly illustrated as follows, by listing out some of the expenses which the assessing officer has treated as capital expenses in nature–

  1. Payments made by the Assessee towards society maintenance charges to ‘Link Square Premises Co-op. Society Ltd.’ in respect of its Bandra bakery and outlets;
  2. Payment made to architect and structural engineer for supervisory and consultancy charges;

iii. Payments made to ‘Anukool Gas Service’ for work carried out in respect of gas ovens and labour charges thereon;

  1. Payment made to ‘All Pest Solutions’ for pest and rodent control work carried out at the Bandra bakery and outlet of the assessee;
  2. Payment made to ‘Kitabullah Arts’ for labour charges towards Plaster of Paris (PoP) repair work, etc.

Copies of invoices in respect of the aforesaid expenses and some additional invoices are hereto annexed as Annexure C (invoices for expenses incurred by the Assessee at its Bandra shop/outlet) and Annexure D (invoices for expenses incurred by the Assessee at Jalal Bakery at Bandra) respectively, relatable to Sr. No. 6 and Sr. No. 10 as per the detailed schedule and summary of expenses provided in Annexure B (above).

(g) It is further submitted that pursuant to the aforesaid renovation, repairs and maintenance which were carried, the Appellant had also installed certain assets, plant and machinery in the bakery premises–viz., air conditioners, washing machines, mixer grinders, various ovens, refrigerators, chillers, water purifiers, etc. These assets have been duly accounted for separately by the Appellant as fixed assets in its books of accounts, and a detailed schedule specifically listing out these capital assets together amounting to Rs. 1,32,99,827 (Rupees one crore thirty two lakhs ninety nine thousand eight hundred twenty seven) which came into existence for the assessment year under consideration is annexed hereto as Annexure E. Thus, where capital assets were introduced into the business of the Assessee, the Assessee duly accounted for the same in its books of accounts and has claimed depreciation thereon, and where expenses for repairs and renovation were incurred in respect of tenanted premises, the Assessee, the same have been rightly treated as revenue expenses in its books of account.

(h) It is submitted that the assessing officer has blindly relied on the test of “enduring effect” on the business premise; failing to appreciate that on the facts of the present case, there is no new capital asset acquired by the Appellant and there is no enduring benefit in the capital field. The test of enduring benefit is not a conclusive test for determining any disallowing of repairs and renovation which has also been stated by the Apex Court in the landmark case of Empire Jute Co. Ltd. v. CIT, (1980) 124 ITR 1 (SC) : 1980 TaxPub(DT) 1083 (SC) wherein the Hon’ble Apex Court explained as to how the test of enduring benefit is not conclusive :–

“What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”

(i) Even in the present case, the renovation, repair and maintenance expenses which are incurred by the Appellant are only for facilitating the Appellant’s trading operations inasmuch as the production capacity of bakery and confectionery products, the sale of which constitutes the business of the Appellant is enhanced pursuant the said expenses being incurred. Being expenses which facilitate the trading operations of the Appellant without creating any assets, the learned assessing officer should not have added the same to the income of the Appellant especially since as stated aforesaid, whatever the assets which were in fact installed at the renovated premises by the Appellant were capitalized and treated separately by the Appellant as fixed assets in its books of accounts. Thus, there was no furnishing of inaccurate particulars by the Appellant since the expenses as claimed by the Assessee were actually in the nature of revenue expenditure. The aforesaid observation of the Hon’ble Supreme Court in Empire Jute Co. Ltd. in relation to expenses advantages accruing in facilitating the trading operations of the assessee being apposite and squarely applicable to the case of the Appellant herein as well, a copy thereof is hereto annexed as Annexure F.

(j) Further, in the case of CIT v. Madras Auto Service (P) Ltd., (1998) 233 ITR 468 (SC) : 1998 TaxPub(DT) 1407 (SC), the Apex Court observed that an expenditure incurred on renovation of a leasehold building has to be treated as revenue in nature. The Apex Court further also noticed that right from the inception, when the ownership of the building is with the lessor and the assessee cannot be said to have acquired any capital asset. The only benefit, which the assessee would derive by spending the money, was that it got a lease of a new building, for the next few years. Therefore, the expenditure was considered as revenue expenditure especially since the assessee did not acquire any asset, but merely acquired the benefit of using modern premises for carrying out its business more successfully or more profitably. The same set of facts exist in the present case, and thus, it is submitted that the judgment of the Supreme Court in Madras Auto Service should be respectfully followed. A copy thereof is hereto annexed as Annexure G for Your Honour’s perusal.

(k) As is the Appellant’s case before Your Honour, the Appellant is merely a lessee and not the owner/lessor of the premise that it has taken on a leasehold basis. In this regard, in addition to the above decision of the Apex Court, other High Courts have also taken a similar view, including the Hon’ble Jurisdictional Bombay High Court in the cases of CIT v. Hede Consultancy (P) Ltd., (2002) 258 ITR 380 (Bom) : 2002 TaxPub(DT) 1428 (Bom-HC), and the landmark case of CIT v. Talathi and Panthaky Associated (P) Ltd., (2012) 343 ITR 309 (Bom) : 2012 TaxPub(DT) 1655 (Bom-HC). A copy of the judgment in Talathi and Panthaky Associated (P) Ltd.is hereto annexed for Your Honour’s perusal as Annexure H.

(l) The Hon’ble Delhi High Court has also taken a similar view inter alia in Instalment Supply (P) Ltd. v. CIT, (1984) 149 ITR 52 (Del) : 1984 TaxPub(DT) 764 (Del-HC) and CIT v. Hi Line Pens (P) Ltd., (2008) 306 ITR 182 (Delhi) : 2008 TaxPub(DT) 2301 (Del-HC).

(m) Based on the above factual and legal submissions, it is reiterated that expenses of the Appellant on repairs and maintenance of the business premises of the Appellant are revenue expenses and not capital expenses and hence, deduction in respect thereof should be allowed by deleting the addition made by the learned assessing officer. The claim of the Assessee

  1. Thus, it is respectfully submitted that the findings arrived at by the learned assessing officer in the present matter with respect to the impugned addition of Rs. 82,90,912 are incorrect, and contrary to the applicable facts, circumstances and law, and the assessment order passed by the learned assessing officer is thus unsustainable and bad in law, warranting that the same be set aside.
  2. The Appellant Company craves leave to add, alter, amend or modify the grounds of appeal. The Appellant also craves leave to file Additional Written Submissions and case laws before Your Honour if so advised.
  3. Prayer

Therefore, in light of the above submissions, it is prayed that Your Honour be pleased to :–

(a) Allow the present appeal and quash the impugned order of the learned assessing officer whereby the addition of Rs. 82,90,912 was made;

(b) Allow the expenses amounting to Rs. 82,90,912 as revenue in nature;

(c) Direct the learned assessing officer to expedite the process of refunding the amount of Rs. 29,17,440 (Rupees twenty nine lakhs seventeen thousand four hundred forty) recovered under the Demand Notice along with interest to the Assesses.

  1. The learned Commissioner (Appeals) after considering the aforesaid contentions of the assessee allowed the appeal of the assessee by holding aforesaid expenses to be Revenue Expenses vide appellateOrder, dt. 28-10-2016, by holding as under :–

” 5.2.1 This ground relates to disallowance of Rs. 9,49,721 claimed on account of repair and maintenance by treating the same as capital expenditure. The assessing officer has discussed this at para 4 of his order. He observed that major expenditure on renovation of shop/bakery at Bandra amounting to Rs. 92,66,827 appeared to be capital in nature. The appellant was asked to give details and explanation to justify the same as revenue expenditure. The Authorised Representative filed letter dated 30-3-2015 explaining that the expenditure was revenue in nature and was done to increase production for the new outlet and for fixing certain plant and machinery on the newly released premises at Jalal Bakery, Bandra. Out of the repair and maintenance expenditure, the expenditure relating to Jalal Bakery amounting to Rs. 77,17,043 was treated as capital expenditure and after allowing depreciation @ 5% balance amount of Rs. 73,31,191 was disallowed.

5.2.2 Further, the assessing officer observed that amount of Rs. 10,26,725 shown under repair and maintenance in ledger account was mainly for setting up kitchen equipments/renovation of kitchen at Jalal Bakery. This amount was also treated as capital in nature and disallowed after allowing applicable rate of depreciation @ 15%. Thus, a disallowance of Rs. 9,49,721 was made.

5.2.3 It is noted that during the year, the appellant had taken over an additional bakery called Jalal Bakery to meet the increased demand of its bakery products. This was taken on lease hold for 5 years period with a monthly rental of Rs. 100.000. As per the agreement dated 26-5-2011, clause 10, the appellant was permitted to install assets, articles, amenities, furniture, fixtures, air-conditioning plants, industrial ovens and other equipments and to renovate the premises including tiling, flooring etc. Further, as per clause 12 of the agreement the appellant was prohibited to carry out any construction or erection except wall, partitions, toilets etc., and was permitted to carry out repairs, renovation and interior work.

5.2.4 The basic contention of the appellant is that the entire expenditure of Rs. 92,66,827 did not lead to creation of new asset of enduring benefit and hence, it was allowable under section 37(1) of Income Tax Act, 1961. In this, the appellant has relied on the judgment of the Apex Court in the case of Empire Jute Company Ltd. v. CIT, (1980) 124 ITR 1 (SC) : 1980 TaxPub(DT) 1083 (SC), which has been quoted above. Further, the appellant also relied on CIT v. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC) : 1998 TaxPub(DT) 1407 (SC) which held that expenditure incurred on renovation of a leasehold building has to be treated as revenue in nature. The appellant also relied on jurisdictional High Court decisions in CIT v. Hede Consultancy (P) Ltd., (2002) 258 ITR 380 (Bom) : 2002 TaxPub(DT) 1428 (Bom-HC), and CIT v. Talathi and Panthaky Associated (P) Ltd., (2012) 343 ITR 309 (Bom) : 2012 TaxPub(DT) 1655 (Bom-HC).

5.2.5 The relevant part of the last mentioned order is as below :–

“7. The issue as to whether expenditure incurred by an assessee is of a revenue or capital nature has fallen for determination in various contexts, but in all decisions particularly of the Supreme Court what has been emphasised is that the matter has to be looked at from a commercial point of view. In Madras Auto Service (P) Ltd.(supra) the assessee obtained certain premises under an agreement of lease for a period of thirty nine years. Under the terms of the agreement, the assessee had a right to demolish the existing premises and to construct a new building thereon for the purposes of its business. The lease deed stipulated that the new construction shall continue to be the property of the lessor and the assessee as the lessee would only have a right to be a tenant for a period of thirty nine years subject to the payment of rent and the observance of other conditions. The Supreme Court noted that the advantage which the assessee obtained by constructing a building which belonged to someone else was the benefit of a long lease on a concessional rate at a lower rent. The saving in expenditure was the saving in revenue expenditure in the form of rent. In defining as to whether the character of the expenditure is of a revenue or capital nature the Supreme Court emphasised (following its earlier decision in Assam Bengal Cement Co. Ltd. v. CIT (1954) 27 ITR 34 (SC) : 1955 TaxPub(DT) 73 (SC) that expenditure may be treated as properly attributable to capital when it is made not only once for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If a lump sum payment gets rid of an annual business expense chargeable against revenue, the lump sum payment should be regarded as a business expense. Contrariwise if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. The Supreme Court noted that by expending money for the purposes of construction, the assessee did not acquire any capital asset and the only advantage which it had obtained was the lease of a new building at low rent. After adverting to the earlier judgments of the Court in Lakshmiji Sugar Mills Co. (P) Ltd. v. CIT (1971) 82 ITR 376 (SC) : 1971 TaxPub(DT) 377 (SC), L.H. Sugar Factory & Oil Mills (P) Ltd. v. CIT (1980) 125 ITR 293 (SC) : 1980 TaxPub(DT) 1125 (SC) and CIT v. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC) : 1988 TaxPub(DT) 1173 (SC) the Supreme Court observed as follows :–

“All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.”

  1. InMadras Auto Service (P) Ltd.(supra) the assessee had in fact incurred the entire cost of construction of a new building but obtained no title to the new construction. The benefit which the assessee obtained was a long lease of thirty nine years on low rent. The Supreme Court held that the asset which was created belonged to someone else.

The assessee was held to have obtained an enduring business advantage for the purpose of conducting the business profitably and more successfully, thus saving a considerable amount of revenue expenditure over the term of the lease. In the present case, there is a concurrent finding of fact both by the Commissioner (Appeals) and affirmed by the Tribunal that the assessee was and continues to be a tenant. The character of the occupation of the assessee has not been altered. The assessee by contributing an amount of Rs. 1.50 Crores to the reconstruction of the building has obtained an enduring advantage but nonetheless of a commercial nature of securing an equivalent area on the same rent of Rs. 11,300 in the new structure.

The ownership of the new structure has not been transferred to the assessee nor has the assessee acquired any capital asset. The case, therefore, cannot be distinguished from the situation which arose before the Supreme Court for its decision in Madras Auto Service (P) Ltd. (supra) on any principled basis.

  1. The judgment of the Supreme Court inMadras Auto Service (P) Ltd.(supra) has been followed by a Division Bench of this Court in CIT v. Hede Consultancy (P) Ltd. 2002) 258 ITR 380 (Bom) : 2002 TaxPub(DT) 1428 (Bom-HC).
  2. At this stage, it would be necessary to note that the decision of the Supreme Court in Madras Auto Service (P) Ltd. (supra) arose in relation to assessment year 1968-69 which was prior to the insertion of Explanation 1 to section 32 of the Income Tax Act, 1961. Explanation 1 has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1-4-1988. Explanation I stipulates that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation 1 is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation 1 brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein includinginter aliafor the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of section 32, if the stipulations and conditions set out in the Explanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasised is that the explanation operates in a situation where capital expenditure is incurred by the assessee. Unless the expenditure is of a capital nature, there would be no occasion to apply the deeming fiction that is carved out by Explanation 1.

In the present case, for the reasons that we have already indicated and following the judgment of the Supreme Court in Madras Auto Service (P) Ltd. (supra), we have arrived at the conclusion that the assessee had not incurred any expenditure of a capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises. By contributing an amount of Rs. 1.50 Crores towards the reconstruction or as the case may be renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature.”

5.2.6 It is noted from a perusal of copies of invoices/extracts of ledger account that practically every bill or invoice by different vendors clearly mentioned “repair/maintenance/replacing” etc..

These relate to heads such as plumbing, drainage, fixing tiles, labour charges, repair and painting, pest control, plaster repair etc. These clearly indicate preparation of the premises for starting a modern and well equipped bakery. Such repair/renovation/maintenance jobs are in nature of expenditure incurred on furtherance of the appellant’s business of bakery and for obtaining commercial advantage of a modern and well equipped bakery that would cater to the rising demand of the appellant’s products. In fact, without incurring these expenses, the full operation of its business would not be able to take off. The building premises do not belong to the appellant and the improvements made are for meeting the higher standards of hygiene and baking that is followed by the appellant. Under the circumstances, in view of the ratios of the case laws cited above, expenditure in relation to such additions/improvements cannot-be considered as creation of capital asset having enduring benefit for the appellant. The ratios of the following decisions also support the above conclusion :–

–CIT v. Hede Consultancy (P) Ltd. (2002) 258 ITR 380 (Bom) : 2002 TaxPub(DT) 1428 (Bom-HC)

–Nila Products Ltd. v. CIT (1984) 148 ITR 99 (Bom) : 1984 TaxPub(DT) 248 (Bom-HC)

— Dy. CIT v. Sandoz (P) Ltd. (2012) 137 ITD 326 (Mum.) : 2012 TaxPub(DT) 2530 (Mum-Trib)

–Cymroza Art Gallery v. ACIT (2013) 21 ITR (Trib) 262 (Mum) : 2013 TaxPub(DT) 0380 (Mum-Trib)

–DCIT v. Bijesh Thakkar (2012) 49 SOT 502 (Mum.) : 2012 TaxPub(DT) 1093 (Mum-Trib)

–Installment Supply (P) Ltd. v. CIT (1984) 149 ITR 52 (Del) : 1984 TaxPub(DT) 764 (Del-HC)

–CIT v. Dr. A.M. Singhvi (2008) 302 ITR 26 (Raj) : 2008 TaxPub(DT) 910 (Raj-HC)

–CIT v. Ayesha Hospitals (P) Ltd. (2007) 292 ITR 266 (Mad) : 2007 TaxPub(DT) 641 (Mad-HC)

–ACIT v. M.M. Publications Ltd. (2011) 43 SOT 59 (Cochin) : 2011 TaxPub(DT) 190 (Coch-Trib)

5.2.7 In view of the above facts and circumstances, the net disallowance of Rs. 82,09,912 (after depreciation) is deleted. This ground of appeal is allowed.”

  1. The Revenue is aggrieved by the appellateOrder, dt. 28-10-2016 passed by learned Commissioner (Appeals) and it was at the outset submitted by learned Departmental Representative that there is a breach of rule 46A of the Income Tax Rules, 1962 by learned Commissioner (Appeals) as the assessee submitted before learned Commissioner (Appeals) certain additional evidences which were admitted by learned Commissioner (Appeals) in breach of rule 46A of the 1962 Rules and the same were also not forwarded to the assessing officer for their verification and rebuttal by the assessing officer as no remand report was called by learned Commissioner (Appeals). It was submitted by learned Departmental Representative that various invoices in respect of these expenses were submitted before learned Commissioner (Appeals) during appellate proceedings for the first time which found mentioned in the appellate order passed by learned Commissioner (Appeals) at page 8. It was claimed that these additional evidences were not submitted before the assessing officer and learned It is also submitted by learned Departmental Representative that learned Commissioner (Appeals) did not call for remand report from the assessing officer and hence principle of natural justice were breached as the assessing officer did not get an opportunity to verify these additional evidences and to submit his rebuttal as no remand report was called by learned Commissioner (Appeals).

It was also claimed that these expenses in any case are capital expenses as new bakery at Bandra was taken by the assessee on lease hold basis for a period of five years on which major/extensive repairs and renovations were done to set up a new bakery and hence these are capital expenditure on which depreciation under section 32(1) is allowable.

The learned Departmental Representative would place reliance on Explanation 1 to section 32(1) of the 1961 Act. The learned Departmental Representative submitted that the assessee has taken new premises on lease hold basis for a period of five years on a monthly rental of Rs. 1 lac for setting up of a new bakery named Jalal Bakery at Bandra and extensive repairs and renovation work were carried out by the assessee to setup a new bakery and hence these are capital expenditure and cannot be allowed as revenue expenditure. It was submitted that since principle of natural justice was breached and the assessing officer did not get an opportunity to verify these additional evidences which were submitted for the first time before learned Commissioner (Appeals) as no remand report was called by learned Commissioner (Appeals), the matter should be remanded back to learned Commissioner (Appeals) for fresh adjudication after complying with mandate of rule 46A of the 1962 Rules.

6.2 The learned counsel for the assessee on the other hand submitted that the only issue in this appeal is whether the expenses incurred by the assessee on repairs and renovation are revenue in nature or are capital expenditure. It was submitted that new premises was taken on lease hold basis at Bandra and renovations and repairs work was undertaken on this lease hold premises to make it a functional bakery and hence it was submitted that these are nature of routine repair and renovation expenses on a rental premises such as wall partition, cabins etc. which should be allowed as revenue expenditure. It was submitted that powers of learned Commissioner (Appeals) powers are co-terminus with powers of the assessing officer and hence he could have made the inquiries with respect to additional evidences filed by assessee and it is not necessary that remand report from the assessing officer be called by learned Commissioner (Appeals) in every case on additional evidences submitted for the first time before learned Commissioner (Appeals). The learned counsel for the assessee would rely on following case laws :–

(a) Hon’ble Bombay High Court decision in the case of Rallis India Ltd. v. CIT reported in (2015) 374 ITR 462 (Bom) : 2015 TaxPub(DT) 1195 (Bom-HC)

(b) Hon’ble Delhi High Court decision in the case of CIT v. Manish Buildwell (P) Ltd. reported in (2011) 245 CTR 397(Del.) : 2012 TaxPub(DT) 0712 (Del-HC)

(c) Hon’ble Supreme Court decision in the case of CIT v. Kanpur Coal Syndicate in Civil Appeal No. 673 of 1963, judgment, dt. 30-4-1964

(d) Hon’ble Bombay High Court decision in the case of CIT v. Hede Consultancy (P) Ltd. reported in (2002) 258 ITR 380 (Bom) : 2002 TaxPub(DT) 1428 (Bom-HC)

(e) Hon’ble Bombay High Court decision in the case of CIT v. Talathi and Panthaky Associated (P) Ltd. reported in (2012) 343 ITR 309 (Bom) : 2012 TaxPub(DT) 1655 (Bom-HC)

  1. We have considered rival contentions and have perused the material on record including cited case laws. We have observed that assessee is engaged in the business of manufacturing and dealing in Food Products. The assessee has two bakeries at Colaba and Bandra and in all there are seven outlets from where business of the assessee was conducted. The assessee has during the year under consideration taken on lease for a period of five year a new bakery named Jalal bakery at Bandra. The said bakery was extensively renovated during the year under consideration by assessee to make it operational as a modern and well equipped bakery. It is claimed by assessee that the said bakery was taken to expand assessee’s business to cater to increased demand at its outlets. The assessee has already capitalised Plant and Machinery including kitchen equipments installed at its bakery at Bandra and claimed depreciation on the same. The assessee has claimed expenses which were incurred for making cabins, wall partitions, fixing tiles, labour charges, plumbing, drainage, civil work and other repairs and renovation expenses to make the Jalal Bakery operational as modern and well equipped bakery to be revenue expenditure while the Revenue on the other hand is contending the same to be capital in nature. The assessing officer had held the said expenditure to be capital in nature as the bakery was a new bakery at Bandra being set up by the assessee for the first time which will give benefit and advantage of enduring nature to the assessee in expanding its business. The assessing officer duly allowed depreciation on these renovation expenditure after treating these expenditure to be capital in nature. The learned Commissioner (Appeals) however was of the view that these expenditure are of Revenue in nature. Section 37 of the 1961 Act postulate that to claim an expenses to be business expenses, the same need to be incurred wholly and exclusively for the purposes of business of the assessee and the said expenses should not be personal in nature nor it be capital expenditure. Section 37(1) is reproduced hereunder :–

“General.

  1. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 (***) and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

((Explanation 1.)–For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.)

(Explanation 2.–For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.)”

Admittedly, the assessee has during the course of appellate proceedings before learned Commissioner (Appeals) submitted for the first time additional evidences which were admitted by learned Commissioner (Appeals) while adjudicating appeal of the assessee in favour of the assessee. These additional evidences are by way of invoices and bills concerning these expenditure which found mentioned in the appellate order of learned Commissioner (Appeals) at page 8. The Revenue is aggrieved by the decision of learned Commissioner (Appeals) in admitting these additional evidences without complying with rule 46A of the 1962 Rules and thereafter holding these expenditure to be Revenue in nature and hence this appeal before tribunal. On perusal of the appellate order passed by learned Commissioner (Appeals), we have observed that there are no reasons and justification recorded by learned Commissioner (Appeals) as is contemplated under sub-rule (1) of rule 46A of the 1962 Rules before admitting additional evidences filed by the assessee. Rule 46A of the 1962 Rules is reproduced hereunder for ready reference :–

“Production of additional evidence before the (Deputy Commissioner (Appeals) (and Commissioner (Appeals)).

46A. (1) The appellant shall not be entitled to produce before the (Deputy Commissioner (Appeals)) (or, as the case may be, the Commissioner (Appeals)), any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the (assessing officer), except in the following circumstances, namely :–

(a) where the (assessing officer) has refused to admit evidence which ought to have been admitted ; or

(b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the (assessing officer) ; or

(c) where the appellant was prevented by sufficient cause from producing before the (assessing officer) any evidence which is relevant to any ground of appeal ; or

(d) where the (assessing officer) has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

(2) No evidence shall be admitted under sub-rule (1) unless the (Deputy Commissioner (Appeals)) (or, as the case may be, the Commissioner (Appeals)) records in writing the reasons for its admission.

(3) The (Deputy Commissioner (Appeals)) (or, as the case may be, the Commissioner (Appeals)) shall not take into account any evidence produced under sub-rule (1) unless the (assessing officer) has been allowed a reasonable opportunity–

(a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or

(b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant.

(4) Nothing contained in this rule shall affect the power of the (Deputy Commissioner (Appeals)) (or, as the case may be, the Commissioner (Appeals)) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the (assessing officer)) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.)”

The learned Commissioner (Appeals) also did not refer/forwarded these additional evidences to assessing officer for verification and comments as no remand report was called by learned Commissioner (Appeals) from the assessing officer. This is a breach of sub-rule 3 of rule

46A of the 1962 Rules owing to non forwarding of these additional evidences by learned Commissioner (Appeals) to the assessing officer for its verification and comments. The principles of natural justice are clearly breached. The procedures as are contemplated are not meant to stifle justice but they cannot be simply given go-bye otherwise there will be break down of rule of Law. Rule of Law is an important ingredient of basic structure doctrine engrained in our Constitution. The assessee ought to have explained before learned Commissioner (Appeals) as to what prevented it from submitting these additional evidences before the assessing officer as is required under sub-rule 1 of rule 46A of the 1962 Rules. There is no explanation given by the assessee for non production of these additional evidences before the assessing officer during the course of assessment proceedings nor learned Commissioner (Appeals) considered appropriate to record reasons and justification for admitting these additional evidences as is required under sub-rule 1 of rule 46A of the 1962 Rule. These additional evidences were also not forwarded to the assessing officer for verification and his comments by learned Commissioner (Appeals) as is contemplated under sub-rule 3 of rule 46A of the 1962 Rules. There is clearly breach of principles of natural justice and Revenue is prejudiced by the breach of rule 46A of the 1962 Rules. It is not the case of the assessee that learned Commissioner (Appeals) directed assessee to produce these additional evidences as is contemplated vide sub-rule 4 of rule 46A of the 1962 Rules.

Neither it is a case of the assessee where learned Commissioner (Appeals) has suo moto directed inquiry as is contemplated under section 250(4) of the 1961 Act. The instant case before us is not covered by these exceptions. The assessee came forward with these additional evidences of its own for the first time before learned Commissioner (Appeals) and these evidences were not furnished by the assessee under directions of learned Commissioner (Appeals). The judgment relied upon by the assessee in the case of Manish Buildwell (P) Ltd. (supra) in-fact support the case of Revenue. There is no dispute as to proposition canvassed by the assessee that powers of learned Commissioner (Appeals) are co-terminus with the powers of the assessing officer but Rule 46A of the 1962 Rules cannot be simply given go bye other wise it will become otiose. This is never the intention of law makers. We are afraid that decision of Hon’ble Supreme Court in the case of Kanpur Coal Syndicate (supra) cannot come to rescue of the assessee as there is no dispute to the proposition that learned Commissioner (Appeals) powers are co-terminus with powers of the assessing officer but Rule 46A of the 1962 cannot be given a simple go bye. We are afraid that the decision of Hon’ble Bombay High Court in the case of Rallies India Limited(supra) relied upon by the assessee cannot also come to rescue of the assessee. This case deals with power of learned Commissioner (Appeals) to refer valuation of property to DVO under section 55(4) of the 1961 Act which is not the issue here before us. There is no dispute so far as powers of the learned Commissioner (Appeals) to be co-terminus with the powers of the assessing officer. The instant case before us is also not a case where an enquiry is initiated by learned Commissioner (Appeals) suo moto or directions are issued to the assessing officer to conduct inquiry by invoking powers under section 250(4) of the 1961 Act. The case before us is where additional evidences are submitted by the assessee of its own for the first time before learned Commissioner (Appeals). The Said sub-section 4 of section 250 is reproduced hereunder for ready reference :–

“(4) The (***) (Commissioner (Appeals)) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the (Assessing) Officer to make further inquiry and report the result of the same to the (***) (Commissioner (Appeals)).”

The case before us is also not covered by sub-rule 3 of rule46A of the 1962 Rules as we have seen that these additional evidences are not been filed on the directions of learned Commissioner (Appeals).

Had the assessee been directed to file additional evidences as is contemplated by sub-rule 3 of rule 46A of the 1962 Rules, then the requirement to forward the same to the assessing officer for verifications or comments could have been dispensed with. This is not the case of the assessee in the instant appeal before us and hence decision of Rallies India Limited (supra) cannot come to rescue of the assessee. The principles of natural justice are breached in the instant case by learned Commissioner (Appeals) by not calling for remand report from the assessing officer as well non recording of reasons and justification for admitting these additional evidences which is fatal to sustaining of appellate order passed by learned Commissioner (Appeals).

So far as merits of these expenses to be capital or revenue expenses need to be looked into whether these expenses bring in benefit and advantage of enduring nature to the assessee.

The assessee took over additional bakery named Jalal Bakery during the year on lease basis for a period of five years on a monthly lease rent of Rs. 1,00,000. The said bakery was extensively renovated to make it operational as modern and well equipped bakery to cater to increased demand at its seven outlets. The Plant and Machinery including kitchen equipments installed at this bakery is claimed to be capitalised and there is no dispute as to it. The dispute is with respect to extensive renovation being done in this bakery to make it operational as modern and well equipped bakery. The expenses were incurred towards wall ceiling, fixing tiles, cabins, labour, civil work, plumbing, drainage and other expenses to renovate the bakery to make it operational as modern and well equipped. This bakery is set up for the first time after taking on lease by the assessee. The assessee has claimed that the assessee is not the owner of the premises which is owned by lessor and it has taken the same on lease hold basis for a period of five years on a monthly rental of Rs. 1,00,000 and claim is made that since the assessee is not owning the premises but the premises is taken on leasehold basis, these renovation expenses are to be held to be revenue in nature. We are afraid explanation 1 to section 32(1) is applicable and this contention of the assessee cannot be accepted. We are reproducing explanation1 to section 32(1) for ready reference, as under :–

“(Explanation 1.–Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.”

The terms and conditions of the lease agreement entered into by the assessee becomes relevant as to whether the lease agreement is renewable after five years or not and secondly, whether as per terms of lease agreement, the assessee will get ownership rights over the assets created vide renovation in the premises or the ownership of assets created vide these renovation expenses vests with lessors. Neither, the said lease agreement nor invoices/details for conducting these renovation expenses are filed before the tribunal. It is purely a finding of fact which is to be gathered from the cumulative study of lease agreement, invoices, nature of renovation done by assessee and other applicable relevant facts and circumstances surrounding the renovation of the premises undertaken by the assessee to arrive at conclusion whether benefit and advantage of enduring nature was obtained by the assessee or not. Then only conclusion can be arrived at as to whether these expenses are to be capitalised or to be held as revenue expenses. The decision of Hon’ble Bombay High Court in case of RPG Enterprises Ltd. v. DCIT (2016) 386 ITR 401 (Bom) : 2016 TaxPub(DT) 3217 (Bom-HC) becomes relevant, wherein Hon’ble Bombay High Court held as under :–

“5. We find that the appellant was a tenant of the said premises.

It was paying monthly rent of Rs. 73,530 from April, 1995 onwards under the agreement dated 15th February, 1995.

Further the agreement provided that the cost of repairs and renovation i.e. civil, electrical, plumbing, polishing etc. would be carried out by the appellant at its own expenses after taking prior permission from the landlord. All the Authorities under the Act have rendered a finding of fact that the so called “repairs and maintenance” were in fact extensive renovation involving civil work. This expense resulted in an advantage/benefit of a enduring nature in as much as it inter alia resulted in the appellant being able to accommodate more number of employees and facilitate improving its trading operations. Thus the benefit obtained by the appellant, according to the Authorities was substantially in the capital field and could not be entirely allowed as revenue expenditure. The submission on behalf of the appellant, before us, that as the appellant does not own the premises the expenditure incurred on renovation goes to the benefit of the owner of the said premises, therefore in the hands of the tenant it can only be revenue expenditure is more then met by the impugned order of the Tribunal. This in view of the fact that the impugned order places reliance upon Explanation-I to section 32 of the Act, which allows depreciation to a tenant in case of any capital expenditure incurred for renovation/improvement to the building in the hands of the tenant by deeming the tenant to be the owner of the premises. In this case the benefit of depreciation has been given to the appellant on the capital expenditure incurred for renovation.

  1. Mr. Jhaveri, learned Counsel for the appellant-assessee then submits that on an identical fact situation expenditure incurred by tenant has been allowed as revenue expenditure by this Court. Therefore it is submitted that the entire issue is no longer open to debate as it stands concluded in favour of the appellant by the decisions of this Court inTalathi & Panthaki Associates (P) Ltd.(supra) and Hede consultancy (P) Ltd. (supra).

In Talathi & Panthaki Associates (P) Ltd. (supra) the tenant of the premises had contributed a sum of Rs. 1.50 crores to the work of repairs and restoration/reconstruction of the building in which it was a tenant. The entire amount of Rs. 1.50 crores was claimed as revenue expenditure. The assessee therein had entered into an agreement with the developer to contribute Rs. 1.50crores for the reconstruction/repairs/restoration of the building in consideration of there being no increase in the rent payable by the assessee in the new structure to that being paid in the old structure. It was in the aforesaid facts that it was held that where a lump-sum payment of Rs. 1.50 crores gets rid of annual business expenses chargeable against revenue then the lumpsum is to be regarded as a revenue/business expenditure. The benefit obtained by the assessee in the above case was premises at a lower rent in view of the contribution made to the developer for repairing/reconstructing the premises. Thus, the expenditure was in the revenue field and allowable under section 37 of the Act. In the present facts, nothing is on record to indicate that there was any advantage secured by the appellant in the revenue field. There was no decrease in the rent nor was there any embargo on future increase in the rent in consideration of the expenditure for renovation. Therefore, the above decision would not apply to the facts of the present case.

  1. Similarly, the decision of this Court inHede consultancy (P) Ltd.(supra) upon which also reliance is placed upon also dealt with the situation where the amount expended for interior decoration and renovating of a godown premises so as to be converted into an office premises was allowed as a revenue expenditure, will not apply to the present facts. This is because in that case the tenant got the benefit of lower rent in view of the expenditure incurred on renovation. It was in that context that this Court upheld the view of the Tribunal that the expenditure for repairs and renovation was in the revenue field. As pointed out above, in the present case, there is nothing on record to indicate that any benefit was obtained by the assessee in the revenue field for having expended the amount of Rs. 31.32 lakhs for repairs/renovation of the office premises. Thus, the aforesaid decisions would have no application to the facts of the present case.
  2. It was next contended there is no basis indicated by the Authorities under the Act for apportioning the expenditure in the ratio of 75% and 25% between capital and revenue account by the Revenue. We find that the authorities on facts found that some of the expenditure incurred out of Rs. 31.32 lakhs was incurred for maintenance such as plastering etc. This allowing of 25% was on the basis of an estimate. Nothing has been shown to us that the estimation by the authorities on the basis of facts found was in any way arbitrary or perverse. Thus we find no merit in the above submission.
  3. In the view taken by us that the expenditure of 75% of Rs. 31.32 lacs i.e. Rs. 23.49 lakhs is on capital account, the submission to claim deduction on account of section 30 of the Act made by the Appellant need not be examined. Nor the decision of the Delhi High Court inCIT v. Hi Line Pens (P) Ltd. (2008) 306 ITR 182 (Delhi) : 2008 TaxPub(DT) 2301 (Del-HC)relied upon for interpretation of section 30 of the Act need be examined. This for the reason that the Explanation to section 30 of the Act itself provides that the amount paid on the cost of repairs would not include any expenditure which is in the nature of capital expenditure.

Although this Explanation to section 30 of the Act was introduced in 2004 with effect from 1-4-2004, the Explanation itself clarifies that it has been introduced for removal of doubts. Therefore, it would be applicable even for the period prior 1-4-2004 including the subject Assessment year. It is for the above reason the learned Counsel for the appellant very fairly did not even attempt to suggest that deduction under section 30 of the Act would be available even in respect of capital expenditure.

  1. In the above view, the concurrent finding of fact by the Authorities under the Act that the expenditure incurred claiming to be the repairs and maintenance was in fact on account of renovation of the premises, leading to enduring benefit to the appellant assessee in as much as it enabled the appellant to accommodate larger number of employees and also facilitate its trading operations. This benefit would be available to it for a long period of time and thus, was capital in nature. It was in the above view that the Tribunal granted the benefit of depreciation to the extent the claim as revenue expenditure was disallowed.
  2. In the above view, we find that the view taken by the Authorities under the Act including the Tribunal, cannot be faulted as the appellant has failed to establish that the expenditure of Rs. 31.32 lakhs claimed as “Repairs and Maintenance” was in the revenue field. In the above view, the substantial question of law as framed hereinabove in paragraph 2 is answered in the affirmative i.e. in favour of the respondent Revenue and against the appellant assessee.”

The Hon’ble Bombay High Court while deciding the aforesaid case in the case of RPG Enterprises Limited (supra) has dealt with the decision relied upon by the assessee in the case of Hede Consultancy (P) Ltd. (supra) and Talathi and Panthaky Associated (P) Ltd. (supra) and distinguished the same. The Hon’ble Bombay High Court in aforesaid case of RPG Enterprises Limited (supra) dealt with Explanation 1 to section 32(1) and also explanation to section 30 of the 1961 Act, which are relevant. This facts and circumstances of the instant case before us are similar to the facts and circumstances of the case before Hon’ble Bombay High Court in the case of RPG Enterprises Limited (supra). The explanation 1 to section 32(1) was reproduced by us earlier in this order. The explanation to section 30 of the 1961 Act is reproduced hereunder :–

“(Explanation.–For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repairs referred to in sub-clause (i), and the amount paid on account of current repairs referred to in sub-clause (ii), of clause (a), shall not include any expenditure in the nature of capital expenditure.)”

Thus, keeping in view the entire factual matrix of the case as elaborated by us in preceding para’s of this order, end of justice will be met in this case if the issues in these appeals are set aside and restored to the file of learned Commissioner (Appeals) for fresh adjudication of these issues after complying with rule 46A of the 1962 Rules and by following ratio of judgment of Hon’ble Bombay High Court in the case of RPG Enterprises Limited (supra). The assessee is directed to file all necessary evidences and explanations before learned Commissioner (Appeals) in its defence including complete details of renovation work undertaken by it.

The learned Commissioner (Appeals) is directed to give proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law and all relevant explanations/evidence submitted by the assessee before learned Commissioner (Appeals) in set aside proceedings shall be admitted by learned Commissioner (Appeals) in the interest of justice and dealt with in accordance with law on merits. The appeal of the Revenue is allowed for statistical purposes. We order accordingly.

  1. In the result, the appeal of the Revenue inITA No. 765/Mum/2017 for assessment year 2012-13 is allowed for statistical purposes.

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