RPG ENTERPRISES LTD. vs. DEPUTY COMMISSIONER OF I-TAX

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ITXA/416/2001HC Bombay29 June 2016Author: HON'BLE SHRI JUSTICE M.S. SANKLECHA, HON'BLE SHRI JUSTICE A. K. MENON10 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the expenditure of Rs. 31.32 lakhs incurred by the assessee, a tenant, on renovation of the premises was substantially capital in nature. The Tribunal's finding that the expenditure resulted in an advantage of enduring nature, such as accommodating more employees and facilitating trading operations, was upheld. The Court noted that Explanation I to Section 32 of the Act allows depreciation to a tenant for capital expenditure on building improvements by deeming the tenant as the owner. The Court distinguished the cited precedents (Talathi and Panthaky, Hede Consultancy) by observing that in those cases, the tenant secured a benefit in the revenue field (e.g., lower rent), which was not evident in the present case. The Court also found no merit in the contention that there was no basis for apportionment, as the 25% revenue portion was an estimate for minor repairs like plastering, and this estimation was not arbitrary or perverse. The Court answered the substantial question of law in the affirmative, in favour of the revenue.

What were the facts?

The assessee, RPG Enterprises Ltd., is appealing against an order of the Income Tax Appellate Tribunal (Tribunal) for Assessment Year 1996-97. The assessee, a tenant of office premises, claimed Rs. 47.63 lakhs as repairs and maintenance, with Rs. 31.32 lakhs specifically related to the tenanted premises. The Assessing Officer (AO) treated 75% of this amount (Rs. 23.49 lakhs) as capital expenditure and 25% (Rs. 7.83 lakhs) as revenue expenditure. The AO allowed depreciation on the capital portion. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's order. The Tribunal also upheld the CIT(A)'s decision, finding the expenditure substantially capital in nature, qualifying for depreciation.

What were the issues?

1. Whether, on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was correct in holding that the expenditure to the extent of 75% of Rs. 31,32,841/- was capital in nature? (Question of law) Assessee's contentions: - The expenditure of Rs. 31.32 lakhs is allowable as revenue expenditure under Section 37 of the Income Tax Act, 1961, citing the High Court's decisions in CIT v. Talathi and Panthaky Associated P. Ltd. and CIT v. Hede Consultancy Pvt. Ltd. and Anr. - The expenditure is allowable under Section 30 of the Act as repairs. - There is no basis for apportioning the expenditure in the ratio of 75% capital and 25% revenue. Revenue's contentions: - The revenue did not present any arguments as none were recorded in the judgment.

Which sections of the Income-tax Act were involved?

Section 260A,Section 32,Section 37,Section 30

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Cause title — parties, addresses and appearances
ITA NO.416 OF 2001.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 416 OF 2001 RPG Enterprises Ltd.  ] A Company Incorporated under the  ] Companies Act, 1956 and having its ] Registered Office at Ceat Mahal, 463, ] Dr. Annie Besant Road, ] Worli, Mumbai – 400 025 ] .. Appellant  v/s.  Deputy Commissioner of Income Tax, ] Circle 5(6), Aayakar Bhavan, ] M.K. Road, ] New Marine Lines, Mumbai – 400 020 ] .. Respondent  Mr. B.V. Jhaveri a/w B.G. Yewale i/b Rajesh Shah for the appellant   None for the respondent                             CORAM : M.S. SANKLECHA &        A.K. MENON, J.J.  Judgment Reserved on : 23rd June, 2016.  Judgment Pronounced on : 29th June, 2016

Judgment : (Per M.S. Sanklecha, J.)

1.

This appeal under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 18th  April, 2001 of the Income Tax Appellate Tribunal (Tribunal). The impugned order dated 18 April 2001 relates to A.Y. 1996­97. 2. On 30 July 2004 this appeal was admitted on the following Uday S. Jagtap 1 of 10 CNR No : HCBM020056652001 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc substantial question of law :­ “Whether on the facts and in the circumstances of the case and in law, Income Tax Appellate Tribunal was correct in holding that the expenditure to the extent of 75% of Rs.31,32,841/­ was capital in nature?”

3.

Brief facts leading to this appeal are as under :­ (a) Since the year 1995, the appellant was in occupation as a tenant of 7th floor of Ceat Mahal, Worli, Mumbai(said premises ). The appellant was paying a monthly rent of Rs.73,530/­. In the A.Y. 1996­97, the appellant filed its return of income declaring an income of Rs.17.46 lakhs. The appellant had debited a sum of Rs.47.63 lakhs to the Profit and Loss account under the head “Repairs and Maintenance” while determining its income.  Out of the   aforesaid   amount   of   Rs.47.63   lakhs   as   expenditure,   an amount   of   Rs.31.32   lakhs   related   to   the   said   premises.   The Assessing Officer on examination of the nature of expenses found that the same were substantially capital in nature i.e. renovating the said premises by doing civil work.  However, some part of its expenditure   were   found   to   be   revenue   in   nature,   example plastering.   Therefore, the Assessing officer   attributed 75% of the   expenditure   claimed   as   capital   and   25%   as   revenue   i.e. Uday S. Jagtap 2 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc Rs.23.49 lakhs (capital expenditure) and Rs. 7.83 lakhs (revenue expenditure)   aggregating   to   Rs.31.32   lakhs.   The   Assessing Officer allowed 10% depreciation i.e. Rs.2.34 lakhs on the capital expenditure of Rs.23.49 lakhs under Section 32 of the Act and an further amount of Rs. 7.83 lakhs as revenue expenditure. The aforesaid exercise resulted in the Assessing officer passing an order dated 18th July 1999 determining the appellant’s income at Rs.41.25 lakhs. (b) Being aggrieved, the appellant carried the issue of repairs and maintenance,   in   appeal   to   the   Commissioner   of   Income   Tax (Appeal)     [CIT(A)].     On   consideration   of   the   nature   of expenditure   incurred   by   the   appellant,   the   CIT(A)   held   that substantial   expenses   incurred   on     the   said   premises   was   on account of major structural renovation. Thus, capital in nature.

Therefore the CIT(A) by order dated 24th February 2000 upheld the Assessment order dated 18th  July 2004   of the Assessing Officer   disallowing   the   claim   of   Rs.   23.49   lakhs   as   Revenue expenditure. (c) Being aggrieved, the appellant carried the issue of nature of expenditure in appeal to the Tribunal.  The impugned order of the Tribunal on facts found that substantially, the expenditure on Uday S. Jagtap 3 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc renovation   gives   a   benefit   or   advantage   of   enduring   nature.

Therefore   substantially     on   capital   account     qualifying     for depreciation in terms of Explanation­I to Section 32 of the Act. In the circumstances , it upheld the order of the CIT(A), holding that   the   expenditure   to   the   extent   of   Rs.23.49   lakhs   out   of Rs.31.32 lakhs is on capital account and cannot be allowed as revenue expenditure.

4.

Being aggrieved, the appellant is in appeal and the appeal has been admitted on the above question of law.   Mr. Jhaveri, learned Counsel appearing for the appellant in support  submits as under :­ (a) The expenditure of Rs.31.32 lakhs claimed on account of repairs and been allowed as revenue expenditure under Section 37 of the Act; (b)  The  expenditure of Rs. 31.32 lakhs incurred on renovation of the Uday S. Jagtap 4 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc said premises being repairs is   allowable under Section 30 of the Act; and (c)In   any   case   there   is   no   basis   indicated   for   apportioning   the expenditure   in   the   ratio   of   75%   and  25%   between   capital   and revenue account.   Therefore, the finding of the authorities is not sustainable;

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 Uday S. Jagtap 5 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc 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 Explanation­I 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.

6.

Mr.   Jhaveri,   learned   Counsel   for   the   appellant­assessee   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 in Talathi & Panthaki Associates Pvt. Ltd. (supra) and Hede consultancy Pvt. Ltd. (supra).  In Talathi & Panthaki Associates Pvt. 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 Uday S. Jagtap 6 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc 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 lump­sum 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.

7.

Similarly, the decision of this Court in Hede consultancy Pvt. Ltd. Uday S. Jagtap 7 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc (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.

8.

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 Uday S. Jagtap 8 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc the basis of facts found was in any way arbitrary or perverse. Thus we find no merit in the above submission.

9.

In the view taken by us that the expenditure of 75% of Rs. 31.32 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46

ITA NO.416 OF 2001.doc 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.

11.

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.

12.

The appeal is disposed of in the above terms.

(A.K. MENON, J.)

(M.S. SANKLECHA, J.) Uday S. Jagtap 10 of 10 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:07:46 Powered by TCPDF (www.tcpdf.org)

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