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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI B. R. BASKARAN & SMT. BEENA PILLAI
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the order dated 3.11.2017 passed by Ld. CIT(A)-10 Bengaluru and it relates to the assessment year 2012-13.
The grounds urged by the assessee relate to the following two issues:- a) Disallowance of repair expenses Rs.21.30 lakhs b) Disallowance of donation paid to association Rs.7,62,500/- The assessee has also pointed out a computation error made by the A.O. in ground No.6 of the grounds of appeal.
The assessee is engaged in the business of manufacture and sale of gold, silver and platinum jewellery and other precious metal and stones.
The first issue relates to disallowance of repair expenses treating the same as capital in nature. The A.O. noticed that the assessee has claimed Rs.29.70 lakhs as repair expenses. The A.O. treated the same as capital in nature and accordingly disallowed the claim after allowing depreciation of 10% thereon. Accordingly, he disallowed a sum of Rs.26,73,520/-. The Ld. CIT(A) partially allowed the claim and confirmed disallowance to the extent of Rs.21,30,530/- which consisted of the following items:- a) Floor expenses - Rs.2,83,478/- b) Renovation of distributors and customers display area - Rs.15,84,418/- c) Waste mitigation and upkeeping of production process - Rs.2,62,684/-
The Ld. A.R. submitted that the assessee has incurred all these expenses in a building taken on lease in order to suit the business activities carried on by the assessee. All these expenses have been incurred in order to create better working environment. He submitted that the assessee has not carried on renovation or extension or improvement of building resulting in creation of any capital asset as mentioned in Explanation 1 to section 32 of the Income Tax Act, 1962 (hereinafter referred as “The Act”). In support of his contentions, the Ld. A.R. placed reliance on the following case laws:
a. DCIT Vs. Bijesh Thakkar (2012) 17 Taxmann.com 174 (Mum.) b. CIT Vs. Anush Shares & Securities Pvt. Ltd. (2015) 62 Taxmann.com 287 (Mad.) c. Indus Motor Company Pvt Ltd. VS. DCIT (2017) 88 Taxmann.com 229 (Ker.)
On the contrary, the Ld. D.R. submitted that the assessee has taken the building on lease for more than 3 years and hence these expenses incurred by the assessee will have enduring benefit. Accordingly, he submitted that the above said expenses have been rightly treated as capital expenditure by Ld. CIT(A).
We have heard rival contentions on this issue and perused the record. We notice that the assessee has incurred expenses for repairing the flooring, renovating the distributors and customers display area and waste mitigation and production process systems. The nature of expenses incurred by the assessee has been narrated by the A.O. as under:-
(a) Flooring Expenses: The building is about 15 years old and the flooring was laid out of mosaic tiles The wear and tear during the said years was obstructing the movement of men and material and affected our production. During the F.Y.2011-12 we have laid vitrified tiles for the entire production, administration and managerial area comprising of about 20,000 Sq.ft. The total expenditure incurred in this regard during the F Y 2011-12 amounts to Rs_2,83.478/- b) Renovation of distributors and customers display area; The turnover of the company has been increasing every year & the volume of distributors & customers have also increased. We cater to almost the entire country and distributors visit our factory for overseeing the manufacturing facilities. We have renovated the entire marketing display and production area by installing false ceiling, electrical pipelines, switches, minor repairs to walls etc. The total expenditure incurred in this regard during the F Y 2011-12 amounts to Rs.15,84.418/- c) Waste mitigation and up keeping of production process & Other Expenses:
We are engaged in manufacture of gold and silver jewellery where the processing of raw materials into finished goods undergoes of production. In all the various states of production process there are chances of generation of process loss which has to be mitigated to a large extent since the raw material comprises of precious metals. In order to mitigate/eliminate process loss which has to be mitigated to a large extent since the raw material comprises of precious metals. In order to mitigate/eliminate process loss we have to keep the surroundings very tidy and cleaning has to be undertaken quite often. Also we have incurred expenditure in respect of extraction of precious metal from loss generated during the production process in the form of dust hand wash and such other forms by replacing the old water tank, pipe lines. containers, sink etc We have incurred expenses in respect of renovation of M D Chamber. Designers rook. Reception chamber, Security premises for the upkeep of the premises and in tune with recent expectation of the marketing and distribution agents. The total expenditure incurred in this regard during the F Y 2011-12 amounts to Rs.2,62,684/- Admittedly, these expenses have been incurred on the building taken on lease. Though these expenses can be considered as renovation expenses, yet we notice that it has not resulted in creation of any capital asset attracting Explanation 1 to section 32 of the Act. The Hon’ble High Court of Madras has considered an identical issue in the case of Anush Shares & Securities Pvt. Ltd. (supra) and it has been held as under:
“11. Next issue relates to deduction claimed for the expenditure incurred towards fixing false ceiling, painting, electrical cabling and certain civil works in the rented premises of the assessee. While according to the assessee, the same has to be treated as revenue expenditure, according to the Revenue, the same shall be treated as capital II expenditure. Whereas, the Tribunal by relying on the decisions of our High court reported in (i) CIT v. Ayesha Hospitals (P.) Ltd. [2006] 292 ITR 266 (Mad) and (ii) ThiruArooran Sugars Ltd. v. Dy. CIT [,2013]32LIR 324/213 Taxman 90 (Mag,)/31taxmann.com 3 (Mad.), held the expenses incurred as revenue expenditure and accordingly allowed deduction on account of the same. For better appreciation, para 5.3 of the order of the Tribunal is extracted hereunder: "5.3. We have heard both the parties and carefully perused the materials available on record. It is apparent from the facts of the case it is not disputed that the expenditure were incurred towards fixing false ceiling, painting, electrical cabling and certain civil works etc., in the rented premises of the assessee. Various judicial authorities has held that in such circumstance the expenditure has to be treated as revenue expenditure. The assessee has relied in the following two cases :-
(i) CIT v.Ayesha Hospitals Pvt. Ltd., [2006] 292 ITR 266 (Mad). Held : dismissing the appeal, that the assessee had spent a sum of Rs.1,85,557/- towards painting, re-laying of the damaged floors, partitions, etc. The co- owners were the directors of the assessee. But they were separate entities. The co-owners were admitting the rental income. They were also paying tax on the profits arising out of the hospital. The lease deed spoke of the normal requirements which the co- owners provided. The assessee was putting the building to a special use. No landlord would ever incur or under-take to bear the expenditure. The expenditure was incurred by the assessee on a leased property and had to he allowed as revenue expenditure. (ii) ThiruArooran Sugars Ltd. (supra). Held : that the temporary structure by means of false ceiling and office renovation had not resulted in any capital expenditure. From the above decisions and the facts before us we do not have any hesitation to hold that the aforesaid expenses of Rs.26,92,718/- has to be treated as revenue expenditure and deduction on account of the same has to be allowed. It is hereby decided accordingly." In view of such settled proposition of law, the finding so rendered by the Tribunal warrants no interference by this Court and no substantial questions of law arise in this Tax Case Appeal.”
We are of the view that the above said two decisions are squarely applicable to the facts of the present case. Following the above said decisions, we set aside the order passed by Ld CIT(A) and direct the A.O. to delete the disallowance.
Since we have fully deleted the disallowance made by the A.O. out of repair expenses, the arithmetical error pointed out by the assessee in ground No.6 shall become infructuous.
The next issue relates to disallowance of donation made to All India Gems & Jewellery Trade Federation. The assessee has given a donation of Rs.15.25 lakhs to All India Gems & Jewellery Trade Federation and claimed the same as revenue expenditure. The A.O. held that the donation amount is eligible for deduction u/s 80G of the Act. Accordingly he proposed to disallow 50% of the claim. The authorised representative, who appeared before the AO, also accepted the disallowance before the AO. Accordingly, the A.O. disallowed 50% of the donation paid by the assessee, impliedly allowing the deduction u/s 80G of the Act @ 50%. The Ld. CIT(A) confirmed the same and hence the assessee is in appeal before us.
The Ld. A.R. submitted that the assessee has become member of All India Gems & Jewellery Trade Association and it has participated in a programme called “Perfect Manufacturer of India, 2011-13” (PMI) organised by the above said Federation. The assessee has paid a sum of Rs.11.63 lakhs for participating in the above said programme. In addition to that, the assessee has also paid a sum of Rs.15.25 lakhs to the federation as corpus donation. The Ld. A.R. submitted that since the All India Gems & Jewellery Trade Federation is working for the interest of the business carried on by the assessee, there is business expediency in giving above said donation, i.e., it is for promoting business interest of the assessee. Accordingly, he submitted that the entire amount of donation given by the assessee is allowable as deduction u/s 37(1) of the Act.
With regard to the acceptance of the addition by the then Ld. A.R., the Ld. authorised representative submitted that the then Ld. A.R. has accepted the same without understanding the correct facts and law. The Ld. A.R. submitted that payment of donation was compulsory for participating in the PMI programme and hence there was no option for the assessee not to pay the said amount. Accordingly, he contended that the entire amount of Rs.15.25 lakhs should be allowed as deduction.
On the contrary, the Ld. D.R. submitted that the above said payment was towards corpus of the association which is eligible for deduction u/s 80G of the Act. Though the assessee submits that there was business completion for contributing the above said Rs.15.50 lakhs for participating India PMI programme, there is no evidence to support the said contention. He submitted that the Ld. A.R. has accepted the disallowance before the A.O. and hence, the assessee cannot take a different stand at this stage.
In the rejoinder, the ld. A.R. placed his reliance that it is rendered by Hon’ble High Court of Rajasthan in the case of Addl. CIT Vs Rajasthan Spinning & Weaving Mills Ltd. (2005) 274 ITR 465 to support its claim.
We heard rival contentions and perused the record. The assessee has furnished copies of receipts given by the Association acknowledging receipt of Rs.15.25 lakhs from pages 37 to 40 of the paper book. All the receipts clearly show that the payment have been received by All India Gems & Jewellery Trade Federation towards donation. The assessee has furnished a copy of application form for participating in the PMI programme in pages 34 & 35 of the paper book. With regard to the amount of Rs.15 lakhs, the assessee has stated as under:- “I further wish to make a corpus donation of Rs.15 lakhs to CGF recognising the value in its bringing to trade and education and well being of the community.”
The above said statement would show that the payment of Rs.15.25 lakhs was voluntary and not under compulsion. Even otherwise, as rightly pointed out by Ld. D.R., there is no material to show that the donation was made under compulsion. On the contrary, the above said extract taken from the application form show that the donation was given to the Federation recognising the value in its bringing not only to trade but also to education and wellbeing of the community.
Hence, it is clearly proved that the donation is a general donation made by the assessee to the association/federation. In the case of Rajasthan Spinning & Weaving Mills Ltd., the contribution made by the assessee was made towards export promotion event which was expected to be utilised promoting business of exports of all its members. So the facts prevailing in Rajasthan Spinning & Weaving Mills Pvt. Ltd., are different and hence the said decision cannot be taken support of by the assessee. It is also pertinent to mention that the assessee has accepted this disallowance before the A.O. Accordingly, we confirm the order passed by Ld. CIT(A) on this issue.
In the result, the appeal filed by the assessee is partly allowed.