M/S. ASPECT RESEARCH & MANAGEMETN P. LTD.,,NEW DELHI vs. ITO, NEW DELHI

The facts in brief are that the assessee is engaged in the business of designing software and offering consultancy services to various multinational companies/agencies. For the purpose of its business, the assessee has taken premises at A-49, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi and at W-6, Sector 11 NOIDA on lease through MOU dated 3rd April, 2006 and 2nd September, 2006, respectively. The assessee undertook repair and maintenance expenses of these lease premises. The expenses incurred were in the nature of normal repair and renovation expenses involving laying down/reinforcing of flooring, temporary partition, roofing and wall covering etc. In the original assessment proceedings passed u/s.143(3) vide order dated 24.12.2009, Assessing Officer has disallowed the entire repair and renovation expenses of Rs.42,15,041/- holding it to be capital expenditure.

Before the Ld. CIT (A) in the first round, the assessee has filed copies of lease deed in respect of lease premises as additional evidence and remand report was called for. The Assessing Officer had objected for admission of additional evidences. Ld. CIT (A) refused to admit the said additional evidences and dismissed the appeal of the assessee. In second appeal, the Tribunal vide order dated 29th December, 2011 in has remanded the issue to the file of the Assessing Officer as per direction incorporated above. Thus, the limited purpose for deciding the issue was, whether expenditure incurred was capital or revenue in nature. In the second round of proceedings, the Assessing Officer has again made the disallowance of repair and renovation expenses holding it to be capital in nature. The genuineness of the expenditure at no stage was in doubt. However, in first appeal, the Ld. CIT (A) for the first time even doubted the genuineness of the expenses incurred on the basis of certain inquiries conducted behind the back of the assessee in the remand proceedings and on the basis of the remand report submitted by the Assessing Officer the Ld. CIT (A) has confirmed the disallowance of the expenses holding it to be non genuine. Alternatively, the Ld. CIT (A) has stated the repair and renovation expenses are not allowable since TDS was not deducted.

I have heard both the parties at length and also perused the relevant material on record. The contention of the ld. counsel before us is that, the only issue raised in the first round of proceedings was, whether the repair and renovation expenses incurred is capital or revenue in nature and none of the authorities have doubted the genuineness of the expenses ever. He submitted that the entire details in respect of repair and renovation were duly filed before the Assessing Officer and the copies of lease deeds were filed as additional evidences before the Ld. CIT (A) which was duly forwarded to the Assessing Officer for comments. Once the lease deeds were not admitted by the Ld. CIT (A), the Tribunal has restored this issue only to examine, whether the repair and renovation expenses are capital or revenue in nature and to consider the lease deeds filed. Thus, he submitted that it was not open to the Assessing Officer or Ld. CIT(A) to undertake any exparte inquiries behind the back of the assessee to doubt even the genuineness of the expenses. He submitted that even if it was held that the expenditure incurred was capital in nature, the assessee was still entitled for depreciation and now assessee cannot be worse off position after the matter is remanded by the Tribunal, in so far as now the entire expenditure stands disallowed on a different footing. When Tribunal has no power of enhancement, then it is not open for the Revenue to make out a new case altogether. Without prejudice, he submitted that, firstly, the inquiry was done without providing any opportunity for cross examination of the persons who have stated that they had not carried out any renovation work and behind the back of the assessee. Such information or material cannot be relied upon and such it is inadmissible in law. The assessee during the course of original assessment proceedings itself has submitted that all the details of repair and renovation expenses for purchase of materials and getting installed by petty contractors. The said expenditure was incurred way back in the financial year 2006-07 and now exparte inquiries conducted after a gap of seven years cannot be accepted. Any statement of a contractor, denying having done any work after a gap of seven year cannot be relied upon especially when copies of invoices raised by the same contractor were filed. He further submitted that repair and renovation expenses incurred on a lease property were always held to be revenue in nature and in support, he relied upon the following judgments:- CIT vs Amway India Enterprises: 346 ITR 341 (Del) CIT vs. Escorts Finance Ltd. 155 Taxman 559 (Del) CIT vs. HI Line Pens (P) Ltd. Vs. CIT, 306 ITR 182 (Del) Instalment Supply (P) Ltd vs CIT 149 ITR 52 (Del)–

Regarding non deduction of TDS, he submitted that, firstly, provision of Section 40(a)(ia) is not applicable in the present case, because major expenditure is towards purchase of material and only small portion relates to labour charges, and therefore, TDS cannot be deducted qua the material purchased.

On the other hand, ld. DR strongly relied upon the order of the Ld. CIT (A) and submitted that there is no enhancement of income albeit the expenditure which was disallowed on the first round of proceedings, same has been disallowed once again and this time in the first appellate proceedings proper inquiry has been made which revealed that the expenses claimed by the assessee werte not genuine. Thus, the disallowance made by the Assessing Officer and confirmed by the Ld. CIT (A) should be confirmed.

In the present round of appeal, the scope of the proceedings was circumscribed to the direction of the Tribunal, which was limited to, whether the repair and renovation expenses incurred on a lease property is revenue expenditure or is capital in nature. Nowhere the genuineness of the expenses incurred were doubted nor the bills and vouchers for the purchase of material and for the renovation work filed before the authorities below was ever disputed or found to be non genuine. The direction of the Tribunal was very categorical, firstly, to admit the lease deed; and secondly, to decide whether the expenditure incurred is revenue in nature or not. The ld. Assessing Officer in the assessment order has again treated the expenditure as capital in nature. The entire context of the addition got changed when in the course of the appellate proceedings; Ld. CIT (A) in the remand proceedings got conducted certain inquiry through Assessing Officer, wherein the Assessing Officer sought information from the parties who have claimed to have provided services to the assessee on which expenses have been claimed. One Shri Vishan Kumar Sharma who was contractor at that time, denied doing any work for assessee and notices to other contractors remained unserved. Now based on this inquiry conducted behind the back of the assessee and without confronting the same, adverse inference has been drawn and entire renovation and expenses have been disallowed. First of all, such an inquiry was not called for, as it was beyond the scope of second round of proceedings and any inquiry conducted behind the back of the assessee after a gap of seven years, same cannot be used to draw any adverse inference, especially when assessee has produced the entire bills and invoices raised by the same contractors and after a gap of substantial time of seven years an ex-parte statement given behind the back of the assessee has no credibility. The same cannot be used as an evidence against the assessee.

Now coming to the issue whether the expenditure incurred is capital in nature, it is an undisputed fact that the assessee carried out repair and renovation expenses on a lease property which was taken on lease and any such repair and maintenance of lease property cannot be held to be giving any enduring benefit to the assessee, firstly for the reason that leased premises is for temporary period and nature of expenses are purely in nature of repairs. In fact such kind of repairs and renovation expenses on leased premises has been held as revenue expenditure by the various courts as relied upon by the ld. counsel. Accordingly, I hold that expenditure incurred by the assessee is allowable and the additions made by the Assessing Officer are deleted.

Such an addition or disallowance cannot be made u/s 40(a)(ia), because the major expenses relates to purchase of material and labour payments are for petty amounts, on which TDS liability is not attracted.

In the result, the appeal of the assessee is allowed.