ITO 3(3)(3), MUMBAI vs. THEBROMA FOODS P.LTD, MUMBAI

O R D E R

PER RAMIT KOCHAR, Accountant Member:

2. 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:- 1. " Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) 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.

2. " Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) 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

3. " Whether on the facts and circumstances of the case and in law, the Ld. CIT{A) has erred in admitting additional evidences in form of invoices/ bills and not granting opportunity to the AO under Rule 46A to give comments

4. "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.

5. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.

3. 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 AO u/s 143(3) read with Section 143(2) of the 1961 Act, the AO 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 AO 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 AO 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 AO 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 AO 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 AO 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 AO rejected the contentions of the assessee and held that an expenditure is capital in nature incurred by the assessee for enduring benefits. The AO observed that expenditure was incurred for repair/ improvements and renovation of Jalal Bakery at Bandra. The AO referred to Explanation 1 to Section 32 of the 1961 Act to hold the said expenditure was capital in nature. The AO , 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 AO allowed depreciation u/s. 32(1) of the 1961 Act. 3.3 The AO 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 AO also held the said expenditure to be capital in nature as in the opinion of the AO the said expenditure was having benefit of enduring nature. The said expenditure was classified by the AO as Plant and Machinery being kitchen equipment and depreciation at an applicable rates was allowed by the AO, vide assessment order dated 31.03.2015 passed by the AO u/s 143(3) of the 1961 Act.

4. The assessee filed first appeal with Ld. CIT(A) challenging the additions to the income made by the AO vide assessment order dated 31.03.2015 passed u/s 143(3) of the 1961 Act. It was submitted by assessee during the course of appellate proceedings before learned CIT(A) , as under:- ―1. The Appellant-Assessee – Theobroma Foods Pvt. Ltd. ("the Appellant") is engaged in the business of manufacture and sale of food products, mainly in the nature of bakery and confectionery products.

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: I. The Ld. AO erred in not granting proper and sufficient opportunity of being heard to the Appellant while framing the assessment; II. Without prejudice to the aforesaid, the Ld. AO erred in making addition of Rs.82,90,912/- to the income of the Appellant as alleged Capital Expenditure; III. While doing so, the Ld. AO 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.

6. In support of the issues raised, the Appellant would like to make the following submissions before Your Honour: a) It is submitted that the Ld. AO 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 Ld. AO 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 AY 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 May 26, 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 May 26, 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 AY 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 6 the aforesaid, it is humbly submitted that these expenses are allowable under the provisions of S. 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 S. 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 AY under consideration and treated as revenue expenses, including the expenses amounting to Rs.92,66,827/- which were disallowed by the Ld. AO, 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 Ld. AO. f) It is submitted that the Ld. AO 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 AO has treated as capital expenses in nature - i. 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; ii. 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; iv. Payment made to 'All Pest Solutions' for pest and rodent control work carried out at the Bandra bakery and outlet of the assessee; v. 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 AY 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 AO 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)] 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 8 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 Ld. AO 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) ], 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 judgement of the Supreme Court in Madras Auto Service should be respectfully followed. A 9 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 Pvt. Ltd., [(2002) 258 ITR 380 (Bom)], and the landmark case of CIT v. Talathi and Panthaky Associated Pvt. Ltd., [(2012) 343 ITR 309 (Bom)]. A copy of the judgement in Talathi and Panthaky Associated Pvt. Ltd. is hereto annexed for Your Honour's perusal as Annexure H. I) 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)] and CIT v. Hi Line Pens Pvt. Ltd., [306 ITR 182 (Del)]. 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 Ld. AO. The claim of the Assessee 7. Thus, it is respectfully submitted that the findings arrived at by the Ld. AO 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 Ld. AO is thus unsustainable and bad in law, warranting that the same be set aside.

8. 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.

9. 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 Ld. AO 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 Ld. AO 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.

5. The Ld. CIT(A) after considering the aforesaid contentions of the assessee allowed the appeal of the assessee by holding aforesaid expenses to be Revenue Expenses vide appellate order dated 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 30/03/2015 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 26/05/2011, 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 judgement of the Apex Court in the case of Empire Jute Company Ltd v CIT, 124 ITR 1 (SC), which has been quoted above. Further, the appellant also relied on CIT v Madras Auto Service (P) Ltd. 233 ITR 468 (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 Pvt. Ltd., [(2002) 258 ITR 380 (Bom)], and CIT v. Talathi and Panthaky Associated Pvt. Ltd., [(2012) 343 ITR 309 (Bom)]. 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 12 capital nature the Supreme Court emphasised (following its earlier decision in Assam Bengal Cement Co. Ltd, v. CIT[1955]27 ITR 34 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) , L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293/4 Taxman 5 ($C) and CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 /38 Taxman 11OA (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."

8. In Madras 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 13 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 CIT (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.

9. The judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) has been followed by a Division Bench of this Court in CIT v. Hede Consultancy (P.) Ltd. [20021 258 ITR 380/(2003) 127 Taxman 597.

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 Vs. Hede Consultancy Pvt. Ltd. (2002) 258 ITR 380 (Bom) • Nila Products Ltd. vs. CIT (1984) 148 ITR 99 (Bom) • MDCIT V/s Sandoz (P.) Ltd. (2012) 137 ITD 326(Mum.) • Cymroza Art Gallery V/s ACIT (2013) 21 ITR (Trib) 262 (Mum) • DCIT V/s Bijesh Thakkar (2012) 49 SOT 502 (Mum.) • Instalment Supply P.Ltd V/s CIT (1984) 149 ITR 52 (Del) • CIT V/s Dr.A.M.Singhvi (2008)302 ITR 26 (Raj) • CIT V/s Ayesha Hospitals P.Ltd (2007) 292 ITR 266 (Mad) • ACIT V/s M.M.Publications Ltd. (2011) 43 SOT 59 (Cochin) 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.‖

6. The Revenue is aggrieved by the appellate order dated 28.10.2016 passed by Ld. CIT(A) and it was at the outset submitted by learned DR that there is a breach of Rule 46A of the Income-tax Rules, 1962 by learned CIT(A) as the assessee submitted before learned CIT(A) certain additional evidences which were admitted by learned CIT(A) in breach of Rule 46A of the 1962 Rules and the same were also not forwarded to the AO for their verification and rebuttal by the AO as no remand report was called by learned CIT(A). It was submitted by learned DR that various invoices in respect of these expenses were submitted before Ld. CIT(A) during appellate proceedings for the first time which found mentioned in the appellate order passed by learned CIT(A) at page 8. It was claimed that these additional evidences were not submitted before the AO and Ld. It is also submitted by learned DR that learned CIT(A) did not call for remand report from the AO and hence principle of natural justice were breached as the AO did not get an opportunity to verify these additional evidences and to submit his rebuttal as no remand report was called by learned CIT(A). 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 u/s 32(1) is allowable. The learned DR would place reliance on Explanation 1 to Section 32(1) of the 1961 Act. The learned DR 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 AO did not get an opportunity to verify these additional evidences which were submitted for the first time before learned CIT(A) as no remand report was called by learned CIT(A), the matter should be remanded back to Ld. CIT(A) for fresh adjudication after complying with mandate of Rule 46A of the 1962 Rules. 6.2 The Ld. 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 Ld. CIT(A) powers are co-terminus with powers of the AO 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 AO be called by learned CIT(A) in every case on additional evidences submitted for the first time before learned CIT(A). 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 Limited v. CIT reported in (2015) 374 ITR 462(Bom.) b) Hon’ble Delhi High Court decision in the case of CIT v. Manish Buildwell Private Limited reported in (2011) 245 CTR 397(Del.) c) Hon’ble Supreme Court decision in the case of CIT v. Kanpur Coal Syndicate in Civil Appeal No. 673 of 1963, judgment dated 30.04.1964 d) Hon’ble Bombay High Court decision in the case of CIT v. Hede Consultancy Private Limited reported in (2002) 258 ITR 380(Bom.)

e) Hon’ble Bombay High Court decision in the case of CIT v. Talathi and Panthaky Associated Private Limited reported in (2012) 343 ITR 30(Bom.) 7. 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 AO 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 AO duly allowed depreciation on these renovation expeniture after treating these expenditure to be capital in nature. The learned CIT(A) 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. 37. (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 CIT(A) submitted for the first time additional evidences which were admitted by learned CIT(A) 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 CIT(A) at page 8. The Revenue is aggrieved by the decision of learned CIT(A) 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 persusal of the appellate order passed by learned CIT(A), we have observed that there are no reasons and justification recorded by learned CIT(A) 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 Ld. CIT(A) also did not refer/forwarded these additional evidences to AO for verification and comments as no remand report was called by learned CIT(A) from the AO. 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 CIT(A) to the AO 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 CIT(A) as to what prevented it from submitting these additional evidences before the AO 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 AO during the course of assessment proceedings nor learned CIT(A) 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 AO for verification and his comments by learned CIT(A) 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 CIT(A) 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 CIT(A) has suo moto directed inquiry as is contemplated u/s 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 CIT(A) and these evidences were not furnished by the assessee under directions of learned CIT(A). The judgment relied upon by the assessee in the case of Manish Buildwell Private Limited(supra) in-fact support the case of Revenue. There is no dispute as to proposition canvassed by the assessee that powers of learned CIT(A) are co-terminus with the powers of the AO 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 CIT(A) powers are co- terminus with powers of the AO 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 CIT(A) to refer valuation of property to DVO u/s 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 CIT(A) to be co- terminus with the powers of the AO. The instant case before us is also not a case where an enquiry is initiated by learned CIT(A) suo moto or directions are issued to the AO to conduct inquiry by invoking powers u/s 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 CIT(A). 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 CIT(A). 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 AO 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 23 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 CIT(A) by not calling for remand report from the AO as well non recording of reasons and justification for admitting these additional evidences which is fatal to sustaining of appellate order passed by learned CIT(A). 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 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.

6. 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 in Talathi & 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.

10. 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.