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Before: Shri I.C. Sudhir & Shri L.P. Sahu
In the Income-Tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi Before : Shri I.C. Sudhir, Judicial Member And Shri L.P. Sahu, Accountant Member ITA Nos.5668/Del./2011 & 2355/Del./2013 Assessment Year: 2007-08 & 2009-10 Elemention Health & Sports Pvt. Ltd. vs. A.C.I.T., Circle 11(1), 23, Anand Lok, New Delhi. New Delhi. (PAN- AAFCA 5244E) (Appellant) (Respondent)
Assessee by Shri Rajan Bhatia, Advocate Revenue by Shri Anil Kumar Sharma, Sr. DR
Date of Hearing 03.05.2017 Date of Pronouncement 26.05.2017
ORDER Per L.P. Sahu, A.M.: These two appeals have been filed by assessee against the orders of the CIT(A) XIII, New Delhi dated 23rd of September, 2011 and 15th February, 2013 for the assessment years 2007-08 and 2009-10 respectively on the following grounds of appeals: Grounds raised in appeal for A.Y. 2007-08: “1. For that the learned CIT(A) erred in not allowing to the appellant company u/s 37(1) of the Income Tax Act, 1961 (Act), full deduction for expenditure, amounting to Rs.1,35,54,662/-incurred by it under the head "Lease-hold improvement." For that the said expenditure having been incurred by the appellant company in relation to leasehold premises, wholly and exclusively for the purpose of its
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business of running health and fitness centers, the same ought to have been allowed in full by the ld CIT (A). 2. For that the Id CIT(A) erred in holding that the appellant company cannot be allowed to raise the contention that the whole of the expenditure amounting to Rs. 1,35,54,662/- incurred by it under the head "Lease-hold improvement" is allowable to it u/s 37(1) of the Act. 3. For that the Id CIT (A) erred in holding that the asset which was generated as a result of the aforesaid expenditure is "building" eligible to depreciation @ 10%.”
Grounds raised in appeal for A.Y. 2009-10: “1. For that the learned CIT(A) erred in holding that the appellant company cannot be allowed to raise in the appellant proceedings for the first time the contention that leasehold improvement expenditure incurred by it during the relevant previous year amounting to Rs.40,32,3387- is an admissible revenue business deduction, u/s 37(1) of the Income Tax Act, 1961 (Act) and that the said contention should have been raised by the appellant company either in its return u/s 139(1) of the Act or byway of a revised return u/s 139(5) of the Act. 2. For that the Id CIT (A) erred in holding that the aforesaid expenditure having been shown by the appellant company in its return as capital, the same has attained finality. 3. For that the ld CIT (A) erred in holding that the appellant company has shown the aforesaid expenditure to have created an "intangible asset. 4. For that the Id CIT (A) erred in holding that, among others the ruling of a three Judge Bench of the Apex Court in the case of Jute Corporation of India Ltd. v. CIT (187 ITR 688) is not applicable to the case of the appellant company.
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For that the question before the Apex Court in the case of Goetze (India) Ltd. v. CIT (284 ITR 323) being entirely different, reliance placed by the Id CIT (A) on the said judgment to reject the claim of the appellant company, is misplaced rendering the impugned order to be unsustainable. 6. For that the ld CIT (A) erred in holding that the aforesaid expenditure of Rs.40,32,338/- resulted in creation of an asset in the nature of "building" on which depreciation @ 10% is allowable. 7. For that no claim for deduction u/s 10A of the Act having been made by the appellant company, order to the affect, to quote from the impugned order, - "hence the claim of the appellant for deduction u/s 10A is not allowable and same is rejected, is incomprehensible. 8. For that the Id CIT (A) erred in holding that the leasehold improvement expenditure amounting to Rs.1,35,54,662/- incurred by the appellant company during F.Y. 2006-07 was treated by it as "intangible asset" on which depreciation @ 25% was claimed. 9. For that the Id CIT (A) erred in holding that explanation 1 to section 32(1) of the Act was correctly invoked by the ld Assessing officer to the aforesaid expenditure of Rs.1,35,54,662/- by treating the asset so created as "building" and allowing in relation thereto depreciation @ 10%.”
We first take up the appeal for A.Y. 2007-08. 2. The brief facts of the case are that the assessee filed his return of income on 24.09.2008 declaring the income at nil. The case was selected for scrutiny and statutory notices were issued
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to the assessee. The assessee was engaged in the business of health and fitness related services and has fitness centres in Delhi, Noida and Chandigarh. The company was incorporated as Active Fitness Centres Private Limited and later on the name of the company was changed to Elemention Health and Sport Private Limited.
During the course of scrutiny proceedings the Ld. assessing officer noted that assessee has incurred an amount of Rs.1,35,54,662/- as expenditure on fixed assets under the lease improvement on lease hold building and it was capitalized by the assessee company and claimed depreciation on these lease improvement assets @ 25%. The Ld. Assessing Officer after scrutiny of bills and vouchers observed that these expenditure capitalized as Leasehold improvement comprise of constructing, furnishing, fabrication and renovation or interiors, sanitary, lighting, sound system etc. The assessee had taken various premises on lease rent where these expenditures have been incurred. The Ld. Assessing Officer applied section 32(1) Explanation 1 and accordingly allowed depreciation @ 10% on
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these lease hold improvement under the block of asset titled as “building” as per Appendix 1 referred to in Rule 5 of the IT Rules. Therefore, the AO allowed depreciation of Rs.9,28,837/- as against depreciation of Rs.23,22,092/- claimed by the assessee. The AO, accordingly made an addition of Rs.13,93,255/-.
During the course of scrutiny proceedings, the AO made further observations that the assessee has deposited cash in his bank account of Rs.25,000/- and Rs.8672/- and the Assessing Officer was not satisfied from the explanation of the assessee. He, therefore, made addition of Rs.33,672/- u/s. 69A of the Act. Aggrieved by the above two additions, the assessee appealed before the first appellate authority with the following grounds : “1. That on the facts and circumstances of the case, the Ld. Assessing Officer erred in disallowing of Rs.13,93,255/- on account of excess claim of depreciation. 2. That on the facts and circumstances of the case the Ld. Assessing Officer erred in making addition of Rs.33,672/- on account of unexplained cash deposits u/s. 69A.”
The AR of the assessee made detailed written submissions before the Ld. CIT(A) and he further submitted before him that these expenditures are also in the nature of revenue
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expenditures and allowable under section 37(1). He also submitted that the total life of lease hold improvement is for four years. Therefore, it has been just to write off for the useful life as per accounting policy adopted by the company, which is mentioned in schedule 12 and notes to the accounts for the year ended 31.03.2007 of the audited accounts. Since the lease period of the premises was for about four years, therefore, the company had claimed depreciation on the same spreading these over the lease period. The ld. CIT(A) after considering his submissions and case laws relied by him, rejected the expenditure incurred as Revenue expenditure u/s. 37(1) of the IT Act and upheld the decision of the Assessing Officer. He also noted that the appellant cannot be allowed to raise this contention for the first time in appellate proceedings. The contention should have been raised within the statutory period as provided u/s. 139(5) and as per prescribed procedure. Moreover, it is appellant’s own view that the fixed assets have been created and depreciation is admissible on the same. Once the expenditure has been treated as capital in nature in the return itself, the issue of expenditure being capital in nature attains finality (until and unless claim
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revised before AO). Now the only issue is whether the asset created is in the nature of intangible asset as claimed in the return or building as observed by the AO. It has already been held that the asset created is in the nature of building. Therefore this plea of the ld. Counsel was rejected. The rulings relied upon by the ld Counsel are all on the admissibility of the expenditure u/s 37(1) of the IT Act. These rulings were held to be inapplicable in the appellant's case in view of treatment of the expenditure as capital in nature in the return filed.
Another plea/ argument taken by the ld Counsel before the ld. CIT(A) is that the premises were taken on lease for four years hence the entire expenditure incurred on making the premises use worthy should be treated as spread over four years. Accordingly, 25% of the same equivalent to depreciation admissible on the same as intangible assets should be allowed. This contention of the ld Counsel that the 25% of the expenditure should be allowed in each of the four years is of no help as section 35D is not applicable to the facts of the case. Therefore, looking to the totality of the facts, it was held that the Assessing
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Officer has correctly invoked Explanation 1 to sec. 32(1) and rightly restricted depreciation @ 10% as against 25% claimed by the appellant. The action of the Assessing Officer in disallowing depreciation of Rs. 1393255 was accordingly confirmed. Further, the ld. CIT(A) allowed ground No. 2 of the assessee. Aggrieved by the order of ld. CIT(A) regarding ground No. 1 for disallowance of depreciation of Rs.13,93,225/-, the assessee is in appeal before the ITAT.
The Ld. AR of the assessee submitted that the assessee has incurred expenditure on the lease hold property which were temporary in nature and lease period was also for four yours. Therefore, the assessee has claimed depreciation over a period of lease on these temporary erections/installations which was equivalent to the total depreciation. The assessee has taken a structure for carrying out of business and without incurring these revenue expenditures, the business cannot run. Therefore, he spent for renovation & repairs on the lease hold premises. As per lease agreement, no capital expenditure can be done on this rented premises and he was also not the owner of the lease hold
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property. The ld. AR further submitted that the ld. CIT(A) was not justified in not entertaining the plea taken by the assessee regarding the above expenditure being revenue in nature without considering the fact that such legal ground can be raised at any stage as held by Hon’ble Supreme Court in the case of CIT vs. NTPC, 229 ITR 383 and also relied on the judgment of CIT vs. SAM Global Securities Ltd., 360 ITR 682.
On the other hand, the ld. DR relied on the orders of the lower authorities and he vehemently objected that the assessee itself has shown these expenditures as capital expenditure in its books of account and return was also accordingly filed. However, subsequent change in the stand of the assessee has rightly been discarded by the first appellate authority. The case laws relied by the ld. AR are not applicable being based on different footings. No ground was taken by the assessee before the first appellate authority in consonance with the submissions made before him.
We have heard both the parties and perused the material available with us including the orders of the revenue authorities
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as well as documentary evidences filed by the assessee. After going through the impugned order, we noted that the first appellate authority has decided the issue involved in ground No. 1 at para 4.4 to 4.8 of the impugned order. For the sake of convenience, the same is reproduced as under : “4.4 I have considered the submissions of the Ld Counsel and the facts on record. The appellant has incurred an expenditure of Rs 13554662/-on 'Lease hold Improvement' of the premises hired by it and utilized for its business purposes The major component of the expenditure is on electrical fittings, furniture and fixture etc at Rs 8445598, rent of Rs 1958990, professional & consultancy fee of Rs. 2002258, it is seen that the sum of Rs 13554662 was taken to the fixed assets under the head "intangible asset" on which depreciation @ 25% has been claimed On these assets put to use for less than 180 days the depreciation claim has been restricted to 12.5% Therefore on the lease hold improvement, total depreciation has been claimed at Rs 2322092 in the return of income. In the course of assessment proceedings no attempt has been made to treat the expenditure as revenue expenditure fully allowable u/s 37(1) It is only now in the course of appellate proceedings that the appellant is seeking to justify the depreciation claimed @ 25% on the grounds that though, the entire expenditure was admissible u/s 37(1} the appellant has claimed only 25% of the expenditure equivalent to She depreciation @25%, Hence it should be allowed. 4.5 The issue for consideration is whether, depreciation @ 25% is admissible on the capital assets which is in the nature of improvement of lease hold premises, The appellant has treated the expenditure as capital expenditure resulting in the generation of "intangible ' assets". As per Explanation 3 to section 32(1) of the IT Act intangible assets denotes 'know- how', patents, copy rights trademarks, licenses, franchises, or any other business or commercial rights of similar nature
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Thus the expenditure of the nature 'incurred by the appellant is not covered in the description of -intangible assets' Accordingly, it is held that depreciation @ 25% is inadmissible on the assets created on account of lease hold improvement by the appellant. 4.6 With regard to the admissible rate of depreciation on assets generated by way of lease hold improvement, the Assessing Officer has invoked Explanation 1 to section 32(1) it is held that the said Explanation has been correctly invoked by the AO as the appellant has incurred expenditure on premises not owned by it but nevertheless it is entitled to claim depreciation in the manner as if is the owner of the said premises. The AO has rightly treated the asset generated as building instead of intangible asset as claimed by the appellant 4.7 In so far as the contention of the Ld Counsel that the expenditure is actually revenue In nature which is admissible for full deduction u/s 37(1) Is concerned, it is held that the appellant cannot De allowed to raise this contention for the first time in appellate proceedings The contention should have been raised within the statutory period as provided u/s. 139(5) and as per prescribed procedure Moreover it is appellant's own view that the fixed assets have been created and depreciation is admissible on the same Once the expenditure has been treated as capital in nature in the return itself, the issue of expenditure being capital in nature attains finality (until and unless claim revised before AO) Now the only issue is whether the asset created is in the nature of intangible asset as claimed in the return or building as observed by the AO It has already been held that the asset created is in the nature of building Therefore this plea of the Id, Counsel is rejected The rulings relied upon by the Id Counsel are all on the admissibility of the expenditure u/s 37(1) of the IT Act These rulings are held to be inapplicable in the appellant's case in view of treatment of the expenditure as capital in nature in the return filed.
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4.8 Another plea/ argument taken by the Id Counsel is that the premises were taken on lease tor four years hence the entire expenditure incurred on making the premises use worthy should be treated as spread over four years Accordingly 25% of the same equivalent to depreciation admissible on the same as intangible assets should be allowed This contention of the Id Counsel that the 25% of the expenditure should be allowed in each of the four years is of no help as section 35D is not applicable to the facts of the case.
Therefore, looking to the totality of the facts, it is held that the Assessing Officer has 'correctly invoked Explanation 1 to sec 32(1) and rightly restricted depreciation @ 10% as against 25% claimed by the appellant The action of the Assessing Officer in disallowing depreciation of Rs. 1393255 is accordingly confirmed.”
Keeping in view the aforesaid finding given by the ld. First appellate authority, we find that the ld. First appellate authority has rightly disallowed the claim of assessee because these expenses have been capitalized by the assessee in his balance sheet and he also filed return of income accordingly by claiming depreciation @ 25%. There was only dispute of the rate of depreciation as applied by the Assessing officer and as claimed by the assessee. The provisions of section 32 and Explanation I have rightly been applied by the Assessing Officer. The assessee has relied on the decision of Hon’ble Delhi High Court in CIT vs.
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SAM Global Securities Ltd., 360 ITR 682(Delhi), wherein Hon’ble Court held in para 2 of the order as under : “2. It is an accepted position that the assessee had not claimed the said deduction or business loss in the return of income filed on 31st October, 2001, declaring taxable income of Rs.1,72,910/-. Subsequently, notice for scrutiny assessment under section 143(2)(ii) was issued. During the course of the assessment proceedings, the respondent assessee had filed revised computation of income vide letter dated 12th January, 2004, claiming that dividend of Rs.80,48,977/- from the units of mutual fund was exempt under section 10(33) of the Act and loss on sale of units amounting to Rs.85,18,583/- was a business loss and not speculative loss.”
This decision is not applicable to the facts of the present case because in the above cited case, the assessee had filed revised computation of income during the scrutiny proceedings but in the instant case, no such situation arose. The ld. CIT(A) has also relied on some case laws in his order, which are applicable to the present case. In view of all this, we do not find any infirmity in the order of the ld. CIT(A). Therefore, we uphold the order of the ld. CIT(A).
In appeal for the assessment year 2009-10, similar issue is involved for adjudication which we have decided in appeal for
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the assessment year 2007-08. Therefore, our decision rendered on the impugned issue in appeal for A.Y. 2007-08 will equally apply to the appeal for A.Y., 2009-10. Accordingly, this appeal of the assessee also deserves to be dismissed.
In the result, both the appeals of the assessee are dismissed. Order pronounced in the open court on 26.05.2017.
Sd/- Sd/- (I.C. Sudhir ) (L.P. Sahu) Judicial member Accountant Member
Dated: 26.05.2017 *aks* Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi