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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI H.S.SIDHU & SHRI PRASHANT MAHARISHI
Page 2 of 21 O R D E R PER PRASHANT MAHARISHI, A. M. 1. Out of the bunch of 3 appeals, two appeals are filed by the revenue and assessee against the order of the Ld. CIT (A)-I, New Delhi for the Assessment Year 2008-09 in quantum proceedings and the 3rd appeal is filed by the revenue against the order of the Ld. CIT (A) New Delhi deleting the penalty under section 271 (1) (C) of the income tax act for the same assessment year. 2. The assessee has raised the following grounds of appeal in for Assessment Year 2008-09:- “1. That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in sustaining the disallowance of Rs.9,90,57,974/-, out of the net disallowance made by Assessing Officer of Rs.18,92,03,226/-.
2. That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining a disallowance of Rs.6,55,18,642/- on account of expenditure incurred on repairs of premises taken on lease for the purpose of running a business centre, by holding such expenditure to be capital expenditure. 2.1 That the learned Commissioner of Income Tax (Appeals) overlooked the basic fact that such expenditure was incurred to renovate and repair the building to carry on the business properly, without making any structural changes, moreover, the appellant company was not the owner of the said property and as per the lease deed, the appellant company was not allowed to carry on any major structural changes in the said property. 2.2 That the learned Commissioner of Income Tax (Appeals) erred in law and on facts by ignoring the copy of lease deed as furnished by the appellant company, as the appellant company was never allowed to install any permanent structure to the premises and as such, the appellant company only installed temporary furniture and fixtures which were removable as and when the lease period expires. 2.3 That the learned Commissioner of Income Tax (Appeals) further ignored the fact that the premises was taken on lease only for a period of five years and as such, no capital asset was acquired by the appellant company and thus, there was no question of claiming depreciation at the rate of 10% as allowed by learned AO and upheld by learned CIT (A). On the contrary, learned CIT (A) could have allowed the entire expenditure to be set off over a period of five years i.e. the period of actual lease.
Page 3 of 21 3 That the learned Commissioner of Income Tax (Appeals) further erred in law out of total disallowance made by learned Assessing Officer of Rs.3,35,33,933/- on account of revenue expenses claimed on crockery, cutlery, utensils etc. 3.1 That the learned Commissioner of Income Tax (Appeals) overlooked the fact that the appellant company was running a resort near Sohna, two restaurants in Gurgaon, fitness centers and business centers. Thus, the expenditure so made on all the above said items was merely consumables and were expended for proper conduct of the business, as it is the expenditure made in obtaining inventories for the proper running of resort and restaurant businesses. 3.2 That the learned Commissioner of Income Tax (Appeals) further overlooked the basic fact that the resort at Sohna was renovated and this was the first year after its renovation, so comparatively bigger amount was needed to be invested in the inventories of said consumables, which the appellant company did, as was also the need of the business. Thus, no capital asset came into existence and as such, disallowance sustained by learned CIT (A) is beyond any logic.
That further the learned Commissioner of Income Tax (Appeals) has failed to appreciate that appellant company furnished sufficient details / evidences during the course of assessment proceeding and even during the course of appellate proceedings as well, which has been rejected without providing any valid opportunity and, the addition so made and sustained is purely on the basis of suspicion and surmises.
That the learned Commissioner of Income Tax (Appeals) has further erred in sustaining the levy of interest under Section 234B of the Act, which is not leviable on the facts of the appellant company.”
The revenue has raised the following grounds of appeal in Assessment Year 2008-09:- “1. The order of Ld. CIT(A) is not correct in law and facts.
2. Is On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in directing the Assessing Officer to verify the facts and allow depreciation on the expenses incurred on additions and renovation etc. amounting to Rs. 6,5,5,18,642/- on repair and maintenance of leased premises in Pune and Hyderabad in accordance with law.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 3,03,47,020/- out of total disallowance of Rs. 3,35,39,332/- made by the Assessing officer in respect of revenue expenses claimed by the assessee in respect of crockery, cutlery, utensils etc. holding the same to be capital expenditure.
Page 4 of 21 4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 10,00,51,0497- made by the assessing officer on the basis of pages as retrieved from the hard disc, of the computer impounded during the survey proceedings held on 4.2.2008 in the premises of M7s Vatika Hospitality Pvt. Ltd. 5. The order of Ld. CIT(A) is perverse in law and on facts.” 4. The revenue has raised the following grounds of appeal in for the Assessment Year 2008-09:- “1. The order of the ld CIT(A) is not correct in law and facts.
2. On the facts and circumstances of the case, the ld CIT(A) has erred in law in deleting the penalty u/s 271(1)(c) amounting to Rs. 2,33,55,000/-.
3. The appellant craves leave to add, amend any/ all of the grounds of appeal before or during the course of hearing of the appeal.”
5. Briefly stated the facts of the case are that assessee is engaged in the business of hospitality and runs resorts and restaurants at Gurgaon. It also runs business centers at Pune, Hyderabad. It filed its return of income on 14/10/2000 showing loss of Rs. 129075807/– which was subsequently revised on 29/07/2009 increasing the loss to Rs. 203850132/–. The Ld. assessing officer has noted a fact that a survey was conducted under section 133A in the case of Vatika Ltd on 04/02/2010 and certain incriminating documents were impounded during the survey. Subsequently assessment under section 143 (3) of the income tax act was made on 28/12/2010 at a loss of Rs. 14646906/-. The Ld. assessing officer disallowed following expenditure:- a. disallowance of leasehold expenses on considering the same is capital expenditure Rs. 65518642/- b. disallowance of expenses on cutlery utensils etc considering the same is capital expenditure of Rs. 33539332/- c. disallowance of expenses in view of impounded documents of Rs. 100051049/– 6. Above disallowances were challenged before the Ld. CIT (A) by assessee and Ld. CIT appeal confirmed the disallowance of Rs. 6551 8642/-, deleted the disallowance of Rs. 30347020/– out of the total Page 5 of 21 disallowance of Rs. 33539332/– and also deleted the disallowance of Rs. 100051049/-. Against the order of the Ld. CIT appeal, the revenue as well as the assessee are in appeal before us.
7. Now we come to the appeal of the assessee wherein the ground No. 1 is against the overall quantum assessment in the hands of the assessee and is general in nature therefore the same is dismissed.
8. Ground No. 2 of the appeal of the assessee is against the sustenance of disallowance of Rs. 65518642/- on account of expenditure incurred on repairs of premises taken on lease for the purpose of running a business centre by holding such expenditure is capital in nature. The facts of above expenditure is that during the course of the survey the documents in hard disk relating to M/s Vatika hospitality private limited, assessee, were also required to be explained. It was noted that the assessee has capitalized leasehold expenses of Rs. 65518642/– and claimed depreciation of Rs. 6876288/– in the books of accounts as per the companies act. However according to the income tax act depreciation on these capital expenditure worked out to Rs. 6551864/–. In the original return, assessee claimed it is a capital expenditure but in the revised return of the income the assessee changed its opinion and claimed it as revenue expenditure. On query by the Ld. assessing officer it was explained that assessee started its business centre at Pune and Hyderabad during the year on leasehold premises not owned by the assessee and expenses were incurred on repair of these leasehold premises. The Ld. assessing officer has noted that the leasehold improvements involve fabrication of workstations, electric installations, furniture and fittings, which obviously have higher expenses, then the expenses on dustbins, quilt, mattress fabric and stitching etc were incurred. He further held that expenditure were incurred on account of civil, plumbing and H AVC – Pune and Hyderabad. He further held that assessee has not furnished the details to explain the nature of leasehold expenses and mo evidences were filed to m substantiate it as revenue expenditure. No reason was also given to change its stand of treating its stand as revenue expenditure. He therefore held that Page 6 of 21 expenses are undoubtedly capital expenditure and he disallowed the above sum of Rs. 65518642/– treating it as a capital expenditure. The Ld. CIT (A) confirmed the above disallowance therefore the assessee is in appeal before us.
The Ld. authorized representative of the assessee submitted that assessee had taken the premises at Hyderabad in Pune on rent and has paid rent. In these premises expenses were incurred which are revenue in nature. He further submitted that the assessee has submitted the complete details to the Ld. assessing officer and therefore the statement of the Ld. assessing officer that assessee has failed to substantiate it is a revenue expenditure and no details were filed is devoid of any merit. He further submitted that all such details were available for the period till 04/02/2008 when the survey was conducted, as it was part of the impounded documents. He further submitted that the details was submitted before the Ld. assessing officer vide its submission dated 24/12/2010 and the details of such expenditure were also given to the Ld. assessing officer which are placed at page No. 309 of the paper book. He further submitted that the improvement in the existing structure was made by the assessee in order to carry out the business of the running of „ business Centre‟ smoothly and more efficiently and to make it a commercially viable. He contended that when improvement was made in respect of leased property, it did not effect the structural stability of the scheduled property nor it was entitled to do so under the terms of the lease deed, which prohibited the assessee to make any structural change. He submitted that the work undertaken by the assessee was only in respect of renovation of interiors on impugned property fixing or installing such devices and gadgets and equipments and furniture and fiction as were deem fit from time to time for the purpose of running the business more effectively and conveniently. He further submitted that the mere fact that it has been capitalized in the books of account by itself is insufficient to hold that such expenditure incurred was not revenue expenditure in nature. For this he referred to the celebrated decision of the Hon‟ble Supreme
Page 7 of 21 Court in case of 227 ITR 172. He further placed reliance on the decision of the Hon‟ble Delhi High Court in case of CIT versus Hi line pens private limited 306 ITR 182 wherein the Hon‟ble high court has held that the expenditure incurred on repairs and operation of leasehold premises is revenue expenditure. He further submitted that unless and until the expenditure is incurred on structural changes in the property the expenditure incurred is not capital in nature. He further stated that the mere fact that the expenditure is substantial by itself is insufficient to conclude that such expenditure is not revenue expenditure. For this reason he also referred to the gross revenue earned by the assessee from the business to Rs. 147819997/–. He further referred to the decision of the Hon‟ble Supreme Court in case of Empire Jute company Ltd versus CIT 124 ITR 1 to submit that the expenditure incurred enured for a longer period does not and cannot make it a capital expenditure. He further submitted that the assessee has got its account audited after obtaining copies of the books of accounts and documents, which were impounded by the revenue therefore the assessing officer, cannot say that the expenditure incurred is unverifiable or has not been incurred. He vehemently submitted that the expenditure incurred is towards repairs of existing superstructure only and was not in respect of laying of a structure therefore the expenditure incurred does not represent capital expenditure as the expenditure incurred is not for doing any work in or in relation to and by way of extension or renovation of premises by making structural changes and the same is therefore revenue expenditure and deserves to be allowed. He further relied on 15 decisions of various Hon‟ble high courts wherein the expenditure has been held to be revenue in nature with respect to renovation etc. During the course of the hearing he also filed an additional written submission to submit that the assessee has premises at Pune under leave and license agreement dated 07/11/2006 of 26000 square feet for 5 years only. With respect to the Hyderabad premises which was taken under a lease deed dated 20/02/2007 of 23538 ft.² for a period of 3 years. He further Page 8 of 21 submitted that expenditure of Rs. 34671983/– was incurred at Pune for which the details are available at page number 310 to 376 of the paper book and a sum of Rs. 30846669/-was incurred at Hyderabad the details of which are available at page number 377 to 432 of the paper book. He further submitted that there is no evidence that there was any structural changes made as no permission was sought from any of the principal authorities seeking any change. He once again vehemently submitted that the expenditure incurred by the assessee is a business expenditure and falls within the ratio of the judgment of Hon‟ble Supreme Court in case of Empire jute company Ltd versus CIT (supra). He further referred to the decision of the Hon‟ble Delhi High Court in case of installments supply private Ltd versus CIT 149 ITR 5 and CIT versus Madras auto services private limited of Hon‟ble Supreme Court in 233 ITR 468. He stated that it is a settled law that the expenditure incurred in respect of premises taken only is on repairs and renovation, hence revenue expenditure and not capital expenditure. Therefore in the end his contention was that the expenditure incurred by the assessee is revenue expenditure in nature and therefore should have been allowed as deduction.
The Ld. departmental representative relied upon the orders of the lower authority and submitted that the assessee has incurred the expenditure which are capital in nature and the assessee could not prove that these are the revenue expenditure and assessee has not derived any benefit of enduring nature therefore disallowance has rightly been made. He submitted that the Ld. assessing officer has noted that the leasehold improvement charges include fabrication of workstations, electric installations, furniture and fittings, which obviously are capital in nature. He further referred to the order of the Ld. CIT appeal specifically para No. 6.3 wherein it has been held that the appellant has made extensive addition alteration in the said premises to suit its requirement. He therefore referred to the provisions of section 32 (1) (ii) and submitted that the explanation 1 of that section covers the issue in favour of the revenue.
Page 9 of 21 11. We have carefully considered the rival contentions and it is noted that the Ld. CIT appeal has dealt with this issue in para number 6.3.3 of his order to hold that when the appellant is allowed to claim depreciation on such expenses incurred by it in premises not owned by it, such expenses should be considered as a capital expenditure subject to depreciation allowance to be allowed to assessee hereinafter as per provisions of the act. Therefore according to him there is no ground for going into the vexed issue is to what constitute capital expenditure and what does not. He further held that in respect of construction put up by the assessee on lease hold land and the ownership of land to which the constructed property is carried belongs to the lessor, the lessee it was felt in the past was neither entitled to the deduction of the outlay on construction on the ground that it is a capital expenditure not was allowed depreciation on the ground that as he was not the absolute owner of the property. He further held that it was in this context the explanation 1 was provided for depreciation on capital expenditure incurred by the appellant for the purpose of the business of profession on construction on any structure in or in relation to end by way of renovation and expansion for improvement to the building. Intention of the legislature while providing this explanation is crystal clear that in such cases depreciation would be admissible on the cost of expenditure. On this premises he upheld the disallowance made by the Ld. AO of Rs. 65518642/– as a capital expenditure.
The provisions explanation 1 to section 32 (1) (ii) of the income tax act provides 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.” [Underlined by us extracted from ITR online.com] Page 10 of 21 13. Above explanation provides that where the business or profession of the assessee is carried on in a lease premises then if any capital expenditure is incurred by assessee for the purpose of business which are on construction of structures, or doing of any work by way of renovation or extension of or improvement to the building then only such expenditure would be considered as building owned by the assessee and depreciation thereon will be allowed. Explanation 1 to section 32(1)(i) of the Income-tax Act, 1961, does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, such expenditure has to be mandatorily treated as capital expenditure. The Explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of section 32(1) shall be applicable as if the structure or work is a building owned by the assessee. The words “any capital expenditure” used in Explanation 1 to section 32(1) indicate that the legal fiction has to be read when any capital expenditure is incurred. Thus whether any capital expenditure has been incurred is a question, which has to be decided on the basis of the facts of each case and relevant tests applicable. Explanation 1 cannot be read to mean that when works mentioned therein are carried out by the assessee, it shall be treated as capital expenditure. Explanation 1 however shall be attracted when expenditure is treated as capital expenditure. The use of the word “any” before capital expenditure emphasizes that the provision is attracted when there is any capital expenditure. In view of this we do not approve the finding of the Ld. CIT appeal given in para number 6.3.3 of his order and para number 6.4.1 of his order wherein he has held that it is not required to go into the vexed question of whether they Expenditure incurred by the assessee is revenue are capital in nature. According to us, unless there is a capital expenditure incurred by the assessee the provisions of explanation (1) to section 32 (1) (ii) cannot be attracted. The Ld. CIT appeal has confirmed Page 11 of 21 disallowance only on this aspect without examining whether assessee has incurred any capital expenditure.
Canvassing that expenditure incurred by the assessee is revenue in nature, before us the Ld. authorized representative has placed plethora of judicial precedents wherein it is held that the expenditure incurred by the assessee is revenue in nature. However we are of the considered opinion that while considering the judicial precedents it is more important to look into the facts of that particular case and how the Hon‟ble courts have applied law to those facts and ratio laid down under those judicial precedents are required to be considered. Whether expenditure is a capital or revenue expenditure is the question, which has been most contentious and vexed issue. The Hon‟ble Supreme Court in case of Assam Bengal cement company Ltd versus CIT 27 ITR 34 (SC) has held that:- “In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business Page 12 of 21 operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductable allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the Income-tax authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles.” Further the Hon’ble Supreme Court in case of KTM TM Abdul Kayoom versus CIT 44 ITR 689 (SC) has also held that none of the test laid down in various authorities either exhaustive or universal and further the each case depend on its own facts and close similarity between one case in another is not enough because even a single insignificant detail may alter the entire aspect. Furthermore Hon’ble Supreme Court in case of alembic chemical works company Ltd versus CIT 177 ITR 377 (SC) has again reiterated that the question in each case would necessarily be whether the test relevant and significant in one set of circumstances are relevant and significant in the case on hand. Nonetheless we have considered the ratios laid down by all the case laws cited before us in reaching at our decision.”
Now we attempt to look at the expenses and then try to determine the nature of expenditure which has been incurred by the assessee. The first information is available at page No. 257 of the paper book filed which says that an expenditure of Rs. 34671983/- has been incurred at Pune and a sum of Rs. 30846659/– have been incurred at Hyderabad and the nature of such expenditure is civil, interior, plumbing and HAVC. Further at page No. 309 to 432 of the paper book various details with respect to expenses were submitted. Page No. 309 is the similar extract which was discussed at page No. 257 of the paper book earlier. The page No. 310 is the copy of the Ledger account of the expenditure incurred at Pune. The page No. 312 of the paper book is a bill for Rs. 37282753/- raised by M/s Fibre fill interiors and constructions dated 06/09/2007. The nature of work carried on in that is civil, interior work electrical works, HVAC work and plumbing work. Page No. 315 to page No. 376 were the progressive bills of interior electrical HVA C and plumbing work. The details of work carried on shows that brick masonry work is created for partition walls with cement mortar , block masonry work, cutouts, cement concrete screen over RCC slab , Indian patent flooring, RCC work, reinforcement work tiles Page 13 of 21 flooring work etc. The appellant has further submitted the breakup of such work at page No. 379 of the paper book which shows that civil, interior works include masonry works, concrete works, flowing works, would works, wall finishes, false selling, interior works and miscellaneous work. In the electric works it is shown that it is laying down of electric panel distribution board‟s cable point wiring, supplying of lighting fixtures and addressable fire alarm system. In case of total of H VAC works a sum of Rs. 3293218/- was spent. In case of plumbing work it is the automatic sprinkler systems which is one of the main expenditure incurred. Over and above these expenditure, assessee has further incurred a sum of Rs. 2000301/- as additional civil, interior works expenditure electrical works expenditure plumbing and firefighting works expenditure etc. The details compiled and submitted by the assessee is general in nature, such as tabulated expenditure titled as „Civil, interior works expenditure electrical works expenditure” On analysis of these evidences it is apparent that these bills do not suggest nature of expenditure incurred. To determine whether it is revenue expenditure the onus would be higher on the assessee to prove it when it has capitalized the same in books of accounts and accepted by the shareholders and auditors. It can be very well done by producing the exact nature of work done with maps and plans, report of the architect, tender or order to the contractor, etc. and many more things. Merely because the permission has not been obtained b= from the corporation does not prove that expenditure is of revenue nature. We also reject the contention of the assessee that no such details were asked for. We are of the view that when the assessee claims something then it is the duty of the assessee to prove that fact reasonably.
Further details of such expenditure has not at all been verified by the learned CIT (A) who has simply applied the provisions of explanation 1 to section 32 (1 ) (ii) to negate the claim of the assessee and or by the Ld. assessing officer who simply submitted before the Ld. CIT A that the issue is purely legal in nature that is the issue of capital expenditure revenue expenditure and may be Page 14 of 21 adjudicated by the CIT appeal himself. Further during the course of assessment proceedings the assessee did not furnish the complete details despite enough opportunities. We do not subscribe to the view of the Ld. CIT appeal as well as of the Ld. assessing officer. The issue here is not purely legal in nature but is factual as held by the Hon‟ble Supreme Court who has held that that the issue of capital expenditure versus revenue expenditure is always based on the facts and even the smallest twist in the fact may change the decision. Further, it would be travesty of justice if we decide the issues on such limited and scanty details. Therefore in the interest of justice we set aside ground No. 2 of the appeal of the assessee to the file of the Ld. CIT A to decide the issue afresh after examining the relevant evidence which are already available on record or which may further be required to arrive at a decision and then to decide the issue on merit. If after examination it is found that the expenditure incurred by the assessee is capital in nature then provisions of expression 1 to section 32 (1) (ii) would be applied otherwise the claim of the assessee may be allowed u/s 30 (a)(i) of the act. Needless to say that proper opportunity of hearing or to adduce further evidence may be granted to the assessee in this regard before deciding the issue. In the result ground No. 2 of the appeal of the assessee is allowed with above direction.
Now we come to ground No. 3 of the appeal of the assessee which is against the order of Ld CIT (A) in confirming the disallowance of Rs.. 3192313/- as expenses incurred in the nature of capital expenditure out of a sum of Rs. 33533933/–. The above expenditure has been incurred by the assessee on crockery cutlery utensils and other consumables etc. Ld. assessing officer has held them to be capital expenditure in nature. The assessee has stated that a sum of Rs. 57927543/– was incurred by the assessee out of which a sum of Rs. 3353 332/- has been considered by the assessee as consumed during the year and the balance amount of Rs. 25024249/- has been considered as the closing stock and it is shown as an inventory in schedule 7 annexed with the balance sheet. Therefore according to the assessee these items of the Page 15 of 21 expenditure are revenue and are consumables stores and therefore they are fully allowable as deduction. However Ld. assessing officer has rejected the contention of the assessee and held them to be capital expenditure. The assessee aggrieved by the order of the Ld. assessing officer preferred appeal before the Ld. CIT appeal who in turn held that out of a sum of Rs. 33533933/– a sum of Rs. 30347020/- are revenue in nature and the balance Rs. 3192313/- is capital expenditure and confirmed the disallowance. 18. the Ld. authorized representative submitted that the Ld. CIT appeal has erred in holding that a sum of Rs. 331404/- capital in nature out of the children play area toys, a sum of Rs. 434525/- out of cutlery Larry for staff cafeteria and kitchen utensils, Rs. 1794501/- out of the facility tools and materials as capital expenditure. He further referred to the nature of expenditure incurred and held to be capital expenditure and submitted that as the restaurant or the resort has restarted during the year it cannot be held to be a capital expenditure as it is a continuous business of the assessee and for temporary period it was nonoperational.
The Ld. departmental representative relied upon the order of the Ld. assessing officer and Ld. CIT appeal and submitted that the expenditure have rightly been held to be capital expenditure in nature.
We have carefully considered the rival contentions. We have also looked at the fact of the case which is that the appellant had incurred total expenses of Rs. 57927543/– besides opening stock of Rs. 636039/- and the assessee has considered Rs. 33539333/– as revenue expenditure which has been consumed during the year. Remaining sum of Rs. 25088211/- has been considered under the head inventory in schedule 7. The breakup of the item on which the expenditure had been incurred as consumed was furnished before the Ld. CIT appeal at page No. 298 to 300 of the paper book. We are of the opinion prima facie that whatever has been consumed during the year cannot be held to be capital expenditure unless there is a finding given by the Ld. assessing officer or Ld. CIT appeal that such expenditure has resulted into benefit of enduring nature. In Page 16 of 21 the present case the assessee is a private limited company and it has recognized the expenditure as revenue expenditure . It has been accepted by the auditor of the company. Furthermore we have also seen the details furnished at page No. 298 to 300 of the paper book. According to us they are in the nature of crockery, utensils, cutlery, linen and other consumable materials . the list contains 53 such headings. These are necessary expenditure required to be incurred for the purpose of running of the restaurant and resort. The Ld. CIT appeal has held that out of a sum of Rs. 463916/- , Rs. 331404/- is considered to be capital in nature. The nature of the such expenditure are children game items. In our view such expenditure cannot be held to be capital in nature. Further with respect to the kitchen equipments such as cutlery of staff cafeteria and kitchen utensils cannot also be held to be capital expenditure because of the reason that the restaurant and the resort has been restarted during the year . It is not the case of the revenue that these are the new purchases for starting of the new restaurants and resorts. Furthermore a total claim of Rs.1794501/- on account of expenses on testing kits, tools, tool bags etc which are been purchased for the resort area as it has become operational during the year under consideration and therefore the Ld. CIT appeal has held them to be capital expenditure and not revenue expenditure. We do not subscribe to the view of the Ld. CIT A as the facility tools and materials for resorts are small items which are required for the day to day use in resort. Such as housekeeping items of dustbins holders garbage dustbins etc are also held to be a capital expenditure. As the nature of expenditure incurred by the assessee no capital asset has come into existence but are the day today expenditure or minor expenditure for running business which is already in existence, such expenditure are incurred. According to us these expenditure cannot be held to be capital in nature and therefore we reverse the decision of Ld. CIT appeal in holding that the sum of Rs. 3192313/- is capital expenditure. In the result ground No. 3 of the appeal of the assessee is allowed.
Page 17 of 21 21. No specific facts have been brought to our notice against the ground No. 4 and 5 of the appeal of the assessee and as they are in general in nature therefore it is dismissed.
In the result appeal of the assessee is partly allowed 23. Now we come to the appeal of the revenue in Y 2008 – 09.
Ground No. 1 of the appeal of the revenue is general in nature and therefore it is dismissed.
Ground No. 2 of the appeal of the revenue is against the order of the Ld. CIT appeal who has directed the assessing officer to verify the facts and allowed appreciation on the expenses incurred on additions and renovation etc amounting to Rs. 65518642/– on repairs and maintenance of lease premises in Pune and Hyderabad in accordance with the law. We have already decided the issue of allowability of these expenses while deciding ground No. 2 of the appeal of the assessee wherein we have set aside the whole issue back to the file of the Ld. CIT A for deciding issue afresh. In view of this the ground No. 2 of the appeal of the revenue is also set aside to the file of the Ld. CIT (A) accordingly.
Ground No. 3 of the appeal of the revenue is against the deletion of disallowance of sum of Rs. 30347020/- made by the Ld. assessing officer holding it to be capital in nature out of the total disallowance of Rs. 33539332/– incurred on account of crockery, cutlery, utensils etc holding the same to be capital expenditure.
We have already decided this issue about the total expenditure of Rs. 3353933/- to submitted by the assessee at page No. 298 – 300 of the paper book. While deciding ground No. 3 of the appeal of the assessee we hold that these are the normal expenditure which are required to be incurred for the purpose of day to day running and maintenance of the resort which has restarted during the year. The Ld. CIT appeal has allowed these expenditure holding it to be revenue in nature. We do not find any infirmity in the order of the Ld. CIT appeal in deleting the above disallowance to the extent of Rs. 30347020/-. In the result ground No. 3 of the appeal of the revenue is dismissed.
Page 18 of 21 28. Now we come to ground No. 4 of the appeal of the revenue which is against deletion of the disallowance of Rs. 10005049/– paid by the assessing officer on the basis of the pages retrieved from the hard disk of the computer impounded during the survey proceedings on 04/02/2008 in the premises of assessee.
Learned departmental representative submitted that the assessee has been asked to explain the details of these expenditure however the expenses incurred by the assessee are excessive and not explained. Therefore the addition was made on the basis of the documents impounded during the survey. He further submitted that the learned CIT appeal has erred in deleting the about addition made by the Ld. assessing officer.
Ld. authorized representative submitted that that Ld. CIT appeal has directed the assessee to reconcile the expenses between impounded documents and what is reflected in the profit and loss account and balance sheet. Reconciliation was furnished before the Ld. CIT appeal who asked Ld. assessing officer to submit its comments on it. The Ld. AO did not find any discrepancy in the reconsideration and thus the Ld. CIT appeal found that the additions made are untenable both on facts in law as there was no discrepancy. Hence disallowance was not sustainable and hence deleted. He therefore submitted that when the accounts are properly reconciled and none of the expenses are found to be either inflated or unverifiable , disallowance deleted by the Ld. CIT appeal is proper.
We have carefully considered the rival contentions. The Ld. CIT appeal has discussed the issue while deciding ground No. 7 of the appeal of the assessee in para No. 6.6 as under:- “6.6.1 The assessing officer made a disallowance of Rs.10,00.51,049/- on the basis of pages 1 2 5 9 & 10 as retrieved from the impounded hard disc of the computer during the survey proceedings held on 4 2.2008 A perusal of the seized papers shows that these papers are in the nature of balance sheet, profit & loss account of M/s Vatika Hospitality and The Fox which is a unit of Vatika Hospitality. In response to the directions of the assessing officer to reconcile these documents with the balance sheet figures the appellant stated that since the time allowed is very less it cannot be done and also since the impounded papers are only up Page 19 of 21 to 04.02.2008 and the balance sheet prepared by it is of 31.03.2008, the same could not be reconciled. It was further stated that appellant has many projects out of which only two accounts were impounded i.e. of Vatika Hospitality and The Fox whereas the accounts of GO (Gym), business centers. Western Resort are not available on the record, therefore, appellant showed its inability to reconcile. 6.6.2 From the order of the assessing officer in this regard it is apparent that the expenses uf Rs 5.00.99.653/- are shown in impounded documents from 01 04.2007 to 04 02 2008 He has out of total expenses referred as claimed in audited accounts of Re-31 91 35,1017- segregated expenses of Rs.. 15.92.00.961/- and assumed the difference of the two figures amounting to Rs. 10.00,51.0497- as excessive expenses claimed by the appellant and made addition thereof in the order of assessment 6.6.3 A comparison/ Reconciliation prepared by the appellant shows that there were five various activities out of which in some of the activities appellant has incurred loss whereas in other activities income was earned by it Further a perusal of profit and loss account shows that appellant has claimed total expenditure of Rs 380844404/- whereas the assessing officer has considered such expenses at Rs 311935101/- only There is not even a whisper in assessment order as to how this figure is computed m the order of assessment. More over as per impounded documents upto 04.02.2008 figures of Vatika Hospitality and Fox restaurant only have been considered which are again subject to change because of activities of the company from 05.02.2008 to 31.03.2008 which have not been considered by the assessing officer at ail Expenses under the projects like 'Go' of Rs.201100634/- 'Business Centre' Rs.109835926/- 6.6.4 During the course of hearing in appellate proceedings appellant was again directed to reconcile the same. Appellant has filed a reconciliation statement with regard to the impounded documents and the balance sheet and profit & toss account A perusal to the reconciliation statement so filed shows that the accounts are duly reconciled and no and no discrepancy is found on such reconciliation. The reconciliation furnished by 'he appellant was sent to the assessing officer also for his comments The assessing office of his reply dated 14.02.2012 stated that the addition are based on the basis impounded documents during a survey proceedings and this has been discussed :n the assessment order after providing sufficient opportunity On the reconciliation given by the appellant the assessing officer has not commented adversely When there were many units of the appellant company, one or two unit cannot be hand picked to arrive at the trading result. Thus addition of Rs 10,0051049/- made by the assessing office hereby deleted”
Page 20 of 21 32. We have carefully perused the order of the Ld. CIT appeal wherein he has held that reconciliation statement with regard to the impounded documents in the balance sheet and profit and loss account was found and no infirmity has been pointed out in the such reconciliation. Therefore according to him in absence of any adverse comment such addition cannot be made. In the result we do not find any infirmity in the order of the Ld. CIT appeal in deleting the addition of Rs. 100051049/– made by the ld. assessing officer. In the result ground No. 4 of the appeal of the revenue is dismissed 33. Ground No. 5 and 6 of the appeal of the revenue are general in nature and therefore they are dismissed.
In the result appeal of the revenue in is dismissed. 35. for assessment year 2008 – 09 is filed by the revenue against the order of the Ld. CIT A deleting the penalty under section 271 (1) ( c) amounting to Rs. 2,33,55,000/–.
The Ld. assessing officer has imposed the penalty amounting to Rs. 23355000/– on the assessee on the a. disallowance of Rs. 65518642/– of expenditure incurred on repair of lease premises holding the same to be capital expenditure in nature and b. disallowance of expenditure incurred on crockery, cutlery, utensil etc holding the same to be capital expenditure amounting to Rs. 3192313/- 37. The Ld. CIT A deleted the penalty based on the decision of the jurisdictional Honourable High Court in case of CIT versus Udaipur hotels Ltd. 35 taxmann.com 207 ( Delhi) and Honorable supreme court in case of CIT V Reliance petro products Limited 322 ITR 158 (sc) .
Both the parties submitted before us that the issue of disallowance of Rs. 65518642/- has been dealt with in ground No. 2 of the appeal of the assessee whereas the issue of disallowance of Rs. 3192313/- is part of Ground No 3 of the appeal of the assessee.