B & A DIGI TACTICAL SOLUTIONS PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

ITA No.304/Mds/2017. :- 2 -:

1) ‘’The order of the learned CIT (A) in confirming the order of the assessing officer determining the income of your appellant at a loss of Rs.3,17,540/- is against law, the facts and circumstances of the case and is against the principles of equity and natural justice.

2) The CIT (A) erred in holding that the expenditure incurred by the appellant towards repairs in the leasehold premises is not an expenditure allowable under section 31 as current repairs or alternatively as expenditure under section 37.

3) The CIT (A) erred in holding that the expenditure incurred by the appellant in its leasehold premises is a capital expenditure. 4) The CIT (A) failed to appreciate the submission of the appellant that the break of up the expenditure supports the submission that the expenditure is revenue In nature.

5) The CIT (A) failed to appreciate that the expenditure should be capital in nature which results in a construction of any structure or doing any work by way of renovation or extension of, or improvement to the building, for applying explanation 1 to section 32. In the case of the appellant in the absence of the same, the assessing officer ought to have allowed the deduction as revenue expenditure.

6) The CIT (A) erred in not applying the ratio of decisions cited before him including that of the jurisdictional High Court 7) The CIT (A) erred in not considering the submission of the appellant that in even if it is to held that the expenditure is capital in nature, the expenditure towards temporary structures are eligible for depreciation at the rate of 100%,

8) Without prejudice, the CIT (A) and the assessing officer ought to have seen that the expenditure which is considered as capital in nature would fall in different block of assets eligible for higher depreciation,

ITA No.304/Mds/2017. :- 3 -:

9) Without prejudice, the CIT (A) and the assessing officer ought to have allowed the depreciation in respect of depreciation disallowed in the earlier assessment year. 10) Your appellant prefers this appeal on these grounds and such other grounds that may be adduced before or at the time of hearing of this appeal’’.

Grounds 1 & 10 are general in nature needing no specific 3. adjudication.

Issue raised by the assessee through its grounds 2 to 9 in 4. respect of treatment of certain expenditure incurred by the assessee in a leasehold premises. Ld. Counsel for the assessee submitted that assessee company engaged in IT support services had incurred an expenditure of �1,76,31,122/- for interiors in its leasehold premises.

As per ld. Authorised Representative not only the expenditure was incurred in leasehold premises, but the items of expenditure were painting, electrical work, HVAC work, networking expenditure, which were all in the nature of revenue outgo. As per ld. Authorised Representative lower authorities had considered the expenditure incurred as capital in nature. Ld. Authorised Representative fairly pointed out that similar issue in assessee’s own case had come up before the Tribunal for the immediate preceding assessment year and issue stood decided against the assessee. However, according to him, assessee’s claim that expenditure incurred in leasehold premises were revenue in nature was not considered by the Tribunal. As per ld. Authorised Representative, his claim primarily was that the expenditure

ITA No.304/Mds/2017. :- 4 -: incurred was revenue in nature and not capital in nature. According to him, Explanation 1 to Sec. 32 of the Income Tax Act, 1961 (in short ‘’the Act’’) could be applied only where the expenditure incurred in leasehold items was capital in nature. Alternatively according to him, even if it was considered as capital expenditure it was only for a temporary structure eligible for 100% depreciation. Reliance was placed on the decision of Co-ordinate bench in the cases of M/s. Amec Foster Wheeler India Pvt Ltd vs. DCIT in dated 25.11.2016 that of M/s. Cholamandalam Distribution Services Ltd. vs. ACIT in ITA Nos.1952 & 1953/Mds/2016, dated 05.10.2016 and that of M/s. Cadensworth (India) Ltd vs. ACIT in 2838/Mds/2016, dated 25.01.2017. Specific reliance was also placed on the judgment of Hon’ble Jurisdictional High Court in the case of Thiru Arooran Sugars Ltd vs. DCIT, 350 ITR 324.

Per contra, ld. Departmental Representative submitted that 5.

there was no claim by the assessee that expenditure incurred was revenue in nature expenditure before the ld. Assessing Officer. Such claim, according to him, was made first time before the ld. Commissioner of Income Tax (Appeals) and the ld. Commissioner of Income Tax (Appeals) had rightly found that the claim could not be allowed. According to him, structure erected by the assessee was not temporary in nature. Reliance was placed on the judgment of Hon’ble

ITA No.304/Mds/2017. :- 5 -:

Madhya Pradesh High Court in the case of Malwa Vanaspati & Chemical Co. Ltd vs. CIT, 154 ITR 655 that of Hon’ble Gujarat High Court in the case of Khimji Visram and Sons (Gujarat) Private Ltd. vs. CIT 209 ITR 993 and that of Hon’ble Bombay High Court in the case of New Shorrock Spinning and Manufacturing Co. Ltd vs. CIT 30 ITR 338.

Further according to him, ld. Assessing Officer had allowed part of the claim, which was found to be Revenue in nature.

I have considered the rival contentions and perused the 6. orders of the authorities below. The expenditure which has been claimed by the assessee as revenue expenditure or alternatively eligible for 100% depreciation are reproduced hereunder:-

Party Name Particulars Amount

Cauvery buildtech Plumbing and Sanitary works 5,79,198 Cauvery buildtech Screed works & Civil works at Toilet 24,38,519 and Electrical / UPS room Cauvery buildtech Interiors 53,10,565 Cauvery buildtech Networking 14,33,748 Cauvery buildtech HVAC 20,22,363 Cauvery buildtech Sprinkler Systems 2,37,775 Cauvery buildtech Interiors (additional) 6,99,621 Cauvery buildtech Fire Protection Systems 11,87,293 Cauvery buildtech Light Fixtures 6,33,092 Cauvery buildtech Electrical works 27,43,841 Cauvery buildtech Fire protection 1,81,291 Cauvery buildtech Roller blinds 1,63,817

Total Value 1,76,31,122 It is admitted position that assessee itself had treated the above expenditure as capital outgo in its books of accounts. For preceding assessment year, there were similar expenditure incurred by the ITA No.304/Mds/2017. :- 6 -: assessee, which was a subject matter of disallowance. What was held by this Tribunal at para 3 to 7 of its order dated 08.06.2017 in in relation to the said year is reproduced hereunder:-

‘’3.0 Ground Nos.2-6 are related to the addition of Rs.59,24,141/- representing the disallowance of depreciation on furniture & fixtures. The AO found that the assessee has claimed 100% depreciation on interiors and furniture & fixtures stating that these items are temporary structures which were valued at Rs.65,82,378/-. The AO called for the details of the interior works done by the assessee and observed from the invoices that the expenditure was incurred for interior, carpentry, painting, security system, modular furniture, chairs and net work etc. Since all the expenses are capital in nature, the AO treated the entire expenses as capital expenditure and the same is not allowable u/s.31 of IT Act ,under the head current repairs and accordingly held it as capital asset and allowed the depreciation @10% treating the same as furniture and fixers, which resulted in addition of Rs.59,24,141/-. 4.0 Aggrieved by the Order of the AO, the assessee went on appeal before the CIT(A) and Ld.CIT(A) dismissed the assessee’s appeal holding that the expenditure in question was neither repair work nor to be treated as current repairs. For ready reference, we extract the relevant paragraphs of the Ld.CIT(A) Para No.5-10 as under:

ITA No.304/Mds/2017. :- 7 -: smaller fragments. This is so as these smaller individual activities would not make available any facility which could be used by the appellant void of the other co-related activities. Renovation therefore would encompass and include the sum total of all such activities to make available a common facility for the use of the appellant. Simply put, all activities put together result in restoring to good and usable condition and such an exercise would include repairs as a integral part thereof. In any case renovation as this would not qualify to be considered as “current repairs” and to that extent the appellant would be the beneficiary to the usage of the facility for several years during the lease period of the premises.

7. The case of the appellant rests on the plea that it is a leasehold premise and hence expenditure should be treated as being towards current repairs notwithstanding the provision in Explanation 1 to s.32(1). In my considered view, this cannot be accepted for the reason that there is a specific provision to deal with such expenditure. Furthermore, the rights and entitlements of the appellant are not adversely impaired as the expenditure qualifies for depreciation and in the event that the premises are vacated the appellant is entitled to terminal benefits with regard to the expenditure / investment made. It may not be out of place to mention that almost all facilities as the one operated by the appellant are run from leased premises. Most of them being on long lease terms.

ITA No.304/Mds/2017. :- 8 -: cannot be subjected to any further interpretation. Further the language of Explanation 1 is very plain and clear and there is no scope for providing a different meaning for the words used and, hence, we are bound to consider the question by giving the literal meaning to the expressions and phraseologies by the legislature applied.” Further applying the ratio, amongst others, obtaining in the case of Madras Auto Service P Ltd 233 ITR 468 the Hon’ble High Court, the jurisdictional ITAT in its order dated 11.9.2015 in for the A.Y.2008-09 in the case of the Continental Enterprises v. ITO has dismissed the claim of 100% depreciation by the assessee.

5.0 During the appeal hearing, the Ld.AR submitted that the assessee has undertaken repair works in the leased premises and works were carried in the leased premises. The Ld.AR further submitted that the assessee has taken the premises for short term lease and at the time of vacating the leased premises, the temporary structures cannot be removed or re-used on vacating the premises and it would be completely wasteful expenditure and loss to the assessee. The assessee also submitted the Paper Book with details of item-wise purchase of various materials and works carried on by the assessee. The Ld.AR further argued that all the works carried on by the assessee were temporary structures which are eligible for deduction @100% depreciation. 6.0 On the other hand, the Ld.DR argued that the assessee has taken the premises on lease and fixed the furniture and fixtures in the lease hold premises and carried on interior carpentry painting works and created an asset in the leasehold premises. The asset created was not disputed by the assessee since the assessee himself has categorized the expenditure as asset and claimed 100% depreciation. The assessee has not carried on any repairs or renovation to the existing assets to claim the expenditure as current repairs u/s.31 of IT Act. The assessee has created permanent asset which is enduring in nature and accordingly, the Ld.DR argued that the AO rightly categorized it as furniture & fixtures and allowed depreciation @10% and no interference is called for. 7.0 We heard the rival submissions and perused the material placed before us.

ITA No.304/Mds/2017. :- 9 -:

The assessee has incurred the expenditure through M/s.Kaveri Build tech for an amount of Rs.65,82,377/- relating to the items of assets. Separate break up of wall paneling and purchase of tiles are included in the total sum of Rs.65,82,377/-. The assessee has taken the premises on lease and argued that unless the expenditure incurred for construction of any structure or improvement, extension etc., in the leasehold premises, it does not fall under Explanation- 1 to Sec.32 of IT Act to hold it as asset. The assessee has furnished the bills for purchase of tiles, wall paneling, networking, electrical works carpentry etc., in the paper book but not furnished the exact details of composite work done with the items purchased. The different invoices for wood, tiles, modular furniture cannot establish the composite item of work done to conclude whether the expenditure in question was capital expenditure or not. Even if the electrical works, carpentry works carried out in the leasehold premises, the same can be categorized as furniture and fixtures depending on the nature of works carried out. The terms of lease, the duration of lease, names and address of the leasehold premises, etc., were not furnished by the assessee. As per the Assessment Order, the assessee himself has treated the works carried on in the leased premises as assets and claimed the depreciation @100%. The 100% depreciation is allowed only on temporary structures. The assessee has not established that the expenditure incurred was towards the temporary structures by providing the necessary evidences with the composite work done in each premises. The tabulation made by the Ld.CIT(A) indicates that the expenditure incurred was capital expenditure Therefore, the assessee’s request for treating the temporary structures cannot be accepted. Having created asset of enduring nature, the expenditure cannot be allowed u/s.37(1) of IT Act. Therefore, we hold that the AO has rightly treated the interior works as furniture and fixtures and allowed depreciation @10%. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the assessee’s ground of appeal’’.

We find that the Tribunal had considered the issue whether expenditure could be considered as revenue outgo u/s.37(1) of the Act at paragraph 7 of its order. A look into break up of expenditure

ITA No.304/Mds/2017. :- 10 -: placed by the assessee at page book pages 7 to 37 indicate that there were number of items like ceramic tiles, false ceiling, flooring etc done by the assessee. In the case of CIT vs. Ayesha Hospitals (P) Ltd 292 ITR 266 (Mad) relied on by the assessee, replacement of damaged flooring was indeed considered as Revenue outgo. However, there is nothing on record to show that ceramic flooring done by the assessee was for replacing a damaged floor. In such circumstances, judicial discipline requires me to follow the order of the Tribunal in assessee’s own case for preceding year where the fact situation was similar. I do not find any reason to interfere with the orders of the lower authorities.