COMMISSIONER OF INCOME TAX vs. SHRI RUPESH ANAND

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 21ST DAY OF SEPTEMBER 2016

PRESENT

THE HON’BLE MR.JUSTICE JAYANT PATEL AND THE HON’BLE MR.JUSTICE ARAVIND KUMAR ITA NO.254/2015 C/W ITA NO.255/2015 C/W ITA NO.256/2015 C/W ITA NO.257/2015

IN ITA NO.254/2015: BETWEEN:

1.COMMISSIONER OF INCOME TAX C.R. BUILDING, BANGALORE

2.ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 1(2) BANGALORE ... APPELLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/W SRI E I SANMATHI, ADVOCATE)

2 AND:

SHRI RUPESH ANAND PARTNER: M/S NANDINI DELUX, NO.114/2, LALBAGH FORT ROAD, BANGALORE-560004 PAN: ABOPA2665E ... RESPONDENT (RESPONDENT SERVED)

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:05/12/2014 PASSED IN ITA NO.442/BANG/2013, FOR THE ASSESSMENT YEAR 2005-2006 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED:05/12/2014 PASSED BY THE ITAT, 'C' BENCH, BANGALORE, IN APPEAL PROCEEDINGS NO. ITA NO. 442/BNG/2013 FOR ASSESSMENT YEAR 2005-06.

IN ITA NO.255/2015: BETWEEN:

1.COMMISSIONER OF INCOME TAX C R BUILDING, BANGALORE.

2.ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(2)

3 BANGALORE. ... APPELLANTS

(BY SRI E R INDRA KUMAR, SR. COUNSEL A/W SRI E I SANMATHI, ADVOCATE)

AND:

SHRI RUPESH ANAND PARTNER:M/S. NANDINI DELUX, NO.114/2, LALBAGH FORT ROAD, BANGALORE-560 004, PAN:ABOPA2665E ... RESPONDENT

(RESPONDENT SERVED)

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:05/12/2014 PASSED IN ITA NO.443/BANG/2013, FOR THE ASSESSMENT YEAR 2006-2007 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED: 05/12/2014 PASSED BY THE ITAT, 'C' BENCH, BANGALORE, IN APPEAL PROCEEDINGS NO. ITA NO. 443/BNG/2013 FOR ASSESSMENT YEAR 2006-2007, AS SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

4 IN ITA NO.256/2015: BETWEEN:

1.COMMISSIONER OF INCOME TAX C R BUILDING, BANGALORE.

2.ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(2) BANGALORE. ... APPELLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/W SRI E I SANMATHI, ADVOCATE)

AND:

SHRI RUPESH ANAND PARTNER:M/S. NANDINI DELUX, NO.114/2, LALBAGH FORT ROAD, BANGALORE-560004, PAN:ABOPA2665E ... RESPONDENT (RESPONDENT SERVED)

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:05/12/2014 PASSED IN ITA NO.444/BANG/2013, FOR THE ASSESSMENT YEAR 2007-2008 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE

5 APPELLATE ORDER DATED: 05/12/2014 PASSED BY THE ITAT, 'C' BENCH, BANGALORE, IN APPEAL PROCEEDINGS NO. ITA NO. 444/BNG/2013 FOR ASSESSMENT YEAR 2007-2008, AS SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

IN ITA NO.257/2015: BETWEEN:

1.COMMISSIONER OF INCOME TAX C R BUILDING, BANGALORE.

2.ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(2) BANGALORE. ... APPELLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/W SRI E I SANMATHI, ADVOCATE)

AND:

SHRI RUPESH ANAND PARTNER:M/S. NANDINI DELUX, NO.114/2, LALBAGH FORT ROAD, BANGALORE-560004, PAN:ABOPA2665E ... RESPONDENT (RESPONDENT SERVED)

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:05/12/2014 PASSED IN ITA

6 NO.445/BANG/2013, FOR THE ASSESSMENT YEAR 2008-2009 PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED: 05/12/2014 PASSED BY THE ITAT, 'C' BENCH, BANGALORE, IN APPEAL PROCEEDINGS NO. ITA NO. 445/BNG/2013 FOR ASSESSMENT YEAR 2008-2009, AS SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

THESE APPEALS COMING ON FOR ADMISSION THIS DAY, JAYANT PATEL J., DELIVERED THE FOLLOWING:

ORDER

As in all appeals common questions are to be considered, they are being considered simultaneously. 2. The appellants-Revenue has preferred the present appeals by raising the following substantial question of law: “Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure incurred by the assessee towards renovation and improvement of hotel building is in the nature of revenue

7 expenditure even when the assessing authority has rightly treated it as capital expenditure considering the available materials on record and Explanation (1) to section 32(1) of the Income Tax Act and the expenditure has resulted in enduring benefit to the assessee?”

8 and alarm system, card access system, plumbing and air conditioning work, electrical works, fixing of carpets, interior work, etc. In the course of assessment proceedings, the Assessing Officer on examination of the same observed that this expenditure indicated that major renovation works had been undertaken and therefore cannot be treated as revenue expenditure. The Assessing Officer referring to Explanation 1 to Section 32 of the Act, was of the view that the assessee has incurred capital expenditure and therefore is entitled to depreciation thereon @ 10%. Accordingly, the Assessing Officer disallowed the assessee’s claim for the aforesaid expenditure to be allowed as revenue expenditure, treated the same as capital expenditure and allowed the assessee depreciation thereon @ 10%.

5.4.2 The question that now arises for consideration is, when the assessee has incurred expenditure on renovation of the hotel taken on lease, then whether the assessee is

9 entitled for deduction of the expenditure incurred on such repairs as revenue expenditure OR whether it has to be treated as capital expenditure in view of Explanation 1 to section 32 of the Act. 5.4.3 Explanation 1 to Section 32 of the Act reads as follows:- “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 any work in or relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this claim shall apply as if the said structure or work is a building owned by the assessee.”

This Explanation to Section 32 of the Act was introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act,

10 1986 w.e.f. 1.4.1988. By introduction of this Explanation, the Legislature intended to allow depreciation on the capital expenditure incurred by the assessee in relation to renovation, extension or improvement to the building in which the assessee carried on business as lessee.

5.4.4 It may be useful to examine the Legislative history of the introduction of Explanation 1 to Section 32 of the Act. The taxation Laws (Amendment) Act, 1970 w.e.f. 1.4.1971 introduced sub-section 1A to grant some benefit to the assessee on the capital expenditure incurred by a tenant in leased premises’. Therefore, it is obvious that prior to the introduction of sub-section 1A to Section 32 of the Act w.e.f. 1.4.1971 by the Taxation Laws (Amendment) Act, 1970, the assessee who takes the business premises on lease was not entitled to any depreciation on capital expenditure incurred thereon. In other words, prior to 1.4.1971, assesses who incurred capital expenditure on leased premises were not

11 entitled to any benefit at all in this regard. Therefore, by removing the legal restrictions in respect of capital expenditure incurred by the assesses who take business premises on lease, Parliament intended to grant / allow depreciation on the capital expenditure incurred on such leased premises. On a careful perusal of the provisions of section 32(1A) of the Act and the circumstances in which it was introduced in the statute, it is clear that in case revenue expenditure was incurred by the assessee on the premises taken on lease, the question of allowing any depreciation u. 32(1A) of the Act would not arise for consideration. In other words, section 32(1A) of the Act introduced w.e.f. 1.4.1971 by Taxation Laws (Amendment) Act, 1970 would not be applicable in case the assessee incurred revenue expenditure on the leased premises.

5.4.5 However, sub-section 1A of Section 32 of the Act introduced by Taxation Laws (Amendment) Act, 1970 was omitted and

12 Explanation 1 to Section 32 was introduced by Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1.4.1988. This was done when the concept of depreciation on individual asset was changed to depreciation on the block of assets. When Parliament introduced depreciation on block of assets, sub-section (1A) of Section 32 of the Act was deleted, an identical provision was incorporated in Explanation 1 to Section 32 of the Act. Therefore, the position of law as it remains after the introduction of sub- section 1A of Section 32 of the Act w.e.f. 1.4.1971 continued to be the same in respect of revenue expenditure incurred by the assessee on premises taken on lease. In other words the concept of allowing depreciation on the capital expenditure in relation to renovation, extension or improvement of the premises taken on lease continued to be the same w.e.f. 1.4.1971. Therefore, whenever the assessee incurred the expenditure, in the process of earning profit while carrying on the business in the leased premises, the expenditure has to be treated as

13 revenue expenditure and neither sub-section (1A) to Section 32 OR Explanation 1 to Section 32 of the Act would come in the way of allowing the same as revenue expenditure. However, when the assessee incurred expenditure which is of capital nature, then the Parliament allows the benefit to the assessee for claiming depreciation on such capital expenditure in relation to renovation, extension or improvement w.e.f. 1.4.1971 u/s. 32(1A) and in accordance with the provisions of Explanation 1 to Section 32 of the Act w.e.f 1.4.1988. Hence, this is a benefit allowed to the assesses who have taken premises on lease and incurred expenditure in the capital field. However, as explained earlier, if the expenditure incurred falls in the revenue filed, the assessee is entitled to claim it as revenue expenditure irrespective of Section 32(1A) or Explanation 1 of Section 32 of the Act. In our considered view, this being the correct position of law, the conclusions of both the Assessing Officer and the learned CIT(A) in the impugned orders that the expenses incurred on

14 leased premises have to be capitalized and only depreciation can be allowed thereon is not in tune with the provisions of law and is therefore incorrect.

5.4.6 To fall within the ambit of the provisions of Explanation 1 to Section 32 of the Act, the question to be answered is, whether the assessee has incurred any capital expenditure for the purposes of business on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement in the building.

5.4.7 In the case on hand, on an appreciation of the facts of the case and details on record, we find that after incurring the expenditure on the leased premises, the assessee has neither obtained any enduring benefit nor has any new capital asset has come into existence. The assessee continued to run the hotel in the very same leased premises. It is not anybody’s case that the seating capacity

15 was not increased after the expenditure. The expenditure incurred was only for carrying on the business and was an integral part of the profit earning process. Therefore, we find that no case has been made out to say that the assessee has obtained any enduring benefit by virtue of this expenditure. The nature of the work undertaken by the assessee is to carry on the business and not obtain any asset. Further, as already observed, no capital asset of an enduring nature came into existence. In other words, the assessee has not acquired any asset/income earning apparatus. It is well settled principle of law that the expenditure incurred for acquisition of an asset is a capital expenditure and expenditure incurred in the process of earning profit is revenue expenditure. In the case on hand, we are of the view that the assessee incurred the expenditure for efficient running of the business and therefore the expenditure incurred is revenue in nature.

16 5.4.8 It is settled principle that the test of enduring benefit is neither certain nor conclusive. Even if this fact is applied, the expenditure incurred by the assessee is only in the process of earning profit and not to acquire any capital asset. As a result of the expenditure incurred by the assessee, the hotel remains a hotel and the capacity does not increase. At the most, the assessee might have carried on the business in a profitable manner. The assessee has not obtained any enduring advantage in the capital field. Therefore, the expenditure incurred facilitated the assessee to carry on its business effectively and more profitably. In this factual matrix of the case on hand, we are of the considered opinion that the expenditure incurred by the assessee has to be treated as revenue in nature.

5.4.9 In view of the judicial decisions cited by the assesseee (supra), it is obvious that whenever an expenditure was incurred in the process of earning profits it has to be allowed as

17 revenue expenditure . In such a case the expenditure incurred by the assessee would be out of the ambit and purview of the provisions of Explanation 1 to Section 32 of the Act of the Act. In the case on hand, it is not in dispute that the expenditure was incurred for renovation. These expenses were incurred only for the purpose of carrying on day to day business and earn profits and do not result in the bringing into existence of any capital asset. Therefore, in the light of the discussion form paras 5.1 to 5.4.9 of this order and the facts and circumstances of the case, in our view, the learned CIT (Appeals) was not right in upholding the disallowance of the expenditure by holding it as capital in nature. We, accordingly, reverse the findings of the authorities below on this issue and allow the assessee’s claim for deduction of expenditure incurred towards renovation of plant design system, computer cabling, fire detection and alarm system, plumbing, air conditioning work, electrical works, interior work etc. on the hotel/building taken on lease. Accordingly the

18 assessee’s grounds raised at S.Nos.6 & 7 are allowed for the Assessment Years 2005-06 to 2008-09.

The aforesaid findings disclose that the Tribunal after perusing the record has found that the expenditure was incurred by the assessee only in the process of earning profit and not to acquire any capital asset. However, the learned Counsel appearing for the appellants- Revenue attempted to contend that by virtue of Section 32 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for short) and more particularly explanation to Section 32 of the Act, even if it is a leased premises and the expenses are incurred for renovation of the structure or otherwise, the depreciation is available to a limited extent. He contended that same would mean that the Parliament wanted to treat certain expenses for structure and others even on the tenanted premises as capital expenditure. He has also submitted that the

19 lower authority had rightly observed that it was a capital expenditure and therefore depreciation as per the prescribed was permissible and not the total amount as if revenue or business expenditure. He submitted that the Tribunal has committed error on the said aspects. 5. The contention may prima facie show some merit but the Tribunal in the above referred observation has elaborately considered that the explanation would not be applicable, more particularly when the expenditure was not of a capital expenditure. Further, we need to keep in mind that it was not the case of the Revenue that number of rooms were added to the hotel premises or that the seating capacity was increased or otherwise. It was only within the same complex the expenses were incurred in order to update the facility which ultimately would result as good business to

20 attract the customer. Considering the facts and circumstances, it appears to us that the view taken by the Tribunal cannot be said to be erroneous nor such view can be said to be contrary to any statutory provision. 6. Under the circumstances, no substantial questions of law would arise for consideration as sought to be canvassed. 7. Hence, the appeals are dismissed.

Sd/- JUDGE

Sd/- JUDGE

JT/-