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Income Tax Appellate Tribunal, ‘ C’ BENCH : CHENNAI
Before: SHRI ABRAHAM P. GEORGE & SHRI G. PAVAN KUMAR
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:
Appeal in has been filed by the assessee against an order dated 09.03.2016 of ld. Commissioner of Income Tax (Appeals)-1, Chennai. This was pursuant to an assessment u/s.143(3) of the Income Tax Act, 1961 (herein after referred to as ‘the Act’) on assessee for assessment year 2009-2010.
Appeal in filed by the Revenue is against another order dated 09.03.2016 of ld. Commissioner of Income Tax (Appeals)-1, Chennai. This was pursuant to an assessment order u/s.143(3) read with section 147 of the Act passed by the ld. Assessing Officer for the very same year. Cross objection of the assessee is against the latter appeal.
Appeal in is taken up first for 3. disposal. Sole issue raised by the assessee is on disallowance of expenditure incurred towards improvement in leasehold facility. Ld. Counsel for the assessee submitted that similar issue had come up before this Tribunal in assessee’s own case for assessment year 2008-
9. As per ld. Authorised Representative this Tribunal in had remitted the matter back to the file of the ld. & 1762/16 :- 3 -: & C.O.No.106/2016.
Assessing Officer for verifying whether expenditure incurred was capital in nature or not. As per ld. Authorised Representative disallowance for the impugned assessment year was also similar to what was claimed by the assessee for assessment year 2008-09.
4. Per contra, ld. Departmental Representative strongly supported the orders of the authorities below.
We have considered the rival contentions and perused the 5. orders of the authorities below. The question raised is whether claim of the assessee on improvement on leasehold premises was a revenue out go or not. Ld. Assessing Officer disallowed the claim considering it to be a capital expenditure and ld. Commissioner of Income Tax (Appeals) had confirmed such disallowance. We find that there was a similar disallowance done for assessment year 2008-09 also. When the matter reached the Tribunal, it had held as under at para 4 to 7 of its order in dated 25.11.2016 as under:-
‘’Aggrieved, assessee moved in appeal before ld. Commissioner of Income Tax (Appeals). Assessee furnished a break up of the expenditure of �2,57,98,071/- before ld. Commissioner of Income Tax (Appeals) which read as under:-
Particulars Amount (in INR) Cost incurred towards partitioning, false 96,70,938 ceiling and flooring Electrical work – repairs and replacement 79,56,512 & 1762/16 :- 4 -: & C.O.No.106/2016.
Cabling & Networking charges 57,92,628 Ducting and other air conditioner related 16,76,540 costs Fire Sprinkler works and fire Extinguishers 2,79,971 Storage units 2,43,000 Architect Fees 1,78,487
Total 2,57,98,076
As per the assessee, above expenditure did not result in creation of any new asset nor gave it any enduring benefit. Reliance was placed on the judgment of Jurisdictional High Court in the case of CIT vs Ayesha Hospitals P. Ltd 292 ITR 266 and Thiru Arooran sugars Ltd vs. DCIT, 350 ITR 324. However, ld. Commissioner of Income Tax (Appeals) was not impressed by the above contention. He held as under:-
‘’10. Renovation per se would be a composite item of activity which would be violated in its concept if the same is split up into 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. The architect fees for example claimed separately by the appellant would be a integral part of the renovation activity as also the fee paid to the contractor executing the renovation. Simply put, all activity put together result in restoring to good and usable condition and such an exercise would include repairs as a integral part thereof. 11.The case of the appellant rests on the plea that it is a leasehold premise land 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. Further more the rights and entitlements of the appellant is 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. 12.FinallY with regard to the claim preferred by the appellant u/s 37 and not u/s 32, the same is not tenable on facts and in law. It is settled law that the provisions of s.37 are applicable in respect of general expenses, where expenditure not specified in & 1762/16 :- 5 -: & C.O.No.106/2016. s.30 to 5.36 are to be considered. As also, expenditure which is not capital or personal in nature and which is wholly and exclusively laid out or expended for the purpose of business. These exclude expenses for any purpose which is an offence or prohibited by law etc. Sec.37(1) therefore being a residual provision, cannot be taken aid! of, unless and until it is established that none of the provisions of s.30 to 36 are applicable to a given case. This view find support from the ratio in. Malwa Vanaspati and Chemical Company Ltd v. CIT 154 ITR 655 (MP) and Khimji Visram and Sons P Ltd v CIT 209 ITR 993 (Guj.). 13.The decisions relied upon by the appellant have drawn strength from the ruling in CIT v. Ayesha Hospitals P Ltd 292 ITR 266 (Mad). It may be taken into account that the assessment year which was before the Hon'ble court was 1991-92 in respect of an expenditure of ₹1,85,557 which was incurred by the assessee towards expenditures relating. to painting, re-laying of damaged floors, and partitions etc in a leased premise for running of a hospital. The lease deed did not provide for such expenditure to be undertaken by the lessor. Drawing support from the Apex court decision in CIT .v. Madras Auto Service P Ltd 233 ITR 468 the expenditure was held to be revenue in nature and deductible as it was for the purpose of carrying on business. The minor repairs were but essential to use the leased premises as a hospital which require the damaged floor tiles to be replaced, painting of walls and minor partitions to be put in place. In the context of the assessee there, these would constitute minor repairs not resulting in added or enduring benefit. Likewise tile amount expended and the extent of renovation and repairs carried out though not determinative would be fairly indicative towards deciding whether the same would constitute minor repairs. The facts in the case of the appellant which was regularly in occupation of lease premises for the conduct of its business are significantly different and differently placed. A situation where the appellant had taken on lease a pare building or a barren plate of floor space wherein civil, electrical, masonary, plumbing and other related works were extensively carried out to make works stations, cabins, and congenial wor1k space cannot be equated to that of a case where minor repairs as in the case of Ayesha Hospital (supra) were carried out. 14.ln this context it will serve useful purpose to refer to the decision of the Hon'ble Kerala High Court dated 18.8.2015 in Indus Motor Company P Ltd v. DC IT 378 ITR 707. While examining a similar claim the Hon'ble Court observed " .... after the introduction of Explanation 1 to section 32(1) of the Act, there is no scope left out at all for any interpretation since by a legal & 1762/16 :- 6 -: & C.O.No.106/2016. fiction, the assessee is treated as the owner of the building for the period of his occupation. This means that by refurbishing, decorating or by doing interior work in the building and enduring benefit was derived by the assessee for the period of occupation and, therefore, is a capital expenditure and not revenue expenditure ..... " " ..... According to us, by adding Explanation 11 to section 32(1) Parliament has manifested its legislative intention to treat the expenditure incurred by the assessee on leasehold building as capital expenditure and, therefore, Explanation 1 to section 32(1) 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 I and phraseologies by the legislature applied." Further applying the ratio, amongst ot1ers, 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 the A.Y.2008-09 in the case of the Continental Enterprises v. ITO has dismisse9 the claim of 100% depreciation by the assessee
Thus he upheld the order of the Assessing Officer.
Before us, ld. Authorised Representative strongly assailing the orders of the lower authorities submitted that breakup of expenditure furnished by the assessee was never doubted by the lower authorities. According to him, a sum of �94,71,490/- was suo motu capitalized by the assessee. Relying on the judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Armour Consultants P. Ltd. 355 ITR 418. Ld. Authorised Representative submitted that claim of the assessee was under sec. 37(1) of the Act. As per ld. Authorised Representative the expenditure claimed was not capital in nature. According to him, Explanation 1 to Sec. 32(1) of the Act applied only to capital items. Ld. Authorised Representative submitted that expenditure incurred for false ceiling, partitions etc were held by the Hon’ble Jurisdictional High Court in the case of Ayesha Hospital (P) Ltd (supra) to be in the nature of repair and maintenance. Further, according to him in the case of Ayesha Hospital (P) Ltd (supra), the jurisdictional High Court had also considered the effect of Explanation (1) to Sec. 32(1) of the Act.
6. Contra, ld. Departmental Representative submitted that cost of repairs claimed by the assessee could not include & 1762/16 :- 7 -: & C.O.No.106/2016.
expenditure which was capital in nature by virtue of Explanation to Sec. 30 of the Act inserted by Finance Act, 2003 w.e.f. 01.04.2004. Further, according to him, claim of the assessee was hit by Explanation (1) to Sec. 32 of the Act. Reliance was placed on the judgment of Kerala High Court in the case Indus Motor Company P. Ltd vs. DCIT 382 ITR 503, that of Bombay High Court in the case of RPG Enterprises vs. DCIT, 386 ITR 401 and that of Delhi High Court in the case of Bigjo’s India Ltd vs. CIT. 293 ITR 170. Further, according to him, Hon’ble Jurisdictional High Court in the case of Ayesha Hospital (P) Ltd (supra) had not considered the Explanation 1 to Sec. 32 of the Act.
We have considered the rival contentions and perused the orders of the authorities below. Ld. Departmental Representative has placed strong reliance on Explanation to Sec.30 of the Act which is reproduced hereunder:- ‘’For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repairs referred to in sub-clause (i), and the amount paid on account of current repairs referred to in sub-clause (ii), of clause (a), shall not include any expenditure in the nature of capital expenditure’’.
He has also placed reliance on Explanation 1 to Sec. 32(1) of the Act, which is also reproduced hereunder:-
‘’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’’.
For applying both these explanations, the threshold requirement is that the expenditure claimed is capital in nature. If the expenditure claimed is not capital in nature then irrespective of the question whether it was incurred in a leasehold premise or on own premises, it will be allowable.
& 1762/16 :- 8 -: & C.O.No.106/2016.
Jurisdictional High Court has clearly held that in the case of Thiru Arooran sugars Ltd (supra) that expenditure incurred on false ceiling and office renovation were revenue in nature. The question thus is not whether expenditure is incurred in lease hold premises or not, the question is whether expenditure incurred capital in nature or not. No doubt, assessee had furnished a break-up of the expenditure before ld. Commissioner of Income Tax (Appeals). In our opinion, none of the authorities verified whether the expenditure included any capital outgo or not. We are therefore of the opinion that matter requires a fresh look by the ld. Assessing Officer. We set aside the orders of the lower authorities and remit the issue regarding claim of expenditure on improvement of leasehold asset back to the file of the ld. Assessing Officer for consideration afresh in accordance with law. Ground No. 2 of the assessee is allowed for statistical purpose’’.
For the impugned assessment year break-up of the improvement expenditure claimed by the assessee were as under:-
Particulars Amount (in INR) Cost incurred towards partitioning, 1,01,01,654 false ceiling and flooring Electrical work carried out 78,85,632 Ducting and other air conditioner 33,23,335 related costs Cabling & Networking charges 29,62,709 Architect Fees 17,10,345 Fire Sprinkler works and fire 10,52,835 extinguishers Storage units 2,49,806 Wall covers/Graphics 1,96,281 Projector screen 26,437 Venetian Blinds 20,633
Total 2,75,29,667 & 1762/16 :- 9 -: & C.O.No.106/2016.
Claim of expenditure is similar to what was claimed by the assessee in A.Y. 2008-2009. Hence we are of the opinion that in view of the order of the Tribunal for assessment year 2008-09, issue regarding claim of expenditure on improvement of leasehold asset requires a fresh look by the ld. Assessing Officer. We give similar directions as given for assessment year 2008-09. Appeal of the assessee is treated as allowed for statistical purpose.
7. Now, we take up appeal of the Revenue in ITA No.1762/Mds/2016.
Facts apropos are that assessee had filed return of income for the impugned assessment year disclosing income of �27,46,17,112/-. Assessment was completed after considering the claim of the assessee for deduction u/s. 10A of the Act. Subsequently, on 21.03.2014, a notice u/s.148 of the Act was issued to the assessee.
Pursuant to such notice, assessee requested the ld. Assessing Officer to treat the return originally filed as one filed in response to the notice.
Ld. Assessing Officer while completing the assessment excluded exchange loss, telecommunication expenditure, software maintenance charge and management fees incurred in foreign currency from export turnover while working out deduction available to the assessee u/s.10A & 1762/16 :- 10 -: & C.O.No.106/2016. of the Act. However, he did not exclude these amounts from total turnover. Further, while computing such deductions, ld. Assessing Officer also included turnover and profits of a Domestic tariff unit of the assessee, to the turnover and profits of its STPI units.
Aggrieved on both above, assessee moved in appeal before the ld. Commissioner of Income Tax (Appeals). In so far as exclusion of the foreign exchange loss, telecommunication expenditure, software Maintenance fees and management fees incurred in foreign currency, from export turnover is considered, the ld. Commissioner of Income Tax (Appeals) was one with the ld. Assessing Officer. However, he was of the opinion that these items which were excluded from export turnover had to be deducted from total turnover also while working out such deduction relying on the Special Bench decision in the case of ITO vs. Saksoft Limited, (2009) 20 DTR 514.
In so far as aggregation of turnover and profits of DTA unit with STPI unit was concerned, ld. Commissioner of Income Tax (Appeals) held that deduction available u/s.10A of the Act was specific to the undertaking and there could not be any such aggregation. He directed the ld. Assessing Officer to grant deduction under section 10A of the Act to the STPI unit on a stand-alone basis. & 1762/16 :- 11 -: & C.O.No.106/2016.
Now before us, ld. Departmental Representative strongly assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that decision of the Special Bench in the case of Saksoft Limited (supra) has been taken in appeal by the Department before the Hon’ble High Court. As for clubbing of turnover and profits of DTA unit with to the turnover and profits of STPI unit, ld. Departmental Representative submitted that such aggregation was rightly done by the ld. Assessing Officer.
Per contra, ld. Authorised Representative strongly supported the orders of the authorities below on the above issues.
We have considered the rival contentions and perused the orders of the authorities below. In so far as exclusion of items from total turnover where these were deducted from export turnover, we find that judgment of Karnataka High Court in the case of CIT vs. Tata Elxsi 349 ITR 98 is in favour of the assessee. Special Bench decision in the case of Saksoft Limited (supra) stands implied approved.
Coming to the aspect of aggregation of turnover and profits of DTA unit, while computing deduction available u/s.10A of the Act is concerned, we find that view taken by ld. Commissioner of Income Tax & 1762/16 :- 12 -: & C.O.No.106/2016.
(Appeals) is fortified by the judgment of Hon’ble Apex Court in the case of CIT vs. Yokagawa India Ltd in Civil appeal no.8498/2013, dated 16.12.2016. While approving the judgment of Karnataka High Court in the case of CIT vs. Yokogawa India Ltd 341 ITR 385 where it as held that deduction available u/s.10A of the Act was to be computed on a standalone basis, separately for each undertaking, their lordship had observed as under:-
‘’’v) From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that,
“The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision.”
(vi) If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous & 1762/16 :- 13 -: & C.O.No.106/2016.
Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression “total income of the assessee” in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee” in Section 10A as ‘total income of the undertaking’.
Hence, in our opinion, ld. Commissioner of Income Tax (Appeals) was justified in directing the ld. Assessing Officer to work out the deduction available to the assessee u/s.10A of the Act, without aggregating the turnover and profit of its DTA unit. We do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals) on both these aspects. Appeal of the Revenue stands dismissed. & 1762/16 :- 14 -: & C.O.No.106/2016.
Cross objection of the assessee which questions the reopening done for the impugned assessment year has become infructuous, since revenue’s appeal has been dismissed on merits.
In the result, appeal of the assessee in is allowed for statistical purpose. Appeal of the Department in ITA No. 1762/Mds/2016 is dismissed and Cross objection of the assessee is dismissed as infructuous.
Order pronounced on Friday, the 6th day of January, 2017, at Chennai.