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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI ASHWANI TANEJA
Date of hearing : 24-11-2016 Date of order : 21 -12-2016
O R D E R Per ASHWANI TANEJA, AM: These two appeals are filed by the assessee.
2. Starting with the appeal for A.Y. 2010-11, This appeal has been filed by the assessee against the order passed by Ld.CIT(A) dated 27-01-2015 against the assessment order of the AO u/s 143(3) dated 04-03-2013 for A. Y. 2010-11 on the following grounds: “1.The learned Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in holding that the lump sum compensation of Rs. 10,00,000/- paid to the lessee Fun Multiplex Pvt. Ltd. for delay in getting the occupation 2 & 1963/Mum/2015 certificate is neither allowable as revenue expenditure nor as capital expenditure.
The learned Commissioner of Income Tax (Appeals) further erred in confirming the action of the AO in holding that sum of Rs. 15,00,000/- paid towards reimbursement of repair work carried out by Fun Multiplex Pvt. Ltd. is not allowable as revenue expenditure however treated the same as capital expenditure.
3. The learned Commissioner of Income Tax (Appeals) further erred in confirming the action of the AO in holding that the expenses of Rs.79,94,553/- incurred by the appellant company on repairs and maintenance are not allowable as revenue expenditure. 4. learned Commissioner of Income Tax (Appeals) further erred in confirming the action of the AO in disallowing gas charges of Rs. 1,11,070/-.”
3. Grounds 1 & 2: In these grounds, the assessee has challenged the action of lower authorities in holding that lump sum compensation of Rs.10 lakhs paid by the assessee to its lessee; viz. Fun Multiplex Pvt Ltd for delay in obtaining the occupation certificate was not allowable as revenue expenditure. Similarly, a sum of Rs.15 lakhs paid by the assessee to the said party towards reimbursement of repair works and other miscellaneous jobs carried out by the said party on behalf of the assessee was also held to be not allowable as revenue expenditure.
The brief facts are that the assessee company was engaged in the business of real estate, re-development of properties and operation of mall. The assessee had purchased land and constructed K Star mall on the said land. The occupation certificate was issued by BMC on 18-08-2008. Shops and showrooms were constructed in the said mall and were given on lease to various customers. One such customer (lessee) was M/s Fun Multiplex Pvt Ltd. As per the terms of the agreement with the said party, the assessee was obliged to arrange occupation certificate within the fixed
3 & 1963/Mum/2015 time limit and in case there was any delay, then assessee was liable to pay compensation to the said party. Eventually, there was delay in obtaining the occupation certificate due to which commencement of business of the said party got delayed. Accordingly, as per the terms of the agreement, the assessee made aggregate payment of Rs.25 lakhs to the said party, i.e. Rs.10 lakhs as lumpsum compensation and Rs.15 lakhs towards repair and miscellaneous work done by the said party on behalf of the assessee. The AO treated these amounts as not allowable as revenue expenses.
In the first appeal before the Ld. CIT(A), it was submitted by the assessee that this expenditure was incurred not for bringing the premises into operation but it was compensation paid to the lessee on account of delay in getting occupation certificate and submitted that the business of the assessee had already commenced and, therefore, this expenditure was incurred in course of business and therefore, this should be allowed as revenue expenses. But, the Ld. CIT(A) did not agree with the submission of the assessee by observing as under:_
“3.4 Here in the first issue the appellant has paid Rs.I0 lacs for compensation for delay in obtaining occupation certificate. It is clear from the facts of the case that if occupation certificate is not obtained, by the lessor cannot use the premises for residential purposes. As there was a delay in obtaining Occupation certificate, the appellant paid this amount even before the business had commenced. Multiplex was not in operation, so appellant cannot claim this compensation as revenue in nature. Even this compensation cannot be treated in full as capital in nature. It is only capital loss to the appellant. This capital loss has been incurred by appellant due to delay in obtaining occupation certificate from the BMC authorities. Hence AO's treatment of this amount of Rs.I0 lacs is to be considered as capital loss and no deduction is allowed in such a case. Even depreciation is not eligible on this issue. Hence ground of appeal is dismissed.”
4 & 1963/Mum/2015 3.5 Regarding second issue, the appellant had paid Rs. 15 lacs towards reimbursement of work carried out. This work was carried out before the theatre started functioning. Hence this work has brought a new asset into existence and new asset is to be treated as capital in nature. Hence this claim of the appellant is to be treated as capital in nature. However, in ground no.4, appellant had claimed depreciation on this expenditure. As it is a capital expenditure incurred for obtaining occupation certificate, the appellant is eligible for depreciation on this issue. Hence ground of appeal is partly allowed.”
5. During the course of hearing before us, it was submitted by the Ld. Counsel that original lease agreement was entered into between the assessee and the said party on 17-02-2006 and even the modified agreement was entered into on 13-04-2009 whereby the compensation for delay in handing over the premises was agreed to be paid. It was submitted that the business of the assessee had already been set up, since premises were let out and rental income was received and the same was shown as part of income in the Profit & Loss Account and accepted as business income by the AO in the assessment order. Thus, compensation of Rs.10 lakhs was paid towards reimbursement of expenses incurred by the said party (i.e. the lessee) on behalf of the assessee. These expenses incurred were in the nature of repairs and routine expenses which were incurred to make the premises usable as the same was lying vacant since last 2 years owing to the delay in receipt of occupation certificate from BMC authorities. These expenses were incurred in normal course of business and no new asset had come into existence. Further, the decisions relied upon by the AO were on different facts and these are not applicable on the facts of the case before us.
5 & 1963/Mum/2015 6. Per contra, the Ld. DR supported the orders of lower authorities and submitted that since the payment was made before the commencement of business by M/s Fun Multiplex Pvt Ltd, these are not in the nature of revenue expenses and has been rightly disallowed by the lower authorities.
We have gone through the orders passed by lower authorities, arguments made and evidences shown to us. It is noted from the perusal of the Profit & Loss Account that the assessee had shown income on account of rent aggregating to Rs.7.40 crores which has been accepted as income under the head “business” by the AO in the assessment order. The income has been earned by the assessee from leasing and operation of mall. It is further noted that in the immediately preceding year also, the rental income has been credited for an amount of Rs.53.33 lakhs. Thus, undoubtedly, business of the assessee was not only set up but also commenced before the beginning of the impugned accounting year itself. Under these circumstances, any expenses incurred in the normal course of business should be held allowable as revenue expenditure so long as it has been incurred for the purpose of business and it does not give rise to creation of a new capital asset or benefits of enduring nature.
Further, as far as the business with the said party, viz. M/s Fun Multiplex Pvt Ltd is concerned, it is noted that the original lease agreement was done with the said party on 17-02-2006. The assessee company had committed to obtain occupation certificate of the leased premises by not later than 30th October, 2006. However, the assessee obtained occupation certificate on 18th August, 2008. As per clause 5(e) of the said agreement, the assessee was liable to pay compensation to the 6 & 1963/Mum/2015 said lessee in case of any delay. It is further brought to our notice that occupation certificate for the remaining building was separately required which was already arranged and provided to the other respective lessees. But the occupation certificate for the multiplex was required separately from BMC and there was delay in obtaining the occupation certificate for the multiplex only.
In view of the aforesaid circumstances, the assessee entered into a modification agreement dated 13-04-2009 under which the assessee agreed to pay Rs.10 lakhs towards lump sum compensation for delay in obtaining the occupation certificate and Rs.15 lakhs towards reimbursement of work carried out by the said lessee on behalf of the lesser, i.e. assessee. It is further noted from the said agreement that vide clause (6), the lease rent was payable by the lessee to the lesser, i.e. assessee wef 01-04-2009. Clauses 4, 5 & 6 of the said agreement read as under:-
“4. As per Clause 4(a) of the Principal Agreement, the Lessor was bound and liable to obtain the Occupation Certificate on or before 30th October 2006. However the Lessor has obtained the Occupation Certificate on 18th August 2008. According to clause (e) of the said Principal Agreement, the Lessee is eligible for the rent free period of number of days, calculated as one day rent free for each day of delay in obtaining the Occupation Certificate on part of the Lessor. It is now agreed by and between the parties hereto that the Lessor will pay, on execution hereof, a lump sum compensation of Rs.l0,00,000/- for delay in obtaining the Occupation Certificate.
As mutually agreed between the parties hereto, the Lessee has for and behalf of the Lessor carried out certain works in the Demised Premises. The Lessor on execution hereof reimburse and pay 10 the Lessee a sum of Rs.15,00,0001- (Rupees fifteen Iacs only) as against such works carried out by the Lessee on behalf of the Lessor.
7 & 1963/Mum/2015 6. Notwithstanding the provisions contained in the said Principal Agreement, it is agreed by and between the parties hereto that the Lease rent shall become due and payable by the Lessee to the Lessor with effect from 1st April 2009, and such rent start date shall be deemed to be Commencement Date.”
From the perusal of the above said clauses of the agreement, it becomes clear that the lease rent commenced from the beginning of the impugned previous year, i.e. 01-04-2009. Thus, business with the said party commenced wef 01-04-2009. The amount of compensation of Rs.10 lakhs and reimbursement of expenses of Rs.15 lakhs was made in the normal course of business as a measure of commercial expediency. Nothing has been brought on record to show if either of these amounts gave rise to creation of new capital asset. It has been further informed to us that the total amount of Rs.1,11,70,422/- being rental income from the said party (i.e. M/s Fun Multiplexes Pvt Ltd) has been credited in the Profit & Loss Account as part of aggregate rental income of Rs. 7,39,56,718/- which has been accepted as business income by the AO. Under these circumstances, we find that both the aforesaid amounts i.e. Rs 10 Lacs as well as Rs 15 Lacs should be allowed as revenue expenses incurred in the normal course of business. The AO is directed to provide relief accordingly. As a result, grounds 1 & 2 are allowed.
Ground 3: In this ground, the assessee has challenged the action of lower authorities in holding that expenses of Rs.79,94,553/- incurred by the assessee on repair and maintenance were not allowable as revenue expenses. During the course of assessment proceedings, it was noted by the AO that following expenditures were incurred in connection with building premises of K Star mall:-
8 & 1963/Mum/2015 “Sr Particulars Amount No. (In Rs.) i) Aluminium 1,91,515 ii) Electric Hardware 19,31,800 iii) Glass 1,14,841 iv) Labour charges 29,45,768 v) Plumbing and sanitation 22,46,290 vi) Repairs and maintenance 3,59,381 vii) Tiles and marble 1,98,911 Total 83,53,934 The AO treated the above expenditure as capital in nature and disallowed the same on the ground that the above expenditure was incurred on the premises given to various lessees and, therefore, these additions were made to the asset before put to use and, therefore, these were capital in nature. In the appeal before the Ld. CIT(A), following submissions were made:-
“We rely on submission given to AO vide letter dated 11-02-2013 which is not fully considered by the AO and even the judgments cited in the letter are not considered by the AO even though the gist of the judgment are mentioned in the letter which are incorporated in the order. From the details of the head of expense under which these expenses were incurred, it is very clear that no structural change is made to the mall building and changes are made in electricity, plumbing and sanitation work has been done for small increase/ decrease to the size of the shops/ showrooms as per the requirement of the lessee. Further, by doing these changes, no addition is made to the building as these changes may be demolished and further such changes are to be made when lease agreement with the lessee is expired and new lessee may require particular area as per his suitability. These expenses are incurred from time to time during the year. Accordingly this is not capital expenditure which is to be capitalized to building as this expense is incurred to make particular shop/showroom suitable for lessee and which the object to the 9 & 1963/Mum/2015 assessee to let out the mall to various persons who open their shops/ showrooms. We are relying on the following judgments wherein the test for considering any expense as capital or revenue is laid out and as per the said judgments, the above expenses incurred by the assessee cannot be treated as capital expenditure. Decision of High Court of Bombay in the case of CIT v. HEDE Consultancy (P) Ltd. - 258 ITR 380 2. Decision of ITAT Kolkata Special Bench in the case of Peerless Securities Ltd. v. JCIT - 93 TT J 325 3. Decision of Supreme Court of India in the case of CIT v. Saravana Spg. Mills (P) Ltd. - 293 ITR 201 4. Decision of High Court of Delhi in the case of CIT v.Indian Visit.com (P) Ltd - 219 CTR 603 5. Decision of High Court of Delhi in the case of International Airports Authority of India v. CIT - 303 ITR 433 6. Decision of Supreme Court in the case of Empire Jute Co. Ltd. v. CIT - 124 ITR 1 7. Decision of ITAT Delhi Bench in the case of Honda Siel Cars India Ltd. V. ACIT - 109 ITD 1" Ld. CIT(A) did not agree with the submissions of the assessee on the ground that these expenses were required for bringing capital asset into existence. Thus, he upheld the action of the AO.
During the course of hearing before us, the Ld. Counsel reiterated the submissions made before the Ld. CIT(A). He also submitted brief note for explaining the purpose of the expenditure incurred which can be summarised as under:-
“i) The object of the assessee is to earn income by letting out the mall to various persons who open their shops/showrooms. ii) After getting the occupation certificate, the company gave the premises on lease. However, the area of showroom was not according to the requirement of lessee and therefore the assessee made the temporary partitions in area of shop/ showroom to be let out by incurring expenses aggregating to Rs 83,53,934. These
10 & 1963/Mum/2015 expenses are incurred to make the particular shop/showroom suitable for lessee. iii) Ld AO has summarized the expenditure incurred on these items - Aluminum, Electric and Hardware, Glass, Labour Charges, Plumbing and Sanitation, Repairs and Maintenance, Tiles and Marbles, etc. iv) Copy of details of expenses are enclosed at Page No. 42 and account of each expenses running in number of pages was given to the AO which is also enclosed at Page No. 43 - 90 of the paperbook. v) Ld AO held that this is addition to property which has been leased out and hence treated the expenses incurred as capital expenditure. vi) The AO further held that these expenditure are incurred first time and are giving enduring benefit and rights of a permanent nature, since the assessee is making the lease agreement to the lessee for 5 years. Therefore this is nothing but capital expenditure. Ld. CIT(A) held that this expenditure is required for bringing capital asset into existence. vii) In this respect, we submit that from the details of the head of expense under which these expenses were incurred, it is very clear that no major structural change is made to the mall building and expenses are incurred on electricity, plumbing and sanitation work for small temporary partitions in the shops/showrooms to suit the requirement of the lessee. viii) Further, by making these changes, no addition is made to the building as these changes are temporary and may be demolished and further such changes are to be made when lease agreement with the lessee is expired and new lessee may require particular area as per his suitability. ix) These expenses are incurred from time to time during the year. Accordingly this is not capital expenditure which is to be capitalized to cost of the building. x) Further the AO in sub para (e) of para 6 held that "from the nature of expenses incurred it is seen that the assessee has made this expenditure for mainly internal structural change to divide the premises in various part according to convenient to the lessee. Since, the assessee has made structural change in the building premises, therefore, these expenditure is nothing but capital expenditure. For this purpose reliance is placed on the case of Arvind Mills Ltd. CIT (SC) 197 ITR 422.” (Copy of the decision is enclosed at page nos 241 to 244 of the paperbook).
11 & 1963/Mum/2015 xi) In this regard it is submitted that the decision of the Hon. Supreme Court in the case of Arvind Mills Ltd. v. CIT - 197 ITR 422 is distinguishable as the facts in that case are different from that of the assessee's case. The Court in that case has discussed the treatment of betterment charge on account of increase in the valuation of the land payable under the Bombay Town Planning Act which was a compulsory payment or statutory exaction within the Town Planning Scheme. As the facts of the appellant are different, the ratio of the said decision cannot be applied to the appellant's case.”
Further, in support of his arguments, the Ld. Counsel placed reliance upon many judgments. Emphasis was laid upon the judgement of Hon’ble Bombay High Court in the case of CIT vs Hede Consultancy Pvt Ltd 258 ITR 380 (Bom) wherein the expenditure incurred under similar circumstances were held to be allowable expenditure.
Per contra, the Ld. DR relied upon the order of the lower authorities. It was submitted that since the expenditure have been incurred on the premises owned by the assessee, therefore, it has given rise to improvement in the capital asset held by the assessee and, therefore, it has been rightly treated as capital expenditure by the lower authorities.
We have gone through the facts of the case. The crux of the arguments made by the Ld. Counsel for treating this expenditure as revenue expenditure is that these are not one-time expenditures or expenses which are permanent in nature. These expenditures are required to be incurred from time to time especially when there is any change in the lessees. Every time, there is some change / modification is required to be done. It is further submitted that these expenses are also necessary to keep the premises in useable condition. These expenses are 12 & 1963/Mum/2015 required to be incurred in the normal course of business. There are many common areas which fall within the sole responsibility of the assessee. It is also noted by us that the expenditure was incurred on highly fragile and temporary items, for example, glass, plumbing and sanitation, tiles and marbles, repair and maintenance, labour charges, etc. It has been held by Hon’ble Bombay High Court in the case of CIT vs Hede Consultancy Pvt Ltd that expenditure incurred by the assessee in converting godown taken on lease into office premises by renovating it, providing interior decoration, replacement of existing roof with that of marble, etc. should be termed as revenue expenditure. In this case, we are also reminded of the judgment of the Hon'ble Supreme Court in the case of CIT vs Saravana Spinning Mills Pvt Ltd 293 ITR 207 wherein it was observed that basic tests to find out as to what would constitute current repairs is that expenditure must have been incurred to preserve and maintain an already existing asset and object of the expenditure must not be to bring new asset into existence. In the facts before us, the premises leased out by the assessee were already constructed. These expenditures were incurred by the assessee to make these premises usable and nothing of the nature of permanent asset came into existence, since these expenses have to be incurred on recurring basis to keep these premises in usable conditions. Thus, we find that these expenditures are actually revenue in nature and should be allowed as such. The AO is directed to allow these expenses as revenue expenses. Ground 3 is allowed.
Ground 4: No arguments were made with respect to this ground and, therefore, the same is dismissed.
As a result, appeal filed by the assessee is partly allowed.
13 & 1963/Mum/2015 ITA No.1963/Mum/2015 18. This appeal arise out of the order of the Commissioner of Income- tax (Appeals)-22, Mumbai [hereinafter referred to as CIT(A)] dated 27-01- 2015 passed against the order u/s 143(3) by the assessing officer for assessment year 2011-12 and is on the following grounds:
“1.The learned Commissioner of Income Tax (Appeals) further erred in confirming the action of the AO in holding that a sum of Ras.39,47,978/- out of repairs and maintenance charges is to be treated as capital expenditure.” 19. Both the parties jointly stated that this ground is identical to ground No.3 of AY. 2010-11; this has been allowed in favour of the assessee. The AO is directed to follow our order for AY. 2010-11 and allow this ground. As a result, ground 1 is allowed.
As a result, appeal of the assessee is allowed.
In the result, appeal for A.Y. 2010-11 is partly allowed and appeal of A.Y. 2011-12 is allowed.
Order pronounced in the court on this 21st day of December, 2016.