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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMARJIT SINGH
These are cross-appeals filed by the assessee and the Revenue against the order of CIT(A)-9, Mumbai dated 16.04.2012, pertaining to the Assessment Year 2008-09, which in turn has arisen from the order
2 Malabar Hill Club Ltd. & 4735/Mum/2012 passed by the Assessing Officer dated 16.12.2010 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
The Grounds of appeal raised by the assessee and Revenue in their respective appeals are as under :-
“1 : 0 Re.: Disallowance of Rs. 53,42,521/- being Building - Repairs, Renovation & Maintenance expenses:
1 : 1 The Commissioner of Income-tax (Appeals) has erred in confirming that repair expenditure to the extent of Rs. 53,42,521/- was capital in nature and in sustaining the disallowance.
1 : 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the repairs, renovation and maintenance expenses incurred by it during the year are revenue in nature and allowable as a deduction while computing its total income and the stand taken by the Assessing Officer in this regard is erroneous and not in accordance with law and the Commissioner of Income-tax (Appeals) ought to have held as such.
1 : 3 The Appellant submits that the sum of Rs. 53,42,521/- disallowed by the Assessing Officer is incorrect to the extent that from the same, only a sum of Rs. 39,35,805/- has been claimed by the assessee as revenue expenditure for the year under consideration and the Commissioner of Income-tax (Appeals) ought to have held as such.
1 : 4 The Appellant submits that the Assessing Officer be directed to delete the disallowance of Rs. 53,42,521/- so made by him and to re-compute its total income accordingly.
3 Malabar Hill Club Ltd. & 4735/Mum/2012 2 : 0 Re.: Disallowance u/s. 14A:
2 : 1 The Commissioner of Income Tax (Appeals) has erred in upholding the action of the Assessing Officer of disallowing a sum of Rs. 36,540/- u/s. 14A of the Income-tax Act, 1961, over and above the sum of Rs. 13,000/- disallowed by the Appellant suo-moto by applying the provisions of Rule 8D of the Income-tax Rules, 1962.
2 : 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no further disallowance u/s. 14A of the Income-tax Act, 1961 is called for and the stand taken by the Assessing Officer in this regard is erroneous, misconceived and ought to be struck down and the Commissioner of Income-tax (Appeals) ought to have held as such.
2 : 3 The Appellant submits that the Assessing Officer be directed to delete the additional disallowance so made by him and to re-compute its total income accordingly.”
ITA NO. 4735/MUM/2012 (Revenue’s appeal)
1. Whether on facts, circumstances and in the law, the Ld. CIT(A) erred in deleting the entire addition of Rs.58,89,925/- made by the Assessing Officer on account of membership fees treated as revenue receipts and further ignoring that the Hon'ble jurisdictional High Court decided the said issue in favour of the revenue for earlier years in assessee’s own case?
Insofar as the appeal of assessee is concerned, the first issue relates to the action of the income-tax authorities in treating an amount of Rs.59,36,134/- debited under the head ‘Building repairs, renovation and maintenance’ as a capital expenditure. In para 18 of the assessment order, the Assessing Officer has tabulated details of such expenditure, which is as under :-
4 Malabar Hill Club Ltd. & 4735/Mum/2012 Sr.No. Description Amount(Rs) Concreting Work B-4 50mm thick concrete over B-2 item 77,976/- B-6 Epoxy Bonding coat to RCC 1,92,500/- B-15 Providing & laying micro concrete incl. shuttering 1,50,000/- Plastering work C-1 Providing double coat sandfaced plaster to external surface 7,46,690/- Plumbing A-2 Fixing in position 6,03,104/- B-2 Providing & fixing GI water supply lines 3,61,815/- M.S. Railing & Cradle Work B-1 Providing, fabricating & fixing MS Galvanised grills 2,48,738/- B-2 Providing, fabricating & fixing of MS hand railing 1,08,750/- B-3 Providing, fabricating & fixing of MS Galvanised Platform 93,225/- Aluminium Composite Panel Cladding Work C-1 Providing & fixing ACP as per specifications 5,40,828/- New G.I. Line for Pump Room 1,14,034/- Terrace Waterproofing 14,46,365/- S.S. Railing work at Ground Floor Level 1,04,312/- Granite Flooring on Corridor 1,24,801/- ACP Cladding & Aluminium Louver 7,08,156/- Aluminium Composite Panel 3,14,840/- Total (Rs.) 59,36,134/-
As per the Assessing Officer, said expenditure brings “into existence a new asset or benefit of enduring nature to the assessee and thus do not amount to revenue expenditure eligible for deduction.” Accordingly, he treated the said expenditure as capital in nature and allowed depreciation @ 10% and thus made a net addition of 5 Malabar Hill Club Ltd. & 4735/Mum/2012 Rs.53,42,521/- (i.e. Rs.5936134 – Rs.593613) to the returned income. The same has been affirmed by the CIT(A) against which assessee is in further appeal before us.
At the time of hearing, the learned representative for the assessee pointed out that the stand of lower authorities is untenable and, in fact, it is based on a wrong appreciation of facts. It has been pointed out that the details culled out by the Assessing Officer in para 18 is based on a bill of a concern, M/s. Painterior and it is pointed out that the expenditure claimed in the instant year in revenue field is only Rs.39,35,805/- and the balance of it has been either claimed as revenue expenditure in Assessment Year 2007-08 or capitalized in the books of account. In this context, he has furnished the detailed reconciliation, which reads as under :-
Malabar Hill Club Ltd. : AY 2008-09 Items of Repairs and Maintenance expenditure treated as capital expenditure Sr. Description Amount Capitalised Revenue Capitalised Revenue No. (Rs.) AY 2007-08 AY 2007-08 AY 2008-09 AY 2008-09 Concreting Work B-4 50mm thick concrete over 77,976 67,716 10,260 B-2 item B-6 Epoxy bonding coat to RCC 1,92,500 1,92,500 B-15 Providing & laying micro 1,50,000 1,25,625 24,375 concret incl. shuttering Plastering Work C-1 Providing double coat 7,46,690 3,11,023 4,35,667 sandfaced plaster to external surface Plumbing A-2 Fixing in position 6,03,104 1,85,592 4,17,512 B-2 Providing & fixing GI water 3,61,815 3,61,815 supply lines M.S. Railing & Cradle Work B-1 Providing, fabricating & 2,48,738 2,48,738 - fixing MS Galvanised grills B-2 Providing, fabricating & 1,08,750 1,08,750 - fixing MS hand railing
6 Malabar Hill Club Ltd. & 4735/Mum/2012 B-3 Providing, fabricating & 93,225 93,225 - fixing MS Galvanised Platform Aluminium Composite panel for Cladding Work C-1 Providing & fixing ACP as 5,40,828 5,40,828 - per specifications New G.I. Line for Pump 1,14,034 87,629 22,545 3,860 Room Terrace Waterproofing 14,46,365 1,04,346 13,42,019 S.S. Railing work a Ground 1,04,312 93,000 5,500 5,812 - Floor Level Granite Flooring on 1,24,801 1,24,801 Corridor ACP Cladding 7 7,08,156 7,08,156 Aluminium Louver Aluminium Composite 3,14,840 3,14,840 Panel 59,36,134 6,31,342 13,63,175 5,812 39,35,805
Elaborating further, the learned representative for assessee pointed out that in Assessment Year 2007-08, the claim of assessee for expenditure as being revenue in nature stands allowed and there is no dispute. Notwithstanding the aforesaid, the learned representative pointed out that the nature of expenditure would itself show that it does not result in creation of a new asset or a benefit of enduring nature in the capital field. Further, the learned representative relied on the following decisions to justify that the nature of expenditure was revenue and not capital :-
(i) Evergreen Engineering Company Pvt. Ltd. vs. ACIT (ITA No. 1185/Mum/2013) (ii) International Tobacco Co. Ltd. vs. JCIT (ITA No. 277/Mum/2013) (iii) Porritts & Spencer (Asia) Ltd. vs. DCIT, 58 TTJ 195 (Del) (iv) Power Build Ltd. vs. ACIT, 126 TTJ 551 (Ahd.) (v) DCIT vs. The Seksaria Biswan Sugar Factory Ltd.
7 Malabar Hill Club Ltd. & 4735/Mum/2012
On the other hand, the ld. DR has reiterated the stand of Revenue, which is based on the reasoning taken by the Assessing Officer, which we have already adverted to in the earlier part of the order, and is not being repeated for the sake of brevity.
We have carefully considered the rival submissions. A perusal of the detail of expenditure, which has been extracted above, clearly reveals that the same is primarily incurred for maintenance and/or repairing/upgrading of existing structures. Though the Assessing Officer has canvassed that it results in creation of a new asset, but the details do not reflect so. Even with regard to the enduring benefit brought out by the Assessing Officer, it is to be understood that the enduring benefit in the case of repairs and maintenance may spread beyond one financial year, but that itself would not justify the characterisation of expenditure as capital in nature so long as it does not result in creation of any new asset or a benefit, in capital field. Apart therefrom, it is also to be appreciated that the expenditure in question, viz. plastering work, providing grills, granite flooring in corridors, terrace waterproofing, etc. are expenses which facilitate the upkeep of the premises and the enduring benefit, if any, is in the revenue field. Therefore, considering the fact-position, we find no reason to uphold the stand of the Revenue that the impugned expenditure is of capital in nature. Thus, the order of CIT(A) is set-aside and the Assessing Officer is directed to delete the addition. Thus, on this aspect, assessee succeeds.
Insofar as Ground of appeal no. 2 is concerned, same relates to the action of Assessing Officer in disallowing a sum of Rs.36,540/- u/s 8 Malabar Hill Club Ltd. & 4735/Mum/2012 14A of the Act instead of a sum of Rs.13,000/- suo moto disallowed by the assessee. In this context, the relevant facts are that the assessee had made a suo moto disallowance of Rs.13,000/- u/s 14A of the Act on the ground that such expenditure related to exempt income. The Assessing Officer, however, computed the disallowance at Rs.36,540/- by applying the provisions of Rule 8D(2)(iii) of the Income Tax Rules, 1962. The said action of the Assessing Officer has since been upheld by the CIT(A) also.
10. Before us, the pertinent plea of assessee is that the lower authorities have made the disallowance in terms of Rule 8D(2)(iii) of the Rules without recording the satisfaction required in terms of Sec. 14A(2) of the Act. In this context, it is a well settled proposition that before the Assessing Officer proceeds to determine the disallowance u/s 14A of the Act by applying the formula contained in Rule 8D of the Rules, it is imperative that a satisfaction is recorded by him with regard to the incorrectness or otherwise of the stand of assessee, having regard to its accounts. In the present case, assessee had suo moto disallowed a sum of Rs.13,000/- and the same has been mechanically brushed aside by the Assessing Officer and instead, disallowance has been worked out in terms of Rule 8D of the Rules. The aforesaid approach is clearly inconsistent with the mechanics of Sec. 14A(2) of the Act and, therefore, the said action is hereby set-aside and Assessing Officer is directed to retain the disallowance to the extent of Rs.13,000/- suo moto disallowed by the assessee itself.
Before parting, we may also say that assessee raised a point of law to the effect that the formula specified in Rule 8D(2)(iii) of the Rules
9 Malabar Hill Club Ltd. & 4735/Mum/2012 prescribing disallowance @ 0.5% of the average value of investments should only take into consideration those investments on which assessee has received exempt income and not the investments on which no exempt income has been received. The aforesaid point of law raised by the assessee is kept open as assessee has been allowed the necessary relief otherwise. In this manner, Ground of appeal no. 2 is allowed.
In the result, appeal of the assessee is allowed.
Insofar as the appeal of Revenue is concerned, the only issue relates to a sum of Rs.58,89,925/- on account of life membership fee treated as revenue receipt. In this regard, it was a common point between the parties that the said issue is a recurring issue and in the past years, the same has been held in favour of the assessee following the judgment of the Hon'ble Bombay High Court in assessee’s own case reported in 136 ITR 569 (Bom). The CIT(A) has relied upon order of his predecessor for Assessment Year 2006-07 in setting aside the action of Assessing Officer.
At the time of hearing, it has been pointed out that the decision of CIT(A) for Assessment Year 2006-07 has been approved by the Tribunal vide its order in & others dated 26.8.2015. It has been pointed out that for Assessment Year 2003-04, the Tribunal vide its order in ITA No. 292/M/2012 dated 30.11.2015 has also held the issue in favour of assessee. Considering the aforesaid
10 Malabar Hill Club Ltd. & 4735/Mum/2012 precedents, which continue to hold the field, we find no error on the part of CIT(A) in upholding the plea of assessee.
In the result, appeal of Revenue is dismissed whereas appeal of assessee is allowed, as above.
Order pronounced in the open court on 18th November, 2016.