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Before: Shri Chandra Poojari & Shri Duvvuru RL Reddy
आयकर अपील�य अ�धकरण, “ए” �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI �ी चं� पूजार�, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri Chandra Poojari, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I.T.A.No.1434/Mds/2016 �नधा�रण वष�/Assessment Year:2012-13 M/s. Southern Auto Centre, The Deputy Commissioner of 481, Anna Salai, Nandanam, Vs. Income Tax, Chennai 600 035. Non Corporate Circle 2, Chennai. [PAN:AANFS3162L] (अपीलाथ� /Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से / Appellant by : Shri K. Balasubramanian, Advocate ��यथ� क� ओर से/Respondent by : Shri N. Madhavan, JCIT सुनवाई क� तार�ख/ Date of hearing : 16.02.2017 घोषणा क� तार�ख /Date of Pronouncement : 09.05.2017 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 2, Chennai dated 29.03.2016 relevant to the assessment year 2012-13. The only effective ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in confirming the disallowance of show room renovation expenses treating it as capital expenditure.
Brief facts of the case are that the assessee firm is a dealer in two- wheelers and spare parts. It has filed its return of income for the assessment year 2012-13 on 08.09.2012 declaring total income of ₹.76,23,940/-. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 [“Act” in short] on 06.08.2013. On going through the details filed by the assessee, the Assessing Officer has noticed in the profit and loss account that the assessee has debited an amount of ₹.32,41,894/- under the head “Show room renovation charges” and as directed, by furnishing complete details with break-up of the entire expenditure under different sub-heads, the nature of such expenditure, bills and ledger account copy for verification, the AR of the assessee has submitted before the Assessing Officer that the nature of show room renovation expenses are painting, polishing, civil works, etc. and they are purely revenue in nature. From the break-up and the bills furnished, the Assessing Officer has noticed that the expenditure was incurred for various work like civil works, demolishing work, bricks work, paintings, tiles laying, plumbing work, and water proofing etc. and most of it can be classified as capital expenditure only considering the enduring nature of benefit out of these expenditure. It cannot be the case of the assessee that building new brick wall, laying tiles, false ceiling, roofing, toilet construction etc. would fall under the category of repetitive nature of expenses qualifying to be a revenue expenditure. The assessee has also failed to appreciate that part of the miscellaneous expenses incurred in connection with the building, depending on the work carried out, will also fall under the category of capital expenditure even though it is not specifically relatable to any capital items per se. Such expenditure also needs to be capitalized. Taking into account the above facts and also considering the assessee's plea that not all the expenditure under the head ‘show room renovation’ would fit into the category of capital expenditure as some regular maintenance work done is also evident from the bills produced, taking a broader view, the Assessing Officer felt that it would be justifiable to treat 50% of the expenditure i.e. ₹.15,09,553/- out of the total major expenditure under this head of ₹.30,19,105/-, as capital in nature and to allow the balance ₹.15,09,552/- as revenue expenditure. The other minor expenditure of ₹.2,22,789/- was also allowed as revenue expenditure. The Assessing Officer has also allowed eligible depreciation on building. Accordingly, after disallowing ₹.15,09,553/-, the assessment was completed under section 143(3) of the Act by assessing the total income of the assessee at ₹.90,40,852/-.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee and case law relied on, the ld. CIT(A) confirmed the disallowance made on this account and dismissed the appeal filed by the assessee.
On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the show room renovation expenses did not result in increase in the productivity or manufacturing capacity but incurred for providing cozy and comfortable customers lounge, toilets and vehicle display area, in a rented premises with no enduring benefit, wear and tear and abandonment at the time of vacating of the premises. Further, he argued that the above expenditure should be either revenue or capital in nature and but not an estimated 50% thereof as capital expenditure since there is no sanction in law for such an arbitrary and unjust classification. It was also argued that the assessee is only a tenant of the show room as per the lease deed, after the expiry of the lease period, the assessee has to leave the premises as such without getting any compensation and hence no enduring benefit has accrued to the assessee so that 50% of the expenditure can be classified as capital expenditure and pleaded that the disallowance made on this account should be deleted.
On the other hand, the ld. DR has strongly supported the orders of authorities below.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. The nature of the expenditure was clearly mentioned in the table format from the vendor-wise bills produced by the assessee before the Assessing Officer. We have also perused the same and observed that most of the works carried out by the assessee are civil works, demolishing work, bricks work, paintings, tiles laying, plumbing work, and water proofing etc. and these works can be classified as capital expenditure only considering the enduring nature since the above civil works would not fall under the category of repetitive nature of expenses qualifying to be a revenue expenditure. We have also noted that as observed by the ld. CIT(A), the Assessing Officer has taken a lenient view while allowing 50% of the entire expenditure as revenue expenditure and capitalizing only the balance 50%, on which, the assessee was allowed eligible depreciation. Further, the contention of the ld. Counsel for the assessee that the assessee is only a tenant and as per lease deed of September, 2009 and after the expiry of the lease period, the assessee has to leave the premises and therefore, no enduring benefit would accrue to the assessee is not acceptable because, during the course of appellate proceedings, the assessee produced the lease deed dated 11.09.2009 entered into between the assessee with the landlord of the premises. The main clauses contained in the lease deed as reproduced by the ld. CIT(A) in his appellate order reads as under: “The lease deed contains successive renewal clauses, each stipulating that the lease can be renewed for a further period of 18 months. The relevant portions of the lease deed are as follows: 1) The lease shall commence from t" August 2008 and is for a specific period of eighteen months upto 30.4.2010.
(2) The monthly lease amount shall be Rs. 1,00,000/- (Rupees One lakh only) and the TENANT shall pay the same on or before the 10th of ) every succeeding month. ……………………………………………………………………………………. (8) The lease can be renewed for a further period of eighteen months i.e. from 1.5.2010 to 31.10.2011 on a monthly rent of Rs. 1,10,000/- (Rupees One lakh ten thousand only) i.e. with an increase of 10% of the earlier rent as mentioned in clause 2 supra. (9) The lease can be renewed for a further period of eighteen months i.e. from 1.11.2011 to 30.4.2013 on a monthly rent of Rs. 1,21,000/- (Rupees One lakh twenty one thousand only) i.e. with an increase of 10% of the earlier mentioned in clause 2 supra. (10) The lease can be renewed for a further period of eighteen months i.e. from 1.5.2013 to 31.10.2014 on a monthly rent of Rs. 1,33,100/- (Rupees One lakh thirty three thousand one hundred only) i.e. with an increase of 10% of the earlier mentioned in clause 2 supra. (11) Both the parties herein agree to renew the lease beyond 31.10.2014 for a further period of three years on a monthly rent of Rs. 1,59,720/- (One lakh fifty nine thousand seven hundred twenty only) i.e. with an increase of 20% of the earlier rent. The same twenty percent increase for every three years shall be for further period of one term ending 31.10.2020." Thus, the said lease deed, as per which the lease commences from 01.08.2008 contains provisions for extending the same upto 31.10.2020, with escalation clauses for the monthly rent. By perusing these portions of the lease deed, the ld. CIT(A) has observed that the lease deed clearly shows that the intention of the assessee in taking the said commercial premises on lease, is to retain the same for a long period of time, the total period of possible extension having been provided for 10 more years, after the initial period of 18 months. In view of the above, we are of the considered opinion that no enduring benefit would accrue to the assessee since the assessee is a tenant and after expiry of lease deed of September, 2009, the assessee has to leave the premises is not acceptable since the total period of possible extension having been provided is ten more years. The relevant assessment year in which the lease deed executed was in the financial year 2009-10 relevant to the assessment year 2010-11 and the assessee is in appeal for the assessment year is 2012-13, which clearly shows that beyond the stipulated period of lease deed, the assessee is continuing in that premises by extending the lease deed, which itself shows that the assessee is enjoying enduring benefit out of the civil works carried out in the leased premises.
6.1 By filing copy of the judgement of the Hon’ble Jurisdictional High Court in the case of CIT v. Armour Consultant P. Ltd. in T.C.A. No. 2 of 2010 dated 01.03.2013, wherein one of the issues raised in the appeal was whether the disallowance of expenditure on setting up of a new office at Mumbai was allowable as revenue expenditure or capital expenditure and the Hon’ble High Court has decided the issue in favour of the assessee by holding that the expenses incurred by the assessee was deductible as revenue expenditure. The above said case law relied on by the ld. Counsel for the assessee has no application to the facts of the present case because in that case the lease period for setting up of a new office at Mumbai was only 30 months. Since the expenses incurred was only for a limited period and looking into the nature of work done by the assessee came to the conclusion that the expenditure incurred by the assessee for designing and layout as well as other construction materials for making the office functional, the Hon’ble High Court did not accept the decision in the case of CIT v. Sri Mangayarkarasi Mills P. Ltd. 315 ITR 114 (SC) and instead, placing reliance on various decisions of the Hon’ble Jurisdictional High Court itself, held that the expenses are revenue in nature. In the present case, admittedly, as per lease deed, the total period of extension having been provided is for 10 more years w.e.f. 01.08.2008, as detailed herein above.
6.2 Coming to the issue of whether the expenditure incurred by the assessee is capital or revenue in nature, the Assessing Officer is required to segregate the nature of construction put up, the purpose of construction/ renovation and the use to which the construction put up and also if it is a case of repair, replacement, addition or improvement has to be gone into. Keeping in mind the provisions of section 37 and 32 of the Act, one has to determine whether the expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. In the absence of sufficient material and without proper application of mind, the assessing authority proceeded on the footing that the expenditure constituted capital expenditure. In view of the above, we remit the issue in dispute to the Assessing Officer to consider whether the expenditure is revenue or capital in nature and decide afresh.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced on the 09th May, 2017 at Chennai.