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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri George Mathan, JM & Shri M. Balaganesh, AM
Per: Bench
This is an appeal directed against the order of the CIT(A)-1, Kochi in appeal No. CIT(A), Kochi-1/10038/2009-10 dated 21.07.2020 for assessment year 2006-07.
Shri P.M. Veeramani, CA represented the assessee and Smt. J.M. Jamuna Devi, Sr. D.R. represented Revenue.
Ground No. 1 raised by the assessee was stated to be not pressed by the learned A.R. at the time of hearing for which necessary endorsement has been made in the file. Accordingly Ground No. 1 is dismissed as not pressed.
The only surviving issue to be decided in this appeal is as to whether the improvements made by the assessee on the lease hold premises can be held as revenue expenditure as against the treatment given by the learned AO by treating it as capital expenditure and allowing depreciation thereon.
ITA No. 358/Coch/2020 2 M/s. PSN Automobiles Pvt. Ltd. 5. We have considered the rival contentions and perused the material available on record. We find that the assessee is engaged in the dealership of Eicher transport vehicle, trading in the automobile parts and allied services. The undisputed fact is that the assessee has taken a land to the extent of 1.22 acres on lease for a period of 10 years for putting up a repair workshop. The assessee on the said lease hold land had setup a super structure in the form of temporary structures using tress work and marine plywood and had incurred an expenditure to the extent of Rs.20,84,743/- for construction of 4500 sq.ft. of super structure. The learned A.R. before us stated that as per the lease deed, the assessee has to remove the structures on the lease hold premises and that the said premises had to be handed over in vacant possession on expiry of the lease. He also stated that the land has already been surrendered by the assessee on expiry of the lease. The learned A.R. has made a statement from the Bar that no retrieval of assets installed by the assessee in the lease hold premises can be made on expiry of the lease. The assessee claimed the entire expenditure incurred on improvements as temporary structures and claimed 100% depreciation thereon in the return of income. During the course of assessment proceedings, the assessee made an alternate plea stating that the entire expenditure would be allowed as revenue expenditure as there is absolutely no scope of retrieval of the assets by the assessee on expiry of lease. The assessee in support of its contentions produced the entire bills from M/s. Archana Construction who had carried out the construction work. The learned AO had not disputed the fact of construction being carried out by M/s. Archana Construction on the lease hold premises. It is not in dispute that the said premises has been used for the purpose of business of the company. The learned AO only observed that perusal of the bills for construction work revealed that the assessee has constructed the structures including office building with attached bathroom, two security rooms, toilet, etc. and that these buildings were made of hollow bricks and the walls also plastered both inside and outside. Accordingly he concluded that the said incurrence of expenditure on construction results in giving enduring benefit to the assessee. With these observations the learned AO treated the expenditure as capital in nature
ITA No. 358/Coch/2020 3 M/s. PSN Automobiles Pvt. Ltd. and granted depreciation in the normal rate as per rules. This action of the AO was upheld by the learned CIT(A).
It is not in dispute that the assessee had to handover the vacant premises on expiry of the lease and that there is no scope of retrieval of assets installed/ constructed in the lease hold premises. Though the manner of construction carried out by the assessee results in enduring benefit to the assessee, in our considered opinion, the same would only lead to an enduring benefit on the revenue field and not on the capital field. The law is very well settled that any expenditure incurred by the assessee which gives enduring benefit on the revenue field would have to be treated only as revenue expenditure. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute Mills Ltd. vs. CIT (1980) 124 ITR 1 (SC). The learned A.R. also rightly placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Indus Motor Co. (P) Ltd. vs. DCIT reported in (2017) 88 taxmann.com 229 (Kerala) wherein similar issue has been addressed after considering the provisions of Explanation 1 to Section 32(1) of the Income Tax Act, 1961. The relevant operative portion of the said order is reproduced here under: -
“19. Merely to understand the nature of the lease, we went through one of the agreements, which indicates almost 60 cents of property having been taken on lease for Rs.25,000/- per month. The superstructures were also built on the said property the actual plinth area of which is not disclosed. The money invested for making such construction is what is claimed as revenue expenditure. We have to observe that, prima facie, considering the extent of property the amount of Rs.25,000/- could be treated as minimal rent, which all the same would have to be verified with the total plinth area constructed in the property and the period for which the lease is permitted. The going market rent for buildings, in the specified locations, would also have to be looked into by the Assessing Officer to arrive at a proper determination of whether the expenditure is a capital expenditure or revenue expenditure. If the Assessing Officer finds that the investments made in the property spread over the period of lease, together with the lease rent payable as per the agreement, would constitute the ostensible lease rent for the building, then investment made for constructing superstructures, has to be deemed to be revenue expenditure, otherwise it should be treated as capital expenditure and in the latter event allowable as depreciation under the Explanation 1 to Section 31(1)”
ITA No. 358/Coch/2020 4 M/s. PSN Automobiles Pvt. Ltd. Respectfully following the aforesaid decisions, we are inclined to allow the alternate plea of the assessee by treating the expenditure incurred by the assessee on the lease hold premises as revenue expenditure. Ground No. 2 of the assessee is allowed. 7. In the result, the appeal filed by the assessee is partly allowed. Dictated and pronounced in the open Court on 16th March, 2022.
Sd/- Sd/- (M. Balaganesh) (George Mathan) Judicial Member Accountant Member
Cochin, Dated: 16th March, 2022
Copy to:
The Appellant 2. The Respondent 3. The CIT(A) -1, Kochi 4. The CIT - Kochi 5. The DR, ITAT, Cochin 6. Guard File By Order
//True Copy// Assistant Registrar ITAT, Cochin n.p.