IN THE ITAT MUMBAI BENCH ‘K’
Lintas India (P.) Ltd.
Versus
Assistant Commissioner of Income-tax – 3(2), Mumbai
IT APPEAL NO. 2024 (MUM.) OF 2007
[ASSESSMENT YEAR 2002-03]
NOVEMBER 9, 2012
ORDER
Per Bench – This is an assessee’s appeal against the orders of the CIT(A)-3 Mumbai, dated 02.01.2007. Assessee has raised five grounds which are as under:
“On the facts and in the circumstances of the case and in law:-
1. The ld. Commissioner of Income Tax (Appeals) erred in confirming a sum of Rs. 32,50,141/- spent on repairs as ‘capital expenditure’. Without prejudice, the ld. CIT(A) erred in not allowing depreciation on the same.
2. The ld. CIT(A) erred in confirming disallowance of a sum of Rs. 17,71,244/ – spent on computer software.
3. The ld. CIT(A) erred in confirming disallowance under section 14A a sum of Rs. 1,00,000/ – as ad-hoc estimated expenses on exempt income.
4. The learned CIT (A) erred in confirming add back of a sum of Rs. 7,81,80,823/- in respect of unclaimed liabilities. The learned CIT (A) erred in disregarding the ITAT order for the earlier years in the appellant’s own case.
5. (a) The learned CIT (A) erred in confirming the addition of Rs. 25,13,808/- under section 92CA(3).
(b) The learned CIT (A) erred in holding that there was no requirement to bring material on record before forming an opinion and before making a reference to the TPO that the arms length price was not correct”.
2. We have heard the learned Counsel and the learned DR in detail and their arguments are considered wherever necessary.
3. Ground No.1 is with reference to treating the expenditure claimed as repairs as capital in nature.
4. The facts of the case are that during the year under consideration assessee had incurred expenditure of Rs. 95,54,601/- on repairs and maintenance of various residential flats and office buildings owned by it. During the assessment proceedings AO examined the nature of these expenses. After examination, he came to the conclusion that the expenses of Rs. 33,12,482/- were of capital nature. The details of the expenses treated by AO as capital expenditure have been given at page 3 and 4 of the assessment order.
5. Before the CIT (A), it was submitted that assessee is a leading advertising agency in India. It is a part of the International LOWE Lintas Group. Every year, it has to incur substantial expenditure on the upkeep of its premises since assessee being an advertising agency, has to keep the premises updated regularly. According to assessee these expenses are day to day expenses needed for the upkeep and regular maintenance of the premises. No new asset has come into existence. The expenses incurred relate to paining, plumbing, electrical repairs and carpentry work. These expenses are required to be treated as revenue expenses. It was submitted that similar issue had come up for hearing before the Hon’ble ITAT in the case of assessee for assessment year 1993-94 to 1995-96 and after detailed discussion it was held that such expenses were of revenue in nature. Even the CIT (A) for assessment year 1996-97 to 1999-2000 has decided the appeals in favour of assessee. Therefore, it was contended that the entire expenses amounting to Rs. 95,54,601/-are required to be treated as revenue expenditure.
6. The learned CIT (A) however, went into the details of the expenditure and discussed the issue item-wise to come to a conclusion that only an amount of Rs. 62,341/- was revenue in nature, whereas the balance expenditure is capital in nature. However, there is no direction for allowance of depreciation on the capitalized amount either by AO or by the CIT (A).
7. After considering the nature of expenditure and the detailed arguments by both the Counsels, we are of the view that most of the expenditure is incurred on the existing buildings or structures in the nature of repairs for maintenance of the asset as such, except the expenditure incurred on Mohandev Building, item No.8, 9 and 10 listed in the CIT (A)’s order. As seen from the details the amount of Rs. 11.00 lakhs and Rs. 4,85,970/- were incurred in connection with the sofa, recreation central table etc., which seems to be for creation of new assets and cannot be considered as repairs of the existing assets. Likewise the amount of Rs. 3.00 lakhs was spent on electrical fittings and Rs. 1.00 lakhs was spent for design consultancy and supervision charges. Therefore, in our view this expenditure is in the nature of capital expenditure and therefore, we uphold the disallowance to that extent. AO is however, directed to allow depreciation as per the rules by capitalizing this expenditure to the assets. Balance of the expenditure in our view is revenue in nature as this is for maintenance/repairs of the existing assets. The findings of the ITAT in earlier years on the same issue are equally applicable to the year which are as under:
“9.7 We further find identical issue had come up before the Tribunal in assessee’s own case in the preceding years. We find the Tribunal vide ITA Nos.2041/Mum /98, 2042/Mum/98 and 3256/Mum/99 for AYs 1993-94 to 1995-96respectively vide order dated 19.1.2005 at Paras 12 & 13 of the order has decided the issue in favour of the assessee by holding as under:
“12 We have heard the rival submissions and considered the facts and materials on record including the decisions cited before us by both the parties, even though, we are mentioning only those decisions which are relevant to our finding, which we are giving in the succeeding sentences. As regards, the expenses incurred on leased property, the Hon’ble Supreme Court in the case of CIT v. Madras Auto Service P Ltd., cited supra has held that by spending money on constructing the new buildings on the leased premises, the assessee did not acquire any capital asset and the only advantage which the assessee derived by spending money was that it got the lease of a new building at low rent and from the business point of view, the assessee got the benefit of reduced rent and the expenditure is to be tread as revenue expenditure. In that case, the assessee was carrying on the business of sale of motor parts. Its head office was at Madras and it had branch at Bangalore. Under an agreement of lease, the assessee obtained certain premises for a period of 39 years under certain terms and conditions of the lease, the lessee (assessee) had the right to demolish existing premises at its own cost and appropriate to itself all the material thereof, without paying to the lessors of any compensation and construct a new building thereof to suit the purpose of their business as per the plan approved by the lessors. The lease agreement further provided that the new construction shall, right from the commencement of the work be the property of the lessors; and upon completion of the work of construction, the lessee would have only right to be a tenant for a period of 39 years under the existing lease, subject to the payment of rent and observation of other terms and conditions of the lease. On the above facts, the Hon’ble Supreme Court held the expenditure incurred by the assessee on construction of new building on leased premises as revenue expenditure.
13. In the facts of the case on hand also, the assessee had spent huge sums on major repairs, it is also found from the record that lease rent was fixed only at Rs. 26 per sq ft as the premises was in a highly dilapidated condition. The assessee has converted the premises into a modern office premises by making the entire structural charges, re-plastering, paining, retiling, rewiring, re-partitioning and repairing of sanitary fittings, equipping with furniture and various office applications. Thus, we find in the case dealt with by the Hon’ble Supreme Court, the entire building was reconstructed which was treated as revenue expenditure and on similar facts and circumstances, in the present case on hand, the rent was fixed at Rs. 26 per sft. In view of the dilapidated condition of the building and the assessee had sent huge sums on the renovation of the building to suit the purpose of the assessee’s business. Thus, in this case on hand, the asset did not get any ownership of the building and therefore, by spending the money, the assessee did not acquire any capital asset as held by the Hon’ble Supreme Court in the case of Madras Auto Services P Ltd (supra) from the business point of view, therefore, the assessee got the benefit of reduced rent and the assessee obtained business advantage. Therefore, the expenditure is to be treated as revenue expenditure by applying the ratio decidendi in the case of Madras Auto Services P Ltd (supra).When the Hon’ble Supreme Court has held so, in our view, the decision of the Tribunal in the case of M/s Vams Fort Motor Pvt. Ltd may not advance any support to the case of the revenue. The Hon’ble Bombay High Court in the case of CIT v. Hede Consultancy P Ltd and another, on similar facts held that since assets created by the said amounts did not belong to the assessee but the assessee got the business advantage of using modern business premises on low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure. In this case also, the assessee had spent Rs. 9,20,436/- for converting go-down premises into office by renovating it by incurring expenses on interior decoration, plastering of walls and construction of bathrooms and WCs etc. Thus, the Hon’ble jurisdictional High Court also had laid down the principle that the sums spent on leased premises for renovation are to be treated as revenue expenditure. Thus, whether expenditure incurred on renovation of building on leased land is revenue or capital is settled by the Apex Court and the Hon’ble Jurisdictional High Court in favour of the assessee by holding that such expenditure is revenue in character. Once it is revenue in character as discussed above and it is purely business expenditure (not personal expenditure), as per section 37 this expenditure is allowable to the assessee, even for argument sake, it is also allowable u/s 32(1) explanation (1). Further, the decision of Hon’ble Bombay High Court in the case of Hede Consultancy P Ltd, dealt with assessment year 88-89, when the explanation was introduced to sec. 32(1). Thus, we find that even when the explanation was part of the statute, the Hon’ble Bombay High Court has laid such expenditure as revenue expenditure u/s 37 of the Act. In that case also it has been noted on page 382 of the report (R) that the expenditure was disallowed by the Assessing Officer u/s 32. In this view of the matter, it can be said that Hon’ble Jurisdictional High Court was aware of the explanation 1 of the section 32(1). Thus, this Tribunal is bound by the decision of the Hon’ble Jurisdictional High Court. Hence, following the decision of the Hon’ble Jurisdictional High Court reported in 250 ITR 380, in turn applying the ratio of Apex Court 233 ITR438(SC), we are inclined to allow the claim of the assessee. Thus, this ground of the assessee succeeds.”
Ground No.1 is partly allowed.
8. Ground No.2 is with reference to the claim of software expenses.
9. It was fairly admitted that this matter should be referred to AO for fresh adjudication in the light of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises v DCIT, 301 ITR (AT), as was done in the earlier years. Accordingly this issue is restored to the file of AO for fresh adjudication in accordance with the law and the principles governing this issue and after giving due opportunity of being heard to assessee.
10. Ground No.3 is regarding disallowance under section 14A which was not pressed, hence treated as withdrawn.
11. Ground No.4 pertain to the issue of taxing an amount of Rs. 9,81,80,823/- in respect of unclaimed liability in addition to the amount of Rs. 2,99,14,525/- offered by assessee in the return of income.
12. The facts of the case are that in Schedule 13 to the Profit & Loss A/c assessee had shown income on account of ‘unclaimed liabilities no longer required’ at Rs. 4,67,40,197/-. The said amount consisted of the following:
