CIT Vs E.T.A. Travel Agency (P) Ltd. (Madras High Court)
It was pointed out that so far as the expenditure incurred as contemplated in the explanation is concerned, a legal fiction is created, by which, the assessee, enjoying a leasehold right on a building, is treated as the owner of the building. It was further pointed out that after the introduction of Explanation 1 to Section 32 of the Act, there is no scope left out at all for any interpretation since, by a legal fiction, the assessee is treated as a owner of the building for the period of his occupation and this would mean that by refurbishing, decorating or by doing interior work in the building, an enduring benefit was derived by the assessee for the period of occupation and therefore, it is a capital expenditure and not revenue expenditure.
Whether an expenditure incurred by assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant tests. Explanation 1 to Section 32(1)(i) does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, then such expenditure has to be mandatorily treated as capital expenditure. The explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of Section 32 (1) shall be applicable as if the said structure or work is a building owned by the assessee.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
We have heard Mr. Karthik Ranganathan, learned Standing Counsel for the Revenue assisted by Mr. S. Rajesh, learned counsel and Ms. Sree Lakshmi Valli, learned counsel appearing for the respondent – assessee.
2. This appeal, filed by the Revenue, under Section 260A of the Income Tax Act, 1961 (for short, the Act), is directed against the order dated 04.7.2008 made in ITA. No. 2300/Mds/2007 on the file taxguru.in of the Income Tax Appellate Tribuna, Chennai ‘A’ Bench for the assessment year 2003-04.
3. The appeal was admitted on 09.1.2009 on the following substantial questions of law :
“1. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred in respect of renovation of leased premises is to be treated as revenue expenditure in spite of Explanation 1 to Section 32 of the Act ? And
2. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the expenditure_ incurred on vasthu consultancy for setting up of a new office is to be treated as revenue expenditure ?”
4. Mr. Sree Lakshmi Valli, learned counsel for the respondent – assessee has raised a preliminary objection with regard to the maintainability of the appeal on the ground that the appeal cannot be pursued any further by the Revenue on account of low tax effect. In this regard, the learned counsel has referred to the circular issued by the Central Board of Direct Taxes in Circular No.3 of 2018 dated 11.7.2018. By referring to paragraph 4 of the said Circular, it is submitted that for the purposes of the said Circular, ‘tax effect’ means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues, against which, appeal is intended to be filed. Further, ‘tax effect’ shall be tax including applicable surcharge and cess. However, the tax will not include any interest thereon, except where chargeability of interest itself is in dispute.
5. The learned counsel for the respondent – assessee has referred to a memo signed by her dated 11.6.2019. The contents of the memo are quoted as hereunder :
“1. In the above tax case appeal, an assessment order was passed under Section 143(3) dated 10.3.2006 assessing the total income at Rs.4,07,80,300/- and computing income tax and surcharge at Rs.1,49,86,760/-.
2. On appeal, the Commissioner of Income Tax (Appeals), by order dated 09.7.2007, partly allowed the appeal by directing the Assessing Officer to modify the impugned assessment order by allowing a sum of Rs.60,42,076/- and Rs.87,14,311/- as deduction and to also withdraw the depreciation allowed on these sums.
3. Consequential order dated 03.9.2007 was passed by the Assessing Officer fixing the taxable income at Rs.2,76,66,350/-.
4. The Department’s appeal before the Income Tax Appellate Tribunal was dismissed. Hence, the tax effect in the above tax case appeal would be as follows :
