Karnataka Soaps & Detergents Limited Vs ACIT (ITAT Bangalore)
The assessee had set up a branch office in Mumbai. The branch office was housed in a leased premises (leave and licence deed was executed on 5th December, 2013). The leased premises required certain repairs and renovation amounting to Rs.12,95,867. The assessee had claimed the above expenditure of Rs.12,95,867 as a revenue expenditure in the return of income. The assessment was completed vide order dated 11.11.2016 u/s 143(3) of the I.T.Act. The Assessing Officer had disallowed the above expenditure of Rs.12,95,867 incurred on the leased premises, for repairs and renovation. According to the Assessing Officer, the impugned expenditure is a capital expenditure.
The assessee had claimed expenditure amounting to Rs.12,95,867 as revenue expenditure. The A.O. disallowed the same treating it as a capital expenditure. The CIT(A) confirmed the view taken by the Assessing Officer. The CIT(A) placed reliance on the judgment of the Hon’ble Madras High Court in the case of CIT v. ETC Travel Agency (P.) Ltd. (supra) and also Explanation 1 to section 32(1) of the I.T.Act.
Explanation 1 to section 32(1) of the I.T.Act relied on by the CIT(A) is of no help to the revenue. Explanation 1 to section 32(1) of the I.T.Act only permits the assessee to claim depreciation on capital expenditure incurred on leased premises taken by the assessee. On the other hand, if the expenditure incurred by the assessee is on the revenue front, whether the premises is taken on lease or not is immaterial and the same is always an allowable deduction. Therefore, the CIT(A) misinterpreted Explanation 1 to section 32(1) of the I.T.Act.
In the light of the aforesaid reasoning and the judgment of the Hon’ble jurisdictional High Court, cited supra, we hold that the assessee is entitled to deduction of sum of Rs.12,95,867 as revenue expenditure.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal at the instance of the assessee is directed against the CIT(A)’s order dated 16.09.2020. The relevant assessment year is 2014-2015. Two issues are raised in this appeal, namely
(i) Disallowance of expenditure amounting to Rs.12,95,867
(ii) Ex-gratia payment of Rs.56,94,720.
We shall adjudicate the above issues as under:-
Disallowance of expenditure amounting to Rs.12,95,867
2. The assessee is a wholly owned undertaking of Government of Karnataka. It is engaged in manufacture of soaps, detergents and sandalwood oil. For the assessment year 2014-2015, the return of income was filed on 26.11.2014 declaring total income of Rs.54,20,30,270. The assessee had set up a branch office in Mumbai. The branch office was housed in a leased premises (leave and licence deed was executed on 5th December, 2013). The leased premises required certain repairs and renovation amounting to Rs.12,95,867. The assessee had claimed the above expenditure of Rs.12,95,867 as a revenue expenditure in the return of income. The assessment was completed vide order dated 11.11.2016 u/s 143(3) of the I.T.Act. The Assessing Officer had disallowed the above expenditure of Rs.12,95,867 incurred on the leased premises, for repairs and renovation. According to the Assessing Officer, the impugned expenditure is a capital expenditure.
3. Aggrieved, the assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the view taken by the Assessing Officer. The CIT(A) placed reliance on the judgment of the Hon’ble Madras High Court in the case of CIT v. ETC Travel Agency (P.) Ltd. in IT Appeal No.2442 of 2008 (judgment dated 26.06.2019). The CIT(A) also relied on Explanation 1 to section 32(1) of the I.T.Act. The relevant finding of the CIT(A), reads as follow:-
“As seen from the body of judgment Hon’ble Madras High Court has considered all the relevant cases on the subject including Helene pens (p) Ltd. case, Indus Motor Company Ltd. and Joyallukkas India (p) Ltd. and held that the renovation expenses are capital expenditure within the meaning of expl. (1) to Sec.32(1). In the present case all the facts are almost similar to the case presented above decided by Madras High Court. Accordingly, relying on the decision of Madras High Court I hold that expenditure is capital in nature.”
4. The assessee being aggrieved, has raised this issue before the Tribunal. The assessee has filed a paper book enclosing the copies of lease deed, copies of invoices / bills for incurring expenditure of Rs.12,95,867. The learned Counsel for the assessee submitted that the expenditure incurred by the assessee towards repairs and renovation of the premises to house the branch cannot be stated to be capital in nature. It was submitted that the premises which was taken on lease required repairs and renovation to uplift the ambiance and make it fit for operating as a branch office. Therefore the expenditure incurred was in connection with the business of the assessee and an allowable deduction. The assessee also placed reliance on the following judicial pronouncements:-
(i) CIT v. MAC Charles (India) Ltd. (2015) 233 Taxman 177 (Kar.).
(ii) CIT v. Infosys Technologies (No.2) (2012) 349 ITR 588 (Kar.).
(iii) CIT v. Sagar Talkies (2010) 325 ITR 133 (Kar.)
5. The learned Departmental Representative submitted that the expenditure incurred is for substantial repairs and cannot be stated to be revenue expenditure. It was submitted that the expenditure was incurred prior to the assessee occupying the premises and the same ought to be capitalised. It was stated that it is not current repairs or routine renovation, which could be termed as revenue expenditure.
6. We have heard rival submissions and perused the material on record. The assessee had claimed expenditure amounting to Rs.12,95,867 as revenue expenditure. The A.O. disallowed the same treating it as a capital expenditure. The CIT(A) confirmed the view taken by the Assessing Officer. The CIT(A) placed reliance on the judgment of the Hon’ble Madras High Court in the case of CIT v. ETC Travel Agency (P.) Ltd. (supra) and also Explanation 1 to section 32(1) of the I.T.Act. The details of the expenditure of Rs.12,95,867 are as follows:-
