IN THE ITAT BANGALORE BENCH ‘B’
Assistant Commissioner of Income-tax
IT APPEAL NOs. 576 & 577 (BANG.) OF 2011
SEPTEMBER 21, 2012
Smt. P. Madhavi Devi, Judicial Member
These appeals by the assessees are directed against the identical orders of the CIT(A)-III, Bangalore, dated 31-12-2010 for the assessment year 2006-07.
2. ITA No.576/Bang/2011: In this appeal, the assessee has filed the following concise grounds of appeal:
“(1) The learned CIT(A) is not justified in partly upholding the disallowance of an amount of Rs. 19,39,647 (out of Rs. 31,20,848/-) made by the learned respondent, in respect of expenditure incurred on refurbishment of showrooms by treating the same as capital expenditure.
(2) Without prejudice to the above, the learned CIT(A) is not justified in upholding the allowance of only 50% of depreciation on the impugned expenditure, even though the appellant had used the same for more than 180 days.
(3) The learned CIT(A) is not justified in upholding the disallowance of an amount of Rs. 4,87,255/- made by the learned respondent in respect of expenditure incurred on the purchase of Keyman insurance policies.
(4) The learned CIT(A) is not justified in upholding the disallowance made by the learned respondent of a sum of Rs. 15,12,766/- incurred on account of sales promotion.
(5) The learned CIT(A) is not justified in upholding the disallowance an amount of Rs. 1,02,700/- made by the learned respondent in respect of expenditure incurred on account of brokerage, under section 40(a)(ia) for want of deduction of tax at source under section 194H.
(6) The learned CIT(A) is not justified in upholding the levy of interest under section 234B and section 234C”.
3. At the time of hearing, the learned counsel for the assessee submitted that ground Nos.4 and 5 relate to disallowance u/s 40(a)(ia) of the Act for want of deduction of tax at source u/s 194H of the Income-tax Act, 1961 [hereinafter referred to as “the Act”]. He submitted that the assessee has paid brokerage and sales promotion expenses without deduction of tax at source u/s 194H and therefore the disallowance u/s 40(a)(ia) has been made. He submitted that without going into the merits of the disallowance, the issue is covered by the decision of the Special Bench of the Tribunal, Vishakapatnam in the case of Merilyn Shipping & Transports v. Addl. CIT 136 ITD 23 wherein it has been held that disallowance u/s 40a(ia) can be made only when the amount is payable as on 31st March of every year and it cannot be invoked to disallow expenditure which had actually been paid during the previous year without TDS. The learned Departmental Representative, however, supported the orders of the authorities below.
4. Having heard both the parties and having considered the material on record, we find that this issue is covered by the decision of the Special Bench of the Tribunal in the case of Merilyn Shipping & Transports (supra). Respectfully following the same, we remand this issue to the file of the AO to verify as to whether the amounts have been paid during this previous year and only if they are not paid but are payable as on 31st of the relevant previous year, can the provisions of sec. 40a(ia) be invoked. These grounds are thus allowed for statistical purposes.
5. As regards the ground relating to levy of interest u/ss. 234B and 234C is concerned, we find that it is consequential and the AO is directed to give consequential relief, if any, to the assessee.
6. As regards ground No. 1 relating to disallowance of an amount of Rs. 15,16,265/- in respect of expenditure incurred on refurbishment of showrooms by treating the same as capital expenditure, brief facts of the case are as under:
6.1 The assessee is a partnership firm engaged in the business of retail trading of Reebok Footwear and shoes. It filed its return of income for the assessment year 2006-07 on 31-10-2006 declaring a total income of Rs. 40,25,257/-. During the assessment proceedings u/s 143(2) of the Act the AO observed that the assessee has debited a sum of Rs. 33,66,638/- under the head ‘renovation and repairs’ in the profit and loss A/c as expenses. From the details furnished by the assessee, the AO observed that the same were incurred on the new showrooms taken at Garuda Mall and Marathahally. From the agreements of the assessee and its sister concern M/s. Emdee Enterprises with Reebok, the AO observed that the agreements are for both lease of area as well as for supply of products of Reebok to the assessee and that these agreements do not have any limitation on the period nor any termination clauses or conditions for termination etc. Therefore, he came to the conclusion that the Agreement is perpetual and permanent in nature except in the case of unexpected happenings or default of the assessee. He further observed that these amounts are spent for new show-rooms and the payments include interior and exterior works, furniture, Mannequins, racks, light fittings, partitions etc., which is going to provide the assessee benefit of enduring nature. He therefore held that such expenditure could not be claimed as revenue expenditure.
6.2 He also examined the allowability of the same separately under the provisions of sec. 30(a)(i) and also u/s 37 of the Act. He observed that u/s 30 only amount spent on repair is allowable and that repairs imply existence of a thing which has malfunctioned and can be set right by effecting repairs by the assessee and the assessee has incurred expenditure for setting up a new showroom, he held that it cannot be held to be repair expenditure and therefore is not allowable u/s 30(a)(i) of the Act.
6.3 As regards the applicability of sec. 37 of the Act, he held that the assessee was getting enduring benefit from the asset created by setting up a new showroom and therefore it is capital in nature and cannot be allowed u/s 37 of the Act. However, he held that the assessee is eligible for depreciation at the rate of 10% on the capitalization of this amount as most of the items were furniture and electrical in nature. However, he held that depreciation at the rate of ½ of the prescribed rate is allowable as the bills for these items are accounted for in the books of the assessee only on 31-3-2006 and therefore these items were put to use for less than 180 days.
7. Aggrieved by the disallowance by the AO, the assessee preferred an appeal before the CIT(A). The assessee reiterated its submissions made before the AO and also relied upon various decisions to bring out the distinction between capital and revenue expenditure. It was submitted that merely because expenditure results in enduring benefit to the assessee would not determine the capital nature of the expenditure. It was submitted that the expenditure incurred by the assessee was for modification of the showrooms to suit particular requirement of its business and particularly on a leasehold premises for a short duration. Thus according to the assessee, it has to be treated as revenue expenditure. The CIT(A), after examining the nature of the items on which the expenditure has been incurred held that part of the expenditure such as light fixtures, wooden flooring, Mannequin, Hangers and racks totalling to Rs. 18,50,373/- is revenue expenditure and only the balance amount mainly on electrical and civil works is capital expenditure. As regards the rate of depreciation to be allowed, he directed the AO to re-work the depreciation. Aggrieved by the confirmation of the disallowance of Rs. 15,16,265/- as capital expenditure. The assessee is in second appeal before us.
8. Shri K.K. Chythanya, learned counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, submitted that the AO has misguided himself in coming to the conclusion that there was no termination clause in the Agreement of the assessee with Reebok and also that the agreement was for the lease of the premises as well as for supply of stock. He submitted that the assessee was the retailer of Reebok footwear and shoes and as it was Reebok which would determine the location of the showroom, the Agreement would invariably be between Reebok and the landlord. He submitted that Reebok would thereafter handover the premises to the assessee to open the showroom and do the retail trading of its goods. He has drawn our attention to various clauses of the Agreement to show that the term of lease was for a period of 4 years only and also that the assessee was required to carry out interior and exterior works of the showroom and it was also required to pay security deposit for the lease of the premises and lease rentals. Thus, according to him, the assessee was in occupation of the premises for a limited period only and therefore by carrying out the internal and exterior works required to do its business effectively and efficiently as per the requirements of the brand Reebok, it would be business expenditure for the running of business and therefore revenue in nature. He submitted that the test of enduring nature is not the only test to determine the nature of the expenditure. According to him, it is also to be seen whether there is any creation of new asset which has enlarged the scope of profit making to come to the conclusion that it is in the nature of capital expenditure. Another argument put forth by the learned counsel for the assessee is that even though the expenditure is on setting up of a new showroom, it cannot be held that the assessee is starting a new business as it is for the expansion of its business. Therefore, according to him, the expenditure is to be held as revenue in nature. In support of his arguments, learned counsel for the assessee placed reliance upon the following decisions:
(i) CIT v. Sakthi Sugars Ltd.  194 Taxman 91 (Mad.),
(ii) Digital Equipment India Ltd. v. Dy. CIT  103 TTJ 329 (Bang – ITAT),
(iii) CIT v. Escorts Finance Ltd.  155 Taxman 559 (Delhi)
(iv) Fition Hotel v. ITO (2008 40-A BCAJ 293 – ITAT – Mumbai)
(v) CIT v. Rex Talkies  148 ITR 560
(vi) CIT v. B.V. Ramachandrappa & Sons  191 ITR 34
(vii) CIT v. HEDE Consultancy (P.) Ltd.  127 Taxman 597 (Bom.)
(viii) CIT v. Bharat Commercial Corpn.  226 ITR 242 (Pat.)
(ix) Banashankari Medical & Oncology Research Centre Ltd. v. Asstt. CIT [IT Appeal No. 1217/Bang/07] (Bang – ITAT)
The learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that the CIT(A) has considered the facts of the case and granted relief to the assessee on the expenditure which was clearly in the nature of revenue. He submitted that the assessee has started two new showrooms and most of the expenses were on civil and electrical works and therefore the assessee was getting enduring benefit. Thus, according to him, the order of the CIT(A) has to be upheld.
9. Having heard both the parties and having considered their rival contentions, we find that the following questions arise for our consideration:
(i) Whether setting up a new showroom would amount to starting a new business or is it only an expansion of the existing business?
(ii) Whether the expenditure on civil and electrical works incurred in leasehold premises would fall in the capital field?
As regards the first question, we find that the assessee is already in the business of retail trading of Reebok footwear and shoes. What the assessee is doing in the relevant assessment year is opening a new outlet in two different locations. In these two locations also the assessee would be carrying on the business of retail trading in Reebok shoes and footwear only. As the goods in which the assessee is trading are one and the same, merely by opening new showrooms it cannot be said that the assessee is starting a new business. The Hon’ble Madras High Court in the case of Sakthi Sugars Ltd. (supra) was considering the case of a sugar factory where it set up two sugar units and the expenditure incurred for the purposes of setting up these new units was held to be revenue expenditure. Therefore, respectfully following the same, we hold that by setting up new showrooms, the assessee is only expanding its business and is not setting up new business.
Coming to question No. 2, we find that in a catena of decisions relied upon by the learned counsel for the assessee (cited supra), it has been held that when any expenditure is incurred by an assessee on leasehold premises, even though it may give an enduring benefit, it would not amount to capital expenditure as no capital asset is being created in favour of the assessee. In some of the cases, the expenditure is on civil and electrical works also. In the case before us, we find that the AO has erroneously held that there was no termination clause in the agreement of lease and that the lease is permanent. We find that the lease is for a period of 4 years only and the assessee was to pay for lease rental as well interest-free security deposit for the lease and also that the assessee is required to incur the expenditure for interior and exterior works for carrying on the business as per ‘brand’ specifications. In such a situation, it cannot be said that the assessee is deriving an enduring benefit nor can it be said that any capital asset has been created in favour of the assessee. The quantum of expenditure cannot determine the nature of the expenditure. Therefore, respectfully following the decisions relied upon by the learned counsel for the assessee we hold that this expenditure is revenue in nature. This ground of appeal is accordingly allowed.
10. As we have already allowed ground No.1, the ground No. 2 which is without prejudice to ground No.1, needs no adjudication.
11. As regards ground No. 3, brief facts of the case are that the assessee has taken insurance policies on three of its partners totalling to an amount of Rs. 6 lakhs. The AO held that as these partners are not employees of the firm and therefore, the expenditure on purchase of Keyman insurance policy is not allowable. On appeal, the CIT(A) confirmed the said addition and the assessee is in second appeal before us.
12. The learned counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, submitted that as per sec. 10(10D) of the Act, Keyman insurance policies would imply life insurance taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person. He submitted that though the partners are not the employees of the firm, they are connected with the business of the firm and therefore the insurance policy taken in their name fall within the meaning of Keyman insurance policy. He submitted that when the Keyman insurance policy matures, the income received would be taxable in the hands of the firm u/s 28(vi) of the Act. He submitted that both the AO as well as the CIT(A) have erroneously considered only the first part of the meaning of the Keyman insurance policy and have failed to consider the implication of the second part of the meaning.
The learned Department Representative, however, supported the orders of the authorities below.
13. Having heard both the parties and having considered the material on record, we find that the partners are ‘connected with the business of the assessee’ and therefore are covered by the second part of the meaning given in the Explanation to section 10(10D) of the Act. This issue is also covered by the decision of the Tribunal in the case of Bangalore Housing Development & Investments v. Asstt. CIT [IT Appeal No. 34 (Bang.) of 2010, dated 20-5-2010] and also by circular No.762 dated 18-2-1998. Respectfully following the same, we hold that the premium paid on the Keyman insurance policies taken by the assessee on the life of its partners is allowable as expenditure.
14. In the result, the assessee’ appeal is partly allowed.
15. ITA No.577/Bang/2011: The grounds of appeal in this appeal are similar to grounds of appeal raised in ITA No.576/Bang/2011 in the case of M/s. Embee Apparels. For the reasons stated above, this appeal of the assessee is also partly allowed.