Case Law Details
Hotel Allied Trades Pvt. Ltd Vs ACIT (Kerala High Court)
In the case of Hotel & Allied Trades Pvt. Ltd. vs. ACIT Circle 1(2), the Kerala High Court deliberated on the validity of disallowing an expenditure claimed by the appellant as revenue expenditure. The dispute arose concerning the assessment year 2009-10, and the appellant contested the disallowance of Rs. 1,01,87,412 as revenue expenditure, asserting it was incurred on repairs and additions to buildings in leasehold premises.
The appellate tribunal, affirming the decisions of the Assessing Authority and the First Appellate Authority, held that the expenditure was of a capital nature and could not be treated as revenue expenditure. The tribunal’s decision was based on Explanation-1 to Section 32(1) of the Income Tax Act, which stipulates that capital expenditure incurred on leased buildings should be capitalized, with only depreciation allowed.
The appellant raised two questions of law before the court:
a) Whether the tribunal was justified in confirming the disallowance of the deduction claimed for the expenditure on buildings in leasehold premises?
b) Whether there was sufficient evidence to support the tribunal’s finding that the claimed amount could not be allowed as a deduction?
The court heard arguments from both parties. The appellant’s counsel contended that the tribunal had mechanically applied Explanation-1 to Section 32(1) without considering the nature of the expenditure. They referred to a prior judgment of a Full Bench of the Kerala High Court in Indus Motors Co. Pvt. Ltd. vs. Deputy Commissioner of Income Tax, which emphasized the need for an independent determination of whether an expense is capital or revenue in nature before applying Explanation-1.
On the other hand, the Standing Counsel for the Income Tax Department argued that the tribunal merely affirmed the findings of the lower authorities based on the description of expenses provided by the appellant. They contended that the appellant failed to produce evidence demonstrating that the expenditure was revenue in nature.
After considering the arguments, the court upheld the tribunal’s decision. It noted that the assessing authority and the First Appellate Authority had relied on the appellant’s written submissions to determine the nature of the expenses. The court observed that the appellant did not provide any material to show that the expenses were revenue in nature at any stage of the proceedings.
While dismissing the appeal, the court emphasized the importance of an independent finding by the assessing authority regarding the nature of expenditure before applying Explanation-1 to Section 32(1). It reiterated the principle established in the earlier judgment of Indus Motors Co. Pvt. Ltd. vs. Deputy Commissioner of Income Tax, emphasizing that this principle must be followed by all authorities under the Income Tax Act.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The appellant-M/s. Hotel & Allied Trades Pvt. Ltd. impugns the order dated 09.11.2022 of the Income Tax Tribunal that was passed in relation to the appellant for the assessment year 2009- 10.
2. By the said order, the Appellate Tribunal had affirmed the order of the Assessing Authority as also the First Appellate Authority that disallowed a claim for an amount of Rs.1 01.87 lakhs as revenue expenditure since, according to the Assessing Authority and the First Appellate Authority, the expenditure that was incurred by the appellant/assessee by way of addition to buildings and electrical fittings on leasehold premises was in the nature of capital expenditure and not revenue expenditure. In the appeals before us, the appellant raises the following questions of law:
“a) Whether on the facts and in circumstances of the case the Tribunal is justified in confirming the disallowance of the claim for deduction of the cost of repairs and additions incurred on buildings in leasehold premises amounting to Rs. 1,01,87,412/-?
b) Whether on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the Appellate Tribunal that the sum of 1,01,87,412/- cannot be allowed as deduction for the assessment year in question?
3. We have heard Sri. Abraham Joseph Markos, the learned Counsel for the appellant and Sri.Jose Joseph, the learned Standing Counsel for the Income Tax Department.
4. The sole issue that arises for consideration is whether the claim by the appellant/assessee of an amount of Rs.10 1.87 lakhs as revenue expenditure is allowable or not. The Assessing Authority as also the First Appellate Authority while considering the claim of the appellant/assessee found that based on the description of the expenditure as given by the appellant/assessee, the expenditure was more in the nature of capital expenditure and not revenue expenditure and hence, the appellant could not claim these expenses as revenue expenses for the assessment year in question. The alternate claim of the appellant/assessee to permit them to claim depreciation to the prescribed extent in respect of the said expenditure incurred by them was however allowed by the said authorities. In the further appeal carried by the appellant before the Income Tax Appellate Tribunal, the Appellate Tribunal found as follows in respect of the claim for revenue expenditure:
6. Disallowance of Current Repairs
6.1 The assessee claimed an amount of Rs.101.87 lakhs as revenue expenditure which is addition to building and electrical fittings on leasehold premises. The Ld. AO, invoking Explanation-1 to Sec.32(1) held that capital expenditure incurred on a leased building was to be capitalized and depreciation would be allowed. Therefore, the amount of Rs.101.87 lakhs was disallowed. The Ld. CIT(A) confirmed the same but directed the LD. AO to allow depreciation on capital component of expenditure. Aggrieved the assesee is in further appeal before us.
6.2 From the facts, it emerges that the assessee has incurred expenditure on existing building which is erected on leased land. This being so, Explanation-1 would apply since the nature of expenditure is capital expenditure. Therefore, the expenditure is to be capitalized and depreciation would be allowable to the assessee. The Ld. AO is directed to allow depreciation on this expenditure. The asessee is directed to provide requisite details. This ground stand partly allowed.”
5. The learned Senior Counsel for the appellant would point out that the Appellate Tribunal merely went by the Explanation-1 to Section 32(1) of the Income Tax Act (‘the IT Act for short) and presumed that the expenditure incurred by the appellant/assessee was capital expenditure incurred on a lease building which had to be capitalized and only depreciation would be allowed thereon. He takes us to the judgment dated 17.06.2016 of a Full Bench of this Court in Indus Motors Co.P.vt. Ltd. v. Deputy Commission of Income Tax [(2016) 382 ITR 503 (Ker)]:(ITA No.14 of 2015) to point out that the provisions of Explanation-1 to Section 32(1) could not be mechanically applied to any claim made by an assessee in relation to an expenditure incurred on lease premises. The nature of the expense, whether capital or revenue, had to be first ascertained and it was only in circumstances where the expenditure was found to be a capital expenditure that the provisions of Explanation-1 to Section 32(1) of the IT Act could be applied. It is the submission of the learned Senior Counsel that in the impugned order of the Tribunal, the Tribunal has mechanically applied the provisions of Explanation -1 to Section 32(1) of the IT Act to the case of the assessment and further, it does not specifically refer to the aforementioned decision of the Full Bench of this Court. He therefore prays for a remand of the case to the Tribunal for a fresh consideration of the issue.
6. Per Contra, Sri.Jose Joseph, the learned Standing Counsel for the Income Tax Department would point out that by the impugned order, the Tribunal has merely affirmed the orders of the Assessing Authority and the First Appellate Authority. The orders of the Assessing Authority and the First Appellate Authority clearly discuss the claim made by the assessee and find that, based on the description of the expenses as given by the assessee, the expenses had to be treated as capital expenditure and not revenue expenditure. He points out therefore that, the Tribunal had in fact endorsed the findings of the authorities below, on facts, as regards the nature of expenses incurred by the assessee and it did not mechanically apply the provisions of Explanation-1 to Section 32(1) of the IT Act.
7. On a consideration of the rival submissions, we find force in the submission of the learned Standing Counsel for the Income Tax Department for we find that the assessing authority and the First Appellate Authority have clearly relied on the written submissions given by the assessee to find that the nature of the expenses incurred by the assessee was capital in nature. We also find that neither in the grounds of appeal before the First Appellate Authority nor before the Tribunal was there any material produced by the assessee to show that the expenses incurred by them were revenue in nature. If the assessee had in fact a case that the expenditure incurred by it was revenue in nature, then it was for the assessee to produce materials that would clearly demonstrate that the expenditure was revenue in nature. This not having been done at any stage before the First Appellate Authority or the Appellate Tribunal, we see no reason to interfere with the impugned order of the Tribunal which merely endorses the views taken by the said authorities.
8. Before parting with this case, and taking note of the apprehension raised by the learned Senior Counsel, we reiterate that the applicability of Explanation -1 to Section 32(1) of the IT Act has to follow an independent finding by the Assessing Authority on whether the expenditure incurred by an assessee is capital or revenue in nature. This is the ratio of the decision of the Full Bench of this Court in Indus Motors Co.P Ltd (supra) and it is binding on all the authorities under the IT Act.
In the result, we dismiss the IT Appeal by answering the questions of law raised therein against the assessee and in favour of the revenue.
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