Case Law Details
Assessee has incurred expenditure in modifying and improving the leased property and claimed it as revenue expenditure. CIT has applied Explanation “1A” of section 32, as per which, where the business of the assessee is carried on in the leased property and any expenditure is incurred on the construction of any structure by way of renovation, extension or improvement, then, section 32 will apply and accordingly, the assessee can claim depreciation on the value spent on such improvement or changes in the structure. The AR has relied on the decision of Hon’ble Madras High Court in the case of CIT v. M/s. TVS Lean Logistics Ltd. (supra). On careful reading of the said decision, in that case, the assessee has taken only the land on lease and built the building for the purpose of running the business and the Hon’ble High Court held that the Explanation 1A of section 32 will not apply in the given case. But in the case before us, the assessee has taken on lease the semi-finished building with other structure and the assessee had made the modification and improvement to the semi-finished structure to suit the requirement of work shop (refer page 21 of paper book). Hence, the decision of the Hon’ble Madras High Court will not apply to the case under consideration. After introduction of the Explanation ‘1A’ to section 32, there is no other judicial pronouncement relating to this subject apart from the decision of the Madras High Court. In our considered view, the assessee has only modified and improved the leased property to suit the requirement of its business. Hence, the explanation “1A” to section 32 will apply to the assessee’s case and the findings of learned CIT is proper.Therefore, expenditure on modification and improvement was not deductible under section 37(1).
Full Text of the ITAT Order is as follows:-
This appeal filed by the assessee is directed against the order of CIT, Kurnool Charge, Kurnool dated 28-3-2016 for assessment year 2011- 12, wherein the assessee has raised the following grounds of appeal :–
“1. The Order of the Hon’ble Commissioner of Income Tax passed under section 263 of the Income Tax Act, in so far as it is against the appellant-firm, is contrary to the facts of the case and the provisions of law.
2. The Hon’ble Commissioner of Income Tax is not justified in passing an Order under section 263 when the assessing officer had allowed the claim for deduction in respect of expenditure incurred on the land taken on lease.
3. The Hon’ble. Commissioner of Income Tax is not justified in holding that the Order of the assessing officer is erroneous and prejudicial to the interests of the revenue.
4. The Hon’ble Commissioner of Income Tax erred in holding the amount of Rs. 24,59,729 incurred by the appellant-firm in respect of the land taken on lease is capital expenditure and is not eligible for deduction in the Computation of Total income.
5. The Hon’ble Commissioner of Income Tax failed to appreciate that the appellant- firm is rightly eligible to the deduction of Rs. 24,59,729 in so far it is covered by the judicial dicta including the decision of the Supreme Court judgment in the case of CIT v. Madras Auto Service (P) Ltd.”
2. Briefly the facts of the case are that the assessee firm filed its return of income for the assessment year 2011- 12 on 26-09-2011 admitting an income of Rs. 38,07,188 from business of dealership in Maruti Cars and their services. The assessment was completed by the assessing officer under section 143(3) determining the income of the assessee at Rs. 52,60,754, as against the returned income of Rs. 38,07,188, by making some additions.
3. Thereafter, the CIT had an occasion to examine the assessment records for assessment year 2011-12 and on perusal of the records, it was observed that the assessee-firm claimed an amount of Rs. 24,59,729 as revenue expenditure under the head Workshop Constructions. He observed that during the course of assessment proceedings, the assessee- firm has relied upon the Hon’ble Supreme Court judgment in the case of CIT Vs. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC), which pertains to assessment year 1968-69 and 1969-70, to claim the above mentioned expenditure as revenue expenditure and the assessee-firm’s claim was accepted by the assessing officer The CIT observed that in view of the Explanation 1 to section 32(1) inserted with effect from 1-4-1988, the assessee-firm’s claim of allowance of said sum under revenue expenditure is not correct and the expenditure is however eligible for depreciation in accordance with the Explanation 1 to section 32(1) of the Income Tax Act, 1961.
3.1 In view of the above observations, the CIT was of the view that the order passed by the assessing officer is erroneous and prejudicial to the interests of revenue. Accordingly, a notice under section 263 dated 7-1-2016 was issued to the assessee to show cause as to why the assessment should not be revised or cancelled under section 263 of the Act. In response, the assessee-firm filed its written submissions at the time of hearing on 22-1-2016.
3.2 After considering the submissions of the assessee, the CIT set aside the order of the assessing officer and directed the assessing officer to re-do the assessment in accordance with the directions given in his order, by observing as under :–
“4. I have considered the submissions made by the assessee. It is seen that the assessee has relied upon the Supreme Court’s judgment referred to supra to claim the expenditure incurred towards Workshop construction on lease land as allowable business expenditure. However, this judgment of the Supreme Court is rendered with reference to the assessment years 1968-69 and 1969-70. Thereafter Explanation 1 has been introduced with effect from 1-4-1988 to section 32(1) where it is clarified that in a case where the business of the assessee is carried on in a leased premises and any expenditure is incurred on the construction of any structure by way of renovation, extension or improvement, then the provisions of section 32 would apply to the assessee, as if the building was owned by the assessee. Further, with effect from assessment year 2004- 05, the provisions of sections 30 & 31 have also been amended to state that no expenditure which is capital in nature can be allowed under the head of Current Repairs of building or plant and machinery. In the assessee’s case, the expenditure of Rs. 24,59,729 has been incurred on the construction of a workshop on land that has been leased out from a related party for a period of 10 years. The expenditure is clearly capital in nature and is not covered within the ambit of sections 30 and 31 of the Act. However, taking into account the Explanation introduced to section 32(1), the assessee would be eligible to claim depreciation on the asset created.
5. The assessing officer has failed to consider the amount incurred for construction of workshop, claimed by the assessee as revenue expenditure, for dis allowance while completing the assessment and, therefore, the assessment is erroneous and prejudicial to the interests of revenue to this extent. For the reasons given in the earlier paragraphs, the assessing officer is directed to re-compute the income of the assessee, after disallowing the amount of Rs. 24,59,729, and allowing depreciation on the workshop building. The assessment is set aside with directions to re-do the assessment in accordance with the aforementioned directions.”
4. Aggrieved by the order of the CIT, the assessee is in appeal before us raising the aforementioned grounds.
5. Learned AR of the assessee filed a paper book containing the following :–
1. Copy of the statement of total income, depreciation statement, trading and profit & loss a/c and balance sheet for the assessment year 2011-12. — Pages 1 to 12.
2. Copy of the lease agreement between Md. Shahed Ali Khan and MSA Motors — Pages 13 to 16
3. Copy of the lease agreement Md. Masood Ali Khan and MSA Motors. — Pages 17 to 20
4. Copy of the lease agreement Ahmed Ali Khan and M/s. MSA Motors. — Pages 21 to 26
5. Copy of the reply dated 22-1-2016 against the show cause notice under section 263 — Pages 27 to 34
6. Copy of the letter dated 19-12-2013 addressed to Additional Commissioner of Income Tax, Kurnool — Pages 35 & 36.
The learned AR relied on the decision of Hon’ble Madras High Court in the case of CIT v. M/s. TVS Lean Logistics Ltd., a copy of which is available at pages 37 to 44.
6. On the other hand learned DR relied on the order of the CIT and placed reliance on the following cases :–
1. Asst. CIT Vs. Efftronics Systems (P) Ltd. (2011) 133 ITD 460 (Vizag)
2. CIT Vs. Madura Coats (2012) 205 Taxman 357 (Mad.)
7. Considered the rival submissions and perused the material facts on record as well as the decisions cited by both the counsels. The learned CIT has invoked section 263 of the Act and considered the assessment as erroneous and prejudicial to the interests of revenue due to the fact that the assessee has incurred expenditure in modifying and improving the leased property and claimed it as revenue expenditure. CIT has applied Explanation “1A” of section 32, as per which, where the business of the assessee is carried on in the leased property and any expenditure is incurred on the construction of any structure by way of renovation, extension or improvement, then, section 32 will apply and accordingly, the assessee can claim depreciation on the value spent on such improvement or changes in the structure. The AR has relied on the decision of Hon’ble Madras High Court in the case of CIT v. M/s. TVS Lean Logistics Ltd. (supra). On careful reading of the said decision, in that case, the assessee has taken only the land on lease and built the building for the purpose of running the business and the Hon’ble High Court held that the Explanation 1A of section 32 will not apply in the given case. But in the case before us, the assessee has taken on lease the semi-finished building with other structure and the assessee had made the modification and improvement to the semi-finished structure to suit the requirement of work shop (refer page 21 of paper book). Hence, the decision of the Hon’ble Madras High Court will not apply to the case under consideration. After introduction of the Explanation ‘1A’ to section 32, there is no other judicial pronouncement relating to this subject apart from the decision of the Madras High Court. In our considered view, the assessee has only modified and improved the leased property to suit the requirement of its business. Hence, the explanation “1A” to section 32 will apply to the assessee’s case and the findings of learned CIT is proper. Accordingly, we are inclined to uphold the order of CIT passed under section 263 of the Act.
8. In the result, appeal of the assessee is dismissed.
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