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Renovation in the nature of Permanent structure not eligible for 100% depreciation

ITAT Delhi held that the renovation made by the assessee company is in the nature of permanent structure by way of Brick Wall partitions, panelling of Aluminium , Flooring etc. which cannot be covered under current repairs as provided in s. 30 of IT Act, 1961.

The facts in brief of the case are that the assessee company was engaged in the business of manufacturing of mobile components and accessories and related activities. For the year under consideration, the assessee filed return of income declaring loss of Rs.5,95,36,759/- on 13/10/2007. The case was selected for scrutiny under Computer Assisted Selection of Scrutiny (CASS) and statutory notice was issued and complied with. In the scrutiny proceedings, the Assessing Officer made certain additions including the disallowance of depreciation claimed of Rs.31,97,677/- on temporary structure at the rate of 100% by the assessee. The learned Assessing Officer, however, allowed depreciation at the rate of 10% on the expenses of Rs.31,97,677/- amounting to Rs.3,19,767/-. The learned Commissioner of Income-tax (Appeals) also sustained the disallowance of 100% depreciation and allowed 10% depreciation on the expenses claimed by the assessee as in the nature of temporary erections. Aggrieved with the finding of the learned Commissioner of Income Tax (Appeals) on the issue of depreciation on temporary structure, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.

ITAT Delhi held that the renovation made by the assessee company is in the nature of permanent structure by way of Brick Wall partitions, panelling of Aluminium , Flooring etc. which cannot be covered under current repairs as provided in s. 30 of IT Act, 1961. Such work as made by the assessee company, cannot be stated so as to keep the premises as restored to good condition or save it from exhaustion or compensation of The work in the case of assessee, are meant to altogether change the user by way of expanding its capacity substantially and changeover of its look. The expenditure is certainly capital in nature on which depreciation can only be allowed.

Further in a recent case, the Tribunal Delhi Bench in the case of Marubeni-Itochu Steel India Pvt. Ltd. Vs. Deputy Commissioner Of Income Tax in ITA No. 1716/Del/2014, dated 15th February, 2016, has decided the identical issue as under:

“18.1. The only other ground raised in this appeal is against the confirmation of addition of Rs.23,91,810/- towards the expenditure incurred on account of leasehold improvements by treating the same as capital in nature.

18.2. The facts apropos this issue are that the assessee claimed leasehold improvement expenses of Rs.23.90 lac and architect fee of Rs.33.14 lac as revenue. The AO observed that the assessee started its business during this year only and civil and construction work was done on the premises taken on lease. He treated this work as construction of a permanent structure on leasehold premises. After entertaining objections from the assessee, he made disallowance of Rs.51,34,426/- (Capitalization of two amounts of Rs.23.90 lac and Rs.33.14 lac as reduced by depreciation). The Id. CIT(A) allowed the assessee’s claim in respect of payment to architect amounting to Rs.33.14 lac. However, the remaining amount of Rs.23.90 lac was treated as capital in nature. The assessee is aggrieved against the confirmation of addition to this extent, while there is no appeal filed on behalf of the Revenue.

18.3. We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee took the premises on lease and also started business during the year under consideration. A sum of Rs.23.90 lac was incurred on complete renovation of such premises as it is apparent from the details placed on record. The Hon’ble Supreme Court in Ballimal Naval Kishore vs. CIT 1997 224 ITR 414 (SC) has held that the expenditure incurred by the assessee on total renovation of cinema theatre by installing new machinery, new furniture, new sanitary fitting and new electrical installation besides extensive repair of structure of building, to be capital expenditure and not allowable as current repairs. This judgment indicates that any capital expenditure on total renovation is liable to be considered as capital expenditure. The Hon’ble jurisdictional High Court in Bigjo’s India Ltd. vs. CIT (2007) 293 ITR 170 (Del) considered almost a similar situation as is obtaining before us in the present appeal. In that case, the assessee, a licensee of the showroom, erected new counters and built a new lift shaft at a new site. It was held that  such amount was not in the nature of current repairs but a capital expenditure not deductible in full.

18.4. Adverting to the facts of the instant case, we find that the present facts are on all fours with those considered by the Hon’ble High Court in Bigjo”s (supra). It is evident from the description of the items on which the above referred expenditure has been incurred that it is a case of renovation of premises immediately after taking it on lease. As such, there can be no question of replacement. We cannot help if the Revenue has accepted the part deletion of disallowance by the Id. CIT(A). Be that as it may we are concerned only with the items of disallowance raked up in the appeal before us and hold that the Id. CIT(A) has taken unimpeachable view in treating the instant amount as capital expenditure.

18.5. At this stage, it is relevant to note that the Tax Laws (Amendment and Miscellaneous Provisions) Act, 1986 inserted Explanation 1 to section 32 w.e.f. 1.4.1988, reading as under : –

“Explanation-1. Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of, or improvement to the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.”

18.6. A circumspection of the above Explanation reveals that where a business is carried on in a building not owned by the assessee but in respect of which it holds a lease or either occupancy rights, then the expenditure on i. the construction of a structure or ii. doing of any work in or in relation to and by way of renovation or extension of, or improvement to the building, shall be considered as structure or work in the nature of building owned by the assessee for the purpose of depreciation. Spirit and text of Explanation 1 to section 32 is that any capital expenditure by the assessee on a building not owned by him, in which he carries on the business, shall be considered as building owned by him for the purposes of section 32, to the extent of the amounts spent on the construction of structure or doing of any work in or in relation to and by way of renovation or extension or improvement to the building. It therefore, follows that in order to bring any amount within the ambit of Explanation 1 to section 32, it is paramount that the expenditure incurred by the assessee on the premises in the capacity of non-owner should firstly be in the nature of capital expenditure and then it should fall within any or both the clauses as discussed above. If these conditions get satisfied, as is the case under consideration, then the amount incurred for such works falls for consideration under Explanation 1 to section 32. In other words, the amount so incurred would be capitalized entitling the assessee to depreciation as per the eligible rate. In view of the foregoing discussion, we uphold the impugned order on this issue subject to grant of depreciation.”

In view of above, we uphold the finding of the learned Commissioner of Income Tax (Appeals) on the issue in dispute and accordingly dismiss the ground No. 1 of the appeal.

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