Case Law Details
Garve Motors Pvt. Ltd. Vs ACIT (ITAT Pune)
ITAT Pune held that repairs & maintenance expenditure incurred in rented workshop and showroom is revenue expenditure and allowable as deduction under section 30(a)(i) of the Income Tax Act,1961
Facts-
Two short issues arising for our consideration, one as to what constitutes sufficiency of interest free funds entitling diversion thereof to sister concern as such? And second as to when repairs & maintenance expenditure to tantamount capital expenditure?
Conclusion-
Since the appellant neither brought on the record any authorization from the banker entitling such diversion of funds to sister concern nor placed any evidential material to substantiate such interest free payments or diversion were triggered on account of business exigencies vis-à-vis obligation and commercial expediency, consequently the claim of the appellant fails the test laid by the Hon’ble Supreme Court in “S.A. Builders Ltd. Vs CIT” thus we find no infirmity with the disallowance made on this count, ergo ground number 1 stands dismissed.
Held that expenditure incurred for the enduring benefit may term as deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken given the magnitude of the expenditure involved and the benefit to be derived subject to the limitation on enduring usage. For the allow ability of any expenditure under the Act, the classification between the capital and revenue and the same does not recognize any concept of deferred revenue expenditure cataloguing with enduring benefit.
The expenses incurred by the appellant squarely intra-legem to the provision of section 30(a)(i) of the Act, and removed the infirmity in the order of both the tax authorities below by deleting the disallowance carried out u/s 30(a)(i) of the Act.
FULL TEXT OF THE ORDER OF ITAT PUNE
The extant appeal challenges the order of Commissioner of Income Tax (Appeals)-6, Pune [for short “CIT(A)”] dt. 06/12/2017 passed u/s 250 of the Income-tax Act, 1961 [for short “the Act”], which climbed out of order of assessment dt. 15/03/2016 passed u/s 143(3) by the Asstt. Commissioner of Income Tax, Circle-9, Pune [for short “AO”] for assessment year [for short “AY”] 2013-14.
2. Two short issues arising for our consideration, one as to what constitutes sufficiency of interest free funds entitling diversion thereof to sister concern as such? And second as to when repairs & maintenance expenditure to tantamount capital expenditure [for short “Capex”]?
3. Before we proceed to adjudicate on aforesaid issues, it’s necessary to reproduce the grounds raised such as;
“1. The learned CIT(A) erred in law and on facts in confirming disallowance of interest expenditure of Rs. 4,77,338/- on account of diversion of funds for non-business purpose. The disallowance being unjustified on facts and in law may kindly be deleted.
2. The learned AO erred in law and on facts in disallowing repairs and maintenance expenditure of 40,95,319/- in respect of its showroom and work shop at rented premises and treating it capital expenditure. The disallowance being unjustified on facts and in law may kindly be deleted.
3. The appellant craves to add, alter, modify or substitute any ground of appeal at the time of ”
4. Laconically stated the facts of the case are;
4.1 The appellant is a private limited company holding authorized dealership of Hyundai Motors, has for the AY 201 3-14 filed its return of income [for short “ITR”] on 30/09/2013 declaring income of ₹1,09,70,250/-, wherein the case was subjected to CASS by service of notice u/s 143(2) and considering the submissions of the assessee, the assessment was culminated u/s 143(3) with additions viz; disallowance of depreciation on demo car, disallowance of interest u/s 36(1)(iii) for diversion of interest bearing funds, disallowance u/s 40a(ia) and disallowance of repairs & maintenance holding as Capex.
4.2 The assessee company challenged the action of Ld. AO contesting all the addition before the first appellate authority [for short “FAA”], wherein the Ld. CIT(A) finding force in assessee’s contention granted part relief as regards to depreciation on demo car following precedents laid in assessee’s own case for earlier years and conceded with the balance action of Ld. AO in confirming other additions. Consequently, against sustained additions / disallowances the appellant company is in appeal before this Tribunal on effectively two grounds set in para 3 hereinbefore.
5. During the course of physical hearing, the learned representative of the assessee [for short “AR”] at the outset referring to affidavit and application filed for condo nation of delay in instituting the appeal, reiterated its contents and prayed for condo nation. In so far as the first merit are ground is concerned, the Ld. AR adverting to page 11-12 of the paper book submitted that, the sum of the equity capital and balance of reserves & surplus are far more than the total amount of interest free funds lent to sister concern, hence the disallowance u/s 36(1)(iii) was unwarranted. And in so far as disallowance of repairs & maintenance is concerned, the Ld. AR contended that, the appellant company renovated its newly acquired lease premises to operationalize as showroom & work shop keeping in view with the dealership agreement and such expenses did not bring into existence any qualifying capital asset nor any structure being came into existence so has to enable the claim of depreciation thereon.
6. The learned departmental representative [for short “DR”] expressing no objection for condo nation of delay, Au contraire, rebutted the first contention of the Ld. AR placing vehement arguments before the bench that, the sum of equity and reserves & surplus balance are not circulating capital of the appellant company but meant exclusively for long-term commitment such as creation of fixed assets etc., and whereas the appellant company diverted its interest bearing “Overdraft Account” [for short “OD A/c”] loan fund which is by nature a circulating fund meant exclusively for working capital needs, hence for the reason the disallowance on this accounts terminally deserves to be confirmed. Whereas the addition on account of disallowance of repairs & maintenance expenditure is concerned, the Ld. DR underlining the acquisition of new lease premises and quantum of expenditure incurred in creating new structure for enduring benefit to be enjoyed over a lease period by the appellant company, solidified the stands taken by the tax authorities below on the ground that such repairs were not undertaken under a lease obligation but self-driven and hence prayed accordingly.
7. We have heard the rival contentions of both the parties; and subject to the provisions of rule 18 of Income Tax Appellate Tribunal Rules, 1963 [for short “ITAT, Rules”] perused the material placed on record, case laws relied upon by the appellant as well the respondent and duly considered the facts of the case in the light of settled legal position forewarned to either parties.
8. First thing first, in so far as the delay of 82 days in instituting the present appeal is concerned, we having regards to facts & circumstance, find force in the submission of the appellant establishing the sufficiency of reason in belated filing, consequently in the light of decision of Hon’ble Apex Court in “Collector Land Acquisition Vs MST Katiji and Others” reported at 167 ITR 5 (SC) and Hon’ble Bombay High Court in “CIT Vs Velingkar Brothers” reported at 289 ITR 382 (Bom), the delay stands condoned in the larger interest of justice.
9. We shall now deal with ground number 1
9.1 Without reproducing the provision of applicable section in verbatim, it shall purposive to state that, by the residuary head of deduction u/s 36, the assessee while computing its taxable income under chapter IV‑ D of the Act, is entitled to a claim of deduction for the amount of interest paid in respect of capital borrowed for the purpose of business by virtue of clause (iii) of sub section (1) thereunder. In the extant appeal, it being an accredited fact that, the appellant borrowed funds from bank through “OD A/c” and out of such interest bearing borrowed funds ₹5,41,227/- and ₹26,41,025/- was advanced interest free to its sister concerns viz; Shri Vinak Garve and M/s Vinayak Enterprises respectively and in the absence of any substantive explanation or material rebutting the observation, proportionate interest on diverted funds was disallowed holding it such lending or diversion as
non-business purpose by both the tax authorities.
9.2 At the outset we concur with contention of the Ld. DR in vouching that, the sum of the equity capital and balances standing in reserves & surplus form part of long-term capital or fund and exclusively meant for long term commitment for acquiring property, plant and machinery, hence the contention of the Ld. AR prima-facie did not inspire any confidence in the claim put forth. We are mindful to the fact that, the funds borrowed on interest under “OD” facility is meant for working capital needs of the borrower & is governed by terms of loan agreement and bench is also aware of the fact that, every banker while making such a sanction invariably restricts the borrower from diverting the such loan funds or utilization thereof for any purpose outside the sanctioned tenacity by stipulating appropriate condition in the loan agreement itself. Since the appellant neither brought on the record any authorisation from the banker entitling such diversion of funds to sister concern nor placed any evidential material to substantiate such interest free payments or diversion were triggered on account of business exigencies vis-à-vis obligation and commercial expediency, consequently the claim of the appellant fails the test laid by the Hon’ble Supreme Court in “S.A. Builders Ltd. Vs CIT” reported in 288 ITR 1, thus we find no infirmity with the disallowance made on this count, ergo ground number 1 stands dismissed.
10. Coming to substantive ground of disallowance of repairs & maintenance expenditure, we ex-facie observed that, both the lower tax authorities outwardly coined the disallowance vouching the quantum of expenditure incurred by the appellant which devoid of provision of section 30 of the Act. Nota bene, the legislature in his wisdom has made a fine distinction between sub-clause (i) and (ii) of section 30(a) of the Act while providing for allowance on account of repairs to building when occupied as tenant and used for the purpose of building, as against current repairs when occupied otherwise than tenancy and for the sake of clarity its apt to reproduced the text thereof as under;
30. Rent, rates, taxes, repairs and insurance for building,
(a) Where the premises are occupied by the assessee-
(i) As a tenant, the rent paid for such premises: and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;
(ii) Otherwise than as a tenant, the amount paid by him on account of current repairs to the premises.
11. Bare reading of the provision sufficiently clenches that, when a premises in a disfigured or dilapidated condition is occupied by the assessee, all extensive repairs meant to include current or otherwise undertaken by the assessee for making such premises tenable vis-a-vis habitable for business, unless such extensive repairs brings into existence any capital field or rights therein, shall pass the litmus test laid in sub-clause (i) of section 30(a) of the Act and accordingly the allowance.
12. In the present case before us, it is an admitted fact that, the appellant has occupied the premises on short term lease in a disfigured condition and carried out the extensive repairs to convert the same into workshop and showroom so has to suit its business operation to be carried therefrom under a dealership specification, but without bringing into existence any capital field / asset or rights therein, except enduring usage over a short period of lease, which naturally subjected to pre-termination, consequently no control over the term of enduring usage as well. And the question as to whether or not such extensive repairs is of enduring nature is extensively dealt by the Hon’ble Supreme Court in the case of “Alembic Chemical Works Co. Ltd. Vs CIT” reported in 177 ITR 377, wherein the Lordships have vide para 9 observed that;
“The idea of “once for all” payment and “enduring benefit” are not to be treated as something akin to statutory conditions ,nor are the notions of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business The expression “asset or advantage of an enduring nature” was evolved to emphasis the element of a sufficient degree of durability appropriate to the context.”
13. We are headful to quote that, expenditure incurred for enduring benefit may termed as deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved and benefit to be derived subject to limitation on enduring usage. For the purpose of allow ability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same-does not recognise of any concept of deferred revenue expenditure cataloguing with enduring benefit, hence for the reason we disapprove the contention of Ld. DR’s for treating the revenue expenditure as deferred expenditure, and are we are of the considered view that, the expenses incurred by the appellant squarely intra-legem to the provision of section 30(a)(i) of the Act, and the same finds fortified by the decision of the Hon’ble Calcutta High Court in “Cultural Enterprises Corp. Vs CIT” reported in 196 ITR 488, ergo we remove the infirmity in the order of both the tax authorities below by deleting the disallowance carried out u/s 30(a)(i) of the Act.
14. Resultantly, the appeal of the appellant assessee is partly allowed in above terms.
In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this Friday 07th day of October, 2022.
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