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 De v. Deputy Commission Of Income Tax [(201

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE DR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR. JUSTICE SYAM KUMAR V.M. TUESDAY, THE 21 DAY OF MAY 2024 / 31ST VAISAKHA, 1946 ITA NO. 7 OF 2023 APPELLANT HOTEL ALLIED TRADES PVT. LTDC/O CASINO HOTEL, WILLINGDON ISLAND,KOCHI PAN AAACH 6770 P, PIN - 682682BY ADVS.ABRAHAM JOSEPH MARKOSISAAC THOMAS'P.G.CHANDAPILLAI ABRAHAMALEXANDER JOSEPH MARKOSSHARAD JOSEPH KODANTHARAJOHN VITHAYATHILAIBEL MATHEW SIBY RESPONDENT/RESPONDENT THE ADDITIONAL COMMISSIONER OF INCOME-TAXCIRCLE 1(2), KOCHI, PIN - 682018 OTHER PRESENT: SC-JOSE JOSEPH THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSIONON 21.05.2024, THE COURT ON THE SAME DAY DELIVERED THEFOLLOWING: J U D G M E N T============ Dated this the 21[st] day of May, 2024 Dr. A.K.Jayasankaran Nambiar, J. The appellant-M/s. Hotel & Allied Trades Pvt. Ltd. impugnsthe order dated 09.11.2022 of the Income Tax Tribunal that waspassed in relation to the appellant for the assessment year 2009-10. 2. By the said order, the Appellate Tribunal had affirmedthe order of the Assessing Authority as also the First AppellateAuthority that disallowed a claim for an amount of Rs.101.87lakhs as revenue expenditure since, according to the AssessingAuthority and the First Appellate Authority, the expenditure thatwas incurred by the appellant/assessee by way of addition tobuildings and electrical fittings on leasehold premises was in thenature of capital expenditure and not revenue expenditure. In theappeals before us, the appellant raises the following questions oflaw: “a) Whether on the facts and in circumstances of the casethe Tribunal is justified in confirming the disallowance of theclaim for deduction of the cost of repairs and additionsincurred on buildings in leasehold premises amounting toRs.1,01,87,412/-? b) Whether on the facts and in the circumstances of thecase, there is any material or evidence on record to justifythe finding of the Appellate Tribunal that the sum ofRs.1,01,87,412/- cannot be allowed as deduction for theassessment year in question? 3. We have heard Sri.Abraham Joseph Markos, the learnedCounsel for the appellant and Sri.Jose Joseph, the learnedStanding Counsel for the Income Tax Department. 4. The sole issue that arises for consideration is whetherthe claim by the appellant/assessee of an amount of Rs.101.87lakhs as revenue expenditure is allowable or not. The AssessingAuthority as also the First Appellate Authority while consideringthe claim of the appellant/assessee found that based on thedescription of the expenditure as given by the appellant/assessee,the expenditure was more in the nature of capital expenditureand not revenue expenditure and hence, the appellant could not claim these expenses as revenue expenses for the assessmentyear in question. The alternate claim of the appellant/assessee topermit them to claim depreciation to the prescribed extent inrespect of the said expenditure incurred by them was howeverallowed by the said authorities. In the further appeal carried bythe appellant before the Income Tax Appellate Tribunal, theAppellate Tribunal found as follows in respect of the claim forrevenue expenditure: 6.Disallowance of Current Repairs 6.1 The assessee claimed an amount of Rs.101.87 lakhsas revenue expenditure which is addition to building andelectrical fittings on leasehold premises. The Ld. AO,invoking Explanation-1 to Sec.32(1) held that capitalexpenditure incurred on a leased building was to becapitalized 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 toallow depreciation on capital component of expenditure.Aggrieved the assesee is in further appeal before us. 6.Disallowance of Current Repairs 6.1 The assessee claimed an amount of Rs.101.87 lakhsas revenue expenditure which is addition to building andelectrical fittings on leasehold premises. The Ld. AO,invoking Explanation-1 to Sec.32(1) held that capitalexpenditure incurred on a leased building was to becapitalized 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 toallow 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 hasincurred expenditure on existing building which is erectedon leased land. This being so, Explanation-1 would applysince 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. Thisground stand partly allowed.” 5. The learned Senior Counsel for the appellant wouldpoint out that the Appellate Tribunal merely went by theExplanation-1 to Section 32(1) of the Income Tax Act ('the IT Actfor short) and presumed that the expenditure incurred by theappellant/assessee was capital expenditure incurred on a leasebuilding which had to be capitalized and only depreciation wouldbe allowed thereon. He takes us to the judgment dated17.06.2016 of a Full Bench of this Court in Indus MotorsCo.P.vt. Ltd. v. Deputy Commission of Income Tax [(2016)382 ITR 503 (Ker)]:(ITA No.14 of 2015) to point out that theprovisions of Explanation-1 to Section 32(1) could not bemechanically applied to any claim made by an assessee inrelation to an expenditure incurred on lease premises. Thenature of the expense, whether capital or revenue, had to be firstascertained and it was only in circumstances where theexpenditure was found to be a capital expenditure that theprovisions of Explanation-1 to Section 32(1) of the IT Act could be applied. It is the submission of the learned Senior Counselthat in the impugned order of the Tribunal, the Tribunal hasmechanically applied the provisions of Explanation -1 to Section32(1) of the IT Act to the case of the assessment and further, itdoes not specifically refer to the aforementioned decision of theFull Bench of this Court. He therefore prays for a remand of thecase to the Tribunal for a fresh consideration of the issue. 6. Per Contra, Sri.Jose Joseph, the learned StandingCounsel for the Income Tax Department would point out that bythe impugned order, the Tribunal has merely affirmed the ordersof the Assessing Authority and the First Appellate Authority. Theorders of the Assessing Authority and the First AppellateAuthority clearly discuss the claim made by the assessee and findthat, based on the description of the expenses as given by theassessee, the expenses had to be treated as capital expenditureand not revenue expenditure. He points out therefore that, theTribunal had in fact endorsed the findings of the authoritiesbelow, on facts, as regards the nature of expenses incurred bythe assessee and it did not mechanically apply the provisions ofExplanation-1 to Section 32(1) of the IT Act. 6. Per Contra, Sri.Jose Joseph, the learned StandingCounsel for the Income Tax Department would point out that bythe impugned order, the Tribunal has merely affirmed the ordersof the Assessing Authority and the First Appellate Authority. Theorders of the Assessing Authority and the First AppellateAuthority clearly discuss the claim made by the assessee and findthat, based on the description of the expenses as given by theassessee, the expenses had to be treated as capital expenditureand not revenue expenditure. He points out therefore that, theTribunal had in fact endorsed the findings of the authoritiesbelow, on facts, as regards the nature of expenses incurred bythe assessee and it did not mechanically apply the provisions ofExplanation-1 to Section 32(1) of the IT Act. 7. On a consideration of the rival submissions, we findforce in the submission of the learned Standing Counsel for theIncome Tax Department for we find that the assessing authorityand the First Appellate Authority have clearly relied on thewritten submissions given by the assessee to find that the natureof the expenses incurred by the assessee was capital in nature.We also find that neither in the grounds of appeal before the FirstAppellate Authority nor before the Tribunal was there anymaterial produced by the assessee to show that the expensesincurred by them were revenue in nature. If the assessee had infact a case that the expenditure incurred by it was revenue innature, then it was for the assessee to produce materials thatwould clearly demonstrate that the expenditure was revenue innature. This not having been done at any stage before the FirstAppellate Authority or the Appellate Tribunal, we see no reasonto interfere with the impugned order of the Tribunal whichmerely endorses the views taken by the said authorities. 8. Before parting with this case, and taking note of theapprehension raised by the learned Senior Counsel, we reiteratethat the applicability of Explanation -1 to Section 32(1) of the IT Act has to follow an independent finding by the AssessingAuthority on whether the expenditure incurred by an assessee iscapital or revenue in nature. This is the ratio of the decision ofthe 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 thequestions of law raised therein against the assessee and in favourof the revenue. Sd/- DR. A.K.JAYASANKARAN NAMBIAR JUDGE Sd/- SYAM KUMAR V.M. JUDGE smm APPENDIX OF ITA 7/2023 PETITIONER ANNEXURESAnnexure ASTATEMENT OF EXPENDITUREAnnexure BTRUE COPY OF ASSESSMENT ORDER DATED 14-12-2011 OF THE ADDITIONAL COMMISSIONEROF INCOME TAX, RANGE-1, KOCHIAnnexure CTRUE COPY OF THE ORDER DATED 15.03.2017OF THE COMMISSIONER OF INCOME TAX(APPEALS)-1, COCHINAnnexure DTRUE COPY OF THE SECOND APPEAL DATED08.05.2017 FILED BY THE APPELLANT BEFORETHE INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH, COCHIN. Annexure ECERTIFIED COPY OF THE ORDER DATED09.11.2022 OF THE APPELLATE TRIBUNAL,COCHIN BENCH, COCHIN IN ITA ITA NO.187/COCH/2017 FOR ASSESSMENT YEAR 2009-10 Annexure F TRUE COPY OF JUDGMENT DATED 18.05.2022IN ITA 28 OF 2017 OF THIS HON'BLE COURT