“(Iii) Treatment Of The Leasehold Improvements As Revenue v. An Addition Increases Quality Of Fixed Assets. Hence Amount Spent Onthe Purchase Of Fixed Asset Is Treated As Capital Expenditure. The Qualityof A Fixed Asset I

Court No. - 3 Case :- INCOME TAX APPEAL No. - 51 of 2022Appellant :- The Pr. Commissioner Of Income Tax Aaykar Bhawan Noida And AnotherRespondent :- M/S Jubilant Foodworks LtdCounsel for Appellant :- Gaurav Mahajan With Case :- INCOME TAX APPEAL DEFECTIVE No. - 29 of 2022Appellant :- The Pr. Commissioner Of Income Tax Aaykar Bhawan Noida And Another Respondent :- M/S Jubilant Foodworks LtdCounsel for Appellant :- Gaurav Mahajan Hon'ble Surya Prakash Kesarwani,J.Hon'ble Chandra Kumar Rai,J. 1.Heard Sri Gaurav Mahajan, learned counsel for the appellants. 2.Income Tax Appeal No.51 of 2022 relates to the A.Y. 2013 – 14and Income Tax Appeal Defective No.29 of 2022 relates to the A.Y. 2012– 13. 3.Since certified copy of the impugned order of the Tribunal anddetailed order of the CIT Appeal have been filed alongwith the IncomeTax Appeal No.51 of 2022 and the facts are common except that thefigures of repair are different. With the consent of learned counsel for theappellants treating the Income Tax Appeal No.51 of 2022 as a leadingappeal and facts thereof are being noted. 4.For the A.Y. 2013-14 the assessee claimed Rs.47,37,14,260/-asrevenue expenditure and for the A.Y. 2012-13 he claimedRs.23,12,19,190/- as revenue expenditure which were disallowed by theassessing officer and treated as capital expenditure and accordingly these amounts were added in the income of the assessee for the assessment ofthe respective Assessment years. 5.The respondent - assessee is engaged in business of manufacturingand sale of pizza and other related fast food items under the brand nameof “Dominos” and non-alcoholic beverages from its retail outlets acrossthe country. The total number of retail outlets are said to be about 129. Inthe appeal filed by the respondent – assessee, under Section 246 A of theIncome Tax Act, 1961 (hereinafter referred to as “the Act, 1961”), theCommissioner of Income Tax (Appeal) New Delhi, exhaustivelyexamined and discussed the matter and held as under : “5.2 Ground 6 and 7 5.2.1 These grounds are related to the disallowance ofRs.47,37,14,260. The appellant in his computation in his profit and lossaccount had claimed a total expenditure of Rs 66,67,14,696 on existingoutlets which were operational during the year under consideration.The assessing officer during the assessment had examined the nature ofthese expenses. The appellant himself had classified the amount of R19,30,00,437 as capital in nature, The balance amount of Rs 47,37,260was claimed as revenue expenditure. The assessing officer whileexamining this expenditure in the assessment order had noted that thesaid expenditure was for improvements on 139 outlets operated by theappellant for dominos and dunkin doughnuts. The assessing officerexamined the provisions of section 30 under which the appellant hadclaimed the aforesaid deduction as being of revenue nature and alsothe provisions of section 37. The assessing Officer has specificallydiscussed the issue in Para section 4 and 5 of the order. “(iii) Treatment of the leasehold Improvements As Revenue Vs Capitalin I.T Act. 1961-Every business entity is required to maintain theaccounts in a proper way as per rules applicable. The expenditureincurred by the business entity is allowed/ disallowed by the IncomeTax Authorities while computing the Profit and loss accounts of thebusiness entity. There is always a difference of opinion identifying somesort of expenditure as to whether revenue expenditure or capitalexpenditure. Briefly stated as under- “(iii) Treatment of the leasehold Improvements As Revenue Vs Capitalin I.T Act. 1961-Every business entity is required to maintain theaccounts in a proper way as per rules applicable. The expenditureincurred by the business entity is allowed/ disallowed by the IncomeTax Authorities while computing the Profit and loss accounts of thebusiness entity. There is always a difference of opinion identifying somesort of expenditure as to whether revenue expenditure or capitalexpenditure. Briefly stated as under- Revenue Expenditure:- Revenue expenditure is an expenditure chargedagainst operation. It is a term used to contrast with capitalexpenditure. Revenue expenditure is intended to benefit the currentexpenditure. Some of the examples for revenue expenditure are-Expenses incurred in the normal course of business viz., expenses ofadministration, manufacturing and selling products. Cost of goodspurchased for resale, Depreciation on fixed assets, interest on loan forbusiness, etc. Capital Expenditure: Capital expenditure is an expenditure intended tobenefit future periods, in contrast to revenue expenditure. The term isgenerally restricted to expenditures that add fixed assets or that has theeffect of increasing the capacity, efficiency, life span, or economy ofoperation of an existing fixed asset. An addition increases quality of fixed assets. Hence amount spent onthe purchase of fixed asset is treated as capital expenditure. The qualityof a fixed asset is said to have increased when expenditure results inany or some of the following events : When probable useful life of the fixed asset increases; When capacity of the fixed asset increases; When efficiency of the fixed asset increases; when operating economy is achieved; In View of Explanation 1 to section 32(1), the expenditure could not beclaimed to be revenue expenditure for reason only that it is in relationto a property of which the assessee is a lessee and if the expenditure isincurred in respect of predominantly fixed capital assets, theexpenditure cannot be claimed to be revenue expenditure for reasononly that it facilities the assessee’s business. In the instant case, the expenditure being in the nature of extensiverenovation beautification of the stores value a much high cost and alsoan enduring benefits. (iv) The lease made for various stores are generally for an initialperiod of three years tenure with a right to the lessee to repair andrenovate as per the assessee company's business requirements. Theassessee has incurred certain expenses for customizing the leasedpremises for its use and an amount of Rs. 47,37,14,260/- has beendebited to the Profit & Loss Account and considered as revenue innature. The assessee submitted that incurring of such expenditure hadnot given rise to any fresh capital asset but was only to give a betterlook to its business premises to attract customers and cater to the tasteof clientele and also to meet the international standards of Domino'sPizza’ and 'Dunkin Donuts' being chains of fast food restaurants andtake away. (v) In view of details of renovations discussed at Para no.3.3 above, thenature of above expenses itself would show that these are not merelyexpenses on current repair and in fact are in nature of fixtures andother fixed assets. Expenses on lease hold improvements liable to betreated as capital expenditure, particularly when the amount spent issignificantly very heavy and not in nature of current repair. Benefit ofthese expenses are not confined to the year under the considerationonly. In this case, allowing deduction for these expenses in one yearwill distort the computation of the taxable income of the year, reliancein this regard is placed on decision of Hon'ble Supreme Court in caseof Madras Industrial investment Corpn. Ltd. v. CIT (1997)225 ITR802." 5.2.2 The appellant on the other hand in his submissions has given adetailed discussion on what is the nature of expense incurred. Theappellant states that the expenses were for generally setting up the 5.2.2 The appellant on the other hand in his submissions has given adetailed discussion on what is the nature of expense incurred. Theappellant states that the expenses were for generally setting up the store taken on lease in accordance with the standard directionsadopted for the branded stores. The appeltant stated that theconsideration paid was for tiling work, woodwork, waterproofing, falseceiling and other such repairs. The principal reliance of the appellantwas on the decision of the honourable high court in the case of CIT VsHi Line Pens Private Limited 175 ITR 132. The said case studies thedistinction between the term current repairs and the term repairswhich were used in section 30 (a)(2). The appellant further arguedthat the deduction for the expenses of the nature quoted above is alsoeligible under section 37(1) as such expenses were in fact necessitatedby the line of business of the appellant. The appellant further discussesthe term capital expenditure and stated that expenses were incurred fornature of work did not fall within the gamut of capital expenditure andsquarely fell within repairs as envisaged under section 30 of the act. Inpara 21 of his submission, the appellant has tabulated and bifurcatedthe aforesaid expenses into 13 separate heads. For eachcategorization, the appellant has quoted a number of judgements whichpertain to the nature of expenses in the categorisation and terms themas revenue in nature for the purposes of eligibility under the Income-tax Act. The AO has also led the argument that the appellant had beenclaiming these expenses as being of capital nature during theassessment year 2012-13. The appellant in his reply has stated that theerroneous classification need not be perpetuated in the subsequentyears. Reliance on the jurisdictional high courts decisions which havealso held this proposition as correct have been given by the appellant. 5.2.3 The arguments of the assessing officer presented in theassessment order and the submissions of the appellant have beenexamined. The quoted case law to the extent, the same are relevanthave also been considered. It is seen from the nature of business of theappellant that the appellant is a franchise of Dunkin Donuts andDomino's Pizza. The appellant takes a bare shell premises on leasefrom various cntities during the ycar. It is also evident that theDomino's store is required to have a specific and outlook., Thereforein order to run a Dominos outlet, the appelant is necessarily requiredto make extensive modifications in the premises which has beenobtained on lease for the purposes of the store. Modification of theconstruction involves the expenses on tiling, glazing, false ceiling,paints, plaster etc. It apparently does not create any new asset in thecase of the appellant. It is also seen that once such store is requiredto be shifted or closed the residual value of such expense ispractically nil. A certain degree of long term benefit, say, for a periodof 3 years is not deniable from the work of flooring etc. carried out inthe store. However, this in itself does not create any capital asset in thecase of the assessee on which depreciation can be claimed. The Actdoes not provide for a simple mechanism of amortization of expensesother than those covered under section 35D. 5.2.4 The submissions of the appellant also indicate that this processof setting up new stores is a continuous presses thereby implying thatevery year some new stores are setup. In view of this fact also theexpenditure of renovation and repairs of stores assumes a characterwhich is revenue in nature. Further, the appellant primarily cannotcarry out his business in a store which is any different from a store ofDomino,s pizza outlet. As a result, the expenditure incurred by theappellant can squarely fall u/s 37(1) as being one which is necessary 5.2.4 The submissions of the appellant also indicate that this processof setting up new stores is a continuous presses thereby implying thatevery year some new stores are setup. In view of this fact also theexpenditure of renovation and repairs of stores assumes a characterwhich is revenue in nature. Further, the appellant primarily cannotcarry out his business in a store which is any different from a store ofDomino,s pizza outlet. As a result, the expenditure incurred by theappellant can squarely fall u/s 37(1) as being one which is necessary for business. The specific observation by the AO that these were notclaimed as revenue in earlier years factually does not in any manner,alter the eligibility of the expenses in the present year under reference. Further examining the provisions of Section 30 it is seen as under : In respect of rent, rates, taxes, repairs and insurance for premises,used for the purposes of the business or profession, the followingdeductions shall be allowed - (a) Where the premises are occupied by the assessee - (i) As a tenant, the rent paid for such premises; and further if he hasundertaken to bear the cost of repairs to the premises, the amount paidon account of such repairs; (ii) Otherwise than as a tenant, the amount paid by him on account ofcurrent repairs to the premises; (b) Any sums paid on account of land revenue, local rates or municipaltaxes; (c) The amount of any premium paid in respect of insurance againstrisk of damage or destruction of the premises. Explanation-For the removal of doubts, it is hereby declared that theamount paid on account of the cost of repairs referred to in sub-clause(i), and the amount paid on account of current repairs referred to insub-clause (ii), of clause (a), shall not include any expenditure in thenature of capital expenditure. 5.2.5 It is noted that the expression used in sec.30(a)(i) refers to theterm repairs in relation to a tenant whereas 30(a)(ii) per se refers tothe term current affairs. As a result, the expenditures falling in termrepairs are to be seen in a wider context when examining the samefrom the point of view of a tenant. It is so because being a lessor, thetenant is not the owner of the property. Therefore, he is not entitled toexpend more or more liberally for repairs or renovations. The AO inhis order refers that the aforesaid expenses do not lie within the ambitof current repairs. It is however seen that Sec. 30 talks of the termrepairs for tenant and not current repairs. In the case of CIT V. HiLine Pens (P.) Ltd. (2008) 175 taxman 132 (DHC), the jurisdictionalDelhi High Court had held as under: “4. The facts of the case are that the assessee had claimed theaforesaid expenditure of Rs. 14,03,835 as a deduction under section30(a)(i) of the said Act. The expenditure was in respect of tenantedpremises which had been taken by the asscssee on lease for thepurposes of its business. The expenditure was towards false ceiling,fixing tiles, replacing glasses, wooden partitions, replacement ofelectric wiring, earthing, replacement of Gl pipes etc. As per theassessce since the premises were not in use for a long time, theassessee was required to make these expenditures to make the premisesusable for the purposes of its business. The assessee’s contention wasthat these expenses were not incurred for creating any new asset butfor making the premises usable for the purposes of its business. Theassessee's claim was also that the expenditure was in the nature ofrevenue expenditure and was not of a capital nature as no new assetwas brought into existence” ………. ………. “16. After having considered the arguments advanced by the learnedcounsel for the parties and examined the decisions cited by them, Weare of the the view that the assessee’s claim for deduction under section30(a)(i) has been rightly allowed by the Tribunal. The decisions citedby the learned counsel tor the revenue relate to ‘current repairs’. Thereis a clear distinction between the expressions repairs and theexpression current repairs. It is obvious that the word 'repairs’ is muchwider than the expression ‘current repairs’. This fact has also beentaken note of by the Supreme Court in the case of Saravana Spg. Mills(P.) Ltd.(supra). The expression 'current repairs’ is much morerestricted than the word repairs because the latter is qualified by theword 'current’. What the assessee has done in present case has beenconstrued to be repairs by the Tribunal as a finding of fact. It has notbrought about any new asset and more importantly it was not theintention of the assessee to bring about any new capital asset. Theexpenses that were incurred by the assessee were towards repairing thepremises taken on lease so as to make it more conducive to its businessactivity. Such expenses would clearly fall within the expression ofrepairs to the premises as appearing in section 30(a)(i). TheLegislature has made a distinction between expenses incurred by atenant for repairs' of the premises and expenses incurred by a personwho is not a tenant towards current repairs to the premises. Thisdistinction has to be given meaning. Perhaps the logic behind thedistinction was that a tenant would, by the very nature of his status as atenant, not undertake expenditures as would endure beyond his likelyperiod of tenancy or create a new asset. Whereas, an owner mayundertake expenditures so as to even bring about new assets of capitalnature. It was, therefore, necessary to qualify the expenditure onrepairs. The deduction was, therefore, limited to expenditure on currentrepairs only. It follows, therefore that the cost of repairs that have beenincurred by a tenant in respect of such premises would have to beallowed under section 30(a)(i). The question of disallowing such anexpenditure and relegating the assessee to claim depreciation undersection 32 does not arise. The assessee has not claimed depreciation. Ithas claimed deduction under section 30(a)(i). Once the assessee'sclaim falls within that provision there is no question of considering thequestion of applicability of section 32. Consequently, the question thathas been framed is answered in favour of the assessee and against therevenue. The appeal is dismissed." 5.2.6 In the case of Installment Supply (P) Ltd vs. CIT [1984] 17Taxman 172 (Delhi), the Hon'ble Delhi High Court held “7. The Tribunal after considering the nature of the work executed bythe assessee, however, came to the conclusion that the amount spentCould not be said to be a current repair and that the expenditure hadcertainly secured to the assessee and advantage of very enduringbenefit and is, therefore, a capital expenditure. This approach of theTribunal, in our opinion, is erroneous in law. The question of therepairs has to be considered in the larger context of the businessnecessity or expediency. If the expenditure incurred by the assessee isso related to the carrying on or to the conduct of the business that itmail be regarded as an integral part of the profit earning process, thenit is not for purposes of securing to the assessee a capital asset. The “7. The Tribunal after considering the nature of the work executed bythe assessee, however, came to the conclusion that the amount spentCould not be said to be a current repair and that the expenditure hadcertainly secured to the assessee and advantage of very enduringbenefit and is, therefore, a capital expenditure. This approach of theTribunal, in our opinion, is erroneous in law. The question of therepairs has to be considered in the larger context of the businessnecessity or expediency. If the expenditure incurred by the assessee isso related to the carrying on or to the conduct of the business that itmail be regarded as an integral part of the profit earning process, thenit is not for purposes of securing to the assessee a capital asset. The possessions of the premises in the shape of big hall by converting alarge number of small rooms into it make it more suitable for officepurposes. It is a condition of carrying on business more profitably andefficiently by the assessee. In such a case the expenditure can beregarded as a revenue expenditure. The expenditure on the repairs ofthe building which ultimately belongs to the owners and not to theassessee can not also be said to be in the nature of a capitalexpenditure. The structural changes made by the assessee and theconversion of small rooms into a big hall cannot be in the nature ofcreation of a capital asset.” 5.2.7 The consistent common thread in the aforesaid judgements isdetermination of the nature of expenses which repairs/ renovateswhen the same has been carried out by a tenant. The judgement of HiLine Pens discusses the nature of expenses which are substantiallysimilar to those of the appellant. The Judgement of M/s instalmentSupply states that in the absence of a capital asset being created thenature of the expense for business has to be of a revenue nature.Keeping in view the aforesaid judgments the expenses indicated atRs 47,37,14,260/ are held to be expenses of revenue nature andallowable revenue expenditure to the appellant.” 6.While deduction claimed by the assessee towards revenueexpenditure as aforesaid, were disallowed by the Assessing Officer, itwas allowed by the CIT (Appeal) by the aforesaid order dated 03.07.2018passed in Appeal No.273/2016-17. 7.Aggrieved with the order of the CIT(Appeal), the appellantherein/Income Tax Department filed Appeal being I.T.A.T.No.6558/Del/2018 for the A.Y. 2013-14 and appeal No.612/Del/2019relating to A.Y. 2012-13. Both the aforesaid appeals were decided by theIncome Tax Appellate Tribunal, Delhi Bench I - 1, New Delhi, by theimpugned common order dated 08.12.2021. The Tribunal concurred withthe view taken by the CIT (Appeal) and noticing the facts in brief, heldas under : “6. The sole controversy is with respect to treatment of expenditure onaccount of leasehold improvement considered by AO as capitalexpenditure. account of leasehold improvement considered by AO as capitalexpenditure. 7. During the course of assessment proceedings and on perusing thecomputation of income, AO noticed that assessee had claimeddeduction u/s 37 of the Act of Rs.47,37,14,260/- on account ofleasehold improvements. Assessee was asked to justify the claim ofexpenditure as Revenue in nature. Assessee made the submissionswhich was not found acceptable to AO. AO noted that assessee hascomputation of income, AO noticed that assessee had claimeddeduction u/s 37 of the Act of Rs.47,37,14,260/- on account ofleasehold improvements. Assessee was asked to justify the claim ofexpenditure as Revenue in nature. Assessee made the submissionswhich was not found acceptable to AO. AO noted that assessee has 7. During the course of assessment proceedings and on perusing thecomputation of income, AO noticed that assessee had claimeddeduction u/s 37 of the Act of Rs.47,37,14,260/- on account ofleasehold improvements. Assessee was asked to justify the claim ofexpenditure as Revenue in nature. Assessee made the submissionswhich was not found acceptable to AO. AO noted that assessee hascomputation of income, AO noticed that assessee had claimeddeduction u/s 37 of the Act of Rs.47,37,14,260/- on account ofleasehold improvements. Assessee was asked to justify the claim ofexpenditure as Revenue in nature. Assessee made the submissionswhich was not found acceptable to AO. AO noted that assessee has done massive level improvements costing a very huge amount resultinginto the creation of assets, meeting with the international parametersfor obtaining and running the stores of Dominos Pizza and DunkinDonuts – chain of restaurants and takeaways which according to AOhas resulted into creation of asset with the nature of InfrastructureImprovement which materially extend the useful life or increase thevalue of the infrastructure. He was of the view that the expenditurebeing in the nature of extensive renovation and beautification of thestores, results into an enduring benefit to the assessee. He thereforeheld the expenditure incurred to be of capital in nature requiringcapitalization. He therefore denied the claim of Revenue expenditurebut however allowed the depreciation at 15% amounting toRs.710,57,139/- and thus disallowed the net expenditure ofRs.40,26,57,121/-. 8. Aggrieved by the order of AO, assessee carried the matter beforeCIT(A). CIT(A) after considering the submissions of the assesseedecided the issue in favour of the assessee and while deciding the issuehas noted that assessee is a franchise of ‘Domino’s Pizza’ and ‘DunkinDonuts’ and had take on lease bare shell premises of various entitiesduring the year under consideration. In order to run a Dominos outlethaving a specific ambience and outlook, assessee was required to makeextensive modifications in the premises that was obtained on lease andthe modification did not create any new asset. He has further notedthat the process of setting up new stores to be a continuous processthereby implying that by every year some new stores are setup and thusthe expenditure on renovation and repairs of stores assumes thecharacter of revenue in nature. He has further given a finding thatassessee cannot carry out his business in a store which is any differentfrom a store of Domino’s pizza outlet and for this reason also theexpenditure incurred by the assessee falls u/s 37(1) of the Act as beingone which is necessary for business. CIT(A) thereafter relying on thedecision of Hon’ble Delhi High Court in the case of CIT vs. Hi LinePens (P.) Ltd. [2008] 175 taxman 132 (DHC) held expenses to berevenue in nature. Aggrieved by the order of CIT(A), Revenue is nowbefore us. 9. Before us, Learned DR took us to the findings of ITO and supportedthe order of AO. He also placed reliance on the decision rendered byHon’ble Delhi High Court in the case of Bharat Gears Ltd. Vs. C.I.T. in[2011] 337 ITR 368 (Del.) 10. Learned AR on the other hand reiterated the submissions madebefore the lower authorities and supported the order of CIT(A). 9. Before us, Learned DR took us to the findings of ITO and supportedthe order of AO. He also placed reliance on the decision rendered byHon’ble Delhi High Court in the case of Bharat Gears Ltd. Vs. C.I.T. in[2011] 337 ITR 368 (Del.) 10. Learned AR on the other hand reiterated the submissions madebefore the lower authorities and supported the order of CIT(A). 11. We have heard the rival submissions and perused the materialavailable on record. The issue in the present ground is with respect tothe treatment of expenditure which has been considered by AO to be ofcapital in nature as against the claim of the assessee of being revenuein nature. We find that CIT(A) after considering the detailedsubmissions of the assessee has given a finding that considering thenature of business of the assessee, the modifications done in thevarious lease premises taken by the assessee for the purpose ofbusiness did not create any new asset, the expenditure of renovationand repairs of stores assumed a character of revenue in nature and theexpenditure incurred by the assessee was necessary for the purpose ofbusiness and squarely fall u/s 37(1) of the Act. Before us, no fallacy in the findings of CIT(A) has been pointed out by Revenue. The case lawrelied upon by Revenue is distinguishable on facts and therefore notapplicable to the present facts of the assessee. In such circumstances, we find no reason to interfere with the order ofCIT(A) and thus the Ground of Revenue is dismissed. 12. In the result, appeal of the Revenue is dismissed.” 8.We find that the findings recorded by the CIT (Appeal) as affirmedby the Income Tax appellate Tribunal are findings of fact based onconsideration of relevant material on record. The CIT (A) and theTribunal have came to the conclusion that by incurring the aforesaidexpenditure no new asset has come into existence. Thus, we find that no substantial question of law is involved in theimpugned order of Tribunal. Therefore, both the Appeals filed by theappellants under Section 260 A of the Act are dismissed. Order Date :- 22.7.2022/vkg