Ita/254/2015 Of Commissioner Of Income Tax v. Shri Rupesh Anand

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 21 DAY OF SKPIEMBER 2016 PRESENT THE HON’BLE MR.JUSTICE JAYANT PATEL ANT) THR HON’BLE MR.JUSTICK ARAVIND KUMAR| ITA NO.254/2015 C/W ITA NO.255/2015 C/W ITA NO.256/2015 C/W ITA NO.257/2015 IN ITA NO.254/2015:BETWEEN: 1.COMMISSIONBR OF INCOMB TAXC.R. BUILDING, BANGALORE| 2 ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 1(2) BANGALORE| —. APPELLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/WORI EI SANMATHI, ADVOCATE) AND: SHRI RUPESH ANAND.PARTNER: M/S NANDINI DELUX, |NO.114/2, LALBAGH FORT ROAD,BANGALORE-5b60004PAN: ABOPAQ665E_ _ RESPONDENT (RESPONDENT SERVED) THIS [TA IS FILED UNDER SEKC.260-A OF INCOMETAXACT1961,ARISINGOUTOF|ORDERDATED:05/12/2014.PASSBHBIN|ITANO.442/BANG/2013, FOR THE ASSESSMENT YEAR,2005-2006 PRAYING TO DBCIDEKE THRE FORBGOIQUESTION OF LAW AND / OR SUCH OTHER QUESTIONSOF LAW AS MAY BR FORMULATBD BY THR HON'BLE|COURTASDBRBMEBBITANDSHTASIDETHE;APPELLATE ORDER DATED:05/12/2014 PASSED BY|THRITAT,‘ClBENCH,|BANGALORE,IN|APPEAL|PROCBRBDINGSNO..ITANO..442 /BNG/2013FOR,ASSKBSSMENT YBAR 2005-06. IN ITA NO.255/2015:BETWEEN: 1.COMMISSIONBR OF INCOMB TAX C R BUILDING,|BANGALORE. 2 ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(2) BANGALORE. ... APPELLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/WORI EI SANMATHI, ADVOCATE) AND: SHRI RUPESH ANAND.PARTNER:M/S. NANDINI DELUX,NO.114/2, LALBAGH FORT ROAD,BANGALORE-560 004, PAN: ABOPA2Q665E ~... RESPONDENT (RESPONDENT SERVED) THIS [TA IS FILED UNDER SEKC.260-A OF INCOMETAXACT1961,ARISINGOUTOF|ORDERDATED:05/12/2014PASSBHBIN|TTA~NO.443/BANG/2013, FOR THE ASSESSMENT YEAR|2006-2007 PRAYING TO DBECIDEKE THRE FORBGOQUESTION OF LAW AND / OR SUCH OTHER QUESTIONS|OF LAW AS MAY BERK FORMULATEHBED BY THE HONCOURTASDHRBME]RIT|ANT)SHTASIDETHE|APPELLATE ORDER DATED: 05/12/2014 PASSED BY)THRITAT,‘ClBENCH,|BANGALORE,LN|APPEAL|PROCBRBDINGSNO..TTA.NO..443/BNG/2013FOR,ASSESSMENT YEAR 2006-2007, AS SOUGHT FOR IN|THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF ASDEEMED FIT, IN THE INTEREST OF JUSTICE. IN ITA NO.256/2015:BETWEEN: 1.COMMISSIONER OF INCOME TAX|C R BUILDING,BANGALORE. 2 ASSISTANT COMMISSIONEROF INCOME TAX, CENTRAL CIRCLE 1(2)BANGALORE. _. APPKRHLLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/WORI EI SANMATHI, ADVOCATE) AND: SHRI RUPESH ANAND.PARTNER:M/S. NANDINI DELUX,NO.114/2, LALBAGH FORT ROAD,BANGALORE-560004,PAN: ABOPA2 665 _. RESPONDENT| (RESPONDENT SERVED) THIS [TA IS FILED UNDER SEKC.260-A OF INCOMETAXACT1961,ARISINGOUTOF|ORDERDATED:05/12/2014.PASSBHBIN|ITANO.444/BANG/2013, FOR THE ASSESSMENT YEAR.200/7-2008 PRAYING TO DECIDE THK FORBGOINGQUESTION OF LAW AND / OR SUCH OTHER QUESTIONSOF LAW AS MAY BR FORMULATBD BY THR HON'BLE|COURTASDBRBMEBBITANDSHTASIDETHE; APPELLATE ORDER DATED: 09/12/2014 PASSED BY|THBRITAT,‘ClBENCH,|BANGALORE,IN|APPHAL PROCBRBDINGSNO..ITANO..444/BNG/2013)FOR,ASSESSMENT YEAR 2007-2008, AS SOUGHT FOR IN|THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF ASDEEMED FIT, IN THE INTEREST OF JUSTICE. IN ITA NO.257/2015:BETWEEN: 1.COMMISSIONBR OF INCOMB TAXC R BUILDING,BANGALORE. 2 ASSISTANT COMMISSIONEROF INCOME TAX, CENTRAL CIRCLE 1(2)BANGALORE. _. APPKRHLLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/WORI EI SANMATHI, ADVOCATE) AND: SHRI RUPESH ANAND.PARTNER:M/S. NANDINI DELUX,NO.114/2, LALBAGH FORT ROAD,BANGALORE-560004,PAN: ABOPA2? 66... RESPONDENT (RESPONDENT SERVED) THIS [TA IS FILED UNDER SEKC.260-A OF INCOMETAXACT1961,ARISINGOUTOH|ORDERDATED:09/12/2014.PASSED.IN.ITA APPELLATE ORDER DATED: 09/12/2014 PASSED BY|THBRITAT,‘ClBENCH,|BANGALORE,IN|APPHAL PROCBRBDINGSNO..ITANO..444/BNG/2013)FOR,ASSESSMENT YEAR 2007-2008, AS SOUGHT FOR IN|THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF ASDEEMED FIT, IN THE INTEREST OF JUSTICE. IN ITA NO.257/2015:BETWEEN: 1.COMMISSIONBR OF INCOMB TAXC R BUILDING,BANGALORE. 2 ASSISTANT COMMISSIONEROF INCOME TAX, CENTRAL CIRCLE 1(2)BANGALORE. _. APPKRHLLANTS (BY SRI E R INDRA KUMAR, SR. COUNSEL A/WORI EI SANMATHI, ADVOCATE) AND: SHRI RUPESH ANAND.PARTNER:M/S. NANDINI DELUX,NO.114/2, LALBAGH FORT ROAD,BANGALORE-560004,PAN: ABOPA2? 66... RESPONDENT (RESPONDENT SERVED) THIS [TA IS FILED UNDER SEKC.260-A OF INCOMETAXACT1961,ARISINGOUTOH|ORDERDATED:09/12/2014.PASSED.IN.ITA NO.445/BANG/2013, FOR THE ASSESSMENT YEAR.A2O0O8-2OO09 PRAYING TO DBCIDEKE THR FORBGQUESTION OF LAW AND / OR SUCH OTHER QUESTIONSOF LAW AS MAY BR FORMULATRBRD BY THR HON'BLCOURTASDHRBME]BITANT)SETASIDETHE|APPELLATE ORDER DATED: 05/12/2014 PASSED BY|THRITAT,‘ClBENCH,|BANGALORE,IN|APPEAL|PROCBRBDINGSNO..ITANO..445/BNG/2013)FOR,ASSESSMENT YEAR 2008-2009, AS SOUGHT FOR IN|THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF ASDEEMED FIT, IN THE INTEREST OF JUSTICE.THESKB APPKALS COMING ON FOR ADMISSIONTHIS|DAY,JAYANTPATELJ*)DERELIVERETHRFOLLOWING: ORDER As in all appeals common questions are to beconsidered, they are being considered simultaneously. 2. The appellants-Revenue has preferred thepresent appeals by raising the following substantialquestion of law: “Whether on the facts and in the circumstances|of the case, the Tribunal was justified in law inholding that the expenditure incurred by the|assessee towards renovation and improvement|of hotel building is in the nature of revenue| expenditure even when the assessing authority|has rightly treated it as capital expenditure|considering the available materials on record|and Explanation (1) to section 32(1) of the|Income Tax Act and the expenditure has|resulted in enduring benefit to the assesseeP” 3. We have heard Mr.Indra Kumar, learned Senior standingCounselwith|Mr.E.I.Sanmathi,learnedCounsel appearing for the appellants-Department. 4. We may at the outset record that the Tribunalin the impugned order at paragraphs 5.4.1 to 9.4.9 hasobserved thus: 5.4.1 We have heard the rival contentionsand perused and carefully considered thematerialOrlrecord,includingthejudicialdecisions cited. It is not in dispute that theassessee has taken the hotel on lease. As perthe details on record it is seen that the qassesseehas incurred expenditure on renovation of plantdesign system, computer cabling, fire detection andalarmsystem,cardacceSS|system,plumbing and air conditioning work, electricalworks, fixing of carpets, interior work, etc. In theCOUTSECof|assessmentproceedings,theAssessing Officer on examination of the sameobserved that this expenditure indicated thatmajor renovation works had been undertakenand therefore cannot be treated as revenueexpenditure. The Assessing Officer referring toExplanation 1 to Section 32 of the Act, was of theview that the assessee has incurred capitalexpenditureandtherefore1SentitledTo depreciation thereon @ 10%. Accordingly, theAssessing Officer disallowed the assessee’sclaim for the aforesaid expenditure to be allowedas revenue expenditure, treated the same ascapital expenditure and allowed the assesseedepreciation thereon @ 10%. 30.4.2 The question that now arises forconsideration1S,whentheaSsSSCSSChas.incurred expenditure on renovation of the hoteltaken on lease, then whether the assessee is entitled for deduction of the expenditure incurredon such repairs as revenue expenditure ORwhether it has to be treated as_ capitalexpenditure in view of Explanation 1 to section32 of the Act. 0.4.3 Explanation 1 to Section 32 of the Actreads as follows:-| 30.4.2 The question that now arises forconsideration1S,whentheaSsSSCSSChas.incurred expenditure on renovation of the hoteltaken on lease, then whether the assessee is entitled for deduction of the expenditure incurredon such repairs as revenue expenditure ORwhether it has to be treated as_ capitalexpenditure in view of Explanation 1 to section32 of the Act. 0.4.3 Explanation 1 to Section 32 of the Actreads as follows:-| “ExplanationqT:Wherethe|businessOrprofession of the assessee 1s carried on in abuilding not owned by him but in respect ofwhich the assessee holds a lease or other rightof occupancy and any capital expenditure isincurred by the assessee for the purposes of thebusiness or profession on the construction of anystructure or doing any work in or relation to, andby way of renovation or extension of, orimprovementto,the|building,then,theprovisions of this claim shall apply as if the saidStructure or work is a building owned by the|assessee.” This Explanation to Section 32 of the ActWasintroducedby|the|TaxationLaws(Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1.4.1988. By introduction of thisExplanation, the Legislature intended to allowdepreciation on the capital expenditure incurredby the assessee in relation to renovation,extension or improvement to the building inwhich the assessee carried on business aslessee. °o.4.4 It may be useful to examine theLegislativehistoryof|the|introduction|of|Explanation 1 to Section 32 of the Act. Thetaxation Laws (Amendment) Act, 1970 w.e.f.1.4.1971 introduced sub-section 1A to grantsome benefit to the assessee on the capitalexpenditure incurred by a tenant in leasedpremises’. Therefore, it ts obvious that prior tothe introduction of sub-section 1A to Section 32of the Act w.e.f. 1.4.1971 by the Taxation Laws(Amendment) Act, 1970, the assessee who takesthe business premises on lease was not entitledto any depreciation on capital expenditureincurred thereon. In other words, prior to1.4.1971,asSeCSSCAWhoincurredcapitalexpenditure on leased premises were not entitled to any benefit at all in this regard.Therefore, by removing the legal restrictions inrespect of capital expenditure incurred by theassesses who take business premises on lease,Parliamentintendedtograntf-allow|depreciation on the capital expenditure incurredon such leased premises. On a careful perusalof the provisions of section 32(1A) of the Act andthe circumstances in which it was introduced inthe statute, it is clear that in case revenueexpenditure was incurred by the assessee onthe premises taken on lease, the question ofallowing any depreciation u. 32(1A) of the Actwould not arise for consideration. In otherwords, section 32(1A) of the Act introduced w.e.f.1.4.1971 by Taxation Laws (Amendment) Act,1970 would not be applicable in case theassessee incurred revenue expenditure on theleased premises. 3.4.5 However, sub-section 1A of Section32 of the Act introduced by Taxation Laws(Amendment) Act, 1970Wasomitted|and Explanation 1 to Section 32 was introduced byTaxation Laws (Amendment and MiscellaneousProvisions) Act, 1986 w.e.f. 1.4.1988. This wasdone when the concept of depreciation onindividual asset was changed to depreciation onthe block of assets. When Parliament introduceddepreciation on block of assets, sub-section (1A)of Section 32 of the Act was deleted, an identicalprovision was incorporated in Explanation 1 tosection 32 of the Act. Therefore, the position oflaw as it remains after the introduction of sub-section 1A of Section 32 of the Act w.e-.f.1.4.1971 continued to be the same in respect ofrevenue expenditure incurred by the assessee onpremises taken on lease. In other words theconcept of allowing depreciation on the capitalexpenditure in relation to renovation, extensionor improvement of the premises taken on leasecontinued to be the same w.ef. 1.4.1971.Therefore, whenever the assessee incurred theexpenditure, in the process of earning profitwhile carrying on the business in the leasedpremises, the expenditure has to be treated as revenue expenditure and neither sub-section (1A)to Section 32 OR Explanation 1 to Section 32 ofthe Act would come in the way of allowing thesame as revenue expenditure. However, whenthe assessee incurred expenditure which is ofcapital nature, then the Parliament allows thebenefit to the assessee for claiming depreciationon such capital expenditure in relation torenovation, extension or improvement w.e.f.1.4.1971 u/s. 32(1A) and in accordance with theprovisions of Explanation 1 to Section 32 of theAct w.e.f 1.4.1988. Hence, this is a benefitallowed to the assesses who have takenpremises on lease and incurred expenditure inthe capital field. However, as explained earlier,uf the expenditure incurred falls in the revenuefuled, the assessee is entitled to claim it asrevenue expenditure irrespective of Section32(1A) or Explanation 1 of Section 32 of the Act.In our considered view, this being the correctposition of law, the conclusions of both theAssessing Officer and the learned CIT(A) in theimpugned orders that the expenses incurred on leased premises have to be capitalized and onlydepreciation can be allowed thereon is not intune with the provisions of law and is thereforeincorrect. 3.4.6 To fall within the ambit of theprovisions of Explanation 1 to Section 32 of theAct, the question to be answered is, whether theassessee has incurred any capital expenditurefor the purposes of business on the constructionof any structure or doing of any work in or inrelation to and by way of renovation or extensionor improvement in the building. 5.4.7 In the case on hand, on anappreciation of the facts of the case and detailson record, we find that after incurring theexpenditureOrnthe|leasedpremises,the|assessee has neither obtained any enduringbenefit nor has any new capital asset has comeinto existence. The assessee continued to runthe hotel in the very same leased premises. It isnot anybody's case that the seating capacity was not increased after the expenditure. Theexpenditure incurred was only for carrying onthe business and was an integral part of theprofit earning process. Therefore, we find thatno case has been made out to say that theassessee has obtained any enduring benefit byvirtue of this expenditure. The nature of thework undertaken by the assessee 1s to carry onthe business and not obtain any asset. Further,as already observed, no capital asset of anenduring nature came into existence. In otherwords, the assessee has not acquired anyasset/income earning apparatus. It is wellsettled principle of law that the expenditureincurred for acquisition of an asset is a capitalexpenditure and expenditure incurred in theprocess of earning profit is revenue expenditure.In the case on hand, we are of the view that theassessee incurred the expenditure for efficientrunning of the business and_ therefore theexpenditure incurred is revenue in nature.| 5.4.8 It ts settled principle that the test ofenduringbenefit1Sneither|certain:TLOTconclusive. Even if this fact is applied, theexpenditure incurred by the assessee is only inthe process of earning profit and not to acquireany capital asset. As a result of the expenditureincurred by the assessee, the hotel remains ahotel and the capacity does not increase. At themost, the assessee might have carried on thebusiness in a profitable manner. The assesseehas not obtained any enduring advantage in thecapital field. Therefore, the expenditure incurredfacilitated the assessee to carry on its businesseffectively and more profitably. In this factualmatrix of the case on hand, we are of theconsidered opinion that the expenditure incurredby the assessee has to be treated as revenue innature. 3.4.9 In view of the judicial decisions citedby the assesseee (supra), it is obvious thatwhenever an expenditure was incurred in theprocess of earning profits it has to be allowed as 3.4.9 In view of the judicial decisions citedby the assesseee (supra), it is obvious thatwhenever an expenditure was incurred in theprocess of earning profits it has to be allowed as revenue expenditure . In such a case theexpenditure incurred by the assessee would beout of the ambit and purview of the provisions ofExplanation 1 to Section 32 of the Act of the Act.In the case on hand, it is not in dispute that theexpenditure was incurred for renovation. Theseexpenses were incurred only for the purpose ofcarrying on day to day business and earn profitsand do not result in the bringing into existence ofany capital asset. Therefore, in the light of thediscussion form paras 5.1 to 5.4.9 of this orderand the facts and circumstances of the case, inour view, the learned CIT (Appeals) was not rightin upholding the disallowance of the expenditureby holding it as capital in _ nature. We,accordingly,YTeECVeCthefindingsof|the|authorities below on this tssue and allow theassessee’s claim for deduction of expenditureincurred towards renovation of plant designsystem, computer cabling, fire detection andalarm system, plumbing, air conditioning work,electrical works, interior work etc. on _ thhotel/ building taken on lease. Accordingly the assessee’s grounds raised at S.Nos.6 & 7 areallowed for the Assessment Years 2005-06 toYAOOS-OYI The aforesaid findings disclose that the Tribunal aiterperusing the record has found that the expenditure was.incurred by the assessee only in the process of earningprofit and not to acquire any capital asset. However,the learned Counsel appearing for the appellants-Revenue attempted to contend that by virtue of Section32 of the Income Tax Act, 1961 (hereinafter referred toas ‘the Act’ for short) and more particularly explanationto Section 32 of the Act, even if it is a leased premisesand the expenses are incurred for renovation of thestructure or otherwise, the depreciation is available to alimited extent. He contended that same would mean|that the Parliament wanted to treat certain expenses forstructure and others even on the tenanted premises ascapital expenditure. He has also submitted that the lower authority had rightly observed that it was acapital expenditure and therefore depreciation as perthe prescribed was permissible and not the totalamount as if revenue or business expenditure. Hesubmitted that the Tribunal has committed error on thesaid aspects. Oo. The contention may prima facie show somemerit but the Tribunal in the above referred observationhas elaborately considered that the explanation wouldnotbe|applicable,INOTEparticularlywhenthe.expenditure was not of a capital expenditure. Further,we need to Keep in mind that it was not the case of theRevenue that number of rooms were added to the hotel|premises or that the seating capacity was increased orotherwise. It was only within the same complex theexpenses were incurred in order to update the facilitywhich ultimately would result as good business to attract the customer. Considering the facts and|circumstances, it appears to us that the view taken bythe Tribunal cannot be said to be erroneous nor such|view can be said to be contrary to any statutoryprovision. 6. Under the circumstances, no_ substantialquestions of law would arise for consideration as soughtto be canvassed. 7. Hence, the appeals are dismissed. JT/-| Sd/-.JUDGE. Sd/-.JU DGE