ITAT Bangalore: Renovation expenditure in leased premises should be allowed as revenue expenditure

Karnataka Soaps & Detergents Ltd. vs Asst. Commissioner of Income Tax, LTU Circle 1, Bangalore; 03.09.2021; ITAT, Bangalore

Issues for consideration:

i. Disallowance of expenditure amounting to Rs. 12,95,867/-

ii. Ex gratia payment of Rs. 56,94,720/-.

Facts:

• Assessee being a wholly owned undertaking of Government of Karnataka engaged in manufacture of soaps, detergents and sandalwood oil. For the assessment year 2014-2015, the assessee claimed the amount spent on repair and renovation of leased premises as revenue expenditure in the return of income. After the assessment of income for the said year, the Assessing Officer had disallowed the said expenditure incurred on the leased premises for repairs and renovation. According to the Assessing Officer, the said expenditure was a capital expenditure.
• Aggrieved, the assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the view taken by the Assessing Officer. Aggreived from the same, the assessee has raised this issue before the Appellate Tribunal.
• The assessee contended that the expenditure incurred by the assessee towards repairs and renovation of the premises to house the branch cannot be stated to be capital in nature. It was submitted that the premises which was taken on lease required repairs and renovation to uplift the ambiance and make it fit for operating as a branch office. Therefore the expenditure incurred was in connection with the business of the assessee and an allowable deduction.
• Further, the assessee contended that ex gratia payment made to the employees is not a statutory payment, and hence, not liable for disallowance u/s 43B of the I.T.Act.
• The Assessing Officer has not mentioned anything about the claim of assessee in the assessment order. The CIT(A) rejected the plea of the assessee since the assessee has not filed a revised return.

Observations:

• On scrutiny of the material placed on record, it is seen that expenditure incurred by the assessee towards repairs and renovation to the leased premises cannot be stated to be a capital expenditure.
• The Hon’ble High Court of Karnataka in the case of CIT v. Infosys Technologies (No.2) (2012) 349 ITR 588 (Kar.) had held that incurring of expenditure towards brick work, cement, plastering, painting walls, laying ceramic tiles, steel grill, internal sanitary fixtures, sewerage works, supply of fixing of water supply pipes, are revenue expenditure. It was further held by the ITAT that having regards to the explanation offered by the assessee that the premises required repairs when they were taken on lease and in order to improve the ambience of the office, it was necessary to carry out the repairs specifically in the business of software where there was stiff competition. The mere fact that enduring benefit ensure to the assessee by itself would not be a factor to be decided as to whether it is a capital or revenue expenditure.
• The Hon’ble High Court held “that the premises had been taken on lease by the assessee and the repairs that were carried out for the purpose of business to create the ambience and to carry out repairs to use the premises as the office of the assessee as there was stiff competition in the business of the assessee and the expenditure of the amount of Rs.15,89,613 which would come to Rs.9 per sq.ft. in respect of 17113 sq.ft. could not be said to be capital expenditure. The mere fact that it was taken on lease for six years would not itself render the expenditure capital in nature”.

Held:

• In the light of the aforesaid reasoning and the judgment of the Hon’ble High Court, it was held that the assessee was entitled to deduction of sum cited as revenue expenditure.
• Regarding ex gratia payment the Ld. Tribunal relied on the judgment of the Hon’ble Apex Court in the case of Jute Corporation of India Ltd. v. CIT; 187 ITR 688 and it was held that the issue of ex-gratia payment, whether it can be subjected to disallowance u/s 43B of the I.T.Act needs examination by the Assessing Officer. Accordingly, the said issue was restored to the files of the A.O with direction to the A.O. to offer a reasonable opportunity of hearing to the assessee and take a decision in accordance with law.