1. Certain common issues and facts are involved in these appeals, the same were argued together by the learned Counsel for the assessee and learned Departmental Representative. We are deciding these appeals together for convenience.
2. Appeal in ITA No. 2038 is appeal filed by the assessee on 14th May, 2002 against the order of the learned CIT(A)-XV, New Delhi, dt. 12th Feb., 2002 in the case of the assessee in relation to assessment order under Section 143(3) for asst. yr. 1996-96. Appeals in ITA Nos. 2528 and 2729/Del/2002 are cross-appeals filed by the assessee on 10th June, 2002 and Revenue on 21st June, 2002 against the order of the learned CIT(A)-XV, New Delhi, dt. 28th March, 2002 in relation to assessment order under Section 143(3) for asst. yr. 1996-97. Similarly appeals in ITA Nos. 2529 and 2730/Del/2002 are cross-appeals filed by the assessee on 10th June, 2002 and Revenue on 21st June, 2002 against the order of the learned CIT(A)-XV, New Delhi dt. 27th March, 2002 in the case of the assessee in relation to the assessment order under Section 143(3) for asst. yr. 1997-98.
3. In all the three appeals filed by the assessee the main dispute relates to deduction claimed by the assessee on account of renovation of office premises. Facts of the case leading to this dispute briefly are that the assessee took on lease office premises located at AIFACS building, 1 Rafi Marg, New Delhi by a lease agreement dt. 1st March, 1994 for a period of three years from 1st March, 1994 to 28th Feb., 1997 with option for renewals. The assessee claimed deduction as revenue expenditure on renovation of the aforesaid office premises in the assessment orders under appeals before us in the following manner: Particulars of (sic) expenditure incurred by the assessee in the course of subsequent assessment years, if any, are not available with us. In the assessment order for asst. yr. 1995-96 the learned AO held that major renovations carried on by the assessee were for providing enduring benefit to the assessee. In the books of account the assessee himself had treated this expenditure as capital expenditure and it was claimed as revenue expenditure in the return of income only. According to the learned AO the assessee acquired capital assets in terms of items of fixtures, fittings etc. Hence the judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. v. CIT did not support the case of the assessee because by this expenditure the assessee's fixed capita did not remain untouched. As a result of major renovations carried out by the assessee the appearance as well as utility of the entire premises had changed. The assessee had fabricated and erected structures that had a long life and were in themselves separate capital assets. In the audited annual accounts of the assessee this expenditure had been enumerated in schedule pertaining to fixed assets. During the course of appeal before the learned CIT(A) the assessee argued that the expenditure had been incurred for proper utilization of the leased premises, facilitating the assessee's trading operations and improvement in working conditions. The assessee claimed that no new asset had been created by this expenditure. The learned CIT(A) referred to the English judgment in the case of Vallambrosa Rubber Co. Ltd. 5 Tax Cases 529 (HL) and the judgment of the Hon'ble Supreme Court in the case of CIT v. Ashok Leyland Ltd. and the judgment of Hon'ble Allahabad High Court reported in R.S. Radha Kishan Kapoor v. CIT (1963) 47 ITR 938 (All) to the effect that lasting or enduring benefit is an attribute of capital expenditure. The learned CIT(A) held that the case of the assessee was covered by the judgment of Hon'ble Punjab High Court in the case of Uttar Bharat Exchange Ltd. v. CIT (1965) 55 ITR 550 (Punj) where on similar facts hotel premises taken on lease for two years only, expenditure incurred on erected shades, partition and other temporary structure was treated as capital expenditure. The learned CIT(A) also placed reliance on the judgment reported in CIT v. Mahalakshmi Textile Mills Ltd. (1965) 56 ITR 256 (Mad) and the judgment of Hon'ble Delhi High Court in the case of Delhi Cloth & General Mills v. Addl. CIT . The learned CIT(A) found that the judgment of Hon'ble Allahabad High Court in the case of Rampur Distillery & Chemical Co. Ltd. relied upon by the assessee had been overruled by the Hon'ble Supreme Court by their judgment reported in Lohia Machines Ltd. v. Union of India upheld the decision of the AO but he directed the AO to allow the assessee depreciation as per law on the expenditure.
4. For asst. yrs. 1996-97 and 1997-98 the learned AO found that facts of the case were identical to asst. yr. 1995-96 and following the reasons given in the assessment order for that year he disallowed the assessee's claim of deduction. During the course of proceedings before the learned CIT(A) the assessee repeated his contentions as in asst.
yr. 1995-96 and the learned CIT(A) repeating his order for asst. yr.
1995-96 upheld the decision of the AO for asst. yrs. 1996-97 and 1997-98.
5. During the course of hearing before us the learned Counsel for the assessee referred to the lease agreement and pointed out that the building at Rafi Marg had been constructed by AIFACS as an art gallery/hall for display, representation and collection of arts, for holding exhibition and an auditorium for cultural purposes. However, a part of that building was given on lease to the assessee. That part of the building was required to be adapted to the assessee's business needs. The learned Counsel pointed out that as per the aareement the assessee had right to have two renewals comprising of period of (sic) years each. Any further extension beyond nine years could be effected only if mutually agreed upon and upon fresh terms. As per Clause 10 of the agreement, the assessee could not make any major permanent additions or alterations without the written consent of AIFACS, which consent would not be unreasonably delayed or withheld. The assessee was entitled to erect temporary partitions, false ceilings, refurbish the premises, make provisions for air-conditioning, refrigeration and electrical outlets without the permission of AIFACS. However, in any event the assessee was required, on expiry of the term, to restore the premises to its original condition. The learned Counsel argued that a major part of the expenditure was on such items that would be of little value if detached or removed from the leased premises. Certain facilities were acquired in the nature of built-in provision and could not be removed and transported elsewhere. The expenditure was thus building specific, it did not increase the floor area available to the assessee for use. The AO had wrongly mentioned in the assessment order that the assessee had fabricated and erected structures. All that the assessee had done was to make some partitions for better space utilization. The learned Counsel argued that enduring benefit or long-term advantage in itself was not conclusive as to the nature of expenditure.
6. The learned Counsel referred to the decision of Tribunal Delhi Bench 'A' in the case of Asstt. CIT v. Medicamen Biotech Ltd. (2006) 99 TTJ (Del) 873 : (2005) 1 SOT 347 (Del) and pointed out that it was held that nature of the expenditure had to be considered in a commercial sense. He referred to the judgment of Hon'ble Delhi High Court in the case of Modi Spinning & Weaving Mills Co. Ltd. v. CIT (1993) 109 CTR (Del) 40 : (1993) 200 LTR 544 (Del) and pointed out that in that case the Hon'ble High Court had held that an expenditure that could not be claimed as on current repairs under Section 30, being on renovation of the premises, could be claimed as deduction under the provisions of Section 37 of the Act. The learned Counsel referred to the judgment of Hon'ble Delhi High Court in the case of Instalment Supply (P) Ltd. v.CIT that the commercial advantage obtained by the assessee by redesigning the premises and providing better fittings, better material and marble flooring was not in the nature of capital expenditure. He referred to the judgment of Hon'ble Gauhati High Court in the case of B & A Plantations & Industries Ltd. v. CIT (2000) 242 LTR 22 (Gau) and pointed out that in that case the Hon'ble Gauhati High Court, following the judgment of Hon'ble Supreme Court in the case of CIT v. Madras Auto Services (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 FIR 468 (SC) held that amounts spent by way of expenditure on wall papers, partition wall, marble flooring etc. was not in the nature of capital expenditure.
7. The learned Counsel placed reliance upon the judgment of Hon'ble Supreme Court in the case of CIT v. Madras Auto Services (P) Ltd. (supra). In that case the assessee had constructed new building after demolishing old building. The premises had been taken on rent by the assessee. By the expenditure the assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rate. The Hon'ble Supreme Court held that whatever substituted or reduced the revenue expenditure should normally be considered as revenue expenditure and held that in that case the assessee had not got any capital asset by spending the amount. The learned Counsel for the assessee also placed heavy reliance upon the judgment of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra) and argued that it had been held by the apex Court that every expenditure that results in long-term benefit or advantage, need not necessarily be capital expenditure and if by such expenditure the fixed capital left untouched and the expenditure merely resulted into facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably, the expenditure would be on revenue account.
8. The learned Counsel referred to the judgment of Hon'ble Bombay High Court reported in CIT v. Hede Consultancy (P) Ltd. (2003) 180 CTR (Bom) 70 : (2002) 258 LTR 380 (Bom) and argued that in that case conversion of godown into office was treated to be revenue expenditure. In the case of the assessee there was conversion of erstwhile art gallery/library into office premises.
9. During the course of hearing before us the learned Counsel also referred to certain Tribunal decisions e.g. Jt. CIT v. Modi Olivetti Ltd. (2004) 84 TTJ (Del) 1038 : (2005) 4 SOT 859 (Del), Modem Traders (Chinease Room) v. Asstt. CIT (1995) 53 TTJ (Pune) 237, IAC v.Fibreglass Pilkington Ltd. (New name FGP Ltd.) (1989) 35 TTJ (Bom) 581.
10. The learned CIT Departmental Representative argued that the assessee obtained the term of nine years as a matter of right.
Thereafter the term of lease was further extendable by way of mutual discussion between the assessee and AIFACS. It was apparent that the assessee entered the premises with the intention to stay there for long time to come. That was the driving force behind colossal expenditure incurred by the assessee. The assessee was a premier company engaged in the field of financial services having well versed and experts on the subject on its payroll and having the benefit of the best accountancy/legal advice. Such an assessee could not commit a mistake in accounts or in law and the fact that in the books of account this expenditure was consistently treated as on "fixed assets", was strong evidence as to the nature of the expenditure. The expenditure was in the nature of non-recurring expenditure incurred in relation to fixed assets i.e. building premises resulting into durable value addition to the fixed assets and long-term advantage to the assessee. The learned CIT Departmental Representative strongly relied upon the judgment of Hon'ble Delhi High Court reported in Delhi Cloth & General Mills Co.
Ltd. v. Addl. CIT (supra) and various judgments relied upon in the impugned orders of the learned CIT(A).
11. We have carefully considered the rival submissions. There are two major aspects of the issue before us. Firstly, the facts that the building premises upon which the expenditure in question has been incurred by the assessee were not ownership building premises of the assessee but taken on lease from AIFACS. Secondly, whether the expenditure incurred by the assessee can be categorized as revenue or capital expenditure. Of these two issues we find the first issue to be no longer material in view of the following Expln. 1 inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1st April, 1988: Explanation 1. : Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
Prior to insertion of aforesaid Expln. 1 w.e.f. 1st April, 1988 the IT Act contained provisions of Section 32(1A) to the same effect that were inserted by the Taxation Laws (Amendment) Act, 1970 w.e.f. 1st April, 1971 and omitted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1st April, 1988. In this view of the matter the fact that premises are leasehold premises is not of much significance. The judgment of Hon'ble Supreme Court in the case of Madras Auto Services (P) Ltd. (supra) and of Hon'ble Delhi High Court in the case of Instalment Supply (P) Ltd. v. CIT (supra) on which so much reliance has been placed by the learned Counsel for the assessee are no longer applicable. First, after insertion of the provisions of Section 32(1A) and thereafter substitution of the same by way of insertion of Expln. 1 to Section 32(1). This aspect is quite clear by the judgment of Hon'ble Delhi High Court in the case of Rajdev Singh & Co. v. CIT . In that judgment the Hon'ble Delhi High Court have distinguished their earlier judgment in the case of Instalment SuppJy (P) Ltd. v. CIT (supra) because of insertion of the provisions of Section 32(1A). In judgment in the case of Rajdev Singh & Co. (supra) the Hon'ble Delhi High Court have clearly declared that the earlier judgment in the case of Instalment Supply (P) Ltd. (supra) is not applicable after insertion of the provisions of Section 32(1A) which provisions are now in the Act by way of Expln. 1 to Section 32(1). It therefore, follows that for the purpose of determination of the nature of expenditure incurred by the assessee we have to assume as if the premises were owned by the assessee. During the course of hearing before us the learned Counsel of the assessee has placed reliance on the judgment of Hon'ble Delhi High Court in the case of Modi Spinning & Weaving Mills Co. Ltd. v. CIT (supra). In that judgment the Hon'ble Delhi High Court have not accepted the contention of the assessee that the expenditure of Rs. 34,606 on repairs and renovations of the administrative block of the assessee's building was admissible as current repairs under Section 30(a)(ii) of the Act. The Hon'ble Delhi High Court have held that the fact that the building required repairs which were long overdue made it apparent that the amount was not spent on current repairs. The Hon'ble High Court however observed as under: One of the ingredients of the amount being allowed as a deduction under Section 30(a)(ii) is that the amount must be spent for purposes of carrying out current repairs. The facts as found by the Tribunal are that the administrative block had been built in 1948 and required repairs and improvement in the relevant assessment year in question. As the amount was spent for carrying out repairs which were long overdue, it is evident that the amount was not spent on current repairs. Section 30(a)(ii) is not concerned with the question as to whether the nature of the expenses towards current repairs is capital or revenue. As long as the repairs which are carried out fall under the category of current repairs, then, irrespective of the fact that the repairs have been carried out to a capital asset, and may otherwise have been regarded as a capital expenditure, the said provision specifically allows deduction.
Current repairs must necessarily mean repairs which are required to be carried out from time to time as and when a defect arises. If there has been wear and tear on an item, like the floors in the present case, over a number of years and ultimately they are replaced, then such replacement cannot be regarded as current repairs. The replacement may amount to renovation or repairs which may or may not be entitled to deduction under Section 37 of the Act but such an expense has been rightly held by the Tribunal as not being allowable as deduction under the said head 'current repairs'.
It would be seen that in the case of Modi Spinning & Weaving Mills Co.
Ltd. (supra) their Lordships were considering a case where the assessee had carried out repairs that were long overdue. There is no such aspect involved in the case of the assessee before us. Significantly in that judgment the Hon'ble jurisdictional High Court have observed that replacement of building parts on account of wear and tear over a number of years would amount to renovation or repairs which may or may not be entitled to deduction under Section 37 of the Act. We find the case of the assessee before us still inferior inasmuch as expenditure is neither on current repairs nor on account of renovation and repairs being made to make good wear and tear over a large number of years.
12. During the course of hearing before us the learned Counsel for the assessee placed considerable reliance on the judgment of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra), especially upon the following observations of the Hon'ble apex Court in that judgment: There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
13. It is important to remember that in the case of Empire Jute Co.
Ltd. (supra), the Hon'ble apex Court considered the question as to whether expenditure incurred by that assessee-company on purchase of loom hours from another signatory members constituted a revenue expenditure. The Revenue contended that as loom hours acquired were in the nature of long-term advantage acquired, the expenditure should be treated as capital expenditure. It is important to remember that in that judgment the Hon'ble apex Court were dealing with the expenditure on an intangible asset that did not constitute any part of the fixed capital assets of the assessee. In the extract quoted by us above their Lordships have made it very clear that the position in law would be otherwise in respect of expenditure in relation to fixed capital of the assessee. The learned Counsel for the assessee has emphasized before us the later part of the observations as extracted above and he argued that if the expenditure was incurred for facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The learned Counsel conveniently omitted the expressions "merely" and "while leaving the fixed capital untouched" which are of seminal importance in relation to the law declared by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra). The rule given is that if the asset is not part of fixed capital asset, the test of enduring benefit may not be a conclusive test in relation thereto. In the present case we are dealing with building which is the most obvious and classic example of fixed capital. The observations of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) relied upon by the learned Counsel for the assessee do not, repeat do not apply where the expenditure in question relates to a fixed capital asset. We, therefore, do not see an iota of assistance to the case of the assessee from the judgment of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra).
14. The learned Counsel relied upon certain Tribunal decisions also. In the case of CIT v. Medicamen Biotech Ltd. (supra), the assessee claimed full deduction of various expenses that had been considered in the books of account of the assessee as deferred revenue expenditure. The AO disallowed the expenditure treating the same to be in the nature of capital expenditure. The Tribunal applied the principle laid down by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra).
It is because the expenditure incurred were marketing expenses in connection with launch of products of the company. Those expenses did not touch or constitute part of fixed capital assets of that assessee.
In the instant case we are concerned with an expenditure incurred in relation to predominantly fixed capital assets. We therefore see no assistance to the case of the assessee from that decision. In the case of Jt. CIT v. Dalmia Cement (Bharat) Ltd. (2006) 99 TTJ (Del) 1109 the expenditure related to right to advertise on the structure of a bus shelter. The Tribunal held that disallowance of expenditure was not justified. An advertisement site need not be the assessee's own property, the same could not be said to be capital expenditure either.
We find factual matrix of that case totally different. The assessee constructed bus shelter at Government land and that bus shelter itself was not leased out to the assessee, as in the case of the present case.
The assessee only obtained the right to advertise on the structure of bus shelter. We find the other Tribunal decisions also distinguishable on facts.
15. To sum up from the judgment of the jurisdictional High Court in the case of Rajdev Singh & Co. (supra) it is clear that after insertion of provisions of Section 32(1A)/Expln. 1 to Section 32(1), the expenditure could not be claimed to be revenue expenditure for reason only that it is in relation to a property of which the assessee was a lessee and if the expenditure is incurred in respect of predominantly fixed capital assets, the expenditure cannot be claimed to be revenue expenditure for reason only that it facilitates the assessee's business. A business expenditure whether capital or revenue serves the same purpose i.e. to facilitate the management and conduct of business to be carried on more efficiently or more profitably. As per the judgment of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) what distinguishes a capital expenditure from revenue expenditure is the fact that former is related to fixed capital of the assessee and the latter leaves the fixed capital untouched.
16. We therefore, have to adjudge the case before us on the basis as to whether the expenditure claimed by the assessee can be allowed as current repairs under Section 30 or as revenue expenditure under Section 37(1) of the Act. This aspect has been considered at length by Hon'ble Supreme Court in their judgment in the case of Ballmal Naval Kishoie and Anr. v. CIT in the following words: The expression used in Section 10(2)(v) is 'current repairs' and not mere 'repairs'. The same expression occurs in Section 30(a)(ii) and in Section 31(i) of the IT Act, 1961. The question is what is the meaning of the expression in the context of Section 10(2). In New Shonock Spinning & Manufacturing Co. Ltd.'s case , Chagla C.J., speaking for the Division Bench, observed that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc., requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The learned Chief Justice observed: The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure.
If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the legislature has permitted under Section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure.
In taking the above view, the Bombay High Court dissented from the view taken by the Allahabad High Court in Ramkishan Sundeilal v. CIT (1951) 19 ITR 324 (All), where it was held that the expression 'current repairs' in Section 10(2)(v) was restricted to petty repairs only which are carried out periodically. The learned Judge agreed with the view taken by the Patna High Court in CIT v. Darbhanga Sugar Co. Ltd. and by the Madras High In Liberty Cinema v. CIT (1964) 52 ITR 153 (Cal), P.B. Mukharji, J., speaking for a Division Bench of the Calcutta High Court, held that an expenditure incurred with a view to bring into existence a new asset or an advantage of enduring nature cannot qualify for deduction under Section 10(2)(v).
In our opinion the test involved by Chagla C.J., in New Shonock Spinning & Manufacturing Co. Ltd. 's case (supra) is the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India. We respectfully accept and adopt the test.
Applying the aforesaid test, if we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the said repairs qualify as 'current repairs' within the meaning of Section 10(2)(v). It was a case of total renovation and has rightly been held by the High Court to be capital in nature. Indeed, the finding of the High Court is that as against the sum of Rs. 17,000 for which the assessee had purchased the factory in 1937, the expenditure incurred in the relevant accounting year was in the region of Rs. 1,20,000.
The expression "repairs" implies a necessity i.e. something, which is required to be done in order to bring the asset to its original functionality in proper order. Such repairs may or may not be urgent but are certainly called for to restore the asset to its full original functionality. Where the repair is immediately attended to, the same can be construed as current repairs and where it is allowed to be accumulated, such repairs would not be current repairs but at the same time allowable as an expenditure under Section 37(1) provided that the fundamental condition of the provisions of Section 37(1) "not being in the nature of capital expenditure" is satisfied. In the case of Ballimal Naval Kishore (supra) the Hon'ble Supreme Court have held that where the expenditure gives the assessee new or fresh advantage, that cannot be allowed as a revenue expenditure. In the case of Modi Spinning & Weaving Mills Co. Ltd. (supra) the Hon'ble Delhi High Court have also said the same thing that the replacement may amount to renovation or repairs which may or may not be entitled to deduction under Section 37. Keeping these aspects in mind we now proceed to consider the nature whether the expenditure claimed by the assessee in the assessment years before us can be allowed as revenue expenditure.
It is seen that the assessee took on lease office premises located at AIFACS building w.e.f. 1st March, 1994. The assessment years before us are first three years of the lease and the assessee has incurred the following expenditure on renovation of the aforesaid office premises: Particulars of renovation expenditure incurred by the assessee in relation to subsequent assessment years, if any, are not available with us. It is however, clear that the assessee undertook to renovate the premises taken on lease in a big way. Expenditure on architectural consultancy alone amounted to Rs. 45 lakhs. During the course of hearing before us the learned Counsel for the assessee pointed out that the premises had been originally constructed by AIFACS to serve the purpose of art and cultural activities such as art gallery, exhibition hall, auditorium, conference room, etc. Hence the portion of the building taken on lease by the assessee was required to be adapted to the assessee's business needs. It is apparent that the expenditure was incurred on the building so that it may yield to the assessee afresh advantage not forthcoming from the leased out premises in its original condition. The assessee had acquired premises for the p nod of nine years but further extension beyond nine years could also be effected if mutually agreed upon and upon fresh terms between the parties. As we have seen in view of Expln. 1 to Section 32(1), we have to ignore the fact that the premises in question are leased premises and view the nature of the expenditure as if the premises were owned by the assessee. Detailed break-up of the expenditure has been enumerated in the impugned orders of the learned CIT(A) for three years before us.
Major part of the expenditure is in relation to building premises.
However, certain expenditure has been incurred in relation to items of furniture, machinery and plant. Only few items such as surface coating paint, plumbing work, can be said to be in the nature of repairs. We are, therefore, of the view that the expenditure being in the nature of extensive renovation and beautification, acquisition of furniture, plant and machinery has rightly been disallowed as capital expenditure by the learned AO and the learned CIT(A). We estimate that if 5 per cent of the expenditure as claimed by the assessee is allowed, the same would adequately cover the expenditure incurred by the assessee on repairs of the premises leased out to the assessee. The balance expenditure should suitably be divided between the building, furniture, plant and machinery and the assessee should be allowed depreciation at corresponding rates. For that limited purpose we restore this issue to the file of the learned AO who would work out depreciation allowable to the assessee under Expln. 1 to Section 32(1) in the light of our order and after allowing the assessee reasonable opportunity of being heard in the matter. The assessee's grounds of appeal in this respect for all the three years are disposed of accordingly.
17. Ground of appeal No. 3 in assessee's appeal for asst. yr. 1995-96 is directed against disallowance of a sum of Rs. 3,48,900 i.e. 50 per cent of commission and brokerage expenses claimed by the assessee as having been paid for arranging office accommodation and residential accommodation for employees. Facts of the case leading to this dispute briefly are that the assessee claimed deduction of Rs. 6,97,800 on this account. According to the learned AO while the assessee furnished details of the expenditure, no justification was given except stating that the expenditure had been incurred as per current industry practice. The learned AO held that the expenditure incurred by the assessee was on the higher side. He allowed the assessee deduction of Rs. 2 lakhs on estimate and made disallowance of Rs. 4,97,800. On assessee's appeal the learned CIT(A) held that the assessee had not discharged its burden of proof. However, he held that it would suffice if the disallowance was restricted to 50 per cent of total expenditure claimed. He thus allowed the assessee a further relief of Rs. 1,48,900.
18. During the course of hearing before us the learned Counsel referred to the particulars of expenditure as given at p. 22 of the paper book.
He argued that the assessee had identified the payee and had also specified the particular accommodation which had been hired by availing the services of the payee and the amount paid to each payee as well as date of payment. Thus all primary details had been given to the AO.However, the learned AO still alleged that the assessee had not furnished justification for the payments and that the payments made were on higher side. The disallowance was made by the authorities below by applying their subjective standards. The learned Departmental Representative relied upon the orders of the authorities below. On consideration of the matter we hold that the assessee has furnished all primary details from which it appears that the assessee has incurred the expenditure in the ordinary course of carrying on of its business.
No specific material has been relied upon by the Revenue for the finding given that the expenditure incurred was on the higher side. The persons to whom the payments have been made are unrelated persons and therefore, it appears that the transactions have been carried out at arm's length. We therefore direct that the full deduction as claimed by the assessee in this behalf of Rs. 6,97,800 should be allowed to the assessee.
19. Ground of appeal No. 4 for asst. yr. 1995-96 is directed against the disallowance of ex gratia payment made by the assessee. The auditors of the assessee-company specified in their report ex gratia payment of Rs. 2,80,000. According to the learned AO the assessee was asked to justify the allowability of the same but no justification was furnished. He held that ex gratia payment was not allowable deduction because it was neither contractual nor verifiable. He therefore disallowed the same. During the course of hearing before the learned CIT(A) the assessee submitted that the assessee had furnished the details of payments such as date of the payment, name of the employee to whom the payment was made and the amount of payment. It was also explained that these payments had been treated as taxable in the hands of the employees and accordingly tax was deducted at source. If the learned AO required any further detail, he should have asked for the same. The learned CIT(A) held that the evidence sought to be furnished by the assessee as to the TDS on the payments and justification for payments was not admissible as the conditions prescribed under Rule 46A(1) were not fulfilled. Based on this reasoning he upheld the disallowance of Rs. 2,80,000. On consideration of the matter we hold that the learned CIT(A) has not correctly held that the expenditure was not verifiable when the names of the employees, dates of payment and amounts of payments had been supplied to the AO. The assessee only sought to further support this basic information by way of TDS which strictly did not constitute any fresh evidence as such. It is not the case of the Revenue that these payments have been made to any of the relatives of the directors, senior executives or shareholders. On consideration we do not see any justification for the disallowance and delete the same.
20. Ground of appeal No. 5 for asst. yr. 1995-96 is directed against disallowance of Rs. 8,56,591 claimed by the assessee as contribution made to superannuation fund. This disallowance has been made by the learned AO relying upon second proviso to Section 43B. During the course of hearing before us the learned Counsel relied upon Tribunal, Special Bench decision in the case of Kwality Milk Foods Ltd. v. Asstt.
CIT being decision of Tribunal Chennai Bench 'A' (Special Bench) dt.
16th March, 2006 in ITA No. 856/Mad/2005 reported at (2006) 102 TTJ (Chennai)(SB) 1Ed. according to which after deletion of second proviso to Section 43B by the Finance Act, 2003 w.e.f. 1st April, 2004, it should be treated that second proviso was never on the statute book.
Respectfully following the decision of Special Bench, we delete the disallowance of Rs. 8,56,591 made by the AO in this behalf.
21. Ground of appeal No. 3 in assessee's appeal for asst. yr. 1996-97 is directed against the assessee not being allowed interest on interest-tax under Section 12B of the Interest-tax Act, 1974 amounting to Rs. 10,369. During the course of hearing before us the learned Counsel for the assessee argued that this deduction was allowable to the assessee in the same manner as interest-tax paid by the assessee.
Merely because it was interest on interest-tax, deduction under Section 37 could not be denied to the assessee. In support of these contentions the learned Counsel relied upon the judgments reported in Bhaiat Commerce & Industries Ltd. v. CIT (1985) 45 CTR (Del) 1 : (1985) 153 LTR 275 (Del), Mahalakshmi Sugar Mills Co. v. CIT (1980) 16 CTR (SC) 198 : (1980) 123 LTR 429 (SC) and Bharat Commerce & Industries Ltd. v.CIT (1998) 145 CTR (SC) 340 : (1998) 230 LTR 733 (SC). The learned Counsel argued that this interest payment was of compensatory nature for which purpose reliance was placed on the judgments reported in Central Provinces Manganese Ores Co. Ltd. v. CIT (1986) 58 CTR (SC) 112 : (1986) 160 LTR 961 (SC) and Prakash Cotton Mills (P) Ltd. v. C1T (1993) 111 CTR (SC) 389 : (1993) 201 LTR 684 (SC). The learned Departmental Representative argued that none of the cases relied upon by the learned Counsel for the assessee related to interest chargeable under Interest-tax Act. The same was penal in nature and therefore, rightly disallowed by the learned CIT(A). On consideration of the matter we are of the view that no material has been relied upon by the Revenue to describe the levy as of penal in nature. The imposition is described as an interest and not penalty. We therefore hold that there was no justification not to allow deduction on this account to the assessee. We direct accordingly.
22. In assessee's appeal for asst. yr. 1997-98 ground of appeal No. 3 relates to disallowance of Rs. 90,500 being ex gratia amount paid to the employees. Following our order in relation to ground of appeal No.4 in the case of the assessee for asst. yr. 1995-96 (supra), we allow this ground of appeal and direct the assessee be allowed deduction of Rs. 90,500 as claimed on this account.
23. Ground of appeal No. 4 in assessee's appeal for asst. yr. 1997-98 is directed against non-deduction of interest on interest-tax amounting to Rs. 17,97,895. Following our order in relation to ground of appeal No. 3 for asst. yr. 1996-97 we allow this ground of appeal and direct that the assessee be allowed deduction of Rs. 17,97,895 as claimed on this account.
24. We now turn to appeals filed by the Revenue. The major issue involved in both the appeals filed by the Revenue for asst. yrs.
1996-97 and 1997-98 is deletion of the disallowance of Rs. 92,31,360 in relation to asst. yr. 1996-97 and Rs. 19,81,291 in relation to asst.
yr. 1997-98 made by the learned AO for interest accrued but not due.
Facts of the case leading to this dispute briefly are that the assessee excluded in its computation of income attached to the return of income, the amounts representing Government securities on the ground that the same had not fallen due for payment. According to the assessee the amount would be offered to tax only at the time the same became due for payment to the assessee. The learned AO held that as the assessee was following mercantile system of accounting there was deviation in the computation of income as filed by the assessee along with return. He further held that the reliance placed by the assessee on the judgment of Hon'ble Supreme Court in the case of Vijaya Bank Ltd. v. Asstt. CIT was not justified. That judgment related to interest pertaining to period prior to purchase of the security. The learned AO made additions accordingly. On assessee's appeal the learned CIT(A) held that the assessee had himself offered the sum of Rs. 92,31,360 for asst. yr. 1997-98. The claim of the assessee was covered by the decision of the Tribunal in the case of State Bank of Bikaner & Jaipur v. Dy. CIT (1999) 65 TTJ (Jp) 480 : (2000) 74 ITD 203 (Jp). Relying upon that decision, the learned CIT(A) deleted the disallowance of Rs. 92,31,360 for asst. yr. 1996-97. For asst. yr. 1997-98 the learned AO made an addition of Rs. 19,81,271 on the same basis. The learned CIT(A) deleted the addition following order for asst. yr. 1996-97.
25. During the course of hearing before us the learned Departmental Representative argued that the decision of the Tribunal reported in (1999) 65 TTJ (Jp) 480 : (2000) 74 TTD 203 (JpJ(supra) had been given in relation to a bank whereas the assessee before us was not a bank.
The learned Counsel for the assessee argued that the case of the assessee was not properly distinguished. The assessee was controlled by RBI guidelines applicable to non-banking financial corporations. The assessee submitted that the securities in question had been acquired in view of the said RBI guidelines only. The same did not constitute the assessee's stock-in-trade. The learned Counsel argued that in addition to Tribunal decision reported in (1999) 65 TTJ (Jp) 480 : (2000) 74 TTD 203 (Jp) (supra) the case of the assessee was also governed by the judgment of Hon'ble Delhi High Court in the case of CIT v. Punjab & Sind Bank Ltd. . Respectfully following the aforesaid judgment of Hon'ble Delhi High Court we reject Revenue's grounds of appeal for both the assessment years provided the assessee has offered the amount of interest on due date basis in the assessment years involved.
26. For asst. yr. 1997-98 Revenue has taken one more ground of appeal i.e. allowance of the sum of Rs. 13,05,965 on software that had been treated by the learned AO to be capital expenditure. On consideration of the matter we see no force at all in the contention of the Revenue.
It is well-known that software is a field of fast changing technology and needs update and upgradation recurrently and may at times less than one year. It is not the case of the Revenue that any special software has been developed for particular needs of the assessee only. We therefore find no reason to interfere in the impugned order of the learned CIT(A) in this behalf. Accordingly this ground of appeal is rejected.
27. In the result, while the appeals filed by the assessee are partly allowed, appeals filed by the Revenue are dismissed.