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Treatment of compensation to reacquire the plot allotted to the customer

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Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that return declaring income of ``4,18,02,660/- filed on 31.03.2006 by the assessee, a real estate company, after being processed u/s 143(1) of the Income–tax Act,1961[hereinafter referred to as the ’Act’] was selected for scrutiny with the service of a notice u/s 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee claimed deduction of ``36,60,500/- on account of compensation to 7 persons mentioned in para 3 of the assessment order. To a query by the AO, the assessee replied that it used to receive sale consideration in installments. Unless the entire sale consideration, registration charges and other expenses were received, the sale deed in respect of land was not executed in favour of the intended purchaser. Similarly, the assessee allowed possession of the land to the intending purchaser only after payment of full consideration and registration of sale deed. In some cases, since the intending purchaser did not want to buy the land as per mutual agreement and advance received was refunded along with some excess amount as return on investment. This excess amount was termed as compensation. However, the AO did not accept the submissions of the assessee on the ground that compensation was nothing but consideration to reacquire the rights in plots allotted to the various customers of the assessee. As such, it was a part of purchase which could only be capitalized and could not be allowed as revenue expenditure. Since the payment of compensation was not under any obligation, statutory or otherwise, the AO disallowed the claim, treating the amount as part of capital work in progress.

Citation :
Assistant CIT, Central Ci rcle-20, New Delhi Vs.M/s Vat ika Landbase Pvt . Ltd. , [Now Vatika Ltd. ] , 308 Vishal Bhawan, Nehru Place, New Delhi.(PAN: .AABCV 5747 G)(Appellant) (Respondent)

 

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘H’ BENCH

 

BEFORE SHRI A.N. PAHUJA, AM AND SHRI C.M. GARG, JM

 

ITA no.154/D/2009

Assessment year: 2005-06

 

Assistant CIT,

Central Ci rcle-20,

New Delhi

 

Vs.

 

M/s Vat ika Landbase Pvt . Ltd. ,

[Now Vatika Ltd. ] , 308

Vishal Bhawan, Nehru Place,

New Delhi.

(PAN: .AABCV 5747 G)

(Appellant) (Respondent)

 

Assessee by Shri K. Sampath, AR

Revenue by Dr. B.R.R. Kumar,DR

 

Date of hearing 07-08-2012

Date of pronouncement 31-08-2012

 

O R D E R

 

A.N.Pahuja:-

 

This appeal filed on 15.01.2009 by the Revenue against an order dated 10.11.2008 of the CIT(A)-I, New Delhi, raises the following grounds:-

 

1) “On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the addition of ``36,60,500/- holding that amount of compensation paid was allowable as business expenditure.

 

2) Whether on the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of ``21,81,197/- made on account of repair and maintenances of building despite the facts that in the absence of any documentary evidence the same cannot be treated as revenue expenditure/temporary structure.

 

3) The appellant craves leave to add, after or amend any/all of the ground of appeals before or during the course of the hearing of the case.”

 

2. Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that return declaring income of ``4,18,02,660/- filed on 31.03.2006 by the assessee, a real estate company, after being processed u/s 143(1) of the Income–tax Act,1961[hereinafter referred to as the ’Act’] was selected for scrutiny with the service of a notice u/s 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee claimed deduction of ``36,60,500/- on account of compensation to 7 persons mentioned in para 3 of the assessment order. To a query by the AO, the assessee replied that it used to receive sale consideration in installments. Unless the entire sale consideration, registration charges and other expenses were received, the sale deed in respect of land was not executed in favour of the intended purchaser. Similarly, the assessee allowed possession of the land to the intending purchaser only after payment of full consideration and registration of sale deed. In some cases, since the intending purchaser did not want to buy the land as per mutual agreement and advance received was refunded along with some excess amount as return on investment. This excess amount was termed as compensation. However, the AO did not accept the submissions of the assessee on the ground that compensation was nothing but consideration to reacquire the rights in plots allotted to the various customers of the assessee. As such, it was a part of purchase which could only be capitalized and could not be allowed as revenue expenditure. Since the payment of compensation was not under any obligation, statutory or otherwise, the AO disallowed the claim, treating the amount as part of capital work in progress.

 

3. On appeal, the assessee reiterated their submissions before the AO and further contended that the amount paid by the assessee as compensation was treated as revenue expense even in the preceding years. In the AY 2001-02, though the ld. CIT(A) allowed their claim vide order dated 6th January, 2005,on further appeal, the ITAT vide their order dated 5.10.2007 in ITA no. 1505/Del./2005 restored the issue to the file of the ld. CIT(A) with the directions to re-examine the issue afresh in the light of various decisions cited before the CIT(A), the method of accounting followed and method of valuation of closing stock and also verify the facts as to whether or not such expenses were allowed in the earlier years. The said matter is stated to be still pending before the ld. CIT(A).As regards accounting policy being consistently followed by the assessee, it was submitted that the assessee was paying compensation every year and claimed the same as revenue expenditure in the books of accounts year after year, as detailed herein below:-

 

Assessment

year

 

Amount of

compensation claimed [In`]

 

Amount of compensation allowed[In `]

 

1995-96

4,98,250

4,98,250

1996-97

13,65,000

13,65,000

1997-98

4,15,000

4,25,000

1998-99

3,04,165

3,04,165

1999-2000

3,75,000

3,75,000 (u/s 143(1)(a)

2000-01

2,46,638

2,46,638 ( u/s 143(1)(a)

2001-02

21,02,000

Nil (appeal pending with CIT(A)

2002-03

1,00,000

1,00,000

2003-04

-

-

2004-05

50,000

50,000

 

While relying upon decisions in Sasun J. David & Co. Pvt. Ltd. Vs. CIT, (Bom) 118 ITR 261; S.A. Builders Ltd. Vs. CIT, 288 ITR 1(SC), CIT Vs. Neo Poly Pack (P) Ltd., 245 ITR 492 (Del); CIT Vs. Rajeev Grinding Mills, 279 ITR 86 (Del); CIT Vs. ARJ Security Printers, 264 ITR 276 (Del); CIT Vs. Dalmia Promotors Pvt. Ltd., 281 ITR 346 (Del); CIT Vs. Narender Doshi, 254 ITR 606 (SC); Berger Paints India Ltd. Vs. CIT, 266 ITR 99 (SC) and JCIT Vs. Mandideep Eng. & Pkg. Ind. P. Ltd., 292 ITR 1 (SC), the assessee pleaded that their claim may be allowed in the year under consideration also. In the light of these submissions, the ld. CIT(A) allowed the claim in the following terms:-

 

“15. In view of the aforesaid facts and circumstances the Assessing Officer has erred in holding that the said amount paid by the assessee as compensation represents purchase consideration to reacquire the rights in the plots and that the said amount will increase capital work in progress of the assessee. In fact there is noting in the accounts of the assessee which could be termed as capital work in progress. The nature of expense clearly shows that the nature of expense is revenue expenditure incurred wholly and exclusively for the purposes of business and hence is allowable as regular business expenditure. Moreover, according to the consistently followed accounting practice, such expenses are being allowed to the assessee as revenue expenditure. The theory as placed by the Assessing Officer that the amount paid by the assessee as compensation represents purchase consideration is wholly misconceived since the assessee has never in earlier years treated the said amount as sales in its books as the assessee had received only part of the sale consideration. In the absence of complete sale consideration and amount having been received by the assessee, the sale was not yet completed and therefore, the amount paid as compensation can under no circumstances be termed as amount paid for acquisition of stock in trade. Assessee cannot be considered to be acquiring any new asset. In fact, theory of purchasing something of which he himself is the owner is in itself misconceived.

 

16. Looking to the facts and circumstances as stated here in above and the law applicable, the addition made by the Assessing Officer of ``36,60,500/- is deleted.”

 

4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR contended that when advance was not credited in profit and loss account nor was there any commercial expediency in making the payment of compensation and no such compensation was provided in the agreement, the claim could be not allowed. Inter alia, the ld. DR relied upon decision in Commissioner of Income-tax v. H. P. Housing Board,340 ITR 388 (H.P.).

 

5. On the other hand, the ld. AR on behalf of the assessee supported the findings of the ld. CIT(A) while relying upon the decision dated 24th August, 2004 in ITA nos.3096 & 3686/Del./2000 for the AY 1997-98 in the case of Gopal Das Estates & Housing Ltd. wherein, according to the ld. AR, a similar claim was allowed in the following terms:

 

 “39. Learned DR relied upon order of ITAT Delhi “B” Bench dated 28th February, 2002 in the case of assessee for assessment year 1995-96 in which the issue is decided against the assessee. We have gone through the order of the appellate Tribunal. The Tribunal directed the counsel for assessee to specify

 

1. Whether compensation was insisted upon by the parties/persons;

2. Whether legal opinion was sought before parting with compensation.

3. Whether payment of compensation was provided for in the agreement entered into at the time of booking.

 

The Tribunal, considering the facts of the case, ultimately held that the so called payment of compensation was not provided by the agreement between the parties, none of the parties asked for it. All they wanted was their flat within a reasonable period, legal opinion also stated that a compensation was not payable as per contract and that opinion was tailor made to suit the assessee.

 

40. The Tribunal, in view of the above, rejected the claim of the and set aside the orders of the CIT(A) in assessment year 1995-96 and restored the order of the Assessing Officer. The Tribunal also considered that payment was apparently made for extraneous consideration.

 

41. Learned counsel for the assessee submitted that all the facts were pleaded before the Tribunal but the same have not been properly considered along with the case laws referred to before us. Learned counsel for assessee also argued that the Tribunal was not having any material before it to give finding with regard to extraneous consideration. Learned counsel for the assessee also argued that since the case of the assessee was not properly considered by the Tribunal on facts, and mistake was apparent on record, therefore, miscellaneous application was filed which is pending before the Tribunal as well as appeal is pending in the High Court. Learned counsel for assessee submitted that since the case of the assessee is not properly considered and that the matter has not reached finality, therefore, the order of the Tribunal may not be relied upon.

 

42. We have considered submissions of the parties. With all respect to order of the Tribunal, we would like to submit that the Tribunal in the earlier year has perhaps considered the principle of

liquidated damages only. Therefore, ITAT held :-since it was not specifically mentioned in the contract, therefore, claim of the assessee was denied. The rule of general and nominal damages have not been considered. The reasons given for cancellation of the contract is also not considered while allowing relief to the revenue. Therefore, in our, view, the order of the ITAT dated 28th February2002 which has not reached finality can not be relied upon at this stage. We, therefore, respectfully do not propose to rely upon the order of the appellate Tribunal dated 28.2.2002.This order is of no help to the revenue as such. Considering the above discussion, and facts of the case, we are of the view that assessee has rightly claimed the expenditure as revenue expenditure. The CIT(A)is therefore, justified in allowing the appeal of the assessee.

 

We uphold the findings of the CIT(A)and dismiss the appeal of the revenue on this issue. We may clarify that the findings in this order shall not prejudice, the rights and contention of the parties in the matter subjudice in other year.” ”

 

5.1 The ld. AR pointed out that Hon’ble High Court admitted a question of law on this issue vide order dated 10.10.2007 in ITA no. 772/2005 .

 

6. We have heard both the parties and gone through the facts of the case. As is apparent from the aforesaid facts, details and explanation tendered by the assessee before the AO and extracted in para 3 of the assessment order, reveals as under:

 

Date

Name of party

Amount[In]

Explanation

 

4-5-2004

Rajinder Kumar

36000

Refund of advance for plot area 250sq. meter at village tigra

Ghat Sushant Lok vide receipt No.612 dated 5-5-2003

9-6-2004

Dinesh Gupta

122500

Being amount given to Dinesh Gupta towards refund of

advance of plot no.1025 at Bhondsi, area of plot is 1acre

 

9-6-2004

Sadhna Gupta

122500

Being amount given towards refund of advance of plot

no.1024 at Bhondsi,area of plot is 1acre

 

9-6-2004

Kamlesh Gupta

122500

Being amount given towards refund of advance of plot

no.1024 at Bhondsi,area of plot is 1acre

 

31-3-2005

Greefield

International Pvt.

Ltd.

 

1439000

Being the compensation given on the surrender of Plot

booked in Vatika Ph.-II

 

31-3-2005

Earth Movers &

builders Pvt. Ltd.

 

1312000

Being the compensation given on the surrender of Plot

booked in Vatika Ph.-II

 

31-3-2005

SK Vaghal

500000

Being the amount paid as compensation against case filed in

MRP as full and final payment

 

 

6.1 The aforesaid explanation reveals that amount has been paid to shri Rajinder Kumar, Dinesh Gupta, Sadhna Gupta and Kamlesh Gupta by way of refund of advance paid by them. There is nothing in the impugned order nor the ld. AR submitted any material before us in support of their claim that the amount was paid as compensation for reacquiring the rights in the plots. How the refund of advance paid by the respective buyers could be treated as compensation, has not been explained before us. As regards amount paid to M/s Greenfield International Pvt. Ltd. and M/s Earth Movers & Builders Pvt. Ltd., it is mentioned that compensation was paid for surrender of plot. The basis for working and payment of compensation or the relevant correspondence is not referred to in the impugned order nor has been placed before us. Regarding amount paid to Shri SK Vaghal, the compensation is stated to have been paid for settlement of some case filed in MRP. The nature of dispute and how the amount is compensation towards reacquiring rights in land is not evident from the impugned order in this case also. In fact, the ld. CIT(A) did not even attempt to analyse the relevant facts and circumstances in each of the aforesaid seven cases nor recorded his specific findings as to how the amount of refund of advance paid to the first four parties referred to above in the table or the amount paid by the assessee to the remaining three persons is compensation for reacquiring the rights in plots. No such material is referred to in the impugned order nor has been placed before us. As regards issue of principles of consistency , the ITAT in the AT 2001-02 analysed the facts and circumstances in the preceding/succeeding years and recorded their findings as under:

 

“6 We have carefully considered rival submissions along with the order of the Tax Authorities and the various case laws cited before us. We have also gone through the paper book and the copy of the assessment order placed before us by the learned AR in the paper book. From the order for the assessment year 1995-96, 1997-98, 1998-99 & 2004-05, the copies of which are placed at page No.73 to 75, 76 to 79, 80 to 85, 89 to 90 of the paper book, we find that there is no description about the allowance or disallowance of the compensation expenses incurred by the assessee. It is only in the assessment order for the assessment year 2002-03, we find that the Assessing Officer has observed that the assessee has claimed deduction for ``1,00,000/- on account of compensation expenses and these expenses have been duly disallowed by the Assessing Officer while framing the assessment. Thus, from the assessment orders the copy of which were placed before us it is not apparent whether the assessee has incurred the compensation expenses and has debited these expenses in the profit and loss account and these expenses have been allowed by the Assessing Officer. We although noted that the assessee had filed the detail of the compensation expenses as appeared at page 72. In the detail, the assessee has also mentioned that the CIT(A) has allowed the appeal of the assessee for the assessment year 2002-03 deleting the compensation expenses of `1,00,000/-. But what happened subsequently whether any appeal has been filed or not is not born out, out of the facts before us. We find that CIT(A) has allowed the appeal of the assessee merely relying on the submission of the assessee that the similar amounts have been allowed in the earlier years. No doubt the expenses incurred by the assessee are the revenue expenses and have been incurred for the purposes of the business, as in our opinion,commercial expediency demands that such expenses should be incurred by the assessee while making the refund to the allottees. But the question arise whether these expenses will form part of the stock in trade or not. This in our opinion will depend on the method of the accounting consistently followed by the assessee for the valuation of the closing stock. Whether the assessee is following project completion method or work certified method. These facts have not been brought on record before us from either of the side. We, therefore, in the interest of justice and fair play to both the parties set aside the order of the CIT(A) and restore this issue to the file of the CIT(A) with the direction that the CIT(A) to re-examine this issue afresh in the light of the various case law cited before us, method of accounting followed by the assessee, method of valuation of the closing stock consistently followed by the assessee and also verify the fact whether such expenditure has been allowed to the assessee in the earlier years or not after giving the proper and sufficient opportunity to the assessee. The assessee is also free to adduce all the necessary evidence on which he may rely before the CIT(A). Thus, the appeal of the revenue is allowed for statistical purposes.”

 

6.2 Admittedly, the matter is still pending before the ld. CIT(A) in the AY 2001-02. The ld. AR also relied upon a decision dated 24th August,2004 in the case of Gopal Das Estates & Housing Ltd..(supra) This decision was not cited before the lower authorities. Since there is nothing to suggest that the facts and circumstances in the instant case are parallel to facts and circumstances in the aforesaid cited decision while as already observed ,the ld. CIT(A) did not analyse the nature of each of the aforesaid seven amounts , apparently, the view taken in the said decision cannot be followed.

 

7. As is apparent from the aforesaid observations in the impugned order, the ld. CIT(A) dismissed the appeal without even analyzing the nature of each of the amount paid to aforesaid seven persons as to how the amount is compensation in nature and what were the circumstances in each of these cases which compelled the assessee to pay such compensation and what was the basis of payment of the aforesaid amount . A mere glance at the impugned order reveals that the order passed by the ld. CIT(A) is crypt ic and grossly violat ive of one of the facets of the rules of natural just ice, namely, that every judicial /quasi -judicial body/author ity must pass a reasoned order , which should ref lect applicat ion of mind by the concerned author i ty to the issues/points raised before it . The applicat ion of mind to the mater ial facts and the arguments should manifest itself in the order. Sect ion 250(6) of the Act mandates that the order of the CIT(A) while disposing of the appeal shall be in wr it ing and shall state the points for determinat ion, the decision thereon and the reasons for the decision. The requirement of recording of reasons and communicat ion thereof by the quasijudicial author it ies has been read as an integral part of the concept of fair procedure and is an important safeguard to ensure observance of the rule of law. I t introduces clar ity, checks the introduct ion of ext raneous or ir relevant considerat ions and minimizes arbit rariness in the decision-making process. Hon’ble jurisdictional High Court in their decision in Vodafone Essar Ltd. Vs. DRP,196 Taxman423(Delhi) held that when a quasi judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum. We may point out that a ‘decision’ does not merely mean the ‘conclusion’. I t embraces within its fold the reasons forming basis for the conclusion. [Mukht iar Singh Vs. State of Punjab,(1995)1SCC 760(SC)] . In view of the foregoing, especially when the ld. CIT(A) have not passed a speaking order nor analysed the nature of amount paid in the year under consideration while the matter in the AY 2001-02 is still pending before him, we consider it fair and appropr iate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the aforesaid issues, afresh in accordance wi th law, af ter al lowing suf f icient opportunity to both the parties, keeping in view , inter al ia, the observat ions of the ITAT in their order for the AY 2001-02. Needless to say that while redeciding the appeal, the ld. CIT(A) shall pass a speaking order, keeping in mind, inter al ia, the mandate of provisions of sec. 250(6) of the Act . With these observat ions, ground no. 1 in the appeal is disposed of .

 

8.. Ground no.2 in the appeal relates to disallowance of expenditure on account of repair and maintenance of building. On perusal of profit and loss account, the AO noticed that the assessee debited an amount of ``24,30,474/- under the head repair and maintenance of building. Of these, ledger account revealed that an amount of `21,81,197/- related to coriander leaf and other repair expenses at Vatika Triangle. Even when the AO asked the assessee to submit bills/vouchers for these expenses , the assessee did not produce the same. Accordingly, while observing that the assessee incurred expenditure on construction of commercial complex and basement at vatika Triangle, the AO disallowed the claim of the assessee, treating the amount capital in nature.

 

9. On appeal, the ld. CIT(A) concluded in the following terms:-

 

“18. The property was fully occupied by the owners of the respective portions of the property or tenants in earlier years. Income there from has been disclosed by the assessee in the assessment year 2004-05. The assessee has also filed copy of an application filed by it before the HUDA authorities for issuance of a completion certificate w.e.f. 24.12.2004. It was further explained that the building contains 7 floors and 3 basements. Thus, in the said building 10 floors have been built up. It was submitted that the commercial complex having 10 floors in all cannot be constructed for a meager sum of `21,81,197/- and, therefore, the observations of the Assessing Officer are wrong that such expenses were incurred during construction of commercial complex and basements at Vatika Triangle. It was also explained that such amount was incurred by the assessee for erection of temporary structures etc. in the basement of the commercial complex known as Vatika Triangle and thus such expenses were only for temporary construction and are eligible for depreciation @100%. The Assessing Officer is directed to allow depreciation as per the provisions of law.”

 

10. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld.DR relied upon the order of the AO while contending that assessee did not place any evidence before the AO that the amount was incurred on temporary construction in the basement nor any bills or vouchers were submitted. Thus, the learned CIT(A) was not justified in treating the amount as having been incurred on temporary construction, eligible for depreciation @100%,without allowing any opportunity to the AO. The ld. DR ,inter alia, relied upon decision in Ramakrishna & Co. vs. CIT,88 ITR 406(Mad.) & CIT vs. Lucky Bharat Garage,174 ITR 526(MP).

 

11. On the other hand, the ld. AR on behalf of the assessee relied upon the impugned order . To a query by the AO, the ld. AR submitted a copy of ledger account of expenses debited under the head repairs to building.

 

12. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions relied upon by the ld. DR. Indisputably, the assessee did not produce all the bills and vouchers in relation to expenditure incurred on repairs to building. The ld. CIT(A),without ascertaining the nature of construction or verifying the bills/vouchers or any other material concluded that expenditure was incurred on temporary structures. There is nothing to suggest that the assessee produced the relevant bills & vouchers before the ld. CIT(A) nor seems to have verified the genuineness of expenditure or even recorded any such findings . In these circumstances, especially when complete bills and vouchers in relation to the aforesaid expenses were not produced before the AO or the ld. CIT(A) nor the latter allowed any opportunity to the AO before concluding that expenditure was incurred on temporary structures, entitled to depreciation @100% , we are of the opinion that the ld. CIT(A) was not justified in deleting the disallowance. The question which arises for determination in this case is whether the assessee was entitled to claim the aforestated amounts as "current repairs" under sections 30 of the Act or u/s 37 (1) of the Act as revenue expenditure. In this connection the judgment of Hon’ble Bombay High Court in the case of New Shorrock Spg.. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 is the leading case , which was approved by the Hon’ble Supreme Court in the case of Ballimal Naval Kishore v. CIT [1997] 224 ITR 414. The Hon’ble Bombay High Court explained the expression "repairs" in the following words:—

 

"The expression ‘repairs’ must be understood in contradistinction to renewal or restoration. A building, machinery, plant or furniture may be renewed or restored either wholly or in part, in which case the amount expended would not be in respect of repairs, but when renewing or restoring a building, machinery, plant or furniture a need may arise to set right certain defects or flaws and an amount may be spent for this purpose and the result may be that although the original asset has been preserved and maintained, no new asset has come into existence and no additional advantage has accrued to the assessee."

 

12.1 Thereafter ,the Hon’ble High Court have explained the expression "current repairs" in the following words :—

 

"The definition of ‘repair’ really does not create much difficulty, but the difficulty is created by the adjective which qualifies the expression ‘repairs’ and that adjective is ‘current’, and as already pointed out the Legislature did not intend that the assessee should be permitted all repairs, even though the expenditure may be a revenue expenditure, as a permissible deduction under section 10(2)(v).

 

What we have to consider is in what way has the Legislature circumscribed the expression ‘repairs’ and to what extent has the Legislature limited the right of the assessee to claim deduction in respect of repairs. One or two views are possible of the expression ‘current’. It may be said that ‘current’ is used in contradistinction to heavy and that small petty repairs are the only repairs which can fall within the ambit of section 10(2)(v).

 

The other view is a view more in fitting with the etymological meaning of the expression ‘current’, and it is that they are such repairs which are attended to when the need for them arises and are not allowed to fall into arrears or to be accumulated. If a building, machinery, plant or furniture needs some repairs and those repairs are attended to as and when the need arises then the repairs are current repairs.

 

But if the assessee, although the need has arisen, does not attend to that need and allows the repairs to get accumulated, then it could not be said that when he is expending money on these repairs he is expending them on current repairs. Again, it seems to have been the intention of the Legislature that if the assessee could carry on with his building, machinery, plant or furniture without attending to its repairs and spends an amount at a later date when the arrears are accumulated, such expenditure partakes more of the nature of capital expenditure than of revenue expenditure. In our opinion, the latter view as to the expression ‘current repairs’ is the better view and more consistent with the language used by the Legislature. It may also be pointed out that since 1953 when section 10(2)(xv) was amended, no deduction is permissible under section 10(2)(xv) which is an allowance of the nature described in any of the clauses (i) to (xiv)."

 

12.2 Whether or not expenditure is on current repairs, Hon’ble Supreme Court in the case of Ballimal Naval Kishore v. CIT [1997] 2 SCC 449, while approving the test formulated by Shri Chagla C J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom),observed as follows:

 

"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."

 

12.3 Hon’ble Supreme Court in another case of CIT Vs. Sarvanna Spinning Mills P Ltd., 293 ITR 201(SC) while referring to the aforesaid decision in the case of Ballimal Naval Kishore(supra) observed that

 

“An allowance is granted by clause (i) of section 31 in respect of amount expended on current repairs to machinery, plant or furniture used for the purposes of business, irrespective of whether the assessee is the owner of the assets or has only used them. The expression "current repairs" denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The word "repair" involves renewal. However, the words used in section 31(i) are "current repairs". The object behind section 31(i) is to preserve and maintain the asset and not to bring in a new asset. In our view, section 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". All repairs are not current repairs. Section 37(1) allows claims for expenditure which are not of capital nature. However, even section 37(1) excludes those items of expenditure which expressly fall in sections 30 to 36. The effect is to delimit the scope of allowability of deductions for repairs to the extent provided for in sections 30 to 36. To decide the applicability of section  31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether the expenditure is "current repairs". The basic test to find out as to what would constitute current  repairs is that the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage.

 

12.4 Hon’ble Apex Court in the aforecited case further observed that the Legislature intended to stress that under section 31(i) of the Act, the permissible deduction admissible is only for current repairs and therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue, it may not fall in the connotation of "current repairs" in section 31(i). It was further observed that replacement generally may not fall under the expression "current repairs" but, in  certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases of exception, fall within the expression "current repairs".

 

12.5 Under section 37, a particular item of expenditure may be deductible if the expenditure does not fall within sections 30 to 36 ; that it should have been incurred in the accounting year; that it should be in respect of a business carried an by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business. Whether expenditure is "revenue" or "capital in nature" would depend upon several factors, namely, nature of the expenditure, nature of the business activity etc. .

 

12.6 Recently, Hon’ble Karnataka High Court in CIT vs. HP Global Soft Ltd.,20 taxmann.com 459 (Kar) while examining the claim as to whether expenditure on civil structures etc is capital or revenue, analysed various decisions in Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900(SC); Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34(SC); Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC); CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468(SC); Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 52(Del.); CIT v. Hi Line Pens (P.) Ltd. [2008] 306 ITR 1829Del.) and CIT v. Escorts Finance Ltd. [2006] 155 taxman 559(Del.) and concluded that in order to find out the nature of expenditure, it is necessary to find out the nature of construction put-up, the purpose of construction and the use to which the said construction is put-up and also if it is a case of repair, replacement, addition or improvement has to be gone into. In the instant case ,as already stated, the assessee did not produce any bills or vouchers or other material before the AO in order to ascertain the nature or purpose of construction while the ld. CIT(A) without disclosing any basis or giving opportunity to the AO, concluded that expenditure was on temporary structure. In these circumstances, we consider it fair and appropriate to vacate the findings of the ld. CIT(A) and the matter is to be remanded to the AO to go into the matter afresh in the light of the observations made above and also in the light of the materials to be furnished by the assessee before him after notice. The AO is directed to pass a speaking order ,bringing out clearly the nature of construction, purpose of construction and the use to which construction is put besides recording his specific findings as to whether expenditure is revenue or capital or on current repairs, in the light of various judicial pronouncements, including those referred to above. With these observations, ground no. 2 in the appeal is disposed of.

 

13. No additional ground having been raised before us in terms of residuary ground no. 3 in the appeal, accordingly, this ground is dismissed.

 

14. No other plea or argument was raised before us.

 

15. In the result, appeal is allowed but for statistical purposes.

 

Order pronounced in open Court

 

                                                          Sd/-                           Sd/-

                                                   (C.M. GARG)          (A.N. PAHUJA)

                                          JUDICIAL MEMBER ACCOUNTANT MEMBER

 

Copy of the Order forwarded to:-

 

1. Assessee

2. Assistant CIT,Central Ci rcle-20,New Delhi

3. CIT concerned

4. CIT(Appeals)-I, New Delhi.

5. DR, ITAT,’H’ Bench, New Delhi

6. Guard File.

 

By Order,

Deputy/Asstt.Registrar

ITAT, Delhi

 

CS Bijoy
on 24 September 2012
Published in Income Tax
Views : 2202
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