By TIOL News Service

NEW DELHI, MAR 09, 2017: THE issue is - Whether Explanation (1) to Section 32 (1) (ii) can be attracted to leasehold expenditure incurred by a resort business on improvement of its infrastructure. NO is the answer.

Facts of the case:

The assessee is engaged in the business of hospitality and runs resorts and restaurants at Gurgaon. A survey was conducted u/s 133A in the case of V Ltd and certain incriminating documents were impounded during the survey. During the course of the survey the documents in hard disk relating to assessee were also required to be explained. It was noted that the assessee had capitalized leasehold expenses and claimed depreciation in the books of accounts as per the companies act. In the original return, assessee claimed it is a capital expenditure but in the revised return of the income the assessee changed its opinion and claimed it as revenue expenditure. Assessing officer noted that the leasehold improvements involve fabrication of workstations, electric installations, furniture and fittings, which obviously have higher expenses, then the expenses on dustbins, quilt, mattress fabric and stitching etc were incurred. He further held that expenditure were incurred on account of civil, plumbing and H AVC - Pune and Hyderabad. He further held that assessee had not furnished the details to explain the nature of leasehold expenses and no evidences were filed to substantiate it as revenue expenditure. He held that expenses are capital expenditure and he disallowed the same.

On appeal, the ITAT held that,

++ where the business or profession of the assessee is carried on in a lease premises then if any capital expenditure is incurred by assessee for the purpose of business which are on construction of structures, or doing of any work by way of renovation or extension of or improvement to the building then only such expenditure would be considered as building owned by the assessee and depreciation thereon will be allowed. Explanation 1 to section 32(1)(i) of the Income-tax Act, 1961, does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, such expenditure has to be mandatorily treated as capital expenditure. The Explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of section 32(1) shall be applicable as if the structure or work is a building owned by the assessee. The words "any capital expenditure" used in Explanation 1 to section 32(1) indicate that the legal fiction has to be read when any capital expenditure is incurred. Thus whether any capital expenditure has been incurred is a question, which has to be decided on the basis of the facts of each case and relevant tests applicable. Explanation 1 cannot be read to mean that when works mentioned therein are carried out by the assessee, it shall be treated as capital expenditure. Explanation 1 however shall be attracted when expenditure is treated as capital expenditure. The use of the word "any" before capital expenditure emphasizes that the provision is attracted when there is any capital expenditure. Unless there is a capital expenditure incurred by the assessee the provisions of explanation (1) to section 32 (1) (ii) cannot be attracted;

++ the bills do not suggest nature of expenditure incurred. To determine whether it is revenue expenditure the onus would be higher on the assessee to prove it when it has capitalized the same in books of accounts and accepted by the shareholders and auditors. It can be very well done by producing the exact nature of work done with maps and plans, report of the architect, tender or order to the contractor, etc. and many more things. Merely because the permission has not been obtained from the corporation does not prove that expenditure is of revenue nature. Further details of such expenditure has not at all been verified by the CIT (A) who has simply applied the provisions of explanation 1 to section 32 (1 ) (ii) to negate the claim of the assessee and or by the assessing officer who simply submitted before the CIT A that the issue is purely legal in nature that is the issue of capital expenditure revenue expenditure and may be adjudicated by the CIT appeal himself. During the course of assessment proceedings the assessee did not furnish the complete details despite enough opportunities. Issue remitted to the file of the CIT A to decide the issue afresh after examining the relevant evidence.

(See 2017-TIOL-278-ITAT-DEL)