Telangana & Andhra Pradesh H.C : Allowance of expenditure has to be limited under rule 6D with reference to the whole of the previous year and not by splitting up each trip of an employee

High Court Of Telangana & Andhra Pradesh

CIT Vs. Coromandel Fertilizers Ltd.

Section : 37(1)

Assessment Years 1975-76, 1985-86 To 1987-88

L. Narasimha Reddy And Challa Kodanda Ram, JJ.

Referred Case No. 13 Of 2000

June 12, 2014


L. Narasimha Reddy, J. – The respondent herein is an assessee. The assessments for the years 1975-76 and 1985-86 to 1987-88 came to be dealt with by the Income-tax Officer. He allowed certain deductions and disallowed some. Principal among the disallowed ones are (a) expenditure incurred for travelling of the employees for the purpose of business ; (b) expenditure incurred for wooden partition, electric wiring, power connection, interior layout and carpeting, etc., in the business premises ; and (c) the perquisites for each employee. Not satisfied with the order passed by the assessing authority, the respondent preferred an appeal before the Appellate Commissioner. On all the three aspects, referred to above, the appellate authority held in favour of the respondent. In the further appeal filed by the Department before the Tribunal, the view taken by the appellate authority was confirmed.

2. The Department submitted as many as seven questions for being referred to this court under section 256(1) of the Income-tax Act. After hearing both the parties, the Tribunal framed the following three questions and referred them to this court :

“1.Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that allowance of expenditure has to be limited under rule 6D with reference to the whole of the previous year and not by splitting up each trip of an employee ?

2.Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in allowing the expenditure of Rs. 22,39,868 under wooden partitions, electric wiring, power connections, interior layout and carpeting, etc., as revenue expenditure for the assessment year 1987-88 ?

3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in restricting the perquisite to Rs. 500 per employee as against Rs. 1,500 per employee considered by the Assessing Officer in respect of the free supply of gas, electricity, water, etc., amenities to the employees free of cost for the assessment year 1975-76 ?”

3. Learned standing counsel for the Department and the learned counsel for the respondent submit that the first question is covered by a judgment of a Division Bench of this court in CIT v. Coramandel Fertilisers Ltd. [1996] 220 ITR 298/86 Taxman 522. Incidentally, the respondent is a party to that case. We, therefore, answer the first question in favour of the Department and against the assessee.

4. Learned standing counsel for the Department submits that the expenditure incurred by the respondent for arranging wooden partitions, electric wiring, power connection, interior layout, carpeting, etc., has the effect of addition to enduring assets, and in that view of the matter, it ought to have been treated as a capital expenditure. It is pleaded that the respondent himself was clear on this aspect and claimed depreciation from the capital expenditure and that there was no justification for the appellate authority or the Tribunal in treating it as the revenue expenditure.

5. On the third question, learned standing counsel submits that the Tribunal did not address the question independently and stating that there is no authoritative precedent from the High Court or the Supreme Court, it just took into account, an order passed by it in the previous assessment year and answered it in favour of the respondent. He submits that questions Nos. 2 and 3 deserve to be answered in favour of the Revenue.

6. Learned counsel for the respondent, on the other hand, submits that the premises in which the respondent was conducting business and arranging the partitions and other amenities were taken on lease, and whether one takes into account, the temporary nature of the structures or the fact that the agency that arranged it was not the owner of the premises ; the inescapable conclusion is that the items were not enduring additions to the assets, and thereby the expenditure was not capital in nature. He submits that the Tribunal has taken into account the decided cases and arrived at a correct conclusion on this aspect. He further submits that in respect of the assessment of the respondent itself, in the previous assessment year, the question as to whether the perquisites for the employees must be fixed at Rs. 500 per employee or anything more, has been decided by the Tribunal itself and once the Department accepted that finding as final, it is not open to them to take a different view in the subsequent assessment year.

7. One of the most recurring questions in the field of income-tax is about the classification of an item of expenditure, as the revenue expenditure or capital expenditure. The expression is so typical and complicated that it is difficult to define it with an amount of certainty. Much would depend upon the facts and circumstances of the case in which the question arises. Instances are not lacking where the same item of expenditure would answer one description, if it is incurred by a particular category of persons and the other description, if the expenditure was in the hands of other persons.

8. For instance, if the owner of an immovable property incurs expenditure even for otherwise temporary structures or fixtures like partition, in his building, it is capable of being treated as capital expenditure, since the structure, though temporary would become part of the permanent asset, and thereby, becoming an enduring addition. In contrast, if the premises are taken on lease, and for better use thereof, the lessee makes certain arrangements such as making partitions or arranging electricity supply to suit the business needs, it may not be treated as addition of assets of enduring nature. The reason is that when the lessee vacates the premises, he would be at liberty to take away all the fixtures arranged by him, and in such event the fixtures cannot be treated as permanent assets, independent of the building. Similar instances can be cited.

9. The respondent in the instant case is a lessee of a building. The business premises naturally needed certain alterations and works of arranging partitions extending electricity supplies carpeting, wherever needed was arranged. Curiously enough, even while claiming that the expenditure is revenue in nature the respondent claimed depreciation on it. The assessing authority treated it as capital expenditure and has even allowed depreciation, in accordance with law.

10. The appellate authority discussed the question at length and allowed the appeal. The judgment of the Delhi High Court in Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 52/17 Taxman 172 was taken into account. The Tribunal confirmed the view taken by the appellate authority.

11. In CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/99 Taxman 575 (SC), the hon’ble Supreme Court gave certain guidelines for determining whether an item of expenditure can be treated as capital expenditure or revenue expenditure. As regards partitions and other arrangements, the Supreme Court expressed the view that the expenditure incurred therefor must be treated as revenue expenditure. The relevant paragraph reads (page 472) :

“In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction ? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure.”

12. Following the same, we answer the second question against the Department and in favour of the assessee.

13. The answer to the third question does not need much of discussion. The reason is that on the same aspect, in relation to the same assessee, i.e., the respondent, the issue arose for consideration before the Tribunal. By undertaking pointed discussion, the Tribunal upheld the view expressed by the appellate authority. It was held that the amount allowed towards perquisites can be Rs. 500 per employee and not more than that. It may be true that there was no binding precedent handed out by the constitutional courts. All the same, there is no reason why the Tribunal be not consistent with its own decisions.

14. We, therefore, answer the third question against the Department and in favour of the assessee.

The reference is accordingly answered.

[Citation : 367 ITR 132]

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