Expenditure Incurred By Way Of Addition To Buildings, Electrical Fittings On Leasehold Premises Is Capital Expenditure: Kerala High Court
The Kerala High Court has held that the expenditure that was incurred by the appellant/assessee by way of addition to buildings and electrical fittings on leasehold premises was in the nature of capital expenditure and not revenue expenditure.The bench of Justice Dr. A.K. Jayasankaran Nambiar has observed that the assessing authority and the First Appellate Authority have clearly relied on...
The Kerala High Court has held that the expenditure that was incurred by the appellant/assessee by way of addition to buildings and electrical fittings on leasehold premises was in the nature of capital expenditure and not revenue expenditure.
The bench of Justice Dr. A.K. Jayasankaran Nambiar has observed that the assessing authority and the First Appellate Authority have clearly relied on the written submissions given by the assessee to find that the nature of the expenses incurred by the assessee was capital in nature. Neither in the grounds of appeal before the First Appellate Authority nor before the Tribunal was there any material produced by the assessee to show that the expenses incurred by them were revenue in nature. If the assessee had in fact a case that the expenditure incurred by it was revenue in nature, then it was for the assessee to produce materials that would clearly demonstrate that the expenditure was revenue in nature.
The appellant/assessee has challenged the order of the Income Tax Tribunal that was passed in relation to the appellant for the assessment year 2009–10. The Appellate Tribunal had affirmed the order of the Assessing Authority as well as the First Appellate Authority that disallowed a claim for an amount of Rs. 101.87 lakhs as revenue expenditure. According to the Assessing Authority and the First Appellate Authority, the expenditure that was incurred by the appellant/assessee by way of addition to buildings and electrical fittings on leasehold premises was in the nature of capital expenditure and not revenue expenditure.
The issue raised was whether the claim by the appellant/assessee of an amount of Rs. 101.87 lakhs as revenue expenditure is allowable or not.
The Assessing Authority, as well as the First Appellate Authority, while considering the claim of the appellant/assessee, found that based on the description of the expenditure as given by the appellant/assessee, the expenditure was more in the nature of capital expenditure and not revenue expenditure, and hence, the appellant could not claim these expenses as revenue expenses for the assessment year in question. The alternate claim of the appellant or assessee to permit them to claim depreciation to the prescribed extent in respect of the said expenditure incurred by them was, however, allowed by the said authorities.
The appellant contended that the Appellate Tribunal merely went by Explanation-1 to Section 32(1) of the Income Tax Act and presumed that the expenditure incurred by the appellant/assessee was capital expenditure incurred on a lease building, which had to be capitalized and only depreciation would be allowed.
The department contended that the Tribunal has merely affirmed the orders of the Assessing Authority and the First Appellate Authority. The orders of the Assessing Authority and the First Appellate Authority clearly discuss the claim made by the assessee and find that, based on the description of the expenses as given by the assessee, the expenses had to be treated as capital expenditure and not revenue expenditure. The Tribunal had in fact endorsed the findings of the authorities below, based on facts, as regards the nature of expenses incurred by the assessee, and it did not mechanically apply the provisions of Explanation 1 to Section 32(1) of the Income Tax Act.
As per Section 32(1) of the Income Tax Act, depreciation should be computed at the prescribed percentage on the written-down value (WDV) of the asset, which in turn is calculated with reference to the actual cost of the asset.
The court, while ruling in favour of the department, held that the applicability of Explanation -1 to Section 32(1) of the Income Tax Act has to follow an independent finding by the Assessing Authority on whether the expenditure incurred by an assessee is capital or revenue in nature.
Counsel For Appellant: Abraham Joseph Markos
Counsel For Respondent: Jose Joseph
Citation: 2024 LiveLaw Ker 312
Case Title: Hotel Allied Trades Pvt. Ltd Versus The Additional Commissioner Of Income-Tax
Case No.: ITA NO. 7 OF 2023