Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income-Tax vs Nirmal Warehousing Agency on 1 February, 2000
ORDER
M. V.R. Prasad, A.M.
1. This appeal is directed against the order of the CIT (Appeals) dated 20-6-1994 for the assessment year 1988-89.
2. The ground taken reads as follows :--
"1. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in directing to treat the expenses of Rs. 7,85,866 made on premises as repairs and alterations in the form of replacing roof, new columns, demolition of old walls as revenue expenditure, without appreciating the facts and the circumstances on which the findings of Assessing Officer in the assessment order treating the said huge amount of repairs as capital expenditure was based and is well supported in the decided cases of M/s. Humayun Property Ltd. v. CIT [1962] 44 ITR 73 (Cal.)."
3. The assessee-firm is a tenant of a property belonging to M/s. Bombay Cotton Mills Estate (P.) Ltd. at Kalachowki, Bombay. The total built-up area in the possession of the assessee was 5,200 sq. ft. It was being used for carrying on the warehousing business of the assessee. The premises were owned and in the year of account relevant for the assessment year 1988-89, the assessee incurred an expenditure of Rs. 7,85,866 towards making the premises suitable for being let out to Dena Bank for conducting its banking business. Regarding the nature of the expenditure involved, the assessee vide its written submissions filed before the CIT (Appeals) mentioned as follows :--
"Before the block was sub-leased to Dena Bank, the premises were not in a good condition. In order to suit the requirements of Dena Bank, certain alteration and repair work was done. In brief, the work done was as under:
(a) The existing roof had a North light structure. This roof was replaced by a flat roof of pre-cast hollow concrete slab. The existing supporting columns for the roof were replaced by new columns duly reinforced for support.
This was the major job to be done.
(b) The existing walls inside the premises were demolished. A new brick wall was constructed for segregating the property between the area occupied by the Bank and the area retained by the appellant firm. The existing lofts were demolished. The walls on the four sides were replastered and restrengthened.
(c) The existing tanduri floor was removed and re-levelled. Mosaic tiles were laid.
(d) Toilets were provided grills were provided for windows, shutters were provided for doors etc. The cost of the above work was approximately as under:
(a) Rs 4,76,600 Approximately.
(b) Rs. 1,34,400 Approximately.
(c) Rs. 1,00.000 Approximately.
(d) Rs. 75,000 Approximately.
Rs. 7,86,000 Approximately.
The details of the work done are contained in the scope of work. (page 15 of the Compilation).
The major portion of the work was done by Vishal Construction Co. The total cost of the work was Rs. 7,85,866. This was accordingly written off in the accounts as Repairs and Maintenance."
The further details said to have been enclosed with the compilation filed before the CIT (Appeals) and placed at page 15 have not been filed before us.
4. A copy of the deed under which the premises were sub-leased to Dena Bank has been filed before us and this indenture is dated 18-4-1993. The deed under which the assessee-firm obtained the said premises from M/s. Bombay Cotton Mills Estate (P.) Ltd. has not been filed before us, even though we specifically wanted it. The Assessing Officer described the expenditure of Rs. 7,85,866 as having been incurred towards the renovation of the premises and concluded that the expenditure is of the nature of a capital expenditure and so added back the amount in the computation of the total income of the assessee-firm. His remarks in this context arc as follows :--
"2. Assessee has debited a sum of Rs. 7,85,866 in P & L A/c. as 'repairs and maintenance'. On further enquiry, it was found that this payment has been made to a contractor for renovating the premises of assessee, which the assessee has subsequently given to 'Dena Bank' on rent. Since this renovation has been made, assessee has started earning substantial rental income from this premises. Assessee has a lease agreement with 'Dena Bank'. Assessee has taken loan from this bank for renovating the premises at Bombay Cotton Mills Estate, Kalachowki, Main Road, Bombay-400033 at a rate of Rs. 16 per sq. ft. The area of this premises is 3000 sq. ft. For a premises admeasuring 3000 sq. ft. the payment made to contractor is Rs. 7,85,866. Hence, payment has been made to the contractor for these premises at a rate of Rs. 262 per sq. ft. From any standard, this payment is as good as constructing a new building. For earning Rs. 192 (16 X 12} assessee will not spend Rs. 262 for repairs and maintenance. From any standard, payment to contractor is a capital expenditure which is in the nature of investment for enduring benefits. Assessee has received substantial gain in his rental income. From Rs. 18,000 annual rental income. assessee will be receiving Rs. 5,76,000 annual rental income in future. It clearly shows that the renovation is in the nature of enduring benefit. Hence, I disallow the sum of Rs. 7,85,866 debited as repair and maintenance in the P & L Account and consider the same as a capital expenditure."
The CIT (Appeals), however, allowed the contention of the assessee that the expenditure in question is of a revenue nature on the ground that the assessee-firm had only undertaken repair work and as it did not own the premises but only held them as lease, the expenditure was allowable as a revenue expenditure. For this proposition, he relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. Dewar's Garage (India) (P.) Ltd, [1993] 204 ITR 763.
5. Before us, the learned Departmental Representative pleaded that the assessee held the premises on a perpetual lease taken from M/s. Bombay Cotton Mills Estate (P.) Ltd. and that the assessee was receiving a meagre income by letting it out as a warehouse and it derived an enduring advantage by incurring the said expenditure of Rs. 7,85,866 as this resulted in the conversion of the premises into a building suitable for the conduct of banking operations and consequently the assessee could let out to the bank at a substantial rent of Rs. 5,76,000 per annum, whereas in the earlier years it was deriving a meagre income of Rs. 18,000 per annum. In support of his contentions, he relied upon the following decisions :--
(1) Uttar Bharat Exchange Ltd v. CIT [1965] 55 ITR 550 (Punj.);
(2) Silver Screen Enterprises v. CIT [1972] 85 ITR 578 (Punj.);
(3) CIT v. Menora Hosiery Works (P.) Ltd. [1977] 109 ITR 714 (Bom.);
(4) CIT v. Vasant Screens [1980] 124 ITR 835 (Bom.);
(5) Ballimal Naval Kishore v. CIT [1997] 224 ITR 414 (SC).
6. The learned counsel for the assessee on the other hand mentioned that the expenditure is only of the nature of repairs and not of renovation and that it has to be allowed as a revenue deduction in view of the ratio of the following decisions :--
(1) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC);
(2) CIT v. Chowgule & Co. (P.) Ltd. [1995] 214 ITR 523 (Bom.);
(3) Standard Mills Co. Ltd. v. CIT [1990] 181 ITR 233 (Bom.);
(4) CIT v. Oxford University Press [1977] 108 ITR 166 (Bom.);
(5) Dewar's Garage (India) (P.) Ltd. 's (supra);
(6) CIT v. Bharat Suryodaya Mills Co. Ltd. [1993] 202 ITR 942 (Guj.);
(7) CIT v. Cominco Binani Zinc Ltd. [1993] 204 ITR 56 (Cal.);
(8) CIT v. N.P. Singh [1994] 207 ITR 183 (Pat.);
(9) CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC);
(10) CIT v. Excel Industries Ltd. [1980] 122 ITR 995 (Bom.);
(11) National Organic Chemical Industries Ltd. v. CIT [1993] 203 ITR 410 (Bom.).
7. We have perused the above decisions. As already mentioned, we required the learned counsel for the assessee to produce the original lease deed entered into by the assessee-firm with M/s. Bombay Cotton Mills Estate (P.) Ltd. However, while the assessee chose to file the sub-lease agreement entered into with Dena Bank, it did not file the original lease agreement with M/s. Bombay Cotton Mills Estate (P.) Ltd. In the face of the failure of the assessee to have filed the original lease agreement with M/s. Bombay Cotton Mills Estate (P.) Ltd., we have to infer that the assessee held the premises in question on a perpetual lease or a long-term lease for 99 years. Actually, the learned counsel for the assessee mentioned in the course of the hearing that his contention is not that the expenditure in question has to be treated as of revenue nature because the assessee held the premises on leasehold basis but because the expenditure inherently is of a revenue nature, irrespective of the fact whether the premises are held as leasehold or freehold. He, however, mentioned that the Assessing Officer was not correct in holding that the expenditure of Rs. 7,85,866 was spent only on the area of 3,000 sq. ft., which was subleased to Dena Bank, but was incurred on the entire premises of 5,200 sq. ft. held by the assessee. At our instance, the learned counsel for the assessee has also filed a statement of the income received on letting out of the premises for warehouse purposes in the earlier four years. The details are as follows :--
Financial Year Income 1983-84 Rs. 66,000 1984-85 Rs. 43,000 1985-86 Rs. 18,000 1986-87 Rs. 18,000.
He has also filed copies of the profit and loss account of the assessee for the above four years and we find that the total expenditure debited in the profit and loss account was as follows :--
Financial Year Expenditure 1983-84 Rs. 25,260 1984-85 Rs. 17,500 1985-86 Rs. 15,088 1986-87 Rs. 23,571.
The book profits distributed among the four partners in the above years were as follows :
Financial Year Amount 1983-84 Rs. 40,740 1984-85 Rs. 25,500 1985-86 Rs. 2,912 1986-87 Rs. 5,571 (Loss).
8. In the light of the above factual position, we are of the view that the Department deserves to succeed in its contention that the expenditure of Rs. 7,85,866 is on capital account. For the reasons mentioned above, we have to hold that the assessee held the premises on a long-term lease.
The expenditure of Rs. 7,85,866 has been incurred to convert the premises fit for banking operations. Earlier, it could be used only for warehousing purposes. Because of the improvement in the nature of the premises, the assessee could get a substantial rental income of Rs. 5,76,000 per annum from Dena Bank while it could gel only Rs. 18,000 per annum in the earlier years as observed by the Assessing Officer. New walls were erected after the dernolition of the existing walls. New roof was put up and toilets etc., were furnished and even the existing columns were reinforced for support. We cannot ignore the substantial spurt in the expenditure in the year. We are of the view that the decisions cited by the learned counsel for the assessee are all distinguishable, inclusive of the decision of the Hon'ble Calcutta High Court in the case of Dewar's Garage (India) (P.) Ltd. (supra). In this case, the Municipal Corporation gave a notice for demolition and so the lessee had to incur the expenditure and there is also a finding that the expenditure is in the nature of repairs. There is no such statutory necessity for the assessee to have incurred the expenditure of Rs. 7,85,866 and we arc also of the view that it is not in the nature of repairs. On the other hand, it partook of the nature of the remodelling, renovation and reconstruction. The issue, to our mind, is squarely covered, as contended by the learned DR, by the decision of the jurisdictional High Court in the case of Vasant Screens (supra). In this case, the assessee converted a godown into a cinema theatre just like the assessee-firm in the present case has converted the premises from a warehouse to a bank. The learned counsel for the assessee sought to distinguish the case considered by the Hon'ble Bombay High Court on the ground that in that case the premises are owned by the assessee, whereas in the present case, they are held on lease. This contention, of course, goes contrary to the earlier stand of the learned counsel for the assessee before us that he was not relying upon the fact that the premises were held on lease. Be that as it may, we find that even in the case considered by the Hon'ble Bombay High Court, the premises were held only on lease and they were not owned by the assessee. We also find that the decision of the Apex Court in the case of Ballimal Naval Kishore (supra) goes against the assessee as in this case extensive repairs to the structure of the building was held not to be of the nature of current repairs or deductible expenditure.
9. In the circumstances, we set aside the order of the CIT (Appeals) and restore that of the Assessing Officer. However, we have to give one consequential relief to the assessec, i.e., that the assessee may be granted depreciation on the capitalised expenditure of Rs. 7,85,866 as per law. Subject to this direction, the appeal is allowed.