Income Tax Appellate Tribunal - Chandigarh
Mohan Lal Syal, Chandigarh vs Assessee on 2 June, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL: "B" BENCH: CHANDIGARH
BEFORE SHRI D K SRIVASTAVA, AM AND Ms. SUSHMA CHOWLA, JM
ITA No. 1182/Chandi/2010
Assessment Year: 2006-07
Mohan Lal Syal v. Addl C.I.T. Range IV, Chandigarh
Helix Institute
SCO 343-345, Sector 34-A, Chandigarh
PAN: AJOPS 6791B
Appellant by: Shri Pankaj Jain, Advocate
Respondent by: Smt. Sarita Kumari, Departmental Representative
ORDER
D K Srivastava: The assessee is engaged in the business of coaching the students preparing for medical/engineering entrance tests, etc., on commercial lines. The assessee is also a franchisee of Akash Institute, Delhi. The assessee filed his return of income for the year under appeal on 30.3.2006 returning total income at Rs.1,84,16,327/-. Perusal of assessment order shows that a survey u/s 133A was carried out by the Department at the business premises of the assessee on 3.5.2005 during which the assessee surrendered a sum of Rs.25.00 lakhs on account of unexplained investment in purchase/construction of house property and further sum of Rs.10.00 lakhs on account of unexplained cash. The assessment was completed by the AO u/s 143(3) on 26.12.2008 assessing the total income at Rs.2,05,89,895/- after making certain additions/disallowances, which were challenged by the assessee before the first appellate authority, namely, the CIT(A). The additions/disallowances confirmed, on appeal, by the ld. CIT(A), by his appellate order dated 2.6.2010 are now subject matter of appeal before this Tribunal.
2. Ground No.1 taken by the assessee reads as under:
"1(a) Because the action in upholding the addition of Rs.5,52,554/- (timber Rs.2,00,554/- + carpenter Rs.3,5,2,000/-) is being challenged on facts and law and alternatively the quantum thereof too is disputed, since ever otherwise there being a misinterpretation and misapplication of law."
"(b) Alternatively for a direction to grant depreciation on the amount captalised."
3. Apropos ground No.1(a), the assessee was found to have purchased timber amounting to Rs.2,00,554/- and also incurred expenditure of Rs.3,52,000/- as wages paid to carpenter. On being called upon to explain the nature of work carried out by the assessee through the aforesaid expenditure, the assessee explained before the AO that the expenses were incurred to increase the size of class rooms so as to accommodate more students in the classes. On being further asked as to why the impugned expenditure should not be capitalized, the 2 Mohan Lal Syal, Chd. v. Addl. CIT ITA No.1182/Chandi/2010 assessee explained before the AO that the expenditure was incurred out of commercial expediency and therefore, it should be allowed as revenue expenditure. The AO was not satisfied with the aforesaid explanation. He Officer therefore disallowed the impugned expenditure. On appeal, the ld. CIT(A) confirmed the action of the AO with the following observations:
"8 After taking the rival contentions into consideration, I find that the appellant had mainly taken the plea that expenditure had been incurred due to commercial expediency and also relied upon the decision of National Diary Development Board (supra). I totally agree that commercial expediency is one of important factors for claiming any expense u/s 37(c) of Income-tax Act but one this test is passed, there are other issues to be sorted out in order to declared the nature of the expenses claimed. The most important test to be applied in my view is the nature of benefit being derived - whether enduring or not. The use of word "Repair & Maintenance" is not enough to treat the expenses as Revenue. The indicators laid down by various judgments are to be applied which the AO has very meticulously discussed in her order and all of these indicators have been duly applied to the instant case.
9 In the instant case, the appellant purchase wooden partitions which increased the length and width of rooms in order to accommodate more students resulting in more income. The benefit derived vide this expenditure is definitely enduring.
10 In view of the above discussion, I agree with the stand taken by the AO and confirm the addition of Rs.5,52,554/- made on account of capitalizing the expenditure of Rs.2,00,554/- (Purchase of timber) + Rs.3,52,000/- (Paid to carpenter), dismissing assessee's appeal on this issued."
4. Aggrieved by the order passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal. In support of appeal, the ld. counsel for the assessee submitted that a sum of Rs.2,00,554/- was paid to Kashmiri Lal & Sons for purchase of Timber and further sum of Rs.3,52,000/- was paid to Dinesh, carpenter, for creating structures of temporary nature to accommodate ever increasing number of students joining the assessee's institute for coaching. According to him, the creation/modification of existing class rooms would not lead to acquisition of any new capital asset or benefit of enduring nature and therefore the AO was not justified in treating the impugned expenditure as capital in nature. In support of his submissions, the ld. counsel for the assessee relied on a large number of English and Indian decisions which are as under:
1 CIT v. Portis & Spencer (A) Ltd, 257 ITR 49 (P & H) 2 Addl CIT v. India United Mills Ltd, 141 ITR 399 (Bom) 2 3 Mohan Lal Syal, Chd. v. Addl. CIT ITA No.1182/Chandi/2010 3 Kanpur Dyeing & Printing v. CIT, 75 ITR 686 (All) 4 Hanuman Motor Service v. CIT (Mys) 148 ITR 560 (Kar) 5 Sasson David and co. (P) Ltd v. CIT, 118 ITR 261 (S C) 6 Shahzada Nand and Sons v. CIT, 108 ITR 358 (S C) 7 National Dairy Development Board v. ACIT, 310 ITR 325 (Ahd) 8 CIT V. Swarashtra Cement & Chemical Industries Ltd, 91 ITR 170 (Guj) 9 Sarabhai Management Corp Ltd V. CIT, 102 ITR 25 (Guj) 10 CIT v. Sarabhai Management Corp Ltd., 192 ITR 151 (S C) 11 Taj Mahal Hotel v. CIT, 66 ITR 303 (A P) 12 British Insulated & Helsby Cables Ltd. v Atherton (1926) AC 205 (HL) 13 D.P. Chirania v. CIT, 112 ITR 12 (Kar) 14 Hindustan Machine Tools Ltd v. CIT, 175 ITR 220 (Kar) 15 Punjab State Industrial Development Corp Ltd V. CIT, 225 ITR 792 (SC) 16 Empire Jute Co. Ltd v. CIT, 124 ITR 1 (SC) 17 CIT v. Ashoka Leyland Ltd, 86 ITR 549 (SC) 18 B.W Noble Ltd. Mitchall, 11 Tax Cases 372 (CA) 19 Anglo Persian Oil Co. Ltd v. (1931) 16 Tax Cases 253 (C.A) 20 G. Scammeall and Nephew Ltd. v. Rowles (1940) I ITR (Suppl) 41 (C.A) 21 Bombay Steam Navigation co. (1953) Pvt Ltd. v CIT, 56 ITR 52 (S C) 22 State of Madras v. G.J. Coelho, 53 ITR 186 (SC) 23 Addl CIT v. Akkammba Textiles Ltd., 117 ITR 294 (A P) 24 Challapalli Sugars Ltd v. CIT, 98 ITR 167 (S C) 25 Sivakkami Mills Ltd. v. CIT, 120 ITR 211 (Mad) 26 Indian Cements Ltd v. CIT, 60 ITR 52 (S C) 27 CIT v. Shaw Wallace and Company, AIR 1932 PC 138 28 Van Den Berghs Ltd V. Clark, (1935) 19 Tax Cases 390
5. In reply, the ld. DR supported the order passed by the ld. CIT(A).
6. We have heard both the parties and carefully considered their submissions. It is not in dispute that the assessee has incurred the impugned expenditure amounting to Rs.5,52,554/- for creating/enlarging the size of class rooms so as to accommodate larger number of students. The assessee has shown the impugned expenditure as "repair and maintenance" in its accounts and claimed deduction in respect thereof as such before the AO. The short and simple issue is whether the impugned expenditure incurred by the assessee as "repair and maintenance" is eligible for deduction u/s 31(1) of the Income-tax Act.
7. In CIT v. Saravana Spinning Mills Pvt. Ltd, 293 ITR 201 (SC), the Hon'ble Supreme Court has held at pp.208-209 of the said Reports as under:
"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 3 4 Mohan Lal Syal, Chd. v. Addl. CIT ITA No.1182/Chandi/2010 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 "repairs" 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 of capital nature. 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."
8. In the same judgment, the Hon'ble Supreme Court has held at p. 213 of the said Reports as under:
"Before concluding, one aspect needs to be discussed. It was submitted on behalf of the assessees, in the present case, that although the assessees had claimed deduction u/s 31(i) they should be permitted to claim deduction u/s 37(1) as on the facts it has been held by the ld. CIT(A), Tribunal and the High Court that the expenditure was Revenue in nature. We find no merit in this contention. As stated above, even if the expenditure incurred is Revenue in nature, still it may not fall in the connotation of the words "current repairs" u/s 31(i) which test has not kept in mind. As held by Chagla C.J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd, 30 ITR 338 (Bom), all repairs do not attract section 31(i) even though the expenditure is Revenue in nature. Therefore, the basic test, which had not been applied, in the present case, by the Commissioner of Income-tax (Appeals), the Tribunal and the High Court is whether the expenditure came within the expression "current repairs". Instead all the three authorities proceeded on the footing that since the expenditure was revenue it constituted "current repair". It is 4 5 Mohan Lal Syal, Chd. v. Addl. CIT ITA No.1182/Chandi/2010 for this reason that we have interfered with the concurrent findings given by the ld. CIT(A), the Tribunal and the High Court."
9. A held in the aforesaid judgment, expenditure on repairs and maintenance can be allowed only if it is in the nature of current repairs and that the distinction between revenue expenditure and capital expenditure is irrelevant in the context of section 31(1). What is relevant is whether the expenditure in respect of which deduction is claimed by way of repairs and maintenance has been incurred to preserve and maintain an already existing asset. The impugned expenditure has been incurred to create/enlarge class-rooms to accommodate larger number of students and not to preserve and maintain already existing class rooms. In this view of the matter, the impugned expenditure cannot be said to be in the nature of current repairs and hence is not eligible for deduction u/s 31 even if it is in the nature of revenue expenditure. Ground No. 1(a) is dismissed.
10. Apropos ground No.1(b), the impugned disallowance made by the AO has been confirmed as the expenditure claimed is not in the nature of current repairs without going into the issue as to whether it is in the nature of revenue expenditure or capital expenditure as such classification is irrelevant for examining the claim u/s 31(1) in terms of the aforesaid judgment. We cannot therefore issue any consequential direction to the AO to allow depreciation as the allowability of depreciation depends upon the fulfillment of several conditions as laid down in section 32. Secondly, no such ground of appeal as taken before us was taken before the ld. CIT(A) and therefore the aforesaid ground does not arise out of the order of the ld. CIT(A). The assessee has not filed any application seeking admission of the aforesaid ground which is in the nature of altogether new ground of appeal. In this view of the matter, Ground No. 1(b) is dismissed in-limine.
10. Ground Nos. 2 and 3 read as under:
"2(a) Because the action in upholding the disallowance for business expenses Rs.1,31,670/- diwali expenses Rs.30,000/- is being challenged on facts and law without returning the findings on the business exigency and commercial expediency, importantly as "for the purpose of business or profession" as appearing u/s 37(1) of the Act. And even the allowance of the claim has to be from the view point, perception of on assessee not the Revenue department."
"(b) Alternatively and without prejudice to the above the quantum of disallowance is disputed."
"3(a) Because the action in upholding and restricting the disallowance for car/vehicle expenses Rs.1,28,284/- telephone and staff welfare expenses Rs.1,17,540/- to the extent of 1/5th is being challenged on facts and law 5 6 Mohan Lal Syal, Chd. v. Addl. CIT ITA No.1182/Chandi/2010 where by the jurisdiction Tribunal has consistently been restricting the said disallowance to the extent of 1/10th."
"(b) Even otherwise the Revenue respondent's pleading is that each year is separate year therefore, mechanical reliance on previous year assessment suffers from suffers from factually and legal infirmity which is even contrary to the decision of Hon'ble Jurisdictional High Court in the case of Chhat Mull Aggarwal v. C.I.T, 116 TR 694 (P & H)."
11. The aforesaid disallowance has been confirmed by the ld. CIT(A) with the following observations:
"18 I have considered the rival contentions. Though past history/conduct cannot become the basis for an addition in the current year, yet it cannot be totally ignored. Complete bills and vouchers have not been produced even at the appellate stage. It was important for the appellant to provide necessary evidence to substantiate the claim of these expenses. In the case of ACIT v. Niko Resources Ltd. (2009) 123 TTJ (Ahd) 310, the Hon'ble Tribunal held that "when the assessee has claimed deduction the onus heavily lies on him as held in the decisions referred to by him/it to substantiate its claim by producing necessary evidence in respect of such expenditure. The vouchers relating to these expenses were found to be kept in a very disorderly manner and it was found extremely difficult to hold that a particular expenditure and the purpose for which such expenditure was incurred was for business purposes. In such circumstances, the deduction in full cannot be allowed and the authorities below are justified in making partial disallowance out of such expenses.
19 In the case of Goodyear India Ltd v. ITO (ITAT Del) 66 TTJ 164, it was held that in the absence of full details or evidence even for a part of the year, assessee's claim for deduction of canteen expenses, sales and misc. expenses, sports expenses and incidental expenses cannot be accepted at the face value simply because there are no adverse comments from the auditors or no disallowance was made in the past.
20 In the instant case, in the absence of proper bills and vouchers, coupled with the assessee having agreed to these expenses in earlier years on account of thee being unvouched as well as because of personal element, I believe that the AO did not best he could i.e. reasonable disallowance from all these expenses. Agreeing with the AO's finding, the plea on these grounds is rejected, dismissing assessee's grounds of appeal."
12. Aggrieved by the order passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal. In support of the aforesaid grounds, the ld. counsel 6 7 Mohan Lal Syal, Chd. v. Addl. CIT ITA No.1182/Chandi/2010 for the assessee relied upon the submissions which were earlier made before the ld. CIT(A). According to him all the expenses are vouched and therefore the ld. CIT(A) should not have confirmed the disallowance.
13. In reply the DR supported the order passed by the ld. CIT(A).
14. We have heard both the parties and carefully considered their submissions. The ld. CIT(A) has confirmed the impugned disallowance for want of complete bills and vouchers. It is stated in para 18 of the appellate order passed by the ld. CIT(A) that 'complete bills and vouchers have not been produced even at the appellate stage". During the course of hearing before us, we called upon the assessee to show us the relevant vouchers in support of the impugned expenses. Though the assessee has filed voluminous paper-book containing 234 pages, the assessee could not invite our attention to any of the vouchers to support the impugned expenses. Both the Departmental authorities, namely, the AO and the ld. CIT(A), have concurrently recorded their findings that the impugned expenses are not supported by proper bills and vouchers. No material has been placed before us to rebut their findings in this behalf. However, the disallowance made by the AO and sustained by the CIT(A) is excessive and on higher side as compared to the total amount of expenditure claimed by the assessee as deduction and the possibility of some of them remaining un-vouched. In this view of the matter, the disallowance is restricted to 1/10th of the impugned expenditure. Ground Nos. 2 and 3 are partly allowed.
15. Ground No. 4 taken by the assessee reads as under:
"4(a) Because the action in upholding the disallowance for advertisement expenses amounting to Rs.3,50,000/- is being challenged on facts and law and alternatively the quantum thereof too is disputed."
"(b) Even otherwise the Revenue respondent's pleading is that each year is separate year therefore, mechanical reliance on previous year assessment suffers from factually and legal infirmity which is even contrary to the decision of Hon'ble Jurisdictional High Court in the case of Chhat Mull Aggarwal v. CIT, 116 ITR 694 (P & H)."
16. Briefly stated, the facts of the case are that the AO has disallowed Rs.3,50,000/- out of expenditure on advertisement on the ground that the assessee has not reduced the expenditure on advertisement by the amount of discount which is usually given by the advertising agencies to their regular customers. On appeal, the ld. CIT(A) has confirmed the aforesaid finding recorded by the AO.
17. In support of the aforesaid ground of appeal, the ld. counsel for the assessee submitted that the impugned expenses on advertisement are duly supported by bills and vouchers. According to him, he has filed the copies of bills 7 8 Mohan Lal Syal, Chd. v. Addl. CIT ITA No.1182/Chandi/2010 together with advertisements in the print media in support of his claim. He submitted that the assessee did not receive any discount from the advertising agencies and therefore the same was not shown by the assessee.
18. In reply, the ld. DR supported the order passed by the ld. CIT(A).
19. We have heard both the parties and carefully considered their submissions. The AO has not brought any material on record to establish that the advertising agencies had actually given discount to the assessee which the assessee has not taken into account while claiming the impugned expenditure or that it is customary for the advertising agencies to give such discounts to all the advertisers. The AO has brought no material on record to support his finding in this behalf. In this view of the matter, the impugned disallowance made by the AO and confirmed by the ld. CIT(A) is deleted. Ground No.4 is allowed.
20. Ground No.5 taken by the assessee reads as under:
"5 Because the action in upholding the disallowance for rent paid amounting to Rs.8,63,520/- by invoking Section 40(a)(ia) is being challenged on facts and law."
21. At the time of hearing, the ld. counsel for the assessee fairly stated that the assessee was statutorily obliged to deduct tax at source out of rent paid by him but it was not deducted at source by the assessee and therefore, the provisions of Section 40(a)(ia) were applicable. It was further submitted that tax out of rent was deducted at source in subsequent years though it was not so deducted at source in the year under appeal. Thus the admitted position is that the tax required to be deducted at source out of rent was not do deducted at source in the year under appeal. The deductibility of the impugned expenses is hit by section 40(a)(ia) and therefore the AO has rightly disallowed the impugned expenses, which, on appeal, has been correctly confirmed by the CIT(A). Ground No. 5 is dismissed.
22. Appeal filed by the assessee is partly allowed.
Order pronounced on 25 April 2011
Sd/- Sd/-
(SUSHMA CHOWLA) (D K SRIVASTAVA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Chandigarh: the 25 April 2011
SURESH
Copy to:
1. The Appellant, Mohan Lal Syal, Chandigarh
2. The Respondent, Addl C.I.T. Range IV, Chandigarh
3. The CIT(A), Chandigarh
4. The ld. CIT, Chandigarh
5. The D.R, Income-tax Department, Chandigarh By Order Assistant Registrar, ITAT, Chandigarh 8