Income Tax Appellate Tribunal - Agra
Agra Colour Lab (P) Ltd. vs Ito on 27 August, 2002
Equivalent citations: (2004)86TTJ(AGRA)836
ORDER
N.K. Karhail, J.M. This appeal of the assessee is directed against the order dated 10-10- 1994, passed by the Commissioner (Appeals)-II, Agra for assessment year 1990-91.
2. The effective ground of appeal states :
"Because assessee- company carries on the business under rented premises for the purpose of running business, the company spent some amount aggregating to Rs. 80,656 on repairing the furniture, replacement of old wooden racks and false ceiling etc. The vouchers for all these are available. They were in the nature of replacement of repairs and not the capital expenditure. Learned Commissioner (Appeals) have erred in treating this expenditure as capital expenditure and has thereby erred in adding the same to the book profits for the purpose of applying 115J of the Indian Income Tax Act."
3. Briefly stated the facts of the case are that the assessee- company derived income from the business of processing of colour films and printing of colour photographs. The company was incorporated with effect from 21-6-1988, when the main object being to take over as running concern along with all assets and liabilities and the business of M/s Agra Colour Photo Lab on 1-4-1990. The company took over the aforesaid firm vide duly executed agreement dated 1-4-1992. The assessee was required to explain the reasons as to why the expenses amounting to Rs. 80,655.85 debited to P&L a/c and treated as revenue expenditure, may not be disallowed because the expenditure as per report of the audit appeared to be a capital in nature. The assessee filed its written reply. The assessing officer observed that on perusal of the P&L a/c and audit report of the CA, it was noticed that an amount of Rs. 80,655.85 was debited to the P&L a/c. It was a capital expenditure as mentioned by the auditor also in his report. It would be added to the total profit of the assessee for working out the assessable income of the assessee as per provisions of section 115J. Thereafter, the assessing officer proceeded to compute the total income of the assessee- company wherein he added the sum of Rs. 80,655.85 treating the same as capital expenditure. The assessing officer further mentioned that the assessee was required vide letter dated 2-9-1992, to explain the reasons why the profit as per provisions of section 115J may not be worked out. The assessee, however, did not furnish any rely to the said query. Thus, the assessing officer observed that as per provisions of section 115J, the profit at 30 per cent of the book profit before taxation would be taken for assessment purposes as the income assessed in the case of the assessee was less than 30 per cent of the book profit. He has further mentioned that it would be seen that the assessee had debited Rs. 80,656 of capital nature in the P&L a/c Thus, this also is to be added back to the total book profit of the assessee for working out the taxable income of the assessee as per provisions of s.115J, which was worked out as under :
Net Profit shown before taxation Rs. 8,42,002 Add : Expenditure of capital nature debited to Rs. 80,656 P&L a/c as discussed above in the body of order.
30 per cent of Rs. 9,22,658 Rs. 2,76,797 Thus, 30 per cent of the book profit worked out by the assessing officer came to Rs. 2,76,797 3.1 Being aggrieved, the assessee preferred appeal before first appellate authority. After considering the submissions, the Commissioner (Appeals) has held, thus "The submissions filed have been considered. It is found that the expenditure incurred on false ceiling is necessarily of capital nature as the same would provide enduring benefit to the assessee under the profits and section 11 5J have to be computed to accordance with Part-II and III of the Sixth Schedule of the Companies Act, 1956, which do not provide for deduction in respect of capital expenditure from the P&L a/c. Therefore, the assessing officer is found to have worked out the profits under section 115J correctly and no interference is called for in the same."
3.2 Before us, the learned counsel for the assessee has submitted that the assessing officer has worked out the book profit for the purpose of section 115J at Rs. 9,22,658 whereas the book profits shown from accounts was only Rs. 8,42,002. He, thereafter, added Rs. 80,656, alleged to be expenditure of capital nature debited in P&L a/c and computed the book profit at Rs. 9,22,658 and, thereafter, computed 30 per cent of the profit at Rs. 2,76,797 and made the assessment on an income of Rs. 2,76,797. The learned counsel has submitted that the sum of Rs. 80,656 was debited to P&L a/c for expenditure incurred on false ceiling, wooden partition, panelling etc. and the said expenditure has been incurred in a rented shop, therefore, the same cannot be termed as capital in nature. While referring to the provisions of section 115J, the learned counsel has submitted that the book profit means the net profit as shown in the P&L a/c for the relevant previous year, prepared under sub-section (1A) of section 116J. Thereafter, this section mentions the items which are to be added for the purpose of adjustment to arrive at the book profit and it further goes to mention the items which are to be deducted for the purposes of arriving at the book profit according to section 115J of the Income Tax Act. He has emphasized that in none of the clauses mentioned in section 115J for making addition to the book profit there is mention of any adding back of any item alleged to be of the capital nature. He has submitted that the book profit for the purpose of section 115J is to be computed only with reference to section 115J itself and not from any other section of Income Tax Act, consequently the addition of Rs. 80,656 made by the assessing officer for arriving at the book profit treating the same as capital expenditure is unwarranted and cannot be made under law. Thus, the adoption at Rs. 2,76,797 made by the assessing officer, is incorrect and it should be 30 per cent of Rs. 8,42,002. Hence, he has urged that the addition made on this account by the assessing officer may be deleted. The learned departmental Representative on the other hand, has submitted that the expenses of Rs. 80,656 debited to P&L a/c represented renovation and cost on temporary partition. Thus, the same are capital in nature. She has further submitted that the book profit has been worked out by the assessing officer as per provisions of section 11 5J, of the Act. Thus, she has supported the order passed by Commissioner (Appeals).
4. We have heard the parties and perused the records of the case. According to section 115J(1), in the case of an assessee, being a company, if the total income of the previous year is less than 30 per cent of its book profit, then, the total income of such company shall be deemed to be an amount equal to 30 per cent of such profit, and such income shall be chargeable to tax. The assessee has to first compute the total income in accordance with the Income Tax Act and if the total income is less than 30 per cent of the book profit, then, it has to prepare a P&L a/c under section 115J(1A) for the relevant previous year in accordance with the provisions of Parts-II and III of Sch. VI to the Companies Act. The book profit as so arrived at, as per the P&L a/c under the Companies Act shall be adjusted by addition of the various amount enumerated under clauses (a) to (ha) of the explanation to section 115J(lA) and reduce by the amounts mentioned under cls.- (i) to (iv) of the Explanation. It would appear that in the first process, the assessing officer has to determine the income of the company as per provisions of Income Tax Act. The assessing officer, in the instant case, while computing the income of the assessee- company under the Income Tax Act, has disallowed the expenditure incurred by the assessee on -false ceiling etc. treating the same as of capital in nature. It is seen that as per audit report, the shop where the expenditure has been incurred, is rented shop'of the assessee. The expenditure incurred by the assessee on the false ceiling of the rented shop cannot be termed as capital in nature. The issue whether the expenditure incurred on repair or alteration of rented premises should amount to revenue expenditure or capital. expenditure, came up for consideration before, the jurisdictional High Court in the case of Girdharilal & Sons v. CIT 1975 CTR (A.U) 156 : (1976) 105 ITR 339 (All) wherein the court has held that the expenditure incurred by the assessee on renovating, furnishing or remodelling the rented business premises can be allowed under section 37 if the expenditure is not of a capital nature. The expenditure incurred for the purpose of renovating the rented premises may, therefore, be held to be the revenue expenditure. In view of the decision of the jurisdictional High Court as aforesaid, the expenditure incurred by the assessee on false ceiling etc, cannot be termed as capital in nature but would be of revenue in nature. Hence, the assessee would be legally entitled to claim deduction in the computation of his income. Thus, we hold that the assessing officer was not justified to disallow the same while computing the income of the assessee under the provisions of Income Tax Act. Further it is to be mentioned that after completion of first process as aforesaid for determination of income under the provisions of Income Tax Act, the second process has to be adopted to work out the book profit in accordance with the explanation of section 115J(1). It is seen that net profit as shown in the P&L a/c relevant for the previous year, prepared under sub-section (1A) will be increased by income-tax paid or payable under the provisions thereof, amount carried,to any reserve, the provisions made for liabilities other than certain provisions of losses of subsidiary company, etc. if the amounts are debited to the P&L a/c. Thus, the expenditure incurred on false ceiling did not fall in any of these categories. Therefore, the assessing officer was not justified to make further addition of Rs. 80,656 while porking out the total book profit of the assessee. In view thereof, we are of the view that the impugned order is not legally sustainable. We, therefore, quash the same.
5. In the result, the appeal of the assessee is allowed.