Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Ferragamo Retail India Pvt. Ltd., ... on 31 July, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'C', NEW DELHI
BEFORE SH. I.C. SUDHIR, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No. 5041/Del/2014
Assessment Year : 2010-11
DCIT, Circle -11(1), New Delhi Vs. M/s. Ferragamo Retail India
Pvt. Ltd., Suite -118, 1st Floor,
Rectangle One Mall Saket
District Centre, New Delhi
PAN : AACCN5467B
(Appellant) (Respondent)
Appellant by Sh. R.C. Danday, Sr. DR
Respondent by Sh. S.P. Singh, AR; Sh. Yishu Goel, AR
and Ms. Kanika Puliani, AR
Date of hearing 20.06.2017
Date of pronouncement 31.07.2017
ORDER
PER O.P. KANT, A.M.:
The present appeal by the Revenue is directed against the order dated 25.06.2014 of learned CIT(A)-XIII, Delhi for assessment year 2010-11, raising the following grounds of appeal:
"1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.64,83,325/- made on account of lease rent expenses.
2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing of this appeal.2 ITA No. 5041/Del/2014
It is prayed that the order of the learned CIT(A)-XIII, New Delhi being contrary to the facts on record and the settled position of law, be set aside and that of the Assessing Officer be restored."
2. Briefly stated facts of the case are that the assessee company is engaged in the business of luxury retailing of produces like shoes, knitwear, ready to wear, handbags, ties, belts, small leather goods etc. under the brand Salvatore Ferragamo. The assessee company filed its return of income declaring loss of Rs,.7,23,79,616/-. The case was processed under Section 143(1) of the Income-tax Act, 1961 (for short "the Act") and was selected for scrutiny. During the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs.68,70,361/- under the head 'repairs and maintenance'. The Assessing Officer observed that these expenses were related to common area development charges, repairs of store, housekeeping staff at warehouses etc. The expenses were made towards repair and maintenance, hence the entire expenses claimed by the assessee as revenue in nature cannot be accepted and the same has to be capitalized for the purpose of allowability of depreciation under the Income Tax Act. Consequently, the Assessing Officer allowed depreciation on repairs and maintenance @ 10% which worked out at Rs.6,87,036/- and balance amount of Rs.64,83,325/- was disallowed and added back to the total income of the assessee. Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who deleted the addition of Rs.68,70,361/-. Aggrieved, the Revenue is in appeal before us.
3. The Sr. Departmental Representative relied on the order of the Assessing Officer and submitted that the learned CIT(A) has wrongly deleted the addition of Rs.64,83,325/- made on account of lease rent expenses.
3 ITA No. 5041/Del/20144. Learned counsel for the assessee company filed its written submission, wherein it submitted as under:
"a) Section 37(1) of the Act provides that:
"Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession."
Therefore, only those expenses are allowed as deductions which are:
- Not in the nature of capital expenditure
- Not in the nature of personal expense
- Laid out or expended wholly and exclusively for the purposes of the business or profession.
b) The expenditure incurred by the assessee is of maintenance nature, as can be seen from Annexure 1 and the same, can by no stretch of imagination, be said to be a capital expenditure.
c) The principles that emerge from landmark decisionsof Apex Court to decide whether the expenditure is capital or revenue in nature are summarized below:
1. Expenditure for initiation, extension or substantial replacement of existing assets is to be treated as capital expenditure.
2. Where expenditure brings into existence any asset or an advantage of enduring benefit to appellant, it is to be treated as capital in nature.
3. If expenditure was wholly incurred to carry out business operations of appellant in efficient and profitable manner, leaving the fixed capital of business untouched than expenditure is to be treated as revenue expenditure.
4. The quantum of expenditure is not determinative of the nature of expenditure.
The summary of key decisions relied upon by the respondent are attached as Annexure 2 Considering the above principles, it is submitted that the expenditure under consideration be allowed as business expenditure under section 37 of the Act since the expenditure was incurred towards the following:
- Common area maintenance charges for usage of list, staircase, housekeeping, security, lighting, cleaning and maintenance in common areas
- Electricity, fax, telephone, car-parking charges etc.
- Warehouse charges, Agency fee, documentation fee and manpower charges
- Alteration, tailor, laundry charges etc.
- Housekeeping/ security staff charges for the stores 4 ITA No. 5041/Del/2014 It is submitted that as can be seen from the nature of expenses mentioned above, such expenditure is revenue in nature and no enduring benefit can be derived therefrom.
d) It is further submitted that the expenditure of capital nature has already been capitalized under the head 'leasehold improvements', appearing in schedule C of the financial statements (refer page 30 of the paperbook).
e) The claim of the respondent has never been questioned in any other assessment year i.e. the respondent has always been allowed repairs and maintenance expenditure in all the assessment years, prior to the relevant assessment year as well as in subsequent assessment years.
In this regard, it is respectfully submitted that in income tax proceedings, though the principle of res judicata does not strictly apply, yet rule of consistency does apply, i.e. if no fresh facts come to light on investigation, a finding arrived at in a subsequent year ignoring the conclusion arrived at earlier would be vitiated in law.
In this regard, attention is invited to the decision of the Apex Court in the case of Radhasoami Satsang vs. CIT: 193 ITR 321, wherein it has been held that where a fundamental aspect permeating through the different assessment years is accepted one way or the other, a different view in the matter is not warranted, unless there be any material change in facts. The relevant observations of the judgment are reproduced as under: (refer para 13 - page 70 of case law paperbook) "We are aware of the fact that, strictly speaking, res judicata does not apply to income- tax proceedings. Again, each assessment year being a unit what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one wav or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year, "(emphasis supplied) Further reliance is also placed on the decision of Ahmedabad Bench of Tribunal in the case of DCIT vs. Shyamdatt Jaydatt Dhariyal: 49 taxmann.com 58 (2014), wherein the Tribunal held as follows: (refer para 4 - page 75 of case law paperbook) "although the similar kind of expenditure was incurred in the subseauent year, the Assessing Officer had chosen not to make any addition in that year. It is true that the principle of res judicata does not apply on tax proceedings but in a situation when the facts are identical, then it is expected from the revenue to have a consistent approach during the finalization of the assessment. Otherwise also, it is not open to the revenue to keep on changing its stand in respect of the same nature of transaction. A consistent approach in turn gives confidence in the mind of taxpayers."
f) The Ld. AO has stated that the expenditure on repair and maintenance consists of substantial value and therefore the same should be capitalized. In this regard, we 5 ITA No. 5041/Del/2014 wish to submit that the quantum of expenditure is not decisive to find whether repairs expenditure is of capital or revenue in nature. It cannot be taken as a matter of assumption that merely because a large sum is expended on repairs, it necessarily amounts to expenditure capital in nature. Unless a new asset is brought into existence or where expenditure has resulted into appreciation in the value of existing asset, it cannot be said that the expenditure is capital in nature. Rebuttal to the case laws relied upon by the Ld. AO is provided in Annexure 3.
In view of the above submissions, it is humbly submitted that the claim of the respondent be allowed and departmental appeal be dismissed."
3. We have heard the rival submissions and perused the material on record. We find that the assessee claimed the deduction of expenses of Rs.68,70,361/- u/s 37(1) of the Income-tax Act, 1961 (for short "the Act"). Before the learned CIT(A), the assessee divided the entire expenses of Rs.68,70,361/- in following three categories:
- Rs.37,24,188/- towards common area development expenses;
- Rs.13,40,173/- towards repairs & maintenance expenses; and
- Rs.18,06,000/- other miscellaneous expenses.
3.1 The details of expenses under the categories of common area development has been reproduced by the learned CIT(A) in the impugned order.
3.2 In our considered opinion, any expenditure incurred, is capital or revenue, should be seen in the light of following principles:
1. Expenditure for initiation, extension or substantial replacement of existing assets is to be treated as Capital expenditure.
2. Where expenditure brings into existence any asset or an advantage of enduring benefit to appellant, it is to be treated as capital in nature.6 ITA No. 5041/Del/2014
3. If expenditure was wholly incurred to carry out business operations of appellant in efficient and profitable manner, leaving the fixed capital of business untouched than expenditure is to be treated as revenue expenditure.
3.3 The learned CIT(A) has examined and noticed that common area development expenses have been incurred for use of lifts, staircases, housekeeping, security charges, adequate lighting, cleaning & maintenance of staff in all the common area, where the assessee was having its showroom or offices. We agree with the finding of the learned CIT(A) that these kind of expenses has not provided any enduring benefit and thus cannot be treated as capital expenditure. Similarly, the assessee filed details of repairs and maintenance expenses of Rs.13,40,173/- before the learned CIT(A), who has reproduced the said details in the impugned order. The assessee contended that in terms of section 30 of the Act, rent, repairs and insurance etc. for leased premises used for business or profession are deductible. The learned CIT(A) after examination of bills and vouchers of the expenses filed before the Assessing Officer, observed that expenses were in the nature of day to day expenses and no new asset has been brought into existence. The Revenue could not controvert the findings of the learned CIT(A) on the issue in dispute. The assessee also provided details of miscellaneous expenditure of Rs.18,06,000/- before the learned CIT(A), which is reproduced in the impugned order. The miscellaneous expenses are related to temporary housekeeping staff, hired personnel etc. The Revenue has not contradicted this factual information. The expenses incurred on hiring of staff have not brought into-existence any asset of any enduring benefit to the assessee. The learned CIT(A) has given his findings on the issue in dispute as under:7 ITA No. 5041/Del/2014
"2.1 I have carefully considered the facts of the case and the submissions made by the Counsel of the appellant. The appellant had claimed the deduction of expenses of Rs. 68,70,361 u/s 37(1) of the Act. The Assessing Officer, however, capitalized the entire expenses and allowed the depreciation of Rs.687,036 on such expenses. These expenses contain an amount of Rs. 37,24,188 which has been paid by the company as common area development charges as stipulated in the agreement signed with the lessor in addition to the rental paid by the Company. The expenditure is incurred for the usage of lifts, staircases, housekeeping, security charges, adequate lighting, cleaning and maintenance of staff in all the common areas. This expenditure under no stretch of imagination can be considered as Capital in nature as no enduring benefit can be derived therefrom. The complete bills and vouchers for the remaining expenditure incurred on the regular repairs and maintenance were produced during the appellate proceedings and it was claimed that the entire details were filed before the Assessing Officer. It is perused from the bills that the expenditure is in the nature of day to day repairs and no new asset has been brought into existence. The quantum of expenditure incurred on the repairs is not relevant for determining whether it is an expenditure on current repairs or not, because the extent of repairs and the amount spent would depend on various factors.
In the case in hand, the amount of Rs. 37,24,188 has been paid for the common area development charges and the expenditure is covered in the domain of section 37(1) of the Act. The remaining expenditure is incurred for the maintenance of stores, stitching, dry cleaning etc. The miscellaneous repairs include the house keeping staff at store in Bangalore, Mumbai and Delhi. No new asset has been brought into existence by incurring this expenditure. The addition of Rs. 68,70,361 made by the Assessing Officer is therefore, deleted."
4. In view of the above discussion, we do not find any infirmity in the order of the learned CIT(A) and the learned CIT(A) has rightly deleted the addition of Rs.68,70,361/- which does not require any interference on our part. Hence, we uphold the order of the learned CIT(A) on the issue in dispute. Accordingly, the ground of the Revenue is dismissed.
8 ITA No. 5041/Del/20145. In the result, the appeal of the Revenue is dismissed. The decision is pronounced in the open court on 31st July, 2017.
Sd/- Sd/-
(I.C. SUDHIR) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 31st July, 2017.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi