2025 (7) TMI 753 - AT - Income Tax

Nature of expenses - repairs and maintenance expenses -expenses incurred towards refurbishment of office/laboratory building and furniture fixtures - Revenue or capital expenses - repairs are in the nature of capital expenses -AO held that the assessee has accepted refurbishing of office/laboratory buildings and furniture fixtures as per requirement of NABL accreditation - AO held that the expenses incurred towards refurbishment of office/laboratory building and furniture fixtures are certainly capital expenditure and not revenue expenditure as claimed by the assessed thus claim of revenue expenditure is rejected and the same is treated as capital expenditure. Depreciation @10% is however allowed on such capital expenditure. HELD THAT - We find that the repairs have been made to get approval of NABL and accreditation thereof. The accreditation is not permanent but based on periodic inspection of facilities. Hence the expenditure cannot be treated as capital in nature.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the appeal are:

• Whether the repairs and maintenance expenses of Rs. 54,72,532/- incurred by the assessee on refurbishment of office and laboratory buildings qualify as revenue expenditure or capital expenditure.
• Whether the substantial nature of the repairs alone justifies treating the expenditure as capital in nature.
• The correctness of disallowance of interest on TDS amounting to Rs. 12,563/-.
• The propriety of the Commissioner of Income Tax (Appeals) setting aside for verification additions of Rs. 11,28,478/- under section 56(vii)(b) of the Income Tax Act instead of deleting the same.
• The correctness of setting aside for verification the disallowance of Rs. 16,19,000/- under section 40(a)(ia) of the Act instead of deleting it.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Nature of Repairs and Maintenance Expenses - Revenue or Capital

Relevant legal framework and precedents: The distinction between capital and revenue expenditure is a well-established principle in income tax jurisprudence. Capital expenditure generally relates to expenses incurred for acquiring or improving a capital asset, resulting in enduring benefits, whereas revenue expenditure is incurred for day-to-day running and maintenance of business assets. The Income Tax Act allows depreciation on capital expenses but disallows their immediate deduction as revenue expenses.

Court's interpretation and reasoning: The Assessing Officer (AO) held that the refurbishment of office and laboratory buildings and furniture & fixtures was not routine maintenance but substantial renovation carried out to meet NABL accreditation requirements. This refurbishment was found to have a long-lasting effect, conferring enduring benefits, and thus was rightly classified as capital expenditure. The AO allowed depreciation at 10% on this capitalized amount.

The assessee contended that the expenditure was incurred to comply with NABL accreditation standards, which require periodic renewal and inspection, and therefore the refurbishment did not create a permanent asset or enduring benefit. The assessee argued that the amount alone cannot determine the nature of expenditure and that the expenses should be treated as revenue expenditure.

The Tribunal observed that NABL accreditation is not permanent but subject to periodic inspection and renewal, implying the expenditure does not result in a permanent improvement or enduring benefit to the asset. Hence, the expenses do not fall within the ambit of capital expenditure but are revenue in nature.

Key evidence and findings: The refurbishment was undertaken to meet NABL accreditation requirements for the laboratory and office premises, which is a regulatory requirement rather than an asset enhancement. The accreditation's temporary nature was pivotal in the Tribunal's conclusion.

Application of law to facts: Applying the principle that capital expenditure must create enduring benefits or enhance the asset's value permanently, the Tribunal found that refurbishment for accreditation, which is temporary and periodically renewed, does not amount to capital expenditure.

Treatment of competing arguments: The Tribunal rejected the AO's view that the substantial nature of expenditure alone converts it into capital expenditure. It accepted the assessee's argument that the purpose and nature of expenditure are critical, and mere quantum of expenditure is not decisive.

Conclusions: The Tribunal allowed the appeal on this issue, holding that the repairs and maintenance expenses of Rs. 54,72,532/- are revenue expenses and not capital in nature.

Issue 3: Disallowance of Interest on TDS of Rs. 12,563/-

The grounds raised included error in confirming disallowance of interest on TDS. However, the judgment text does not elaborate on detailed analysis or final decision on this issue. Given the absence of further discussion, it appears the Tribunal did not find it necessary to alter the CIT(A)'s order or considered it ancillary to the main issues.

Issue 4 & 5: Additions under Section 56(vii)(b) and Disallowance under Section 40(a)(ia)

The assessee challenged the CIT(A)'s order for setting aside for verification the additions under section 56(vii)(b) amounting to Rs. 11,28,478/- and disallowance under section 40(a)(ia) of Rs. 16,19,000/- instead of deleting these additions/disallowances.

The judgment does not provide detailed reasoning or final determination on these points, indicating that the Tribunal did not find sufficient grounds to interfere and upheld the CIT(A)'s approach to remit the matter for verification rather than outright deletion.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning on the nature of repairs and maintenance expenses is preserved verbatim:

"We find that the repairs have been made to get approval of NABL and accreditation thereof. The accreditation is not permanent but based on periodic inspection of facilities. Hence the expenditure cannot be treated as capital in nature."

Core principles established include:

• The nature and purpose of expenditure are decisive in classifying it as capital or revenue, not merely the amount or substantiality of the expenditure.
• Expenditure incurred for compliance with regulatory requirements that are temporary and subject to periodic renewal/accreditation does not create enduring benefits and thus is revenue expenditure.
• Capital expenditure must result in a permanent improvement or enduring benefit to the asset.

Final determination on the primary issue was that the repairs and maintenance expenses of Rs. 54,72,532/- incurred for refurbishment to meet NABL accreditation standards are revenue expenses and allowable as such, overturning the CIT(A) and AO's classification as capital expenditure.