TMI Blog2008 (10) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 of the Act. In this connection, it is mentioned in the assessment order that during this year, the assessee incurred an expenditure of Rs. 2,05,08,030 towards improvement of lease-hold premises, which was claimed to be the revenue expenditure. The assessee filed the details of the expenditure. On perusal thereof, it was found that the assets procured by the assessee from by way of the expenditure provided a benefit of enduring nature to it. The expenditure was also not recurring in nature. Therefore, it was held that the expenditure was of capital nature, incurred in acquiring capital assets. Further, a reference was made to the provision contained in Explanation 1 to section 32 of the Income-tax Act, in respect of business or profession carried by an assessee from a building not owned by him, but for which he holds any lease right or right to occupancy. In such a situation, he is entitled to deduction of depreciation on the capital expenditure incurred by him. It was pointed out that this provision overrides the provision contained in section 30( a )( i ). The matter was agitated in appeal. It was submitted to him that the assessee incurred expenditure of Rs. 2,76,87,887 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the DCD from 7-1-2000 to 6-1-2003 in consideration of rent and other charges. Paragraph 3( a ) describes the condition of the building that electric wiring is done only up to the main distribution board and further wiring etc. will have to be done by the assessee on its own cost. The air-conditioning was provided up to air handling unit and the internal distribution system was to be installed by the assessee at its cost and responsibility. The assessee was to plan and distribute electric load of 170 KVA provided by the DCD after due approval from the DCD. According to paragraph 4( a ), the assessee agreed to install fire-fighting equipments and system at its own cost. According to paragraph 8( viii ), the assessee was required to hand over the demised premises along with fixtures and fittings of DCD in bare-shell condition on the expiry of the term of the lease deed. According to paragraph 9( vii ), the assessee was to carry out the work at its own cost without in any way damaging or altering the main structure of the premises. The lease period was extendible for two further terms of three years each, but the learned counsel pointed that the assessee vacated the premises in May, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achinery etc. were to be considered as capital expenditure, as claimed by the revenue? The Hon ble Court pointed out that even if the expenditure incurred is revenue in nature, still it may not fall in the meaning of the words "current repairs" under section 31( i ), which test has not been kept in mind by the Tribunal and the High Court. The authorities proceeded on the footing that since the expenditure was revenue in nature, it constituted "current repairs". Therefore, the court found merit in the appeal of the Commissioner and held that the assessee was not entitled to claim the deduction. However, this case was distinguished by stating that while expenditure on current repairs is allowed in the case of a owner, the expenditure on repairs is deductible in the case of tenanted properties, which was the case at hand. In this connection, reliance was placed on the decision of Hon ble Madras High Court in the case of CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432. In that case, the assessee claimed deduction of expenditure incurred by it on construction of a building on leasehold land in assessment years 2001-02 and 2002-03. The expenditure was held to be capital in nature b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the income. The claim was denied by the Assessing Officer on the ground that it was for renovation of the building. The CIT (Appeals) pointed out that although considerable expenditure was incurred but it did not amount to capital expenditure as it was incurred on leased premises with a view to bring it to a habitable condition. The Tribunal found that out of the aforesaid expenditure, a sum of Rs. 35,000 was spent on renovation of the building and replacement of sanitary fittings etc. This expenditure was held to be capital in nature. The Hon ble Court pointed out that the material fact in this case was that the premises were leased premises. When repairs are not undertaken for a considerable period, extensive repairs may be required in a particular year. Such repairs may not be allowed as current repairs but still such repairs would be deductible as revenue expenditure under section 37. 2.3 In reply, the learned DR pointed out that it was a case where a new asset was put in use after its renovation. The expenditure also involved brick work, laying a new floor altogether etc. Although the lease was for three years, it could be extended up to 9 years at the option of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as furnished on the applicability of section 37(1). The case before us is not of the own premises, which may be similar to the case of own machinery. We are concerned with tenanted premises, which has been taken on lease by an on-going business. Thus, the ratio of this case is not applicable. In the case of Ayesha Hospitals (P.) Ltd. ( supra ), the business was being carried on from leased premises. The expenditure was incurred on flooring, partitions etc., for the newly extended area of space, leading to increase in the capacity of the hospital. Further, the owners were directors of the assessee-company. Yet, relying on the decision of Hon ble Supreme Court in the case of Madras Auto Services (P.) Ltd. ( supra ), it was held that the expenditure incurred on construction of a leased premises by the assessee was deductible as revenue expenditure. This decision may apparently seem to be in contradiction with the decision of Hon ble Supreme Court in the case of Sarvana Spg. Mills (P.) Ltd. ( supra ) but that is not the case, the reason being that in the latter case the Hon ble Supreme Court refused to express any opinion on applicability of section 37(1). Thus, the ratio of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not made a distinction between money borrowed as circulating capital or for fixed capital and, therefore, what was to be seen was whether the capital was used for the purpose of business. The court further pointed out that insertion of Explanation 8 in section 43(1) retrospectively from 1-4-1974 does not alter the aforesaid position, as the Explanation is applicable only to sections 32, 32A, 33 and 41, which deal with depreciation or investment allowance. There is no such concept in section 36(1)( iii ). This would mean that if the assessee becomes entitled to the deduction of the expenditure as repairs of the leased premises, the provision of Explanation 1 to section 32 will not come into play as the same deals with depreciation. Thus, we find that the ratio of the case of Ayesha Hospitals (P.) Ltd. ( supra ), pertaining to assessment year 1991-92, squarely covers the case of the assessee except in respect of brick works, which may or may not get covered by the decision of jurisdictional High Court in the case of Hotel Diplomat ( supra ). In these circumstances, we remand the matter to the Assessing Officer to find out whether any extra facility was created by way of br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of jurisdictional High Court in the case of CIT v. Eicher Ltd. [2006] 287 ITR 170 (Delhi). The Hon ble Court held that so far as the present case is concerned, the accuracy of the provision has been determined fully or at least there is no controversy about it. In any event, the action for resorting to the provisions of the Companies Act does not arise, since a reading of Explanation ( c ) of section 115JA(2) makes the matter very clear. The CIT (Appeals) allowed the appeal of the assessee, which was upheld by the Tribunal. While commending the view of the CIT (Appeals), the Hon ble Court did not find that the Tribunal had taken an unreasonable view. In fact, the view was justified on a plain reading of the statute. The learned DR did not point out any controversy about quantification of the amount. Therefore, respectfully following this decision, it is held that no adjustment could be made to the book profit as per profit loss account in respect of provision for bad and doubtful debts, as the provisions of section 115JB are in pari materia with the provisions of section 115JA. Thus, this ground is allowed. 6. Ground No. 5 regarding charging of interest under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be set up under the STP scheme in the previous year relevant to assessment year 1994-95 or thereafter. This condition was not relaxed by the Board circular dated 23-11-1994. Since the assessee did not set up the unit in the previous year relevant to assessment year 1994-95 or thereafter, the profits were not deductible under section 10A from the total income even though it was admittedly a STP unit. 9.1 In reply, the learned counsel for the assessee referred to page 78 of the paper book, being a letter dated 16-2-2005 addressed by the Assessing Officer to the CIT (Appeals). It was mentioned that the assessee had filed two separate accounts for the STP unit and the other unit, but the fact remains that the unit set up in STP area was an extension of the existing business of the assessee carried on earlier from the old unit. Both the units were engaged in development of software and providing software development services for export of computer software. It was argued that deduction under section 10A will not be admissible to the assessee if it was already having an existing business. The assessee had such a business in existence, set up in the previous year relevant to assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting unit, which was also carrying on similar business, for which separate books of account were maintained and necessary audit certificate was filed. The assessee has not claimed deduction under section 80HHE in respect of profits of this unit and, therefore, the provisions contained in sub-section (5) are not applicable. The learned CIT(A) has given a clear finding that provisions contained in section 10A(2) are satisfied, which has not been displaced by the learned DR. Therefore, we are of the view that the assessee is entitled to deduct the profits of this unit in computing the total income. Accordingly, this ground is dismissed. 10. Ground No. 2 is against the finding of the learned CIT(A) that the Assessing Officer was not right in charging interest under section 234D. This provision was inserted in the Act by Finance Act, 2003, with effect from 1-6-2003. The case of the revenue was that since the assessment order was passed on 31-3-2004, the interest could be charged, while the case of the learned counsel was that the provision is applicable to the proceedings of assessment year 2004-05 and onwards as it is a substantive provision, fastening an additional liability on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of prioritization of the activities of the Government. Therefore, it was held that the action of the assessee in writing off the debts as bad debts in the books of account was only a unilateral act and no case had been made out about irrecoverability of the debt. For claiming the bad debt, the assessee has to apply an honest judgment taking into account the financial position of the hospital. Thus, the case of the assessee was dismissed. In reply, the learned counsel pointed out that the debt was in respect of cadila, in whose case the amount of Rs. 3,14,90,305 was written off in the immediately preceding year, but claimed in this year. The amount was offered to tax in earlier year and this issue was explained to the Assessing Officer. The ground taken by the assessee for disallowance was that the amount was not routed through profit loss account. It was argued that there was no condition precedent for allowance of bad debt to show that the debt became bad in this or that year. Therefore, it was argued that the conditions mentioned in section 36(1)( vii ) and section 36(2) are fulfilled. We have considered the facts of the case and rival submissions. We find that the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Enterprises Ltd. ( supra ). In the result, these grounds are treated as allowed for statistical purposes. 13.2 Ground Nos. 3 and 3.1 are against disallowance of the expenditure of Rs. 4,90,59,610 incurred on lease-hold premises. On perusal of the order of the learned CIT(A), it is seen that an expenditure of Rs. 8,34,95,644 was incurred on the premises taken on lease, situated at 7th floor, Tidal Park. Out of this expenditure, a sum of Rs. 4,90,59,610 was claimed as revenue expenditure. The Assessing Officer held that the expenditure was capital in nature under the provision contained in Explanation 1 to section 32 of the Act. The case of the assessee before the learned CIT (Appeals) was that the expenditure was incurred on the leased premises for its improvement and not for bringing into existence any capital asset. The lease subsisted for three years with an option to extend it for a further period of three years. No benefit of enduring nature ennured to the assessee on incurring the expenditure. The assessee had claimed only a part of the expenditure as revenue expenditure but the Assessing Officer disallowed the entire expenditure of Rs. 8,34,95,644. The expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of jurisdictional High Court in the case of Eicher Ltd. ( supra ). Therefore, following that order, these grounds are allowed. 16. Ground Nos. 6 and 6.1 are also regarding computation of profits under section 115JB, regarding the deduction to be allowed under section 80HHE of the Act. The controversy is whether, the quantum of deduction is to be computed as per book profits or as computed in assessment under section 143(3) under other provisions of the Act. The learned counsel for the assessee pointed out that the order of the Tribunal in the case of Syncome Formulations (I) Ltd. ( infra ) is to the effect that the deduction is to be allowed under section 80HHC with reference to the book profits. Such orders will mutatis mutandis apply to section 80HHE also. On the other hand, the learned DR relied on the order of the learned CIT(A) to the effect that the deduction computed under section 80HHE and deducted from the gross total income to arrive at the total income shall be deductible as per the statutory provision. Having considered the rival submissions, it is held that computation of profits under section 115JB starts with book profits, to which certain adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was decided in favour of the assessee. Following that order, this ground is dismissed. 21. Ground No. 2 is against deduction of a sum of Rs. 59,67,342, paid to the employees in respect of software customization. It is mentioned that the payment of Rs. 2,69,79,229 made to others in this regard was held to be capital expenditure by the ld. CIT(A). Similar matter in the appeal of the assessee for this year has been restored to the file of the Assessing Officer with a direction to consider the nature of the expenditure in the light of the order of the Tribunal in the case of Amway India Enterprises Ltd. ( supra ). Following that order, this matter is restored to the file of the Assessing Officer to consider the matter de novo after hearing the assessee and considering the aforesaid order of the Tribunal. Thus, this ground is treated as allowed for statistical purposes. 22. Ground No. 3 is against grant of deduction under section 80HHE in respect of gains arising to the assessee on account of fluctuation in the rate of foreign exchange. While the learned DR relied on the order of the Assessing Officer, the learned counsel relied on the order of the Tribunal in the case of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial reduction from profits of business for the purpose of computation of deduction under section 80HHE was not pressed by the learned counsel, in view of the decision of the Hon ble Delhi High Court in the case of Shriram Honda Power Equipments Ltd. ( supra ). Therefore, this ground is dismissed. 26. Ground No. 2, regarding levy of interest under section 234B, was stated to be consequential in nature. The Assessing Officer is directed to compute interest again after giving effect to this order. Thus, this ground is treated as partly allowed. 27. Ground No. 3, regarding withdrawal of interest of Rs. 15,88,899 granted under section 244A of the Act, was not pressed by the learned counsel. Therefore, the same is dismissed. 28. Ground No. 4 regarding levy of interest amounting to Rs. 29,82,288 under section 234D was stated to be covered by the Special Bench of Delhi Tribunal in the case of ITO v. Ekta Promoters (P.) Ltd. [2008] 113 ITD 719, in which it was held that the interest is chargeable for assessment year 2004-05 and onwards. Respectfully following this order, the interest is deleted. Thus, this ground is allowed. 29. Ground Nos. 5 and 5.1, regarding additio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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