TMI Blog2013 (6) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... apital in nature. See Veeraraghavan vs CIT [1965 (7) TMI 55 - KERELA HIGH COURT]. Against assessee. Expenditure towards advertisement including payment made to temples, churches, clubs, educational institutions and trade unions, etc. - revenue v/s capital - Held that:- In the written submission, the assessee claims that the prime motive for contribution is charity. If it is a charity, it has to be claimed u/s 80G if the same is approved by the respective CIT. Here, the assessee is claiming business expenditure. It is not the case of the assessee that the expenditure was incurred in connection with the welfare of the employees. Moreover, the assessee has incurred Rs.7,20,99,724 but the AO has disallowed only Rs.1 lakh. In the absence of claim of the assessee that the expenditure was incurred for business purpose or for welfare of the employees, this Tribunal is of the considered opinion that the contribution made by way of charity cannot be allowed u/s 37 as business expenditure. Against assessee. Interest on loan - revenue v/s capital - Held that:- The assessee claims that the entire borrowed funds to the extent of Rs.76.06 crores was invested in the stock in trade. Even if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and parcel of the structure of the building which belongs to somebody else. The ld.representative further submitted that the interior work cannot be detached from the super structure and it has no value. The ld.representative placed his reliance on the judgment of the Apex Court in the case of CIT vs Madras Auto Service (P) Ltd (1998) 233 ITR 468 (SC). Referring to Explanation 1 to section 32(1) of the Income-tax Act, 1961, the ld.representative submitted that "current repairs" shall not include any expenditure in the nature of capital. 5. The ld.representative for the assessee further submitted that the interior work, repair, replacement in the showroom needs to be carried out from time to time. The work carried out by the assessee will last only for 2 to 3 years. Referring to the judgment of the Kerala High Court in CIT vs Premier Cotton Spinning Mills Ltd 223 ITR 440 (Ker), the ld.representative submitted that unless an asset was brought into existence by incurring the expenditure it cannot be said that the assessee acquired an enduring advantage for the business. The ld.representative has also placed reliance on the decision of the Hyderabad Bench of this Tribunal in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as revenue expenditure. However, if the expenditure was incurred for the purpose of acquisition of a capital asset, the same has to be treated as capital in nature. 8. Let us now examine whether the expenditure incurred by the assessee for the purpose of establishing a new show room is in the course of earning profit / in the course of business or it is an expenditure for establishment of a capital asset. Setting up of a new show room is an expansion of the existing business. It increases the capital base of the assessee for doing the business. In other words, the establishment of a new show room expands the profit making apparatus of the assessee. As a result of this expenditure, a new show room which is a capital asset came into existence. Though the building belongs to third party, the assessee had the benefit of doing business in the new show room by using the same as capital asset. It is to be remembered that lease is also a transaction in the immovable property. Though the entire title on the property is not transferred during the course of lease, an interest in the property was transferred in favour of the assessee during the lease period. The assessee would be in ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1986 with effect from 01-04-1988 and the legislative history of introduction of Explanation 1 to section 32(1) and found that the position of law as it remained after introduction of section 32(1A) with effect from 01-04-1971 continued to be the same in respect of revenue expenditure incurred by the assessee on the premises taken on lease. The Hyderabad Bench of this Tribunal further found that whenever the assessee incurred the expenditure in the process of earning of profit while carrying on the business in the leased premises, the expenditure has to be treated as revenue expenditure and neither section 32(1A) or Explanation 1 to section 32 would come in the way of allowing the same as revenue expenditure. However, in case, the assessee incurred the expenditure which is of a capital nature, then, the assessee has the benefit of claiming depreciation on such capital expenditure in relation to renovation, extension or improvement with effect from 01-04-1971 u/s 32(1A) and under the Explanation 1 to Sec.32 w.e.f. 1.4.1988. The Hyderabad Bench of this Tribunal placed its reliance on the judgment of the Apex Court in Empire Jute Co. Ltd vs CIT (1980) 124 ITR 1 (SC). In the case be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed building thereon. The land does not belong to the assessee. It did not bring into existence an enduring advantage to the assessee. The expenditure was in the nature of staff welfare expenditure. The Kerala High court further found that the expenditure was incurred for the purpose of business; therefore, it was deductible as business expenditure u/s 37 of the Act. In this case before us, it is not for the welfare of the employees; but for the purpose of establishing a new show room. In fact, the Kerala High Court extracted the observations made by House of Lords in Atherton v. British Insulated and Helsby Cables Ltd (1925) 10 TC 155 (HL), which is as under:- "When an expenditure is made .... With a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This Tribunal is of the opinion that this observation of the House of Lords as approved by the Kerala High Court is applicable to the facts of this case. The expenditure incurred by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax. Here, the assessee is claiming business expenditure. It is not the case of the assessee that the expenditure was incurred in connection with the welfare of the employees. Moreover, the assessee has incurred Rs.7,20,99,724 but the assessing officer has disallowed only Rs.1 lakh. In the absence of claim of the assessee that the expenditure was incurred for business purpose or for welfare of the employees, this Tribunal is of the considered opinion that the contribution made by way of charity cannot be allowed u/s 37 of the Act as business expenditure. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed. 17. Now coming to the revenue's appeal, the only issue arises for consideration is disallowance of interest. 18. Smt. Susan George Varghese, the ld.DR submitted that during the year under consideration the assessee has debited an amount of Rs.7,14,80,735 towards interest and bank charges and interest on advance. Referring to the chart at page 8 of the assessment order, the ld.DR submitted that all advances are personal nature and there is no commercial expediency in such advances. According to the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not diverted for any other purpose. According to the ld.representative, what was given to the relatives is only from the interest free funds which would be clear from the balance-sheet of the assessee. The ld.representative further submitted that interest free funds were borrowed especially for the purpose of purchase of stock in trade and in fact the borrowed funds were invested in the stock in trade. Therefore, there is no question of any disallowance. The ld.representative placed his reliance on the judgment of the Madras High Court in the case of CIT vs South India Corporation (Agencies) Ltd (2007) 290 ITR 217 (Mad); CIT vs Sambandham Spinning Mills Ltd Another (2008) 298 ITR 306 (Mad); and CIT vs India Carbon Ltd (2001) 247 ITR 510 (Gau); and CIT vs S.A. Builders 288 ITR 1. Further reliance was placed on the decisions of the various benches of this Tribunal. 20. Referring to the judgment of the Kerala High Court in the case of V.I. Baby Co (supra), the ld.representative submitted that on scrutiny of the accounts there was huge debit balances in the capital account of the partners of the firm was found. The assessee did not have credit balance in the capital account of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent of Rs.4.10 crores. The total interest free funds available with the assessee including the sundry creditors and unsecured loan were Rs.39.23 crores. Out of this, the assessee invested Rs.14.18 crores on the furniture and fittings including building. Another sum of Rs.0.21 crore was shown as investment. Therefore, the total investment is Rs.14.39 crores in the fixed asset. The assessee is showing Rs.21.38 crores as deposits. However, the nature of the deposits is not known from the materials available on record. Therefore, it is obvious that the total utilization of the capital may be to the extent of Rs.35.77 crores including the deposit of Rs.21.38 crores. Thus, the funds available with the assessee including the sundry creditors of Rs.4.10 crores is Rs.39.23 crores and the funds invested by the assessee is Rs.35.77 crores. Therefore, it is not known how the assessee claims that Rs.20.74 crores of interest free funds is available with it. The assessee claims that the entire borrowed funds to the extent of Rs.76.06 crores was invested in the stock in trade. Even if we take the deposits of Rs.21.38 crores as assessee's investment, the balance amount claimed by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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