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TMI Blog2013 (6) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... belongs to third party and the assessee has no right of ownership over the premises. The interior work carried out by the assessee in a building belonging to third person cannot be treated as capital expenditure. According to the ld.representative, the expenditure incurred by the assessee is required for the business of the assessee. The ld.representative further submitted that the interior work carried out by the assessee is part 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r decoration like false ceiling, racks, change of flooring, etc. The question arises for consideration is when the assessee incurred the expenditure on the leased premises for the first time to set up the show room, whether it has to be treated as capital expenditure or revenue expenditure? It is well settled principles of law that any expenditure incurred in the course of business for the purpose of earning profit has to be treated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly allowed depreciation at 10%. However, the CIT(A) found that the assessee has incurred the expenditure for the purpose of maintaining the cinema theatre in the course of its business activity, therefore, it is a revenue expenditure. On appeal by the revenue, the Hyderabad Bench of this Tribunal examined the scope of Explanation 1 to section 32(1) which was introduced by Taxation Laws (Amendment & Miscellaneous Provisions) Act, 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such other work in the land after allotment to the employees who had constructed a building in the lands allotted to them. The assessee claimed the expenditure for laying the roads, digging well, construction of water tanks and pumps, drainage, etc. as revenue expenditure. The Kerala High Court found that the expenditure incurred by the assessee is for the benefit of the employees, who purchased the properties and constructed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness expenditure. 16. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the written submission filed by the assessee. 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 Commissioner of Income-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 disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the ld.representative, the interest free funds available with the assessee was Rs.20.74 crores. The interest free advances given to the relatives are only Rs.12.14 crores which is far below the interest free funds available with the assessee. Therefore, according to the ld.representative, the borrowed funds from the banks and financial institutions are invested only in jewellery for business purpose and it is 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 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the Kerala High Court, it is obvious that there was a negative balance in the capital account of the partners. 22. Let us now examine the case before us in the light of the balance- sheet extracted by the CIT(A) on page 9 of his order. As rightly submitted by the ld.representative for the assessee, the proprietor's capital is Rs.27.49 crores and unsecured loan was Rs.7.64 crores. Sundry creditors were to 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 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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