TMI Blog2014 (12) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year in which such search is conducted or requisition is made - the AO gets jurisdiction for passing orders u/s 153A of the Act, once search action is initiated, whether or not any incriminating material is found during the course of search action. Scope of assessment u/s 153A – Held that:- The jurisdiction to issue notices u/s 153A cannot be equated with the scope of assessment – as held in Assistant Commissioner of Income-tax (CC) – 45 Versus Pratibha Industries Ltd. [2012 (12) TMI 760 - ITAT MUMBAI] - where incriminating material relating to the earning of income not declared to the Department is found in the course of search, then there is no dispute as to the jurisdiction as well as the scope of assessment where an assessment proceedings for any AY is pending on the date of search, then proceedings relating to that assessment will abate and the scope of assessment will be wide enough to include issues emerging from abated proceedings as well as issues emerging from seized incriminating material – Following the decision in M/s CANARA HOUSING DEVELOPMENT COMPANY Versus THE DEPUTY COMMISSIONER OF INCOME TAX [2014 (8) TMI 642 - KARNATAKA HIGH COURT] - once the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the bringing into existence of any capital asset - CIT(A) was not right in upholding the disallowance of the expenditure by holding it as capital in nature – the order of the CIT(A) is set aside and the assessee's claim for deduction of expenditure incurred towards renovation of plant design system, computer cabling, fire detection and alarm system, plumbing, air conditioning work, electrical works, interior work etc. on the hotel / building taken on lease is allowed – Decided in favour of assessee. - I.T.A. No. 442 to 445/Bang/2013 - - - Dated:- 5-12-2014 - Shri Rajpal Yadav And Shri Jason P. Boaz,JJ. For the Appellant : Shri Babu Prasad, Advocate For the Respondent : Ms. Priscilla Singsit, CIT-III (D.R) ORDER Per Bench : These four appeals by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-VI, Bangalore dt.15.1.2013 and pertain to Assessment Years 2005-06 to 2008-09. These appeals were heard together as common issues are involved, and are therefore disposed off by way of this common order. 2. The facts of the case, briefly, are as under :- 2.1 There was a search and seizure operation conducted on 20.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee filed its return of income on 30.11.2010, in response to notice under section 153A of the Act, declaring total income of ₹ 35,70,480. The case was taken up for scrutiny and the assessment was subsequently completed under section 153A rws 143(3) of the Act by order dt.28.12.2011, wherein the income of the assessee was determined at ₹ 27,24,431 in view of the Assessing Officer, inter alia, treating expenditure of ₹ 14,75,658, incurred by the assessee on renovation and improvement of a building taken on lease by him and claimed as revenue expenditure by the assessee, to be capital expenditure. 2.2 Aggrieved by the orders of assessment for Assessment Years 2005-06 to 2008-09, all dt.28.12.2011, the assessee preferred appeals before the CIT (Appeals) VI, Bangalore. ; The learned CIT (Appeals) disposed off the assessee's appeals for these four years by way of a common order dt.15.1.2013 dismissing the four appeals. 3.1 Aggrieved by the combined orders of the CIT (Appeals) VI, Bangalore dt.15.1.2013 dismissing his appeals for Assessment Years 2005-06 to 2008-09, the assessee is in appeal before this Tribunal raising the following identical grounds for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isted from invoking the said explanation and provision of section 32(1) and accepted the claim of the appellant as done by the learned DCIT in the A.Y. 2005-=06 in the case of appellant himself and as such the learned CIT (Appeals) should have allowed the claim on merits also. 3.2 From a perusal of the grounds of appeal raised for all the four impugned assessment years, we find that, briefly, they pertain to the following :- Ground No.1 is general in nature and therefore no adjudication is called for thereon. Ground Nos.2 to 5 pertains to the assessee's challenging the jurisdiction of the Assessing Officer in making the additions / disallowance in the absence of any incriminating material found during search. Ground Nos.6 and 7 relate to the matter of the issue on the treatment by the authorities below, of expenditure incurred by the assessee on renovation and cost of improvement of building leased by him as capital expenditure, thereby disallowing the assessee's claim that the said expenditure be allowed as revenue expenditure. 4.0 Ground Nos. 2 to 5 4.1 The assessee has assailed the order of the learned CIT (Appeals) for the impugned assessment years 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s below and submitted that the Assessing Officer was empowered to make the additions / disallowances carried out by him in the orders of assessment for Assessment Years 2005-06 to 2008-09 dt.28.12.2011 as per the provisions of section 153A of the Act. 4.3 A Subsequent to the completion of hearing on 31.7.2013, it came to our notice that a decision has been rendered by the Hon'ble High Court of Karnataka in the case of Canara Housing Development co. V DCIT CC-1(1) in ITA No.38/2014 dt.25.7.2014, the findings of which have a bearing on the decision in this case. As this decision of the Hon'ble High Court was not before the Bench in the course of hearings, the case was fixed for hearing on 28.10.2014 when both parties were heard with reference to this decision of the Hon'ble High Court and its implication on the facts of the assessee's case. 4.3.1 We have heard the rival submissions at length and perused and carefully considered the material on record, including the judicial decisions cited. The relevant portions of section 153A of the Act are extracted hereunder : 153A. Assessment in case of search or requisition.- (1) Notwithstanding anything contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out under section 132 or a requisition under section 132A of the Act, the Assessing Officer shall issue notice requiring the person searched to furnish his return of income in respect of each assessment year relevant to the previous year in which such search is conducted or requisition is made. Therefore, the Assessing Officer gets jurisdiction for passing orders under section 153A of the Act, once search action is initiated, whether or not any incriminating material is found during the course of search action. 4.3.3 The next issue is the scope of assessment under section 153A of the Act. The jurisdiction to issue notices under section 153A cannot be equated with the scope of assessment under this section. This has been lucidly explained by the order of the ITAT, Mumbai in the case of Pratibha Industries Ltd. (supra) wherein it has been observed that when we examine the provisions of section 153A(1)(b) of the Act, the 2nd proviso thereto and the judicial decisions cited before us, three possible circumstances emerge on the date of the initiation of search under section 132(1) of the Act. i. assessment proceedings are pending; ii. proceedings are not pending but so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reassessment were pending since they had already culminated in assessment or reassessment orders when the search was initiated or the requisition was made. 4.3.6 Therefore, where no incriminating material is found in the search proceedings relating to any assessment year, then the scope of assessment will depend on whether the original assessment is pending or completed. Where the original assessment in any assessment year is pending on the date of search, then the proceedings relating to the pending assessment shall abate and the proceedings initiated as a result of search will be continued. The scope of this assessment would cover issues arising from the pending assessment and the freshly initiated proceedings will cover issues which could arise from the originally pending proceedings also. 4.3.7 The third circumstance at (iii) above, i.e. where proceedings are not pending and no incriminating material is found in the course of search; has been left unaswered by the Hon'ble Delhi High Court in the case of Anil Kumar Bhatia (supra). In this case, the Hon'ble Court has held that even if the assessment order has been passed in respect of one or any of the six relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chapter XIV-B of the Act which took care of the assessment to be made in cases of search and seizure. Such an assessment was popularly known as block assessment because the Chapter provided for a single assessment to be made in respect of a period of a block of ten assessment years prior to the assessment year in which the search was made. In addition to these ten assessment years, the broken period up to the date on which the search was conducted was also included in what was known as block period. Though a single assessment order was to be passed, the undisclosed income was to be assessed in the different assessment years to which it related. But all this had to be made in a single assessment order. The block assessment so made was independent of and in addition to the normal assessment proceedings as clarified by the Explanation below Section 158BA(2). After the introduction of the group of Sections namely, 153A to 153C, the single block assessment concept was given a go-by. Under the new Section 153A, in a case where a search is initiated under Section 132 or requisition of books of account, documents or assets is made under Section 132A after 31.5.2003, the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47 and 148, have been removed by the non obstante clause with which sub section (1) of Section 153A opens. The time-limit within which the notice under Section 148 can be issued, as provided in Section 149 has also been made inapplicable by the non obstante clause. Section 151 which requires sanction to be obtained by the Assessing Officer by issue of notice to reopen the assessment under Section 148 has also been excluded in a case covered by Section 153A. The time-limit prescribed for completion of an assessment or reassessment by Section 153 has also been done away with in a case covered by Section 153A. With all the stops having been pulled out, the Assessing Officer under Section 153A has been entrusted with the duty of bringing to tax the total income of an assessee whose case is covered by Section 153A, by even making reassessments without any fetters, if need be. 10. Section 153A of the Act starts with a non obstante clause. The fetters imposed upon the Assessing Officer by the strict procedure to assume jurisdiction to reopen the assessment under Sections 147 and 148, have been removed by the non obstante clause with which sub section (1) of Section 153A opens. The tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income, taking note of the undisclosed income, if any, unearthed during the search. He has been entrusted with the duty of bringing to tax the total income of an assessee whose case is covered by Section 153A, by even making reassessments without any fetters. This means that there can be only one assessment order in respect of each of the six assessment years, in which both the disclosed and the undisclosed income would be brought to tax. When once the proceedings are initiated under Section 15 3A of the Act, the legal effect is even in case where the assessment order is passed it stands reopened. In the eye of law there is no order of assessment. Re-opened means to deal with or begin with again. It means the Assessing Officer shall assess or reassess the total income of six assessment years. Once the assessment is reopened, the assessing authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or and also any other income which is not disclosed in the earlier return or which is not unearthed during the search, in order to find out what is the total income of each year and then pass the assessment order. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thed in the course of search under section 132 of the Act, in order to find out and determine what is the total income of each year and then pass the order of assessment. The grounds of appeal raised by the assessee at S.Nos. 2 to 5 are accordingly dismissed for all four assessment years 2005-06 to 2008-09. 5. Treatment of certain expenditure as capital in nature. 5.1 Grounds Nos. 6 and 7 relate to the issue of treatment by the authorities below of expenditure incurred by the assessee on renovation and cost of improvement of building leased by him as capital expenditure, thereby disallowing the assessee's claim that the said expenditure be allowed as revenue expenditure. 5.2.1 In the case on hand, for the impugned assessment years in appeal before us, additions / disallowances have been made in respect of items of expenditure claimed as deduction in the assessee's profit and loss account. In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed expenditure towards renovation / investment in the hotels taken on lease which were added to the assessee's business during the year under consideration. The Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of earning business profits and not for the acquisition of any capital assets. In support of its averments, the learned Authorised Representative placed reliance on the following judicial pronouncements, copies of which were placed on record :- (i) CIT V Madras Auto Services (P) Ltd. (1998) 233 ITR 468 (SC) (ii) CIT V Haridas Bhagath Co. (P) Ltd. (1999) 240 ITR 169 (Mad); (iii) CIT V Amway India Enterprises - LD/60/71 (Del) dt.4.10.2011. 5.3.2 Placing particular reliance on the decision of the Hon'ble Apex Court in the case of CIT V Madras Auto Services (P) Ltd. (supra), the learned Authorised Representative held that the expenditure incurred in construction of a building in a leased premises to be revenue expenditure.. In view of the facts of the case on hand and the decision of the Hon'ble Apex Court in the case of Madras Auto Services (P) Ltd. (supra) which is squarely applicable to the facts of the case, the learned Authorised Representative submits that the assessee's appeals on this issue are to be allowed. 5.3.3 Per contra, the learned Departmental Representative supported the orders of the authorities below. According to the learned Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5.4.3 Explanation 1 to Section 32 of the Act reads as follows :- Explanation 1 : Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing any work in or relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this claim shall apply as if the said structure or work is a building owned by the assessee. This Explanation to Section 32 of the Act was introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1.4.1988. By introduction of this Explanation, the Legislature intended to allow depreciation on the capital expenditure incurred by the assessee in relation to renovation, extension or improvement to the building in which the assessee carried on business as lessee. 5.4.4 It may be useful to examine the Legislative history of the introduction of Explanation 1 to Section 32 of the Act. The taxation Laws (Amendment) Act,1970 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Therefore, whenever the assessee incurred the expenditure, in the process of earning profit while carrying on the business in the leased premises, the expenditure has to be treated as revenue expenditure and neither sub-section (1A) to Section 32 OR Explanation 1 to Section 32 of the Act would come in the way of allowing the same as revenue expenditure. However, when the assessee incurred expenditure which is of capital nature, then the Parliament allows the benefit to the assessee for claiming depreciation on such capital expenditure in relation to renovation, extension or improvement w.e.f. 1.4.1971 u/s. 32(1A) and in accordance with the provisions of Explanation 1 to Section 32 of the Act w.e.f. 1.4.1988. Hence, this is a benefit allowed to the assessees who have taken premises on lease and incurred expenditure in the capital field. However, as explained earlier, if the expenditure incurred falls in the revenue field, the assessee is entitled to claim it as revenue expenditure irrespective of Section 32(1A) or Explanation 1 of Section 32 of the Act. In our considered view, this being the correct position of law, the conclusions of both the Assessing Officer and the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has not obtained any enduring advantage in the capital field. Therefore, the expenditure incurred facilitated the assessee to carry on its business effectively and more profitably. In this factual matrix of the case on hand, we are of the considered opinion that the expenditure incurred by the assessee has to be treated as revenue in nature. 5.4.9 In view of the judicial decisions cited by the assessee (supra), it is obvious that whenever an expenditure was incurred in the process of earning profits it has to be allowed as revenue expenditure. In such a case the expenditure incurred by the assessee would be out of the ambit and purview of the provisions of Explanation 1 to Section 32 of the Act of the Act. In the case on hand, it is not in dispute that the expenditure was incurred for renovation. These expenses were incurred only for the purpose of carrying on day to day business and earn profits and do not result in the bringing into existence of any capital asset. Therefore, in the light of the discussion form paras 5.1 to 5.4.9 of this order and the facts and circumstances of the case, in our view, the learned CIT (Appeals) was not right in upholding the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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