TMI Blog2014 (12) TMI 1166X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessment. Treatment of expenditure incurred on renovation and cost of improvement of building leased as capital expenditure - revenue disallowing the assessee's claim that the said expenditure be allowed as revenue expenditure - Held 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 our view, the learned CIT (Appeals) was not right in upholding the disallowance of the expenditure by holding it as capital in nature. We, accordingly, reverse the findings of the authorities below on this issue and allow the assessee's claim for deduction of expenditure incurred towards renovation of plant design system, computer cabling, fire detection and alarm system, plumbing, air co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndisclosed investments in the hotels run by it in the period relevant to Assessment Year 2008-09. The assessee similarly admitted, on oath, to undisclosed investments of ₹ 1.50 Crores and ₹ 2 Crores in the periods relevant to Assessment Years 2009-10 and 2010-11 respectively. Pursuant to the notices issued u/s.153A of the Act by the Assessing Officer, for Assessment Year 2008-09 and 2009-10, the assessee filed returns of income for, inter alia, the three impugned Assessment Years 2008-09 to 2010-11 including the additional income admitted in the statement u/s.132(4) of the Act recorded in the course of search action, the details of which are as under := Assessment Year Notice u/s.153A Total income declared (Rs.) Date of filing of Return of Income 2008-09 27.10.2010 29,60,870 30.11.2010 2009-10 27.10.2010 2,31,14,460 29.11.2010 2010-11 Not applicable. 2,00,80,950 29.11.2010 2.2 The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned A.O. to disallow expenses on interior decoration and renovation of rented building as capital expenditure and allow only depreciation under section 32(1) acting under section 153A of the Act without any seized material on this issue. 3. The learned CIT (Appeals) has erred in taking the view that the learned A.O. can review a decision already taken under section 153A or disturb an assessment which was allowed to become final without any seized material pointing out to undisclosed income. 4. The learned CIT (Appeals) has erred in upholding the decision of the learned A.O. to disallow expenditure on interior decoration and renovation of rented building as capital expenditure and allowing only depreciation under section 32(1) acting under section 153A of the Act without any seized material on this issue. 5. The learned authorities has failed to appreciate that even the decision of the Hon'ble Delhi H C relied on the by the learned CIT (Appeals) lays down the rule that there should be seized material indicating undisclosed income to get jurisdiction under section 153A in regard to assessments which have become final and as such should have accepted the claim of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 234B and C without appreciating the fact that the assessee could not have paid any advance tax on an income which he has not earned at all. 3. The learned CIT (Appeals) should have deleted the levy of interest u/s.234B C on incomes surrendered by the appellant voluntarily as held by the Hon'ble Karnataka High Court in 322 ITR 454 (Kar) since it is an undisputed fact that but for the surrender of income by the appellant there are no evidences found in search or in assessment in regard to this income. 5. Ground No.1 in all three appeals for Assessment Years 2008-09 to 2010-11 is general in nature and not being urged before us, no adjudication is called for thereon. 6. Grounds Nos.2 to 5 only for A.Y. 2008-09 6.1.1 These grounds, in the assessee's appeal for Assessment Year 2008-09, pertain to the disallowance of revenue expenditure of ₹ 29,86,511 incurred towards flooring and wiring in the assessee's hotel premises, claimed by the assessee as deduction treating it as revenue expenditure, but held by both the Assessing Officer and the learned CIT (Appeals) to be expenses capital in nature. From the grounds raised (supra), it is seen that the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 6.3.1 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 section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall- (a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 some incriminating material is found in the course of search, indicating some income and/or assets not disclosed in the return of income; and iii. proceedings are not pending and no incriminating material is found in the course of search. 6.3.4 When we examine the cases covered under these three circumstances, the cases covered under (i) above, where proceedings are pending, is answered by the Act itself; i.e. since proceedings are still pending, all those pending proceedings abate and the Assessing Officer gets a free hand to make the assessment. Where incriminatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 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 arise from the search and the originally pending proceedings also. 6.3.7 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 assessment years, either under section 143(1)(a) or 143(3) of the Act prior to the initiation of search, the Assessing Officer is still empowered to reopen those proceedings under section 153A of the Act without any fetters and reassess the total income taking note of undisclosed income, if any, unearthed during the search. It is clear that the Hon'ble Court dealt with a situation in which some incriminating material was found in respect of a non-pending assessment. It was in this background that the Hon'ble Court held that section 153A of the Act applies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 Officer is obliged to issue notices calling upon the searched person to furnish returns for the six assessment years immediately preceding the assessment year relevant to the previous year in which the search was conducted or requisition was made. The other difference is that there is no broken period from the first day of April of the financial year in which the search took place or the requisition was made and ending with the date of search/requisition. Under Section 153A and the new scheme provided for, the AO is required to exercise the normal assessment powers in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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, the Commissioner by virtue of the power conferred under Section 263 of the Act gets no jurisdiction to initiate proceedings under the said provision because the condition precedent for initiating proceedings under Section 263 is any order passed under the Act by the Assessing officer is erroneous insofar as it is prejudicial to the interest of the revenue. Once the order passed by the Assessing officer gets reopened, there is no order which can be said to be erroneous insofar as it is prejudicial to the interest of the revenue which confers jurisdiction on the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture, thereby disallowing the assessee's claim that the said expenditure be allowed as revenue expenditure. 7.2.1 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 Officer held that these expenses were incurred towards capital items and by invoking the provisions of Explanation 1 to section 32 of the Act and placing reliance on the decision of the Delhi ITAT in the case of Asstt. CIT v. Flour Daniel India (P) Ltd. [2007] 11 SOT 349 disallowed the expenses claimed as revenue, held them to be capital in nature and allowed depreciation thereon. 7.2.2 On appeal, the learned CIT(A) upheld the decision of the Assessing Officer in treating the said expenditure incurred on renovation/investment in hotels acquired by the assessee on lease, as bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7.3.3 Per contra, the learned Departmental Representative supported the orders of the authorities below. According to the learned Departmental Representative, the assessee had taken the hotel building on lease and had incurred substantial amounts towards renovation thereof. The learned Departmental Representative submits that the incurring of this expenditure has resulted in the assessee obtaining enduring benefit and has brought into existence a capital asset. Referring to Explanation 1 to Section 32 of the Act, the learned Departmental Representative submitted that after the introduction of Explanation 1, the assessee at best is entitled only for depreciation on the capital assets brought into existence by virtue of the said expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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. 7.4.4 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 w.e.f. 1.4.1971 introduced sub-section 1A to grant some benefit to the assessee on the capital expenditure incurred by a tenant in leased premises'. Therefore, it is obvious that prior to the introduction of sub-section 1A to Section 32 of the Act w.e.f. 1.4.1971 by the Taxation Laws (Amendment) Act, 1970, the assessee who takes the business premises on lease was not entitled to any depreciation on capital expenditure incurred thereon. In other words, prior to 1.4.1971, assessees who incurred capital expenditure on leased premises were not entitled to any benefit at all in this regard. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT(A) in the impugned orders that the expenses incurred on leased premises have to be capitalised and only depreciation can be allowed thereon is not in tune with the provisions of law and is therefore incorrect. 7.4.6 To fall within the ambit of the provisions of Explanation 1 to Section 32 of the Act, the question to be answered is, whether the assessee has incurred any capital expenditure for the purposes of business on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement in the building. 7.4.7 In the case on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 from paras 7.1 to 7.4.9 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 the expenditure by holding it as capital in nature. We, accordingly, reverse the findings of the authorities below on this issue and allow 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. Accordingly the assessee's grounds raised at S.Nos.6 7 are allowed for Assessment Years 2005-06 to 2008-09. 8. Common grounds raised by assessee on the chargeability of interest u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich interest was payable under subsection (1) is increased, the assessee shall be liable to pay simple interest at the rate of two per cent for every month or part of a month comprised in the period commencing on the day following 2 the date of determination of total income under sub- section (1) of section 143 3 and where a regular assessment is made as is referred to in sub- section (1) following the date of such regular assessment]] and ending on the date of the re-assessment or re-computation under section 147, on the amount by which the tax on the total income determined on the basis of the reassessment or re- computation exceeds the tax on the total income determined4 under sub- section (1) of section 143 or] on the basis of the regular assessment aforesaid. 8.5.2 A perusal of the provisions of section 153A(1)(a) of the Act clearly mandates that the Assessing Officer is to issue notice on the searched person requiring him to furnish, within such period as may be specified in the notice, the returns of income in respect of each assessment year falling within six assessment years etc. and the provisions of this Act shall, so far as may be, apply accordingly as if such retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 153A of the Act declaring the additional income, disclosed/admitted in the partners statement under section 132(4) of the Act in the course of search, as its income. In view of the above discussion from para 9 to 9.5.4 of this order, we uphold the decision of the learned CIT (Appeals) confirming the action of the Assessing Officer in levying interest under section 234B and 234C of the Act. The grounds raised by the assessee at S.Nos.8 9 for Assessment Year 2008-09 and at S.Nos.2 and 3 for Assessment Years 2009-10 and 2010-11 are dismissed. 9. In the result, the assessee's appeal for Assessment Year 2008-09, 2009-10 and 2010-11 are partly allowed. Revenue's appeals for Assessment Years 2008-09 to 2010-11 in ITA Nos.499 to 501/Bang/2013. 10.1 Revenue has raised similar grounds of appeals for its three appeals for Assessment Years 2008-09 to 2010-11 in respect of the order of the learned CIT (Appeals) deleting the addition made towards profit on alleged unrecorded sales are as under : 1. The learned CIT (Appeals) has erred in deleting the following amount on account of suppression of sales : A.Y. : 2008-09 : Rs.;2,64,201. 2. The learned CIT (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord any evidence to substantiate the additions made. These observations of the learned CIT (Appeals) at page 5 of her order are extracted hereunder: - I have examined the statement of facts, written submissions, etc. Ongoing through the facts of the case, it is clear that the conclusion of the Assessing Officer is based merely on certain text messages which pertained to 11 dates in October and November, 2009. Merely, on the basis of these text messages and the statements of Sri Roopesh Anand and Sri K P Suresh referred to by the Assessing Officer as recorded by the investigation Wing Officers pertaining to these 11 text messages, the inference drawn, by the Assessing Officer with regard to 'suppression of sales' is a little far fetched without bringing on record any evidence in the form of sales bills, or statement of clients, or other evidence etc. It is observed that these text messages relate only to 11 dates which fall in A.Y. 2010-11 only. ; Inference of suppression of sales or its extrapolation to the entire year, actually 3 financial years, on the facts and circumstances of the case is not justified. 10.4 The learned Departmental Representative was heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that these figures represented actual sales of these days. (viii) We find that no material corroborative/evidence was brought on record by the Assessing Officer in assessment proceedings to substantiate the claim of unaccounted sales. (ix) The admission/disclosure of additional income made by the assessee firm under section 132(4) of the Act in the course of search, was on account of investments made in the hotels which were related to understatement of profits. Here again, it appears that there was no mention of any unaccounted/suppressed sales. 10.7 In view of the facts and circumstances of the case, as laid out above at paras 10.1 to 10.6 of this order, we concur with the view of the learned CIT (Appeals) that the said additions made by the Assessing Officer on account of profits earned on suppressed sales for Assessment Years 2008-09 to 2010-11 are unsubstantiated and therefore uphold the order of the learned CIT (Appeals) deleting the said additions of ₹ 2,64,201 for Assessment Year 2008-09, ₹ 40,41,098 for Assessment Year 2009-10 and ₹ 5,73,045 for Assessment Year 2010-11. We, accordingly, dismiss the grounds raised by revenue at S.Nos.1 to 3 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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