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2016 (11) TMI 70 - KARNATAKA HIGH COURT

2016 (11) TMI 70 - KARNATAKA HIGH COURT - TMI - Expenditure incurred towards renovation and improvement of hotel building - nature of expenditure - revenue or capital - Tribunal after perusing the record has found that the expenditure was incurred by the assessee only in the process of earning profit and not to acquire any capital asset - Held that:- Tribunal in the referred observation has elaborately considered that the explanation would not be applicable, more particularly when the expenditur .....

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e erroneous nor such view can be said to be contrary to any statutory provision. - Decided against revenue - ITA No. 254/2015, C/W ITA No. 255, 256, 257/2015, ITA No. 254/2015 - Dated:- 21-9-2016 - Jayant Patel And Aravind Kumar, JJ. For the Appellants : Sri E R Indra Kumar, Sr. Counsel A/W, Sri E I Sanmathi, Advocate ORDER As in all appeals common questions are to be considered, they are being considered simultaneously. 2. The appellants-Revenue has preferred the present appeals by raising the .....

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in enduring benefit to the assessee? 3. We have heard Mr.Indra Kumar, learned Senior Standing Counsel with Mr.E.I.Sanmathi, learned Counsel appearing for the appellants-Department. 4. We may at the outset record that the Tribunal in the impugned order at paragraphs 5.4.1 to 5.4.9 has observed thus: 5.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited. It is not in dispute that the assessee has taken the hote .....

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treated as revenue expenditure. The Assessing Officer referring to Explanation 1 to Section 32 of the Act, was of the view that the assessee has incurred capital expenditure and therefore is entitled to depreciation thereon @ 10%. Accordingly, the Assessing Officer disallowed the assessee s claim for the aforesaid expenditure to be allowed as revenue expenditure, treated the same as capital expenditure and allowed the assessee depreciation thereon @ 10%. 5.4.2 The question that now arises for co .....

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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 introd .....

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) 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, assesses who .....

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r that in case revenue expenditure was incurred by the assessee on the premises taken on lease, the question of allowing any depreciation u. 32(1A) of the Act would not arise for consideration. In other words, section 32(1A) of the Act introduced w.e.f. 1.4.1971 by Taxation Laws (Amendment) Act, 1970 would not be applicable in case the assessee incurred revenue expenditure on the leased premises. 5.4.5 However, sub-section 1A of Section 32 of the Act introduced by Taxation Laws (Amendment) Act, .....

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it remains after the introduction of sub- section 1A of Section 32 of the Act w.e.f. 1.4.1971 continued to be the same in respect of revenue expenditure incurred by the assessee on premises taken on lease. In other words the concept of allowing depreciation on the capital expenditure in relation to renovation, extension or improvement of the premises taken on lease continued to be the same w.e.f. 1.4.1971. Therefore, whenever the assessee incurred the expenditure, in the process of earning profi .....

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nt 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 assesses 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 filed, 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, .....

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or 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. 5.4.7 In the case on hand, on an appreciation of the facts of the case and details on record, we find that after incurring the expenditure on the leased premises, the assessee has neither obtained any enduring benefit nor has any new capital asset has come into existence. The assessee continued to run the hotel in the ver .....

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bserved, no capital asset of an enduring nature came into existence. In other words, the assessee has not acquired any asset/income earning apparatus. It is well settled principle of law that the expenditure incurred for acquisition of an asset is a capital expenditure and expenditure incurred in the process of earning profit is revenue expenditure. In the case on hand, we are of the view that the assessee incurred the expenditure for efficient running of the business and therefore the expenditu .....

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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 assesseee (supra), it is obvious that whenever an expenditure was incurred in the process of earning pr .....

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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 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 .....

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