ITAT, MUMBAI BENCH ‘A’, Determination of nature of renovation expenses incurred on a leased premises

Determination of nature of renovation expenses incurred on a leased premises



In order to claim deduction of an expenditure as revenue which otherwise gives enduring advantage, the onus is on assessee to prove that the ownership of the property even during subsistence of lease, vests with the lessor and the assessee enjoyed the benefit of reduced license fee.

ITAT, MUMBAI BENCH ‘A’, MUMBAI

The Living Room Designers

v.

ITO

ITA No. 996/Mum/2008

August 31, 2009

RELEVANT EXTRACTS:

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12. Broadly, if an expenditure gives the assessee an enduring advantage, the same has to be treated as a capital expenditure. Similarly if an expenditure is incurred on a leased premises and the agreement speaks of handing over possession of the property to the original owner as-it-is, without any benefit or without any right to retain the improvements made to the existing premises, such expenditure may be treated as revenue in nature since the assessee cannot be said to be having any enduring advantage out of such expenditure. Courts have also highlighted subtle difference between replacement and renovation. A wall or roof, which is already in existence, is given further support no new asset can be said to have come into existence but if a new floor is constructed thereon or an altogether change brought out to the existing premises it can be treated as capital expenditure.

13. In the case of Balimal Naval Kishore vs. CIT 224 ITR 414 the Apex Court observed that a total renovation of the theatre and the expenditure incurred for that purpose by purchasing new machinery, new furniture, new sanitary fittings and new electrical wiring, cannot be said to qualify as "current repairs" but has to be treated as capital in nature.

14. However, in the case of CIT vs. Madras Auto Service (P) Ltd. 233 ITR 468 the Apex Court, while deciding Civil Appeal relevant for the assessment year 1968-69, observed that an expenditure incurred on renovation of leasehold building has to be treated as revenue in nature. In that case, the assessee had obtained premises on lease for a period of 39 years and as per the terms and conditions of the lease the assessee had the right to demolish the existing premises and appropriate to itself of the material thereof without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business. The lessee was required to pay rent of Rs.1000/- per month for the first 15 years with slight increase from time to time thereafter. The lease deed further provided that the new construction shall, right from the commencement of the work, be the property to the lessors. The lessee was not entitled, under any circumstances, for any compensation whatsoever on account of its putting-up the new construction in the place of the old. Acting under the lease deed the assessee invested a sum of Rs. 1,62,835/- on construction of a new building on the said land and claimed it as business expenditure or as extra rent for the lease. In the backdrop of these facts, the Apex Court laid emphasis on the following principle "if what is got rid of by a lump-sum payment is an annual business expense chargeable against revenue, the lump-sum payment should equally be regarded as a business expense." The Apex Court further noticed that right from the inception the building was of the ownership of the lessor and thus the assessee did not acquire any capital asset. The only benefit, which the assessee derived by spending the money, was that it got a lease of a new building at a low rent, thus saving considerable revenue expenditure, for the next 39 years. Therefore, the expenditure was considered as a revenue expenditure.

15. In the case of Bigjo's India Ltd. vs. CIT (2007) 293 ITR 170 (Delhi), the HonTDle Delhi High Court was concerned with the assessment year 1998-99 wherein the assessee incurred certain expenditure on account of repair and. maintenance of air-conditioners etc., and the same was claimed as revenue expenditure by placing reliance upon the decision of the Apex Court in the case of Madras Auto Services (supra). The Hon’ble High Court observed that the decision of the Apex Court is distinguishable on facts inasmuch as the Apex Court was concerned with a situation where the constructed portion would be in the ownership of the lessor and on account of the expenditure incurred the assessee had benefit of reduced payment of license-fee whereas, in the instant case the assessee had enduring benefit ; By virtue of incurring huge expenditure on purchase of timber, plywood and by building new shaft it is not shown that the assessee had enjoyed any revenue benefit in lump-sum and thus it was treated as capital expenditure.

16. In the case of CIT vs. HEDGE consultancy (P) Ltd. 127 Taxman 597 the assessee converted the godown premises into office by renovating it. The Hon’ble Bombay High Court observed that the asset created by spending the said amount did not belong to the assessee but the assessee got the business advantage of using modern business premises at low rent, thus saving considerable revenue expenditure for a considerably long period and hence the expenditure character of revenue expenditure. Similarly the other case law relied upon by the assessee were also decided under the peculiar facts of each case.

17. As could be noticed from the above referred Judgments, in order to claim deduction of an expenditure which otherwise gives enduring advantage, the onus is on assessee to prove that the ownership of the property even during subsistence of lease, vests with the lessor and the assessee enjoyed the benefit of reduced license-fee. In the instant case, however, the lease agreement was not placed on record and it was not shown as to what is the revenue advantage, over a period of time, the assessee obtained by incurring the huge expenditure. It is also not known as to whether the ownership of the items replaced and/or affixed to the property would automatically become the property of the lessor. On the contrary, some of the expenditure such as carpet purchase etc., indicate that it has nothing to do with the property and, upon termination of lease, even if there is a condition of surrender of the property on as-is-where is condition, certain items such as carpet, ladder, glass etc., need not be handed-over to the lessor. Out of the total expenditure of approximately Rs. 12 lakhs on the same property, the assessee treated a sum of Rs. 3 lakhs as capital in nature which is specifically connected to the civil work and carpentry work. If there is a clause in the lease deed, as in the case of Madras Auto Service (supra), with regard to lessor's right over the constructed portion of the building, the assessee would have claimed a sum of Rs. 3 lakhs also as revenue expenditure but such sum having been not declared as revenue expenditure, it shows that expenditure incurred on the renovation has given the assessee an enduring benefit and the ownership of the renovated items would not per se become the property of the lessor. Such being the case it is difficult to conceive that items like carpet etc., would fall in the category of items which are considered in the case of Madras Auto Service (supra). In particular, the assessee has not placed any material, either before the tax authorities or before us to show that the lump-sum payment in the form of renovation expenses has benefited the assessee in the form of reduction in the revenue expenditure over a period of years by virtue of low rentals or otherwise. Under these circumstances we do not find any merit in the argument advanced by the learned counsel appearing on behalf of the assessee. In the absence of any material to contradict the findings of the learned CIT (A) we reject ground Nos. 1 and 2 of the assessee and uphold the Order of the learned CIT (A).

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