ORDER
K.C. Singhal, J.M.
1. The only issue arising out of this appeal is whether CIT(A) was justified in upholding the action of the AO treating the repairs and maintenance of the rented premises as capital expenditure on the facts of the case.
2. The brief facts of the case are these :
3. The assessee is a firm of chartered accountants. It claimed total expenditure of Rs. 2,27,735 as business expenditure under the head “repairs and maintenance”. The assessee was asked to explain the nature of such expenses. On the basis of details furnished by the assessee it was found by the AO that such expenditure was incurred on demolition of some of the original walls and rebuilding part thereof to suit the office requirements, preparation of number of temporary wooden partitions for the office purpose, painting and decorative wood panelling and extensive electric wiring and fittings. In addition to all such expenses the assessee also incurred another expenditure of Rs. 71,114 towards furniture and fixtures consisting of chairs, telephone counter, office counter, cabinet, tables, teapoys, sofa, etc. which was capitalised by the assessee itself as a capital expenditure. Keeping in view the nature of expenditure incurred by the assessee and the test laid down in the case of Hylm Ltd. vs. CIT (1973) 87 ITR 310 (AP) it was held by AO that such expenditure was capital in nature. However, some of the minor expenses were held to be revenue expenditure. Thus, a sum of Rs. 1,71,362 was considered as capital expenditure on which depreciation @ 10 per cent was allowed and the balance amount of Rs. 1,54,226 was disallowed.
4. The matter was carried before the CIT(A) who has upheld the additions made by the AO considering the case law (1973) 87 ITR 310 (AP) (supra) and the nature of expenditure. According to him an asset or advantage of enduring nature does not mean that it should last forever. If the capital asset is a short-term one, the expenditure incurred on it does not for that reason cease to be capital expenditure. It is further held by him that it is the intention and the object with which the asset is acquired, which is relevant. In support of his conclusion he relied on the decision of the Madras High Court in CIT vs. Mahalaxmi Textiles Mills Ltd. (1965) 56 ITR 256 (Mad), the decisions of Bombay High Court in CIT vs. Ballimal Naval Kishore (1979) 119 ITR 292 (Bom), 147 ITR 222 (sic) and Fancy Corpn. Ltd. vs. CIT (1986) 162 ITR 827 (Bom), the decision of Patna High Court in CIT vs. Karuna Mica Co. (1987) 167 ITR 292 (Pat) and decision of Delhi High Court Delhi Cloth & Gen. Mills Co. Ltd. vs. Addl. CIT (1986) 160 ITR 857 (Del). Aggrieved by the said order, the assessee is in appeal before the Tribunal.
5. The learned counsel for the assessee Mr. K. A. Sathe, has vehemently assailed the order of CIT(A) by contending that the assessee does not acquire an asset or an advantage of enduring nature by incurring expenditure in the rented premises. It was submitted by him that the expenditure in the nature of capital i.e., on acquisition of furniture of various types was already capitalised by the assessee and it was only expenditure in the nature of repairs and replacement to have optimum use of the rented premises which has been claimed as revenue expenditure.
6. In support of his contentions he relied on the decision of Karnataka High Court in CIT vs. B. Ramachandrappa & Sons 191 ITR 34 (Kar), of Patna High Court in CIT vs. Bharat Commercial Corpn. (1997) 226 ITR 242 (Pat), of Calcutta High Court in Cultural Enterprises Corpn. vs. CIT (1992) 196 ITR 488 (Cal), of Gujarat High Court in CIT vs. Mehta Transport Co. (1986) 160 ITR 35 (Guj) and of Supreme Court in Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC) and J.M.D. Medicare Ltd. & Anr. vs. Union of India & Ors. (1998) 232 ITR 467 (Cal). He also relied on the decision of the Pune Bench of the Tribunal in Modern Traders (Chinease Room) vs. Asstt. CIT (1995) 53 TTJ (Pune) 237. On the other hand the learned Departmental Representative has relied on the reasons given by the lower authorities. In addition to that he drew our attention to the two agreements under which the leasehold rights were acquired by the assessee. He took us through the terms of these agreements to show that it was a case of perpetual lease and not the case of lease for a smaller period. According to him it was ownership right and therefore, the expenditure incurred by the assessee should be seen in the light of this fact. According to him the expenditure incurred by the assessee was by way of revocation of the newly acquired leasehold premises and, therefore, was in the capital field and consequently could not be allowed as revenue expenditure.
7. Rival submissions of the parties have been considered carefully. Perusal of all the case law relied upon by the parties as well as recent decision of the Supreme Court reveals the following tests :
(1) An advantage of enduring nature need not always be on capital account. It may also be on revenue account on the facts of the case, if in the commercial sense facilitates the trading operations or enabling the management to conduct all business of the assessee to be carried on more efficiently or more profitably. However, if the advantage is in the capital field, it will be disallowable [(1980) 124 ITR 1 (SC) (supra)].
(2) Where the expenditure incurred by the assessee is by way of renovation it could not be considered either as repair or revenue expenditure. Such expenditure should be treated as capital expenditure. [recent decision of Supreme Court in Ballimal Naval Kishore & Anr. vs. CIT (1997) 224 ITR 414 (SC).]
(3) Where the expenditure incurred is in the capital field but the assessee does not become the owner of the property so created out of such expenditure then it would be of revenue nature, if incurred for the purpose of business [CIT vs. Madras Auto Services (P) Ltd. (1998) 233 ITR 468 (SC), CIT vs. Associated Central Companies Ltd. (1988) 172 ITR 257 (SC)].
8. Let us consider the facts of the case and apply the legal position stated above. The perusal of the two agreements dt. 4th May, 1986 and 1st September, 1988, shows that the assessee has become the perpetual lessee of the building. The first agreement shows that the flat was constructed by the landlord Mrs. V. B. Thakkar, out of the funds of Rs. 3,37,800 paid in advance by the two lessees viz. (1) Mrs. Kamal Kulkarni and (2) Mrs. Alka Kulkarni. According to cls. 6 and 8 of the agreements between them, the landlord was to pay interest on advances and the lessees were to pay the rent. However, cl. 10 provided that rent will be in lieu of the interest. That means no interest and no rent basis. However, it provided that each of the parties will pass the receipts to each other. Clause 18 which is very relevant provided that in case, the society of which the landlord is the member, is wound up and the plot becomes freehold, the tenant has right to purchase property at the same price which has been paid as loan under the agreement and the landlord shall transfer and convey the same to the tenant at his cost. Perusal of all these covenants clearly shows that the lessees were the perpetual lessees of the flat.
9. The perusal of the second agreement between the assessee and the above lessees dt. 1st September, 1988, shows that these lessees have transferred their leasehold rights in the flat to the assessee against same consideration of Rs. 3,37,800 which was paid by them to the landlord. Thus in our opinion, the assessee-firm has become the perpetual lessee. It is in this background, the nature of the expenditure incurred by assessee is to be seen.
10. The perusal of assessment order shows that assessee had incurred a substantial amount of Rs. 2,27,735 under the head “repairs and maintenance”. This expenditure was incurred on rebuilding of interior walls, wooden partitions, paintings of all rooms with plastic emulsion paint and extensive electrical fittings in addition to the substantial expenditure and on furniture of Rs. 71,145. Some of the petty expenses were allowed by the AO while the balance amount incurred on major items totalling Rs. 1,72,362 were disallowed as capital expenditure. Keeping in view all the facts that the assessee acquired the flat as perpetual lessee and incurred extensive expenditure as compared to acquisition cost of the leasehold rights, and the nature of items on which expenditure was incurred, we are of the view that such expenditure was by way of renovation of newly acquired leasehold property and thus can be said to be in the capital field in view of recent Supreme Court decision in the case of Ballimal Naval Kishore & Anr. vs. CIT (supra). We further find that the case of assessee does not fall within the exception of the tests mentioned above. The advantage obtained by the assessee on account of renovation is not akin to the advantage in the trading operations of a businessman as held by the Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (supra) but was in the capital field. Since the building in the present case was totally new one, expenditure could not be said as of repairs or maintenance of such building. The extent of the expenditure was to such a large extent that it was nothing but renovation of building. It would make no difference if such building is rented one. On the other hand it is a case of perpetual lease which is practically considered as akin to ownership though not legally. The advantage being in the capital field, in our opinion has been rightly disallowed by the CIT(A).
11. The case law relied upon by the learned counsel of the assessee are distinguishable on facts of the case. Firstly, none of the case law related to perpetual lease. Secondly, the expenditure incurred in these cases was by way of repair and renovation of the existing old and dilapidated asset to make it useful for carrying on the business. Thirdly, the expenditure was not substantial one as in the present case. Fourthly, no asset had been created belonging to the assessee while in the present case the expenditure incurred by assessee created asset belonging to the assessee and not to the lessor.
12. In view of the above discussions, it is held that, expenditure incurred by the assessee was on account of renovation of the leasehold property was in the capital field and, therefore, cannot be considered as revenue expenditure. The order of the CIT(A) is accordingly upheld.
13. In the result, appeal of the assessee is dismissed.