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Central Cottage Industries Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1984)7ITD731(Delhi)
AppellantCentral Cottage Industries
Respondentincome-tax Officer
Excerpt:
.....as items at serial nos. 5j to 13 above totalling at rs. 7,37,730 are concerned, he held them to be capital expenditure entitled to depreciation (as per annexure 'a' of the assessment order). the ito also allowed items at serial nos. 3 and 4 aggregating at rs. 3,28,356 as 'actual revenue expenses on renovation of shops'.4. the assessee felt aggrieved of the disallowances made as above and, therefore, the matter was brought in appeal before the commissioner (appeals). before him the details of all the expenses, as extracted above, had been furnished. he considered the nature of these expenses and held that the ito had no justification to hold that expenses at serial nos. 5 to 13 above were capital expenses. accordingly, he allowed rs. 7,37,730 as revenue expenses and directed that.....
Judgment:
1. The appellant, Central Cottage Industries Corporation of India Ltd., a Government of India undertaking, which came into existence on 1-4-1976 as a wholly owned subsidiary of the Handicrafts and Handlooms Exports Corporation of India Ltd. and which took over the business of Central Cottage Industries Association as a running concern, incurred an expenditure of over Rs. 18,83,000 as per particulars below in the accounting year ending on 31-3-1977 relevant to its very first assessment for the year 1977-78 on renovation, improvement, alteration, extension, decoration and furnishing of its business premises situate at 124, Janpath, New Delhi.1. Cost of new furniture 4,65,0001} } 4,69,0004. Expenditure on paints and 3,28,356distemper 1,52,956 }and on renovation of old furniture11. Cost of contingencies, }material and design fees 1,50,000 }13. Cost of miscellaneous }work like fixing of racks, }display of alcoves and }expenditure on false ceilings }(described as expenditure 1,08,930 }on extension as Annexure }'A' of the assessment order) }14. Cost of renovation }of building at 124, Janpath, }New Delhi.

3,38,052 }Less expenditure met by }the Government of India 97,000 } ---------}15. Renovation of the }above (structural 76,286-}extension of the main }hall of the emporium }and mezzanine floor).

}16. Renovation of the above }(replacement of 24,827 beams).

}17. Addition/alteration in the }above (cost of 4,256 } 3,48,162providing expanded metal }and extension of A.C. sheets)(cost of 1,741closing of the opening at 2. As far as items at serial numbers 1 and 2 are concerned, these had been capitalized by the assessee. Out of items at serial Nos. 3 to 13, the assessee claimed that it had incurred deferred revenue expenditure to the extent of Rs. 10,56,078 and that one-third of that amounting to Rs. 3,52,026 was deductible in the assessment year 1977-78. With regard to the rest of the items of expenditure as described at serial Nos. 14 to 18, the assessee had paid a sum of Rs. 3,42,000 towards the cost of extensions, alterations, improvements and replacements in the building situate at 124, Janpath, New Delhi, to the Central Public Works Department (CPWD) as per statement submitted and demand raised by the latter vide their communication dated 19-9-1977. This sum of Rs. 3,42,000 had been claimed by the assessee as a revenue expenditure incurred by way of repairs on its business premises, which were under its occupancy on the basis of a lease and licence agreement between it and the Government of India.

3. In the assessment made by the ITO under Sections 143/144B of the Income-tax Act, 1961 ('the Act'), which is not as coherent and intelligible as it ought to have been, the ITO disallowed the assessee's claim of deferred revenue expenditure of Rs. 3,52,026, allowed the expenditure of Rs. 3,42,000 paid by the appellant to the CPWD and so far as items at serial Nos. 5J to 13 above totalling at Rs. 7,37,730 are concerned, he held them to be capital expenditure entitled to depreciation (as per Annexure 'A' of the assessment order). The ITO also allowed items at serial Nos. 3 and 4 aggregating at Rs. 3,28,356 as 'actual revenue expenses on renovation of shops'.

4. The assessee felt aggrieved of the disallowances made as above and, therefore, the matter was brought in appeal before the Commissioner (Appeals). Before him the details of all the expenses, as extracted above, had been furnished. He considered the nature of these expenses and held that the ITO had no justification to hold that expenses at serial Nos. 5 to 13 above were capital expenses. Accordingly, he allowed Rs. 7,37,730 as revenue expenses and directed that depreciation granted by the ITO on those items be withdrawn At the same time, however, the Commissioner (Appeals), who was seized of the allowability or otherwise of the expenses claimed, issued a notice under Section 251 of the Act calling upon the assessee-corporation to explain why the amount of Rs. 3.42 lakhs debited to the repairs and maintenance account being expenditure reimbursed to the CPWD, be not treated as capital expenditure within the meaning of Section 32(1A) of the Act and depreciation allowed thereon. After hearing the appellant and after taking into account contents of the letter dated 15-6-1976 sent by the CPWD to the officer concerned of the NDMC, the Commissioner (Appeals) held that the expenditure was incurred on extensive renovation of the barrack type structure at 124, Janpath, New Delhi, which had outlived its life long time back. He, accordingly, held that the expenditure of Rs. 3.42 lakhs was capital in nature entitled to depreciation under Section 32(1 A) and directed the ITO to treat it as such and amend the assessment which had been made on the footing that the expenditure was revenue in character.

5. It is in the background of the above facts, that we heard the learned counsel for the appellant, Shri B.L. Chawla, vehemently contending that the aforesaid finding of the Commissioner (Appeals) regarding the expenditure of Rs. 3.42 lakhs was erroneous and without jurisdiction. Shri Chawla took us through a paper book and in particular referred to the agreement of licence dated 18-12-1976 between the Government and the assessee-Government corporation whereby the former had granted the latter occupancy of premises at 124, Janpath, New Delhi, for using the same in its business of running the Central Cottage Industries Emporium. The learned counsel has highlighted the various terms of lease and licence agreement and then submitted that in view of the fact that the licence was of a temporary nature revocable at one month's notice and the fact that whenever any expenditure was to be incurred by the licensee on any additions and alterations, etc., to the building, it was to enure to the benefit of the licensor without there being any right for the licensee to claim any compensation in respect thereof, the expenditure of Rs. 3,42,000 could not be described as capital expenditure. The learned counsel then contended that as a result of expenditure of Rs. 3.42 lakhs, no asset or enduring advantage was acquired by the assessee and that it had merely resulted in replacements of roofs of a building which had outlived their lives. For so contending reliance was placed on decisions in CIT v. Kisenchand Chellaram {India) (P.) Ltd. [1981] 130 ITR 385 (Mad.), CIT v. Delhi Cloth & General Mills Co. Ltd. [1981] 131 ITR 641 (Delhi), Addl CIT v. Dyer's Stone Lime Co. (P.) Ltd. [1982] 136 ITR 8 (Delhi) and Addl. CIT v. India United Mills Ltd. [1983] 141 ITR 399 (Bom.). In the end the learned counsel contended that the Commissioner (Appeals) had acted beyond his jurisdiction as according to him the question of adjudging the nature of expenses of Rs. 3.42 lakhs did not arise out of either the assessment made by the ITO or the appeal preferred by the assessee before the Commissioner (Appeals).

On the other hand, the learned departmental representative has merely relied upon the order, passed by the Commissioner (Appeals) and an authority in CIT v. Ballimal Nawalkishore [1979] 119 ITR 292 (Bom.).

6. We have given our very careful consideration to the orders passed by the ITO and the Commissioner (Appeals) and to the representations made on behalf of the appellant and the department. Before we adjudicate upon the issues involved, we might reproduce below the letter dated 19-9-1977 sent by the karyapalak engineer of CPWD to the manager (general administration), Central Cottage Industries Emporium, which describes the expenditure of Rs. 3.42 lakhs incurred by the assessee-corporation : Please refer to your letter No. CCIE/2981, dated 9-9-1977 on the subject cited above. The expenditure incurred, deposits received and the share of expenditure to be met by the Government of India is as under workwise:SI.Name of work Expenditure Departmental TotalNo. incurred charges Rs. Rs. Rs.1. Renovation 2,91,009.84 47,041.95 3,38,051.79 to A Less barracks expenditure plot No. to be met 124, by GOI 97,000.00 Janpath, ------------ New Delhi 2,41,051.79 (portion Less : occupied deposit by CCIE).

received 2,07,215.00 ------------2. Renovation to 63,889.00 12,397.15 76,286.13 A barracks3. Renovation to 21,825.78 3,801.06 24,826.84 A barracks4. A/A in A 3,469.00 687.03 4,256.03 barracks5. A/A in A 1,460.00 281.05 1,741.05 barracks -------------- plot No. 1,40,946.84 124, Janpath platform at 7,360.75 1,416.95 8,777.70 ground floor -------------- of the portion Grand Total : 1,49,724.54" occupied -------------- by CCIE) A/A Before judging the nature of the above expenses, we might as well reproduce below the provisions of Section 32(1A) which were brought on the statute book with effect from the assessment year 1971-72- (1A) Where the business or profession is carried on in a building not owned by the assessee 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 after the 31st day of March 1970, on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of, or improvement to, the building, then, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of Section 34, be allowed- (i) such percentage on the written down value of the structure or work as may in any case or class of cases be prescribed ; The reason why these provisions beneficial to the taxpayers were enacted is well-known. Till before the assessment year 1971-72 depreciation allowance was available to an assessee in respect of building, plant, machinery and furniture owned by him and used by him for the purposes of his business or profession. Under the unamended provisions relating to grant of depreciation, an assessee was not entitled to any allowance in respect of any capital expenditure which he might be obliged to incur on the property of others. Similarly the assessees were not entitled to any depreciation allowance on any capital expenditure incurred on any buildings which were not owned by them but which were in their use or occupation on hire or on the basis of a lease or licence agreement. But then the thinking of the Courts changed. In a number of cases which came before the Hon'ble Courts for their decisions, it was noticed that even though an assessee-lessee might not be entitled to any rights in a structure that he built which were to become the property of the lessor on determination of lease, he nonetheless continued to be the owner of superstructure during the sustenance of lease. The judicial opinion, therefore, veered round the view that full ownership for a limited period did not militate against the concept of ownership in jurisprudence. As a consequence, depreciation allowance was held admissible in cases where the property was not owned by an assessee but where capital expenditure had been incurred by him for the purposes of his business. The correctness of such views was accepted by the Parliament and statutory recognition was granted to them by incorporation of provisions of Section 32(1 A) into the Act by the Taxation Laws (Amendment) Act, 1970, with effect from 1-4-1971.

7. Judging the nature of spending of Rs. 3.42 lakhs in the background of the letter dated 19-9-1977 reproduced above and by applying the touchstone of the ethos behind the provisions of Section 32(1A), it appears to us that the expenditure in question was incurred by the assessee on the substantial renovation and extension of its business premises. Such an expenditure clearly partook the character of capital expenditure. In any case, the expenditure came within the meaning of 'doing of any work in or in relation to and by way of renovation or extension of, or improvement to, the building' as appearing in Section 32(1A). Even though the building did not belong to the assessee and even though the structural extension and improvement was to revert to the lessor or the licensor on the determination of lease or licence at short notice, the fact remained that the work done by the assessee was squarely covered by the terms of Section 32(1 A). The old barracks, housing the predecessor of the assessee-corporation, had outlived their lives and become unsafe for human occupation. Large scale extensions and improvements had, therefore, to be made and the expenditure of Rs. 3.42 lakhs came to be incurred in order to make a structural metamorphosis of the building in question which has continued to be in its occupancy ever since the coming into existence of the assessee-corporation. We would, therefore, agree with the views of the Commissioner (Appeals) on the point and uphold his decision that the sum of Rs. 3.42 lakhs was a capital expenditure and entitled to depreciation within the meaning of Section 32(1 A).

8. We have gone through the decisions relied upon by the learned counsel for the appellant. So far as the Madras High Court decision in the case of Kisenchand Chellaram (India) (P.) Ltd. (supra) is concerned, the facts in that case were different. In that case some current repairs had been carried out and some insignificant alterations had been made by putting up a wall-panelling and some partition walls.

That case, according to us, cannot be compared with the case in appeal before us where in order to give an absolutely new life to the building an expenditure of Rs. 18,83,248 had been incurred. Similarly the other decision relied upon by the assessee in the case of Delhi Cloth & General Mills Co. Ltd. (supra) had entirely distinguishable facts. Some small expenditure had been incurred by Delhi Cloth & General Mills Co.

Ltd. on redesigning its retail depots and furniture used for those retail shops. The Hon'ble Delhi High Court had held that the expenditure was necessitated by changes in design and had been incurred as a revenue expenditure in the ordinary course of business. As against the facts in that case, in the present case there has been a substantial renovation and extension of the building and, therefore, the second authority relied upon by the learned counsel does not help the assessee's case. As in the above-mentioned two cases, in the third case of Dyer's Stone Lime Co. (P.) Ltd. (supra), on which reliance has been placed by the learned counsel, some expenditure on current repairs had been incurred on the brick-kiln plant and that had been allowed as a revenue expenditure. On the very face of the facts found in the present case, the aforesaid decision would have no application whatsoever. Lastly, the decision in the case of India United Mills Ltd. (supra) also does not help the appellant's case. In that case certain old worn out doors had been substituted by fire proof doors as per factory rules and the renewal of roof had been done in order to get more light into the factory. The expenditure thus incurred was held to be a revenue expenditure on current repairs. As against the facts of the above mentioned case, in the present case large scale renovations and extensions were made as per details given in paragraph 1 above and as per the particulars mentioned in the letter of Public Works Department dated 19-9-1977 which has been reproduced in paragraph 6 of this order.

9. The representation made by the learned counsel that the decision of the Commissioner (Appeals) was without jurisdiction is not acceptable to us in view of the provisions contained in the Explanation appended beneath the provisions of Section 251(2). It is clearly provided in this Explanation that the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter had not been raised before the AAC. The decision of the ITO had been given with regard to the expenditure of Rs. 18,83,248, the details of which had been furnished before him. The ITO had considered part of these expenses as inadmissible being capital in nature and had allowed part of them as revenue expenditure. When the Commissioner (Appeals) decided the matter, he did not travel beyond the facts which had been furnished before the ITO and which had once again been considered by him in the appellate proceedings. In view of these provisions, we would reject the contention raised that the order passed by the Commissioner (Appeals) was without jurisdiction.

10. In conclusion, therefore, we would agree with the order passed by the first appellate authority and reject the appeal filed by the assessee.


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