THE issue before the Bench is - Whether even if the tenanted premises are in an inoperable state, expenses incurred on extensive repair and refurbishment are to be allowed as revenue expenditure. NO is the Tribunal's answer.
Facts of the case
The assessee is a builder and developer. The AO disallowed its repair and maintenance expenses of a rented premises. Assessee had taken an office premises on rent in October, 2007 for a period of five years. As the said premises was old and not in use for a long time, it incurred the impugned expenditure towards repair and renovation of the said premises. The same was only toward achieving its' functional utility. No capital asset had come into existence thereby. Further, the same was in respect of rented premises and, accordingly, allowable u/s.30(a)(i), which employs the word 'repairs', in contradistinction to the words 'current repairs', i.e., in respect of non-tenanted house property, which falls u/s. 30(a)(ii). The Revenue's objection, on the other hand, was based on the premise that the nature and the volume of the expenditure would not qualify it to be a repair, which only could be allowed u/s.30. The expenditure was admittedly on renovation, capital in nature, and would therefore stand to be capitalized, albeit eligible for depreciation.
Having heard the matter, the Tribunal held that,
++ the expenditure stands thus incurred on refurbishment and renovation of an old premises, in an inoperable state, so as to make it fit for use. It is therefore wrong to classify or describe it as 'repairs'. The expenditure was incurred to render it in a functional state and, therefore, is clearly in the capital field. The ingredients and prerequisites of a capital expenditure would remain the same, and not undergo any change depending on the object matter of the expenditure, i.e., whether an owned or leased premises, and which itself is the premise of Explanation 1 to section 32(1)(ii), invoked by the Revenue;. Total renovation, leading to substantial improvements, is only capital expenditure, as clarified by the apex court in Ballimal Naval Kishore v. CIT - 2002-TIOL-912-SC-IT. It is nobody's case, nor could be, that the improvement is not enduring or shall not inure in future, particularly upon incurring regular, maintenance expenditure. The benefit arising out of a capital expenditure, again, does not imply permanence, in which case no expenditure even on regular maintenance, or for keeping it in a state of good repairs, a stipulation that marks most tenancy agreements, would be required. The said benefit, though, cannot also be said to be limited to the period of lease, which may well be extended. Further, that the same, i.e., capital expenditure, is excluded, stands amply clarified per Explanations to sections 30 and 31, brought on the statute by Finance Act, 2003 w.e.f. 01.04.2004. The expenditure, in our view, thus stands rightly considered by the CIT(A) to form a part of an admissible asset in view of Explanation 1 below section 32(1)(ii), carving an exception for depreciation, which is generally allowed only on assets owned by an assessee, on a building not owned by it, but in respect of which it holds a lease or other right of occupancy. A question may arise as to the fate of the written down value (WDV) of the relevant block of assets on the termination or expiry of the lease or rent arrangement, leading to the vacation of the premises. The assessee in such a case would continue to be entitled to its claim for deduction on the relevant block of assets, subject of course to the adjustment in respect of 'moneys payable', if any, as explained by the tribunal in Metro Exporters Pvt. Ltd.- 2014-TIOL-995-ITAT-MUM, as modified by its' further order dated 30.01.2015), on such an issue arising before it for adjudication. In view of the foregoing, we uphold the impugned order on this ground, dismissing the assessee's ground.
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