Section 37(1) – When the assessee incurs expenditure, on the premises taken on rent by it, which does not create any new capital asset and the said expenditure merely helps the assessee for efficiently carrying on its business and the items on which expenditure so incurred cannot be reused on vacation of said premises, then such expenditure has to be treated as revenue in nature.
Explanation-1 after the fifth proviso to section 32(1)(ii) – It can be invoked only if the expenditure itself is capital in nature
FACTS
During the year under consideration, the assessee, an investment manager/advisor, had taken new premises on rent and had carried civil work, tiling work, marble work, fittings, fixtures, interior work in respect of said premises. The assessee had treated the said expenses as revenue expenditure.
However the Assessing Officer was of the opinion that these were major renovation expenses in the nature of capital and since the property was taken on lease, the assessee was entitled to depreciation only.
The Commissioner (Appeals) sustained the disallowance on the basis of Explanation (1) after the fifth proviso to section 32(1)(ii) which reads as – where the business or profession of the assessee is carried on in a building not owned by him 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 of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
Aggrieved, the assessee preferred an appeal before the Tribunal.
HELD
The nature of business of the assessee needed a posh office as the visitors/clients were normally corporate executives and high net-worth individuals. It was submitted that during the course of its business, the assessee had to cater high-profile clients both Indian as well as foreign and hence the office premises were required to be kept to a good standard. The expenditure incurred by the assessee was in order to meet these business requirements.
The civil work, tiling work, marble work, fittings, fixtures, interior work carried out in respect of said rented premises brought changes only in the internal part of the structure. No new asset had been created and the said expenditure merely helped the assessee for efficiently carrying on its business and the items on which expenditure had been incurred could not be reused on vacation of said premises. Hence, the expenses incurred were revenue in nature.
Also the pre-condition to invoke the provision of Explanation- 1 after the fifth proviso to section 32(1)(ii) is that expenditure itself should be capital in nature. If the expenditure by its nature itself is not capital in nature and its nature is revenue then provisions of Explanation-1 after fifth proviso to section 32(1)(ii) will not be applicable at all.
