Expenses incurred on buy back of shares is capital expediture :ITAT

ORDER

R.S. Syal, Accountant Member – This appeal by the assessee arises out of the order passed by the CIT(A) on 27.01.2014 in relation to the assessment year 2005-06.

2. The first issue involved in this appeal is against the confirmation of addition of Rs. 1,95,320/-, being legal and professional expenses incurred in relation to shares buy back.

3. Briefly stated, the facts of this ground are that the assessee claimed deduction for Legal and professional charges. The AO held some of such expenses to be capital in nature. An ad hoc disallowance of Rs. 5 lac was made on this score. The ld. CIT(A) reduced the disallowance to Rs. 1,95,320/-, being the expenditure relating to buy back of shares, by relying on the judgment of the Hon’ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792 and Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798  (SC). The assessee is aggrieved against the sustenance of addition.

4. We have heard the ld. DR and perused the relevant material on record. There is no appearance from the side of the assessee despite notice. As such, we are proceeding to dispose of this appeal ex parte qua the assessee.

5. Adverting to the facts of the instant case, it is observed that the disallowance of expenditure of Rs. 1,95,320/- sustained in the first appeal relates to buy back of shares. The Hon’ble Supreme Court in Punjab State Industrial Development Corpn.(supra) has held that the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Similar view has been reiterated inBrooke Bond India Ltd. (supra). As the expenditure of Rs. 1,95,320/- relates to buy back of shares, respectfully following the precedents noted by the ld.CIT(A), we uphold the disallowance. This ground is not allowed.

6. Ground nos. 2 and 3 are against the confirmation of addition in respect of Repair and maintenance expenses amounting to Rs. 8,28,304/- incurred in relation to building upkeep and maintenance on the ground that they are capital in nature and in the alternative in not allowing depreciation on the same.

7. The facts apropos this ground are that the assessee claimed deduction under the head ‘Repair & maintenance’ at Rs. 8,28,304/- On perusal of the details, it transpired that a number of expenses were incurred for renovation of building. The AO treated this amount as capital expenditure and disallowed the same. The ld. CIT(A) upheld the disallowance.

8. After hearing the ld. DR and perusing the relevant material, it is observed that the assessee incurred expenses of Rs. 8,28,304/- on a rented premises. Such expenses are in the nature of renovation of building. The Hon’ble Supreme Court inBallimal Naval Kishore v. CIT [1997] 224 ITR 414 has held that the expenditure incurred by the assessee on total renovation of cinema theatre by installing new machinery, new furniture, new sanitary fitting and new electrical installation besides extensive repair of structure of building, is a capital expenditure and hence not allowable as current repairs. This judgment indicates that any capital expenditure on total renovation is liable to be considered as capital expenditure. The Hon’ble jurisdictional High Court in Bigjo’s India Ltd. v. CIT [2007] 293 ITR 170 (Delhi)considered almost a similar situation as is obtaining before us in the present appeal. In that case, the assessee, a licensee of the showroom, erected new counters and built a new lift shaft at a new site. It was held that such amount was not in the nature of current repairs but a capital expenditure not deductible in full. We thus reject the viewpoint of the assessee of such an expense being of revenue nature.

9. Explanation 1 to section 32 provides that where the business 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 ‘on the construction of any structure or doing of any work in or in relation to, and by way of renovation or expansion or, or improvement to, the building, then, the provisions of this clause shall apply as the said expenditure or work is a building owned by the assessee.’ It implies that whereas the expenditure of a capital nature incurred on the renovation etc. of a building, which is not owned by the assessee but in respect of which the assessee holds mere occupancy rights, cannot be allowed deduction as a revenue expense, but such expenditure of a capital nature is liable to be considered as a building owned by the assessee for the purposes of section 32 and hence depreciation is allowable pro tanto. In view of the above discussion, by which we have held that the expenditure incurred by the assessee in respect of the building is a capital and not a revenue expenditure, we hold that the assessee is entitled to depreciation at the stipulated rate. The AO is directed to allow such depreciation as per law after allowing a reasonable opportunity of hearing to the assessee.

10. In the result, the appeal is partly allowed.