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Business expenditure - Repairs on leased premises
July, 31st 2007

HC (Chennai)
CIT vs Ayesha Hospitals (P) Ltd.
Citation 292 ITR 266 
Business expenditure - Repairs on leased premises
The assessee company was running a hospital in leased premises. The expenses incurred by the assessee on repairs and maintenance of premises being towards painting, relaying of damaged floor and partitions, etc. were not in the nature of capital expenditure. Therefore, Explanation I to s.32(1) of the Income Tax Act 1961 was not applicable and the expenses incurred were deductible as business expenditure.

High Court of Madras

CIT vs Ayesha Hospitals (P) Ltd.

Tax Case (Appeal) No. 42 of 2004

R. Balasubramanian and P.P.S. Janarthana Raja, JJ

10 October 2006

Pushya Sitaraman for the Appellant
G.S. Shivakumar for the Respondent


The judgment of the court was delivered by

P.P.S. Janarthana Raja, J The Revenue has filed this appeal under section 260A of the Income-tax Act, 1961 against the order dated June 30, 2003, made in I. T. A. No. 665 (Mds) of 1996 on the file of the Income-tax Appellate Tribunal, Madras "A" Bench. On February 3, 2004, this court admitted the appeal and formulated the following substantial questions of law :

"(i) Whether, on the facts and circumstances of the case, the Tribunal was right in allowing the expenditure incurred on flooring and partitions, etc., for the newly extended area of space, as revenue expenditure, when very clearly new infrastructures have been provided and the space and capacity of the hospital has been increased ?

(ii) Whether, on the facts and circumstances of the case, the Tribunal was right in allowing the expenditure incurred on flooring and partitions, etc., for the newly extended area of space, co-owners of the property and the directors of the assessee-company are same persons ?"

The brief facts arising out of the above tax case are as hereunder :

The assessee is a private limited company running a hospital in a leased premises. The assessment year is 1991-92 and the corresponding accounting year ended on March 31, 1991. The assessee-company filed a return of income on October 28, 1991, showing the income at Rs. 3,23,275. Later the case was selected for scrutiny and notice was issued under section 143(2) of the Income-tax Act (hereinafter referred to as "the Act"). Then the assessment was completed under section 143(3) of the Income-tax Act determining the total income at Rs. 6,80,890. While completing the assessment, the Assessing Officer made an addition of Rs. 1,85,557 as unwarranted expenses on repairs and maintenance of building and held that it is a capital expenditure. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) dismissed the appeal confirming the order of the Assessing Officer in respect of the expenditure. Aggrieved by the same, the assessee filed an appeal before the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal"). The Tribunal allowed the appeal and set aside the order of the Commissioner of Income-tax (Appeals).

Learned senior standing counsel appearing for the Revenue submitted that the Income-tax Appellate Tribunal erred in treating the expenditure as revenue without appreciating the fact that it would amount to acquisition of a new capital asset. It was further submitted that the Tribunal ought to have appreciated that the co-owners of the property and the directors of the assessee-company are the same persons and had colluded and have evaded the assessability of the capital expenditure in the hands of the co-owners. An alternative submission also has been made that the Tribunal ought to have applied the proviso under Explanation 1 to section 32(1) of the Income-tax Act, which is inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from April 1, 1988, and held as capital expenditure.

Learned counsel appearing for the assessee submitted that whenever the tenant had incurred expenditure, it would amount to only revenue expenditure and further stated that Explanation 1 to section 32(1) of the Act is not applicable to the facts of the case.

Heard counsel. The assessee had spent a sum of Rs. 1,85,557 towards painting, re-laying of the damaged floors, partitions, etc. The co-owners were the directors of the appellant. But they were separate entities. The co-owners were admitting the rental income. They were also paying tax on the profits arising out of the hospital. The lease deed spoke of the normal requirements which the co-owners provide. The assessee was putting the building to a special use. No landlord would ever incur or undertake to bear the expenditure. Here the expenditure was incurred by the assessee on a leased property and the same has to be allowed as revenue expenditure. The Tribunal has correctly followed the judgment of the Supreme Court in the case of CIT v. Madras Auto Service P. Ltd. reported in [1998] 233 ITR 468, wherein the Supreme Court held that the expenditure incurred on construction of a leased premises by the assessee was deductible as revenue expenditure. The nature of the expenditure indicates that it is only revenue expenditure for the purpose of carrying on business.

An alternative plea also was made by learned standing counsel for the Revenue that the present case comes within the purview of Explanation 1 to section 32(1) of the Act which is inserted with effect from April 1, 1988. The said Explanation reads as follows :

"Explanation 1. 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."

From a reading of the above, it is clear that if the lessee incurs capital expenditure on the building of the nature mentioned above, the said provision treats the building as if owned by the assessee. The Explanation is an exceptional one which permits depreciation in cases were the assessee does not own a building. In the present case, the Tribunal had given a finding that it is a revenue expenditure on the ground that the expense is incurred only towards painting, re-laying of the damaged floors, partitions, etc. This expenditure can never be considered to be a capital expenditure of the nature mentioned in the above Explanation.

In view of the foregoing reasons, we find no error or legal infirmity in the order of the Tribunal and the same does not require interference. Under these circumstances, we answer the questions of law in favour of the assessee and against the Revenue and the tax case is dismissed. No costs.

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