IN INCOME-TAX APPELLATE TRIBUNAL B BENCH, CHENNAI Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member I.T.A. Nos. 1764 and 1765/Mds/2012 2013 [In I.T.A. Nos.1765 and 1764/Mds/2012] Deputy Commissioner of M/s. Arihant Foundations & Income Tax, Company Circle I(1), Vs. Housing Ltd., No. 271, Chennai. Poonamallee High Road, Chennai 600 010. [PAN: AAACA7402P] (Appellant) (Respondent/Cross Objector) Department by : Shri Supriyo Pal, JCIT Assessee by : Shri Devendra Kumar Bhandari,CA Date of hearing : 14.07.2016 /Date of Pronounce ment : 23.09.2016 O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: These two appeals filed by Revenue and Cross Objections filed by assessee are directed against different orders of ld. Commissioner of Income Tax (Appeals) III, Chennai both dated 19.06.2012 for assessment years 2004-05 and 2005-06. only effective common ground raised in appeal of Revenue is that ld. CIT(A) has erred in allowing depreciation @ 100% on temporary wooden partitions. 2 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 2. brief facts of case are that assessee is engaged in business of construction of residential and commercial complexes at various projects. It filed return of income on 23.08.2005 admitting total income of .1,89,12,614/-. Assessment under section 143(3) of Income Tax Act 1961 [ Act in short] was completed on 30.05.2006 determining total income at .1,97,81,220/-. assessee had claimed amount of .29,87,018/- as depreciation @ 100% on expenditure incurred on erecting temporary wooden partitions. It was found out by Assessing Officer during assessment proceedings for assessment year 2005-06 that assessee had let out its building along with various equipments installed in it which includes temporary wooden partitions and these partitions, though temporary, would remain for period of three years till expiry of lease period and that assessee should have capitalized these items. As assessee had claimed entire expenditure in full, Assessing Officer has reopened assessment by issue of notice under section 148 of Act dated 03.01.2008. In response to notice under section 148 of Act, assessee vide letter dated 08.02.2008 requested to treat original return filed on 23.08.2005 as return filed in response to said notice. Subsequently, notice under section 143(2) of Act was issued on 02.05.2008. 3 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 3. Before Assessing Officer assessee has submitted that temporary wooden partitions were installed in building which was let out on rent during year and income derived thereon was offered under head income from house property . income derived from hiring of equipments and provisions of amenities were offered under head income from other sources . assessee had contended that expenditure was incurred as per requirement of lessee and it has not resulted in any asset of enduring nature. wooden partitions are of no use after expiry of lease period. Hence, they were temporary erections eligible for 100% depreciation. However, Assessing Officer did not accept submissions of assessee and concluded that temporary partitions will remain for three years and therefore he held that expenditure incurred on false ceiling and wooden partitions were of capital in nature to be included in cost of building and assessee should have capitalized these items in its books along with cost of building. By relying on following decisions viz., CIT v. India Metal and Metallurgical Corporation (141 ITR 40), CIT v. N.L. Mehta Cinema Enterprises Private Limited (216 ITR 437) and Uttar Bharat Exchange Limited v. CIT (55 ITR 55), Assessing Officer has further held that since building was let out and income derived thereon was offered under head income from house property , no depreciation on building was allowable under head income from business and consequently no depreciation would be allowed 4 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 on cost of wooden partitions. Thus, Assessing Officer has disallowed depreciation of .29,87,018/- claimed by assessee on temporary partitions and false ceiling and completed assessment under section 143(3) r.w.s. 147 of Act and determined total income of assessee at .2,27,68,238/-. 4. assessee carried matter in appeal before ld. CIT(A). AR of assessee has submitted before ld. CIT(A) that assessee company constructs residential and commercial buildings and sells same to its prospective customers. In some situations, where company has completed projects and does not have any readymade buyers, it finds suitable tenant and leases out property. company has completed construction of jointly developed project "Arihant Viceroy" in April 2003 but could not immediately find any taker for building. building consisted of 9 floors, out of which 4 floors belonged to owner and other 4 floors to assessee. company entered into agreement with Verizon Data Services India Pvt. Ltd (VDSI) for leasing out property. Once property was let out, it would be easy to find buyer for building. tenant (VDSI) wanted property with all fixtures, false ceilings and interior decoration to their satisfaction. It also wanted assessee to install certain wooden temporary structures/partitions, lifts, extra generators, sanitary installations, scanning installations like web camera, 5 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 biometric access to premises, special air-conditioning requirements etc. assessee installed all furniture and fixtures as well as partitions etc. according to requirement of VDSI. expenditure was incurred so that building could be let out which would enable assessee to subsequently sell building. assessee sold two floors alongwith wooden partitions/structures installations installed in those floors after letting out property and therefore, AR of assessee pleaded that expenditure towards part of temporary wooden structures deserves to be allowed as deduction sold with building. AR of assessee has further stated that total expenditure on building on this account was to extent of .3 to 4 crores. He stated that out of said expenditure, .59,74,037/- was towards temporary wooden partition on which depreciation @ 100% has been claimed. He explained that tenant paid lease rent of .32.50 per sq.ft. for area let out and .5.50 as rent for amenities including flooring, interiors, fire sprinklers etc. No depreciation has been claimed on rent of house property but depreciation has been claimed on interior decoration, temporary wooden partitions etc. whose rental income is shown as "Income from other sources". AR also referred to clause (H) and clause 7(b) of lease agreement and stated that assessee (developer) was fully responsible for operation and maintenance services to be provided for Viceroy building. Hence, it was contended that providing furniture and fixture as well as maintenance of 6 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 building was part of agreement which has to be followed by assessee and expenditure incurred in relation to such agreement is deductible. On above submissions and request of assessee, ld. CIT(A) asked Assessing Officer to furnish remand report. 5. In remand report, Assessing Officer stated that project "Arihant Viceroy" constitutes 9 floors out of which 4 floors have gone to owner. assessee had sold 2 floors allotted to it and balance of 2.5 floors was still retained which fetched rent. He stated that entire claim of 100% depreciation cannot be allowed. In respect of 2.5 floors retained and given on rent and 4.5 floors transferred to owner of land, assessee derived amenities @ .5.5. per sq.ft. of super built-up area. wooden partitions and false ceiling erected during year pertaining to 7 out of 9 floors was not eligible for 100% depreciation. value corresponding to 2 floors need to be allowed as cost of asset transferred. By doing so, .13,27,653/- gets allowed as expenditure pertaining to two floors of building sold during year. In respect of balance of .46,46,785/-, same cannot be allowed as expenditure for year. Therefore, depreciation @ 100% is not allowable and same shall be restricted to 15%. Since asset was put in use for less than 180 days, depreciation has to be restricted to 7.5% which works to . 3,48,509/-. 7 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 6. In rejoinder, AR of assessee submitted that building was completed in May, 2003. assessee has to liquidate term loan of .5 crores from Indian Overseas Bank. Therefore, assessee decided to liquidate stock through rent capitalization method. If property was let out to reputed tenant, assessee could take liquirental loan from bank and repay existing loan. It can also sell property on basis of rent capitalization method. It was pre-condition of tenant that colour, interior design etc had to be completed before letting out property. If assessee had not incurred cost towards temporary partitions and false ceilings, it could not have let out premises to VDSI and consequently could not have sold same. land owner had also refused to incur above expenditure. If tenant vacated, temporary partitions would be worth nothing as it contained only 4-5 mm ply wood and false ceiling made out of plaster of paris. He further stated that objective for entire project was to develop and earn profits on same and not to invest and get returns on investment. Hence, he requested that entire cost of temporary partitions installed should be allowed. In case, same is not allowed, then apart from cost of temporary partitions in sold premises, temporary partitions installed in premises of land owner should also be allowed which were installed only to clinch commercial utilisation of premises leading to sales. Further, it was argued that on same analogy adopted by Assessing Officer, cost of air- 8 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 conditioners amounting to .7,08,333/- should be allowed because no separate consideration was paid to assessee by buyer. 7. After considering submissions of assessee as well as in its rejoinder to remand report, and also by following decision in case of CIT v. Amrutanjan Finance Ltd. in TCA No. 294 of 2005 dated 24.08.2011 ld. CIT(A) has directed Assessing Officer to allow depreciation @ 100% on temporary wood partitions. 8. On being aggrieved, Revenue is in appeal before Tribunal for both assessment years 2004-05 and 2005-06 since facts are identical and Department has raised ground for both years. By reiterating grounds raised by Revenue, ld. DR has submitted that furniture and fixture put up by assessee in sited premises is not consumable item which gets depleted within year or become unusable after year, but brings into existence asset of enduring nature for which 100% depreciation is not allowable. He strongly supported assessment order and remand report of Assessing Officer and pleaded that order passed by ld. CIT(A) should be reverted. 9. On other hand, ld. Counsel for assessee has strongly supported order passed by ld. CIT(A), who has followed decision of Hon ble Jurisdictional High Court in case of CIT v. Amrutanjan 9 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 Finance Ltd. in TCA No. 294 of 2005 dated 24.08.2011 on similar facts and circumstances, wherein Hon ble High Court has held that issue is covered by by decision in case of Thiru Arooran Sugars Ltd v. DCIT [T.C.No.197 of 2005, dated 26-7-2011] and also applied decision in CIT v. Madras Auto Services (P) Ltd [1998] 233 ITR 468 (SC) and CIT v. Ayesha Hospitals (P) Ltd. [2007J 292 ITR 266. Therefore, he prayed that appeal filed by Department should be dismissed. 10. We have heard both sides, perused materials on record and gone through orders of authorities below. assessee s project consisted of 9 floors out of which 4.5 floors belonged to assessee and other 4.5 floors belonged to land owners. assessee and land owner entered into agreement of lease with Verizon Data Services India Pvt. Ltd. [VDSI] for whole building. tenant insisted on interior, false ceiling, wooden partitions and several other amenities as precondition for taking property on lease. Since land owners refused to bear cost for such fixtures and amenities in their portion of building, assessee has to bear entire cost of such fixtures and amenities. As per facts on records, separate considerations were paid for floor space of building and fixtures, amenities etc. rent for building was .32.50 per sq.ft., whereas, rent for installation and fixtures was .5.50 per sq.ft. assessee has received rent for 4.5 floors of property belonging to it. 10 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 Such rental income has been offered as "Income from house property". It has also received rent for furniture, fixtures, amenities etc for entire building (9 floors). Such rent was offered as "Income from other sources". Admittedly, out of 9 floors building property, only 4.5 floors belonged to assessee and other 4.5 floors belonged to land owners. But assessee has created such fixtures and amenities for entire 9 floors. Though assessee is in receipt of rent for 4.5 floors, but received rent for furniture, fixtures, amenities etc for entire building (9 floors) and assessee has offered rent income from such assets under head "Income from other sources" under section 56 of Act. Section 57 of Act specifies deductions allowable while computing "Income from other sources". As per clause (ii) of sec 57 of Act, income under section 56(2) is eligible for depreciation under sub-sections (1) and (2) of sec 32 of Act. Since assessee has shown "Income from house property" and "Income from other sources" separately in respect of rental income of building and rental income of fixtures and other amenities such as wooden partitions etc, we are of considered opinion that assessee is eligible for depreciation on such assets under section 57(ii) of Act. However, question that arises is whether depreciation @ 100% can be allowed on such furniture & fixtures including wooden partitions and false ceiling or not. In remand report submitted before CIT(A), Assessing Officer held that wooden partition in question comes under 11 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 block of assets of plant and machinery which is entitled for depreciation @ 15% as available in case of plant and machinery . He further explained that since asset was put to use less than 180 days, depreciation claimed would come down @ 7.5%. However, ld. CIT(A) has treated wooden partition as purely temporarily erected wooden structure [building] entitled for deduction @ 100% and therefore, by following case law of CIT v. Amrutanjan Finance Ltd. reported in [2011] 15 taxman.com 392 (Mad), he allowed ground raised by assessee for both assessment years. 11. On perusal of orders of authorities below, it is clear that as per requirements of lessees, assessee has incurred expenditure towards interior designing including erection of temporary wooden partitions and has not resulted in any asset of enduring nature. It was also contended that wooden partitions are of no use to assessee after expiry of lease period and therefore, they have been claimed as temporary erections eligible for depreciation at rate of 100%. However, we have no details to examine nature of partition & interior designing and life of structure to ascertain as to whether assessee will enjoy enduring benefit or so and also assess whether structure created by assessee is purely temporary erection or not. Under these facts and circumstances, we remit matter back to Assessing Officer to verify as to whether 12 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 structure erected by assessee was purely temporary to claim 100% depreciation or not and decide issue in accordance with law after allowing opportunity of hearing to assessee. Thus, ground raised by Revenue is allowed for statistical purposes for both assessment years. 12. Coming to Cross Objections filed by assessee for both assessment years, both Cross Objections are found to have been filed late by 112 days in filing Cross Objections before Tribunal and duly mentioned defects in notice of hearing. However, assessee has not filed any petitions for condonation of delay of 112 days. Since assessee failed to rectify defect, Cross Objections filed by assessee are dismissed as unadmitted. 13. In result, both appeals filed by Revenue are allowed and Cross Objections filed by assessee are dismissed. Order pronounced on 23rd September, 2016 at Chennai. Sd/- Sd/- (A.MOHAN ALANKAMONY) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, 23.09.2016 Vm/- 13 I.T.A. Nos. 1764 & 1765/M/12 & C.O. Nos. 31 & 32/M/13 Copy to: 1. Appellant, 2. Respondent, 3. CIT(A), 4. CIT, 5. DR & 6. GF. Deputy Commissioner of Income Tax, Company Circle I(1), Chennai v. M/s. Arihant Foundations & Housing Ltd