IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 163/Del/2012 Assessment Year: 2007-08 M/s. Ripe Component Vs. Asstt. Commissioner of Income Technologies Pvt. Ltd., B-8/14, Tax, Circle- 15(1), C.R. First Floor, Vasant Vihar, New Building, I.P. Estate, New Delhi Delhi PAN : AADCR2107F (Appellant) (Respondent) Appellant by Sh. S.K. Chaturvedi, CA Respondent by Sh. F.R. Meena, Sr.DR Date of hearing 23.08.2016 Date of pronouncement 21.10.2016 ORDER PER O.P. KANT, A.M.: This appeal by assessee is directed against order dated 19/07/2011 passed by learned Commissioner of Income-tax (Appeals)-XVIII, New Delhi for assessment year 2007-08 raising following grounds: 1. learned Assessing Officer erred on facts in law in making addition of Rs.31,97,677/- on account of Depreciation claimed on temporary erections and allowing only Rs.3,19,767/- as depreciation. 2. appellant seeks permission to modify and/or add any other ground/grounds of appeal as circumstances might require or justify before or at time of hearing. 2 ITA No.163/Del/2012 AY: 2007-08 2. facts in brief of case are that assessee company was engaged in business of manufacturing of mobile components and accessories and related activities. For year under consideration, assessee filed return of income declaring loss of Rs.5,95,36,759/- on 13/10/2007. case was selected for scrutiny under Computer Assisted Selection of Scrutiny (CASS) and statutory notice was issued and complied with. In scrutiny proceedings, Assessing Officer made certain additions including disallowance of depreciation claimed of Rs.31,97,677/- on temporary structure at rate of 100% by assessee. learned Assessing Officer, however, allowed depreciation at rate of 10% on expenses of Rs.31,97,677/- amounting to Rs.3,19,767/-. learned Commissioner of Income-tax (Appeals) also sustained disallowance of 100% depreciation and allowed 10% depreciation on expenses claimed by assessee as in nature of temporary erections. Aggrieved with finding of learned Commissioner of Income Tax (Appeals) on issue of depreciation on temporary structure, assessee is in appeal before Tribunal raising grounds as reproduced above. 3. In ground No. 1, assessee has challenged upholding of disallowance of depreciation claimed at rate of 100% on structure claimed to be temporary in nature. 4. learned Authorized Representative of assessee submitted that, assessee took factory premises located at IMT, Manesar, Gurgaon, Haryana on lease for initial period of 60 months from 01/03/2006 (one month prior to beginning of year under consideration) from Mr. Sanjay Sodhi and Mr. Salil Sodhi and in said leased premises, assessee constructed wooden partitions in offices and factory area, fall ceiling, electrical fittings etc. amounting to Rs.34,42,549.49/-. He further submitted that structure erected in 3 ITA No.163/Del/2012 AY: 2007-08 factory premises was on purely temporary basis and once broken, was having no commercial value. learned Authorized Representative referred to list of all such expenses incurred, which is available at page 21 of paper book submitted by assessee. He submitted that temporary erection was required to be erected at premises necessarily for carrying out assessee s business activity. learned Authorized Representative referred to lease agreement, copy of which is available on pages 1 to 20 of paper book and submitted that assessee had no right on factory premises, where such construction was carried out and on termination of lease, assessee was required to hand over vacant possession of demised premises to lessor. He also referred to copy of various bills of expenses available in assessee s paper book from pages 22 to page 43. In view of above, learned Authorized Representative submitted that it would be unjustified, if depreciation on purely temporary reaction was disallowed. In support of contention of learned Authorized Representative relied on following decisions: i. Commissioner of Income Tax Vs. Industrial Cables (India) Ltd., 254 ITR 267 (P&H) ii. ACIT Vs. Nippo Batteries Co. Ltd., ITA No. 1139/1140/Mds/2010 iii. CIT Vs. Amrutanjan Finance Ltd. (2011) 15 Taxmann.com 392 (Mad.) iv. Peri (India) (P.) Ltd. Vs. Joint Commissioner of Income Tax (OSD), [2016] 159 ITD 541/71 taxmann.com 79 (Mumbai-Trib.) 5. On other hand, learned Sr. Departmental Representative relied on orders of authorities below and submitted that construction carried out was in nature of improvement of leasehold premises after taking on lease and was for enduring benefits and not in nature of repairs or renovation of leased premises and thus case laws referred by learned Authorized Representative were not applicable over facts of assessee. 4 ITA No.163/Del/2012 AY: 2007-08 6. We have heard rival submissions and perused relevant material on record. We find from para B of terms of lease agreement, which is available on page 1 to 20 of assessee s paper book that assessee, has taken factory premises on lease for initial period of five years from 01/03/2006. relevant financial year in case of assessee started from 01/04/2006, therefore, premises have been taken on lease, one month prior to beginning of relevant financial year. In year under consideration, assessee carried out various works, which have been claimed by assessee of temporary nature. On perusal of page- 21 of assessee s paper book, we find that assessee carried out work from following parties: Details of Temporary Shed From 01.04.2006 to 21.03.2007 SI. Date of Name of Date No. Entry Party Am ount 1 20/06/2006 Design Studio 02/06/2006 78,297.00 2 01/07/2006 Alum inium Craft 29/06/2006 7,772.50 3 06/07/2006 Abhishek Engineers 02/07/2006 23,596.00 4 31/07/2006 Design Studio 27/07/2006 136,748.00 5 31/07/2006 Design Studio 23/06/2006 31,470.00 6 17/08/2006 BaseLine 04/05/2006 223,425.00 7 17/08/2006 Baseline 1,652,682.00 8 25/08/2006 Deepak Floorings 23/08/2006 50,625.00 9 28/08/2006 Deepak Floorings 24/08/2006 22,230.00 10 02/09/2006 Mukta Industries 01/09/2006 56,999.00 11 12/09/2006 Aluminium Craft & Steel Fab 09/09/2006 97,328.00 12 19/09/2006 Deepak Floorings 14/09/2006 133,583.00 13 20/09/2006 Deepak Floorings 14,062.00 14 20/09/2006 Azim Khan Contractor 04/09/2006 229,106.00 15 22/09/2006 Design Studio 09/09/2006 102,017.00 16 29/09/2006 Aluminium Craft & Steel Fab 92,863.47 17 04/10/2006 Aluminium Craft & Steel Fab 28/09/2006 11,076.00 18 17/10/2006 MBG Industrial Corporation 17/10/2006 20,000.00 19 01/11/2006 Design Studio 31/10/2006 89,161.00 20 03/02/2007 Floor Tech Co. 01/02/2007 49,920.00 21 03/02/2007 Floor Tech Co. 01/02/2007 3,661.00 22 28/02/2007 Floor Tech Co. 27/02/2007 106,223.52 23 01/03/2007 Design Studio 24/02/2007 101,292.00 24 08/03/2007 Azim Khan 20/02/2007 10,000.00 25 08/03/2007 Azim Khan 26/02/2007 16,400.00 26 12/03/2007 Aluminium Craft & Steel Fab 26/12/2006 49,416.00 27 12/03/2007 Aluminium Craft & Steel Fab 26/12/2006 12,096.00 28 21/03/2007 MBG Industrial Corporation 21/03/2007 20,500.00 3,442,549.49 5 ITA No.163/Del/2012 AY: 2007-08 7. Further on perusal of bills available in paper book, we find that according to page 22 of paper book, bill of Rs.78,297/- has been raised by M/s. Design Studio for carrying out civil construction, flooring etc. Similarly, on page 24, bill of M/s. Design Studio of Rs.1,36,748/- for constructing trenches, transformer foundation, steel structural etc. is available. On page 25, again copy of bill of M/s. Design Studio, amounting to Rs.31,470/- for demolition of wall, slab casting, construction of brick wall, plaster etc. has been filed. On page 35, 36 and 37, copy of bills of M/s. Design Studio of Rs.1,02,011/- is available which contains work in nature of civil construction like Crane girder fixing, Exhaust Fan fixing, motor foundation for cooling tower, Air washer tank foundation, diesel tank foundation. According to page No. 40, which is bill of design studio for work of construction of brickwall, plaster, steel door window etc. carried out. On page 23, copy of Bill of M/s Abhishek Engineers, amounting to Rs.23,596/- for Gypsum Board Partition with glass wool filled, is available. On page 26 and 27, copies of bills issued by M/s. Baseline, amounting to Rs.2,23,425/- and Rs.19,12,943/- for supply of carpet and providing and fixing false ceiling, partition, display in reception, laminated door, teak wood doors, air conditioners ducting etc. On pages, 28 and 29 copies of bills raised by M/s Deepak Floorings, amounting to Rs.50,625/- and Rs.22,550/- for supply of air curtain and installation material for ceilings respectively have been filed. On page 32 and 33, copies of bills of M/s. Deepak Floorings, amounting to Rs.1,33,583/- and Rs.14,062/- for supply of Diaken mineral fibre ceiling with aluminium grid, installation materials etc. have been filed. On page 30, copy of Bill of M/s Mukta Industries amounting to Rs.56,999/- for air compression shed has been filed. On page 31 and 38, copies of bills of M/s. Aluminium Craft and Steel Fab amounting to Rs.97,328/- and Rs.92,863/- for aluminum 6 ITA No.163/Del/2012 AY: 2007-08 partitions, door closers etc. have been filed. According to pages 41 to 43 of paper book, M/s. Floor Tech. has raised bills of Rs.49,920/-, Rs.3,661/-, Rs.1,06, 223/- for EPU flooring. 8. It is evident from bills raised by different vendors, that work carried out by assessee was not in nature of repair work or refurbishing or renovation of old premises, but it was in nature of addition to premises, which have been taken on lease for initial period of five years 9. Further, we find from para 13.6 of lease agreement, which is having condition that on termination or expiry of agreement lessee may take away such installation at its own cost, and in case lessor so desires to retain same parties shall negotiate price, which lessor shall pay to Lessee. In view of this condition, also it is apparent that installations in nature of aluminium partitions, fall- ceiling, floorings etc were installation in nature of enduring benefit and cannot be termed as structure in nature of temporary. 10. In case of Commissioner of Income Tax Vs. Industrial Cables India Ltd.(supra) expenses involved were towards temporary quarters for workers and Kacha (temporary) road linking worker s quarters with factory. In case of M/s. Dredging International India Private Limited (supra) expenses incurred were related to temporary housing units at project site in Hazira, on land not owned by assessee company, which were required in connection with execution of contractual work and not for other purposes. In case of M/s Nippo Batteries Company Limited ( supra) also following decision of Mumbai bench of Tribunal in case of ACIT Vs. M/s. Lintas (I) Ltd (ITA Nos. 1696 & 1601/Mum/06 dated 18-10-2010) it is held that repair and maintenance and renovation expenditure or building, machinery and equipment to keep asset in good working condition 7 ITA No.163/Del/2012 AY: 2007-08 could not be considered as capital outgo. In case of Amrutanjan Finance Ltd (Supra), Hon ble Madras High Court has held expenses of temporary wooden structure and partitions for running computer centres is eligible for 100% depreciation, but from facts of case it is not clear whether expenses were in nature of repairs or first-time installments. In case of Peri (India) (P) Ltd (supra) also Tribunal has held expenses incurred by assessee as repair expenses rather than leasehold improvements . 11. Whereas, in facts of instant case we find that expenses are not in nature of repair or renovation of existing premises but same are taken on lease only month prior to beginning of financial year under consideration and, thereafter, assessee has incurred expenses on construction of brick walls, plasters, aluminium and teak doors. From bills raised, it is also apparent that expenses have been incurred for foundation of cooling tower, diesel tank etc. which appears to be part of plant and machinery. In view of above facts and circumstances, we find that decisions cited by Authorized Representative are not applicable over facts of case of assessee. 12. Further, we find that provisions of Expl. 1 of s. 32 of IT Act, 1961 specifically provide as under: Explanation 1. Where business or profession of assessee is carried on in building not owned by him but in respect of which assessee holds lease or other right of occupancy and any capital expenditure is incurred by assessee for purposes of business or profession on 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 building then, provisions of 8 ITA No.163/Del/2012 AY: 2007-08 this clause shall apply as if said structure or work is building owned by assessee. above Explanation was introduced w.e.f. 1st April, 1988. 13. renovation made by assessee company is in nature of permanent structure by way of Brick Wall partitions, panelling of Aluminium , Flooring etc. which cannot be covered under current repairs as provided in s. 30 of IT Act, 1961. Such work as made by assessee company, cannot be stated so as to keep premises as restored to good condition or save it from exhaustion or compensation of loss. work in case of assessee, are meant to altogether change user by way of expanding its capacity substantially and changeover of its look. expenditure is certainly capital in nature on which depreciation can only be allowed. 14. Further, we find that in recent case, Tribunal Delhi Bench in case of Marubeni-Itochu Steel India Pvt. Ltd. Vs. Deputy Commissioner Of Income Tax in ITA No. 1716/Del/2014, dated 15th February, 2016, has decided identical issue as under: 18.1. only other ground raised in this appeal is against confirmation of addition of Rs.23,91,810/- towards expenditure incurred on account of leasehold improvements by treating same as capital in nature. 18.2. facts apropos this issue are that assessee claimed leasehold improvement expenses of Rs.23.90 lac and architect fee of Rs.33.14 lac as revenue. AO observed that assessee started its business during this year only and civil and construction work was done on premises taken on lease. He treated this 9 ITA No.163/Del/2012 AY: 2007-08 work as construction of permanent structure on leasehold premises. After entertaining objections from assessee, he made disallowance of Rs.51,34,426/- (Capitalization of two amounts of Rs.23.90 lac and Rs.33.14 lac as reduced by depreciation). ld. CIT(A) allowed assessee s claim in respect of payment to architect amounting to Rs.33.14 lac. However, remaining amount of Rs.23.90 lac was treated as capital in nature. assessee is aggrieved against confirmation of addition to this extent, while there is no appeal filed on behalf of Revenue. 18.3. We have heard rival submissions and perused relevant material on record. It is noticed that assessee took premises on lease and also started business during year under consideration. sum of Rs.23.90 lac was incurred on complete renovation of such premises as it is apparent from details placed on record. Hon ble Supreme Court in Ballimal Naval Kishore vs. CIT 1997 224 ITR 414 (SC) has held that expenditure incurred by 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, to be capital expenditure and not allowable as current repairs. This judgment indicates that any capital expenditure on total renovation is liable to be considered as capital expenditure. Hon ble jurisdictional High Court in Bigjo s India Ltd. vs. CIT (2007) 293 ITR 170 (Del) considered almost similar situation as is obtaining before us in present appeal. In that case, assessee, licensee of showroom, erected new counters and built new lift shaft at new site. It was held that 10 ITA No.163/Del/2012 AY: 2007-08 such amount was not in nature of current repairs but capital expenditure not deductible in full. 18.4. Adverting to facts of instant case, we find that present facts are on all fours with those considered by Hon ble High Court in Bigjo s (supra). It is evident from description of items on which above referred expenditure has been incurred that it is case of renovation of premises immediately after taking it on lease. As such, there can be no question of replacement. We cannot help if Revenue has accepted part deletion of disallowance by ld. CIT(A). Be that as it may we are concerned only with items of disallowance raked up in appeal before us and hold that ld. CIT(A) has taken unimpeachable view in treating instant amount as capital expenditure. 18.5. At this stage, it is relevant to note that Tax Laws (Amendment and Miscellaneous Provisions) Act, 1986 inserted Explanation 1 to section 32 w.e.f. 1.4.1988, reading as under : - Explanation-1. Where business or profession of assessee is carried on in building not owned by him but in respect of which assessee holds lease or other right of occupancy and any capital expenditure is incurred by assessee for purposes of business or profession on 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 building, then, provisions of this clause shall apply as if said structure or work is building owned by assessee. 11 ITA No.163/Del/2012 AY: 2007-08 18.6. circumspection of above Explanation reveals that where business is carried on in building not owned by assessee but in respect of which it holds lease or either occupancy rights, then expenditure on i. construction of structure or ii. doing of any work in or in relation to and by way of renovation or extension of, or improvement to building, shall be considered as structure or work in nature of building owned by assessee for purpose of depreciation. Spirit and text of Explanation 1 to section 32 is that any capital expenditure by assessee on building not owned by him, in which he carries on business, shall be considered as building owned by him for purposes of section 32, to extent of amounts spent on construction of structure or doing of any work in or in relation to and by way of renovation or extension or improvement to building. It therefore, follows that in order to bring any amount within ambit of Explanation 1 to section 32, it is paramount that expenditure incurred by assessee on premises in capacity of non-owner should firstly be in nature of capital expenditure and then it should fall within any or both clauses as discussed above. If these conditions get satisfied, as is case under consideration, then amount incurred for such works falls for consideration under Explanation 1 to section 32. In other words, amount so incurred would be capitalized entitling assessee to depreciation as per eligible rate. In view of foregoing discussion, we uphold impugned order on this issue subject to grant of depreciation. 15. In view of above, we uphold finding of learned Commissioner of Income Tax (Appeals) on issue in dispute and accordingly dismiss ground No. 1 of appeal. 12 ITA No.163/Del/2012 AY: 2007-08 16. ground No. 2 of appeal being general in nature, we are not required to adjudicate upon same. 17. In result, appeal of assessee is dismissed. decision is pronounced in open court on 21st October, 2016. Sd/- Sd/- (H.S. SIDHU) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 21st October, 2016. Laptop/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi M/s. Ripe Component Technologies Pvt. Ltd. v. Asstt. Commissioner of Income-tax, Circle-15(1), New Delhi