By TIOL News Service

KOLKATA, NOV 06, 2017: THE issue before the Bench is - Whether if the AO fails to make inquiry about the details of repair & maintenance expenses debited in the P&L Account, it is a fit case for invocation of powers u/s 263. YES is the verdict.

Facts of the case

Whether mere non-enquiry about allowability of repairs and maintenance of buildings, as to whether same is incurred for the purpose of business or not, and same is capital or revenue in nature, makes the order of the AO erroneous and prejudicial to the interest of the Revenue. And the ITAT verdict is YES.

Facts of the case

The Assessee-company was in the business of providing management consultancy services and also accounting and business advisory services. The Assessee filed its return of income electronically for the AY 2010-11 declaring taxable income of Rs 33,70,69,038/- along with audited accounts, tax audit report, computation of total income and notes to computation. The assessment was completed by the AO u/s 143(3) r.w.s. 144C of the Act determining total income at Rs 138,14,36,330/-. The Assessee preferred an appeal against the order of the AO before the CIT(A) against the additions made in the assessment. Later the CIT issued show cause notice u/s 263 of the Act treating the order passed by the AO as erroneous in as much as it is prejudicial to the interest of the revenue . According to CIT, the Assessee had debited a sum of Rs 1063.07 lakhs in its P&L account under the head ‘Repairs & Maintenance – Buildings' and that substantial part of the expenditure was incurred on ‘interior design' etc of various buildings of the company and that such expenditure does not fall under the ambit of ‘Current Repairs' and should have been added back treating the same as capital expenditure. The Assessee replied that the expenditure were incurred on rented / leased premises and that as far as rented premises were concerned, all expenditure in respect of repairs were allowable and the restriction of current repairs was applicable on owned premises and not otherwise. Further, it was submitted that the expenditure incurred on account of renovation, interior decoration, etc ought to be considered as an allowable revenue expenditure as such expenses were required to keep the office building and premises not only operational but also in presentable and good condition, which was necessary for smooth and efficient running of the business of the Assessee. Moreover, the expenditure incurred on account of repairs and maintenance of office building did not bring any capital asset into existence. Hence it was submitted that a plausible view had been taken by the AO in that regard in the light of various decisions and accordingly the same could not be subject matter of revision u/s 263 of the Act.

However, the CIT observed that the AO had not inquired into the eligibility of interior design and layout of owned office premises, guest houses etc u/s 37(1) of the Act or under any other sections of the Act. The AO had not examined the applicability of section 30 of the Act. Accordingly he held that absolutely no enquiry was carried out with regard to allowability of ‘Repairs & Maintenance – Buildings' by the AO in the assessment proceedings and non-enquiry itself would make the order of the AO erroneous and prejudicial to the interest of the revenue. Based on those observations, the CIT set aside the assessment order to frame the assessment afresh.

Having heard the parties, the Tribunal held that,

++ we find from the entire paper book filed by the assessee that no query was indeed raised by the AO in the course of assessment proceedings with regard to the issue of repairs and maintenance of buildings. Infact the AO called for details of all expenses debited to profit and loss account at the initial stage of assessment proceedings. The assessee in response thereon requested the AO to call for specific items of expenditure which required examination as filing of details of all expenditure debited in profit and loss account would be very voluminous. Thereafter the AO did not call for any specific items of expenditure for examination. The reliance placed by the AR on the note filed along with computation of total income would not come to the rescue of the assessee as admittedly the said note did not contain any break up of repairs and maintenance so as to warrant further examination by the AO. The said note only stated that assessee had incurred expenditure towards rented premises and the same has been debited in the profit and loss account. We hold that there was no occasion for the AO to examine the allowability of repairs and maintenance of buildings and whether the same is incurred for the purpose of business of the assessee or whether the same is capital or revenue in nature. We find that absolutely no query was raised or any enquiry was carried out by the AO in this regard. Hence this is a clear case of lack of enquiry on the part of the AO for which the revisionary jurisdiction u/s 263 of the Act could be invoked by the CIT. It has already been held that mere non-enquiry of an item itself would made the order of the AO erroneous and prejudicial to the interest of the revenue as has been held by the Supreme Court in the case of Rampriya Devi Saraogi vs CIT and Tara Devi Aggarwal vs CIT. When the requisite enquiry that is warranted in the facts of the instant case was not made, then that itself would make the order of the AO erroneous and prejudicial to the interest of the revenue. Hence we do not find any infirmity in the revision order passed by the CIT u/s 263 of the Act. Accordingly the grounds raised by the assessee are dismissed.

(See 2017-TIOL-1549-ITAT-KOL)