Charges for Conversion of residential house usage to commercial is revenue expenses

Charges for Conversion of residential house usage to commercial revenue expenses as they are incurred on year-to-year basis and nor result in enduring benefit – ITAT

ABCAUS Case Law Citation:
ABCAUS 2697 (2019) (01) ITAT

The appeal by the assessee was directed against order passed by the Commissioner of Income-tax (Appeals) in sustaining the disallowance and consequent addition incurred by the appellant towards recurring conversion charges paid to the MCD.

The assessee, an individual was proprietor of business concern engaged in manufacturing and trading of fabrics and trading of bedsheets, carpets etc.

The business of proprietary concerns were used to be carried out from premises which were residential but on account of sealing drive undertaken by the Municipal Corporation (MCD), the assessee had to make annual payments to MCD as conversion charges for the usage from residential to commercial.

The case of the assessee was selected for scrutiny and assessment under section 143(3) of the Income Tax Act, 1961 (the Act) was completed by the Assessing Officer (AO) after making additions/disallowance.

Aggrieved with the finding of the CIT(A) on the issue of conversion charges as capital expenditure, the assessee was before the Tribunal.

The assessee submitted that such payments did not create any new asset or expansion of profit-making apparatus. He submitted that these payments were made on year-to-year basis for enabling the assessee to continue its business operation.

He submitted that similar expenses paid in earlier assessment years had been allowed by the Assessing Officer. He further submitted that in a subsequent assessment year, a similar addition was made by the Assessing Officer. However, same had been deleted by the CIT(A) and no appeal had been filed by the Revenue against the said disallowance.

The Tribunal observed that the CIT(A) in subsequent assessment year had allowed the expenses as revenue expenditure observing that the conversion charges had not resulted in any addition to the capital asset, neither it had resulted in expansion of profit making apparatus. The CIT(A) had held that the payment was revenue in nature and, therefore, allowable being vital to the survival and running of the Appellant’s business.

The Department could not controvert the fact that in earlier assessment year, the Assessing Officer himself haf allowed the said expenditure as revenue expenditure and in a subsequent assessment year, CIT(A) had allowed the expenditure and no further appeal on the issue had been filed by the Revenue.

The Tribunal opined that following the rule of consistency, in identical set of the facts, the Assessing Officer was not required to make addition on the issue in dispute.

The ITAT expressed concurrence with the finding of CIT(A) in subsequent assessment year that the conversion charges had neither resulted in extension of any profit-making apparatus of the assessee nor it had resulted in any addition to the capital asset of the assessee.

The Tribunal added that the expenses on conversion of the usage from residential to commercial were being incurred on year-to-year basis and thus no enduring benefit was obtained by the assessee.

Following the rule of the consistency, the disallowance sustained by the CIT(A) was deleted.

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