2012 (9) TMI 801 - AT - Income Tax

Disallowance of expenditure on repairs to furniture and fixture - CIT(A) allowed it - By examining the invoices and other details of the expenses, it can be noticed that no new asset was created. The labour was engaged for replacement of old wooden panel and repair of the damaged furniture. On the basis of these facts, it can be held that the assessee being in hotel industry, therefore the expenditure incurred for interior decoration with a view to provide a comfortable stay to customers, the expenditure was nothing but revenue in nature allowable u/s.37. By the study of the nature of expenditure, it can be ascertained whether the assessee has started a new line of revenue generation or started getting an altogether new advantage of enduring benefit. Therefore, it can be concluded that substantial repair may be advantageous for retaining an existing asset but such an enduring benefit may not lead to a conclusion that a capital asset has been created through which a new enduring advantage was created, thus expenditure in question was a business requirement as decided by the assessee to incur such huge expenditure on commercial consideration - in respect of hotel industry it was held that even the modernization of hotel building is allowable as revenue expenditure because such an expenditure was found to be incurred with a view to create a conducive and beautiful atmosphere for running hotel business - in favour of assessee.

Summary

Issues involved:
1. Disallowance of capital expenditure by Assessing Officer.
2. Whether the expenditure incurred was revenue or capital in nature.

Issue 1: Disallowance of capital expenditure by Assessing Officer:
The appeal before the Appellate Tribunal ITAT Ahmedabad arose from the order of the Learned CIT(Appeals)-XIV, Ahmedabad, regarding the disallowance of Rs.17,38,395 as capital expenditure by the Assessing Officer. The Assessing Officer contended that the expenditure incurred by the assessee-company, related to repairs to furniture and fixtures, was actually for creating new assets, specifically new wooden panels and glass work. The AO believed that the expenditure resulted in the creation of a capital asset, leading to disallowance of the amount. However, the CIT(A) disagreed with this assessment, stating that the expenditure was for repairs and replacements of old wooden panels and mirrors, falling within the ambit of revenue expenditure. The CIT(A) directed the AO to delete the disallowance and treat the expenditure as revenue in nature. The Tribunal upheld the CIT(A)'s decision, emphasizing that no new asset was created, and the expenditure was a business requirement for maintaining the hotel premises.

Issue 2: Whether the expenditure incurred was revenue or capital in nature:
The Tribunal analyzed the nature of the expenditure in detail, considering the invoices for purchases of plywood, glass, and wood. It was established that the assessee, being in the hotel industry, had a business requirement to maintain the premises in good condition to attract customers. The Tribunal observed that the expenditure was for interior decoration and repair work, aimed at providing a comfortable stay to customers, rather than creating a new asset for enduring benefit. By referring to legal precedents and the specific nature of the hotel industry, the Tribunal concluded that the expenditure was revenue in nature and allowable under Section 37 of the Income Tax Act. The Tribunal highlighted that the expenditure was incurred for commercial reasons and to enhance the attractiveness of the hotel premises, rather than for creating a capital asset. Therefore, the Tribunal confirmed the CIT(A)'s decision, dismissing the Revenue's appeal.

In summary, the judgment by the Appellate Tribunal ITAT Ahmedabad dealt with the disallowance of capital expenditure by the Assessing Officer and determined that the expenditure incurred by the assessee for repairs and replacements in the hotel industry was revenue in nature, not resulting in the creation of a capital asset. The Tribunal upheld the CIT(A)'s decision, emphasizing the business requirement aspect and the nature of the expenditure in maintaining and improving the hotel premises.