2012 (9) TMI 1175 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 30,07,454/- as capital expenditure.
2. Applicability of Explanation 1 to section 32(1) of the Income Tax Act.

Summary:

Issue 1: Disallowance of Rs. 30,07,454/- as capital expenditure

The Assessee appealed against the order of the Ld. Commissioner of Income Tax (Appeals)-XXI, New Delhi, which confirmed the disallowance of Rs. 30,07,454/- made by the Assessing Officer (AO) for expenditure on repairs and maintenance of the building, treating it as capital expenditure. The AO noted that the Assessee incurred Rs. 58,42,496/- on repairs and maintenance, including Rs. 30,07,454/- under 'Office General' (Renovation). The AO held that the expenses provided enduring benefits and enhanced the efficiency and effectiveness of the hotel, thus should be capitalized to fixed assets.

The Assessee contended that the expenditure was for ongoing operations to maintain the charm and attract customers, involving items like upholstery, fabric, cutlery, rubber mats, napkins, civil work, shower mirror, room chair cloth, etc. The Assessee argued that no additional asset was created, and the expenditure was for renewing existing assets. The Ld. Commissioner of Income Tax (A) upheld the AO's decision, stating that the expenses provided enduring benefits and should be capitalized.

Issue 2: Applicability of Explanation 1 to section 32(1) of the Income Tax Act

The Assessee argued that Explanation 1 to section 32(1) was not applicable as there was no creation of additional space or building capacity. The Tribunal examined the nature of the expenditure and found it to be revenue in nature, not capital. The Tribunal referred to several case laws supporting the Assessee's claim, including:

- C.I.T. vs. Lean Logistics Ltd. (293 ITR 432): Held that construction costs for business purposes are admissible as revenue expenditure.
- Roger Enterprise (P) Ltd. vs. C.I.T. (169 Taxman 41): Held that expenditure for renovation of leased premises can be revenue expenditure.
- C.I.T. vs. Delhi Press Samachar P Ltd. (322 ITR 590): Held that expenditure to preserve and maintain existing assets is revenue expenditure.
- C.I.T. vs. Dr. A.M. Singhvi (302 ITR 26): Held that expenditure for smooth working of professional activities in rented premises is revenue expenditure.
- C.I.T. vs. Ooty Dasaprakash (237 ITR 902): Held that expenditure for modernizing a hotel and replacing existing components is not of enduring nature and is revenue expenditure.

The Tribunal concluded that the expenditure incurred by the Assessee was for preserving and maintaining existing assets and enhancing the efficiency and effectiveness of the hotel, not for creating additional space or capacity. Therefore, the expenditure was revenue in nature and not capital. The Tribunal set aside the orders of the authorities below and decided the issue in favor of the Assessee.

Conclusion:

The appeal filed by the Assessee was allowed, and the disallowance of Rs. 30,07,454/- as capital expenditure was overturned. The expenditure was deemed revenue in nature, preserving and maintaining existing assets without adding to the space or capacity of the hotel.

Order pronounced in the open court on 19/9/2012.