2017 (10) TMI 1530 - AT - Income Tax

Allowable business expenditure - whether the building renovation expenses, incurred by the assessee is a deductible business expenditure? - HELD THAT - It is a clear case of renovation; of substantial (if not total) replacement, so that it is not repairs as explained in Sri Rama Sugar Mills Ltd. 1951 (5) TMI 7 - MADRAS HIGH COURT . The account head building renovation expenses , under which the expenditure stands booked in accounts, thus, correctly describes the same, i.e., its nature. Phase-II of the modernization program, as planned, followed Phase-I, being in fact under progress at the time of inspection (for valuation) on 08.01.2014. The same may not have translated into higher revenue or yield, as sought to be emphasized by the ld. counsel during hearing, which depends on a variety of factors. Retaining the franchise; retaining or improving the market share (which would accrue only in future as the expenditure itself continues up to March, 2013 the repair being followed by refurbishing); upgradation/improvement in facilities, are, in our view, definite advantages in the capital field. It is clear that but for the expenditure, the assessee would not be able to retain either the franchise or a competitive edge in the market, which it wishes or intends to, and the expenditure is incurred with a long term perspective, objective and goal. It rather advances the argument of the expenditure being incurred at the behest of the ITC group, to contend of the same being repairs or revenue in nature. The argument is misconceived in-as-much as both the revenue and capital expenditure are incurred only in response to business decisions, so that that by itself would not determine the nature of the expenditure As explained in Sri Mangayarkarasi Mills (P.) Ltd 2009 (7) TMI 17 - SUPREME COURT deductibility of expenditure on repairs does not necessarily entail negating the bringing into existence of a new asset. We have in fact already found as a fact the impugned expenditure to result in an advantage in the capital field, which scotches this argument, which is in fact without merit. This is as an asset as both quantitative and qualitative aspects/attributes to it. Two machines with the same production capacity may vary significantly in cost and/or price in view of the quality of their output. As common experience bears out, two pieces of land of the same area and, further, even same dimensions, cost (valued by market) differently depending upon their location, even if subject to the same construction regulations. Could one possibly compare a room (of a particular size) in a downtown lodge with a room (of the same size) in an upmarket hotel, much less in a star hotel? Why, two rooms of the same size in the same hotel may be priced differently depending on their furnishing; locational advantage, as (say) sea facing, etc., or even if priced equally, attract different occupancy rates, indicating being differently valued assets of the business. As explained in C.R.Corera Bros. 1962 (9) TMI 73 - MADRAS HIGH COURT introduction of additional features may result in bringing a new asset or advantage into existence. In fact, to even so suggest, i.e., that no new advantage has come into existence, places a serious question on the wisdom (or the business purpose being not for preservation or maintenance) of incurring the expenditure. It is in fact contradictory in-as-much as it is admittedly incurred to upgrade the accommodation facilities to international standards, so that it is, by implication, presently, i.e., prior to incurring the expenditure, not. - Assessee s appeal is dismissed.

Summary

Issues Involved:
1. Deductibility of building renovation expenses as business expenditure.
2. Classification of expenditure as capital or revenue in nature.
3. Interpretation and application of relevant legal provisions and precedents.

Detailed Analysis:

1. Deductibility of Building Renovation Expenses as Business Expenditure:
The primary issue in this appeal was whether the building renovation expenses amounting to ?143.37 lacs incurred by the assessee, a 3-star hotel operating as a franchisee of the ITC group, are deductible as business expenditure. The Assessing Officer (AO) treated the entire expenditure as capital, allowing depreciation, while the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as revenue expenditure and allowed it as a deduction.

2. Classification of Expenditure as Capital or Revenue in Nature:
The CIT(A) concluded that the expenditure was for preserving the existing asset without creating any new asset or increasing the room capacity. The CIT(A) emphasized that the renovation was necessary to maintain the hotel's standards and attract foreign customers, and thus, the expenditure should be considered revenue in nature. The CIT(A) stated:
“The appellant has changed the flooring and replaced worn out doors and renovated the bathrooms... the appellant did not increase the room capacity or create any new asset... the appellant incurred capital expenditure and, consequently, the AO is not justified in treating it as capital expenses.”

3. Interpretation and Application of Relevant Legal Provisions and Precedents:
The Tribunal referred to several higher court rulings to delineate the law concerning repairs and capital expenditure. It cited the case of New Shorrock Spinning & Manufacturing Co. Ltd. v. CIT, which established that expenditure aimed at preserving and maintaining an existing asset is considered repairs and thus revenue expenditure. However, if the expenditure brings a new asset into existence or obtains a new advantage, it is capital expenditure. This principle was endorsed by the Supreme Court in Ballimal Naval Kishore v. CIT and CIT v. Saravana Spinning Mills (P.) Ltd.

The Tribunal found that the renovation involved substantial replacement and improvement of the existing asset, indicating a capital nature. The Tribunal noted:
“Every single aspect of the civil work as well as electrical and sanitary fittings, i.e., other than the foundation and the existing superstructure, was dismantled and redone... it is not ‘repairs’ as explained in Sri Rama Sugar Mills Ltd. (supra).”

The Tribunal also emphasized that the expenditure resulted in a significant improvement to the hotel, aligning it with international standards, which is an enduring benefit in the capital field. It stated:
“Retaining the franchise; retaining or improving the market share... upgradation/improvement in facilities, are, in our view, definite advantages in the capital field.”

Conclusion:
The Tribunal concluded that the expenditure incurred by the assessee did not qualify as revenue expenditure but was capital in nature. Consequently, the Tribunal set aside the CIT(A)’s order and restored the AO’s decision to treat the expenditure as capital and allow depreciation. The appeal by the Revenue was allowed, and the assessee’s appeal was dismissed. The order was pronounced on October 16, 2017, at Chennai.