2022 (1) TMI 1387 - AT - Income Tax

Business Expenditrue - Deduction u/s 37(1) - assessee advanced money for the purpose of purchase of material to construct the hotel building - HELD THAT - As it is clear that the amount paid to various vendors for supply of construction material for construction of hotel building was not in the normal course of business of assessee. Since the amount was given for the purpose of creation of capital asset, the same cannot be treated as a revenue loss, but a capital loss. Accordingly, the debt arisen in the normal course of business is revenue in nature, but in the present case, the debt arose in the field of capital investment and writing off the same was in the nature of capital loss and cannot be allowed as a deduction. This ground of the assessee is dismissed. Accrual of income - incentive deposit received for rebranding of the hotel - AO observed that the 'incentive' has been received during the year under consideration for rebranding of the hotel and corresponding expenditure has been debited in the instant year itself, the amount received is an revenue receipt - HELD THAT - The argument of the assessee is that income not at all accrued to the assessee, as such, incentive cannot be taxed in the hands of the assessee in the year under consideration. In our opinion, the assessee is following mercantile system of accounting. The assessee treated the expenditure as an asset and claimed depreciation on it and charged it to P L account. However, corresponding incentive received by the assessee towards brand building has been shown as liability which is against the provisions of Section 5 of the Act. Accordingly, AO rightly brought it to tax. The assessee cannot postpone it on the reason that it is liability and there is likelihood of repaying the amount in a phased manner after 5th of every year in case agreement is prematurely terminated. If the assessee refunds back to the payer, then it could be claimed as deduction in the year in which was paid back by the assessee. Decided against assessee.

Summary

Issues Involved:
1. Disallowance of advances written off.
2. Treatment of incentive deposit received for rebranding of the hotel as income.

Issue-wise Detailed Analysis:

1. Disallowance of Advances Written Off:
The assessee challenged the disallowance of Rs. 20.66 crores as advances written off, asserting that these advances were made to vendors for procuring materials for hotel construction, which were neither received nor recovered, and thus should be deductible under Section 37(1) of the Income Tax Act.

The Revenue countered that these advances were for hotel construction, a capital expenditure, and thus not deductible. The Tribunal noted that Section 37(1) allows deductions for business expenditures not covered under Sections 30 to 36, excluding capital expenditures. The Tribunal emphasized that for an expense to qualify under Section 37(1), it must be for earning business profits, not merely incurred during business operations.

The Tribunal cited the Supreme Court's ruling in Haji Aziz and Abdul Shakoor Bros., emphasizing that the primary condition for deduction under Section 37(1) is that the expenditure should be in the revenue field, not the capital field. Since the advances were for hotel construction, a capital expenditure, the Tribunal concluded that the write-off was a capital loss and not deductible under Section 37(1). This ground was dismissed.

2. Treatment of Incentive Deposit Received for Rebranding:
The assessee received $250,000 from InterContinental Hotel Group (IHG) for rebranding expenses, which was treated as a liability, arguing it was repayable in case of premature termination of the management agreement. The AO treated this amount as revenue receipt, asserting that the corresponding expenditure was debited in the same year.

The Tribunal examined the management agreement, noting that the incentive was repayable only upon premature termination before ten years, with a decreasing repayment schedule after five years. The assessee argued that the amount was a liability due to the potential repayment obligation, and it was recognizing the incentive over the agreement period.

The CIT(A) upheld the AO's decision, stating that the amount received was income in the year of receipt, as the corresponding expenses were incurred in the same year. The Tribunal agreed, noting that the assessee capitalized the rebranding expenses and claimed depreciation, but treated the incentive as a liability, which was inconsistent with Section 5 of the Act. The Tribunal concluded that the incentive was taxable in the year of receipt, dismissing the assessee's argument of potential future repayment.

Conclusion:
The Tribunal dismissed the appeal, upholding the disallowance of the advances written off and the treatment of the incentive deposit as income in the year of receipt. The decision emphasized the distinction between capital and revenue expenditures and the proper recognition of income under the Income Tax Act.