2016 (11) TMI 70 - HC - Income Tax

Expenditure incurred towards renovation and improvement of hotel building - nature of expenditure - revenue or capital - Tribunal after perusing the record has found that the expenditure was incurred by the assessee only in the process of earning profit and not to acquire any capital asset - Held that - Tribunal in the referred observation has elaborately considered that the explanation would not be applicable, more particularly when the expenditure was not of a capital expenditure. Further, we need to keep in mind that it was not the case of the Revenue that number of rooms were added to the hotel premises or that the seating capacity was increased or otherwise. It was only within the same complex the expenses were incurred in order to update the facility which ultimately would result as good business to attract the customer. Considering the facts and circumstances, it appears to us that the view taken by the Tribunal cannot be said to be erroneous nor such view can be said to be contrary to any statutory provision. - Decided against revenue

Summary

Issues:
1. Whether the expenditure incurred by the assessee towards renovation and improvement of a hotel building should be treated as revenue or capital expenditure under the Income Tax Act.

Analysis:
The Tribunal considered whether the expenditure incurred by the assessee on renovation of a leased hotel building should be treated as revenue or capital expenditure. The Assessing Officer initially treated it as capital expenditure, disallowing the claim for revenue expenditure and allowing depreciation at 10%. The Tribunal examined the provisions of Explanation 1 to Section 32 of the Income Tax Act, introduced in 1988, which allows depreciation on capital expenditure related to renovation, extension, or improvement of a building leased by the assessee. The Tribunal noted the legislative history, emphasizing that prior to 1971, assesses in leased premises were not entitled to depreciation on capital expenditure. The Tribunal concluded that if the expenditure is revenue in nature, the assessee can claim it as revenue expenditure, irrespective of Section 32(1A) or Explanation 1 of Section 32. The Tribunal held that the expenditure incurred by the assessee was for efficient business operations and not to acquire any asset, thus classifying it as revenue expenditure.

The Tribunal further analyzed the enduring benefit test, stating that even if applied, the expenditure was for profit-earning purposes and did not result in the acquisition of a capital asset. The Tribunal found that the hotel remained the same, with no increase in capacity, and the expenditure facilitated more profitable business operations. Citing judicial decisions, the Tribunal held that expenses incurred in the profit-earning process should be allowed as revenue expenditure. The Tribunal disagreed with the lower authorities' classification of the expenditure as capital in nature, reversing their findings and allowing the deduction for the renovation expenses incurred by the assessee on the leased hotel building.

The Revenue contended that depreciation should be available even for expenses on leased premises for renovation under Section 32 of the Act. However, the Tribunal elaborately considered that the explanation would not apply if the expenditure was not of a capital nature. The Tribunal noted that the expenses were incurred within the same complex to update facilities for better business, without adding rooms or increasing seating capacity. Considering these facts, the Tribunal found the view taken to be correct and not contrary to any statutory provision, leading to the dismissal of the appeals.

In conclusion, the Tribunal upheld that the expenditure incurred by the assessee for renovating the leased hotel building was revenue in nature, allowing the deduction for the expenses and dismissing the Revenue's appeals.