2017 (3) TMI 111 - HC - Income Tax

Legal and professional fees - allowable business expenditure - Held that - As during the period of construction of two additional floors, a temporary operational plan had to be prepared providing for alternative access to and exit from the Hotel. This without compromising on the high standard expected by customers in respect of ambiance and comforts in a Five Star Hotel. The respondent-assessee had engaged a professional interior designer to plan temporary access and exit from the Five Star Hotel and for which an amount of ₹ 22.44 lakhs was paid. This expenditure which was incurred by the respondent was necessary for carrying on business as it resulted in increased turnover in the subject Assessment year as compared to the earlier years. Therefore, this expenditure is allowable as deduction under Section 37(1) of the Act as revenue expenditure. The balance of ₹ 23.99 lakhs has been held by the Tribunal to be expenses incurred in normal / regular running of its business and therefore allowable as revenue expenditure under Section 37(1) of the Act. Amounts incurred for repairs of Hotel Building - Held that - We find that the Tribunal, on examination of nature of expenditure and result of the expenditure in the context of the respondent-assessee s activity of running Five Star Hotel has determined which expenses could be considered as revenue and which as capital in nature. After giving a finding on principle on each of the items of expenditure, the impugned order has restored the issue to the Assessing Officer to pass appropriate orders.The entire exercise carried out by the Tribunal results in a finding of fact and this is not shown to us to be perverse in any manner.

Summary

Issues:
1. Whether the Tribunal was correct in deleting the addition of expenses for repairs and maintenance as capital expenditure.
2. Whether legal and professional fees paid for a temporary plan during construction constitute capital expenditure.

Analysis:

Issue 1: Legal and Professional Fees
The appellant challenged the Tribunal's decision to delete the addition of expenses for repairs and maintenance as capital expenditure. The appellant argued that the expenses were not allowable under Section 30 and 31 of the Income Tax Act. However, the Court found that the question posed did not suggest the applicability of those sections. The Court upheld the Tribunal's decision, stating that the expenses claimed as revenue expenditure were allowable under Section 37(1) of the Act. The Court emphasized that the expenses incurred by the respondent were necessary for carrying on business and resulted in increased turnover, making them deductible under Section 37(1).

Issue 2: Repairs and Maintenance Expenses
Regarding the legal and professional fees paid for a temporary plan during construction, the Court found that a sum of ?22.44 lakhs was paid to a professional interior designer for alternative access and exit from the hotel. This expenditure was deemed necessary for maintaining the high standards expected by customers in a Five Star Hotel. The Court concluded that this expense was allowable as a deduction under Section 37(1) of the Act as revenue expenditure. The remaining balance of ?23.99 lakhs was also considered allowable as it was incurred in the normal course of business operations.

Conclusion:
The Court dismissed the appeal, stating that the Tribunal's findings were not perverse and did not give rise to any substantial question of law. The Tribunal's decision to allow the expenses as revenue expenditure under Section 37(1) was upheld, and the issue was not entertained further. The Court emphasized that the expenses were necessary for the business and contributed to increased turnover, justifying their treatment as revenue expenditure.