2017 (3) TMI 977 - HC - Income Tax

Allowable business expenditure - Held that - Bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. We have already explained why replacement, in this case, amounts to bringing into existence a new asset and also an enduring benefit for the asses see. It is clear then that expenditure of the assessee here is not of a revenue nature and thus, cannot be claimed as a deduction under section 37 of the Act. - Decided against assessee.

Summary

Issues:
1. Determination of whether expenditure incurred by the assessee qualifies as capital or revenue expenditure.
2. Interpretation of provisions of law governing the computation of income under the head income from business and profession.

Analysis:

Issue 1:
The primary issue in this case revolves around determining whether the expenditure incurred by the assessee, amounting to ?60,09,212, falls under the category of capital or revenue expenditure. The assessee argued that the expenses were part of day-to-day business operations and should be considered as revenue expenses. However, the Tribunal found that the expenditure on repairs, replacement, and renovation of hotel rooms resulted in an enduring advantage by enhancing the standard of the hotel, leading to higher rental and occupancy. Consequently, the Tribunal concluded that such expenditure created an enduring advantage and should be classified as capital expenditure. The Tribunal's decision was based on the principle that expenditure resulting in an enduring benefit for the business is considered capital in nature, as established in judicial precedents such as Travancore-Cochin Chemicals Ltd. v. CIT and Lakshmiji Sugar Mills Co. P. Ltd. v. CIT.

Issue 2:
The second issue pertains to the interpretation of the provisions of the Income-tax Act governing the computation of income under the head income from business and profession. The Tribunal's decision to disallow the assessee's claim for deduction of the expenditure under various heads was based on the understanding that the expenditure created an enduring advantage, making it capital in nature. The Tribunal referenced judicial precedents, such as CIT v. Saravana Spinning Mills (P) Ltd. and Ballimal Naval Kishore v. CIT, to support its conclusion that replacement of assets resulting in a new benefit is not considered current repairs. The Tribunal's decision was further reinforced by the apex court's rulings emphasizing the distinction between repair and the creation of a new asset for the business. Ultimately, the High Court upheld the Tribunal's decision, emphasizing that the expenditure in question did not qualify as revenue expenditure under section 37 of the Income-tax Act.

In conclusion, the High Court dismissed the appeal, ruling in favor of the Department and against the assessee, based on the capital nature of the expenditure incurred and the enduring advantage it provided to the business.