2018 (3) TMI 1570 - AT - Income Tax

Disallowance of repair and maintenance expenditure - Held that - When expenditure claimed by the assessee company on account of repair and maintenance disallowed on account of non-producing the vendors are held to be existed but CIT (A) has restricted the disallowance to 5% on the basis of doubt only and no addition can be made on the basis of suspicion. Disallowance of 5% made by the CIT (A) on the ground that still some doubt are there qua the existence of vendors is not sustainable in the eyes of law and hence ordered to be deleted. Disallowance of repair and maintenance expenditure paid to Chandra Singh Contractor and National Sanitation - revenue or capital expenditure - Held that - CIT (A) has erred in confirming the disallowance of repair and maintenance expenditure paid to Chandra Singh Contractor and National Sanitation for AYs 2003-04 and 2005-06 as the expenditure are liable to be treated as revenue in nature as keeping the hotel rooms, floors, ceilings and its ambience in good condition would certainly lead to the increase of the revenue of hotel and it will also enhance its sale-ability and cannot be treated as capital expenditure of enduring nature. - Decided in favour of assessee No illegality or perversity in the deletion of the disallowance made by the CIT (A) by treating the same as expenditure incurred wholly and exclusively for the purpose of business on account of directors foreign travelling expenditure.

Summary

Issues Involved:
1. Disallowance of repair and maintenance expenses as capital expenditure.
2. Ad hoc disallowance of repair and maintenance expenses due to non-production of vendors.
3. Disallowance of Director's foreign travel expenses.

Detailed Analysis:

1. Disallowance of Repair and Maintenance Expenses as Capital Expenditure:
The assessee company challenged the disallowance of repair and maintenance expenses paid to Chandra Singh Contractor and National Sanitation, which were treated as capital in nature by the AO. The CIT(A) confirmed this disallowance. The Tribunal, referencing the nature of the work (e.g., changing floors, repair work, replacement of fixed woodwork), concluded that these expenses should be treated as revenue in nature. The Tribunal cited previous decisions, including those of the Hon'ble Madras High Court and Karnataka High Court, which held that such expenditures, aimed at maintaining the hotel’s condition and enhancing its saleability, do not provide an enduring benefit and should be allowed as revenue expenditure. Consequently, the Tribunal ruled in favor of the assessee, determining that these expenses should not be capitalized.

2. Ad Hoc Disallowance of Repair and Maintenance Expenses Due to Non-Production of Vendors:
The AO made a 50% ad hoc disallowance of repair and maintenance expenses because the assessee failed to produce vendors for verification. The CIT(A) reduced this disallowance to 5%, citing doubts about the existence of the vendors. The Tribunal noted that the AO never disputed the actual incurrence of the expenses and that the assessee provided complete details of the vendors, including PANs, invoices, and ledger accounts. The Tribunal referenced the decision of the Hon'ble High Court of Delhi in CIT vs. Fancy International, which held that an addition based on the non-production of parties was unjustified if the explanation for their absence was plausible. The Tribunal concluded that the 5% disallowance by the CIT(A) was based on mere suspicion and should be deleted, thus ruling in favor of the assessee.

3. Disallowance of Director's Foreign Travel Expenses:
The AO disallowed the Director’s foreign travel expenses, arguing they were not related to the business. The CIT(A) deleted this disallowance, relying on the assessment order for AY 2011-12, which treated similar expenses as business-related. The Tribunal examined the details provided by the assessee, including passport and visa expenses, board meeting minutes, travel invoices, and the operating agreement showing the responsibility for business promotion. The Tribunal noted that the issue had been previously decided in favor of the assessee in earlier assessment years. The CIT(A) had correctly treated these expenses as business-related after thorough examination. Thus, the Tribunal upheld the CIT(A)’s decision, ruling against the Revenue.

Conclusion:
The Tribunal allowed the appeals of the assessee, determining that the repair and maintenance expenses should be treated as revenue in nature and that the ad hoc disallowance based on non-production of vendors was unjustified. The Tribunal also upheld the CIT(A)’s decision to treat the Director’s foreign travel expenses as business-related, dismissing the Revenue’s appeals.