2020 (7) TMI 688 - HC - Income Tax

Nature of expenditure - expenditure incurred in the renovation and redecoration of rooms in a hotel - capital expenditure or revenue expenditure - appellant is engaged in the business of running a three star hotel - HELD THAT - Revenue does not dispute the fact that the number of rooms in the assessee s hotel remained at 57 and that there was no increase in the number of rooms and only 18 rooms out of 57 rooms were renovated and repaired - assessee specifically contended that the renovation and repairs neither increases their capacity nor does it empower to revise the basic room tariff because it can be done only after considering further facts such as market condition remaining in Madurai City and with the concurrence of M/s.ITC Limited, as they only have a franchisee agreement with the assessee. Granite and marble used by them will not last long and there is no guarantee and they may develop cracks and lose their shine and even become obsolete in a couple of years. These facts were never disputed before the Assessing Officer or before the CIT(A). As rightly contended by assessee,Tribunal did not consider the issue, but was of the opinion that it was neither the case of the assessee nor that of the Revenue that the claim was for current repairs. Assessment is for the year 2012-13 and the facts are not in dispute. It is only an application of legal principle to the given facts. Therefore, we hold that there is no justification in remanding the matter to the Tribunal or to any other Lower Authority. We hold that the expenditure incurred by the assessee is a revenue expenditure and not a capital expenditure. - Decided in favour of assessee.

Summary

Issues:
1. Whether expenditure incurred in the renovation and redecoration of rooms in a hotel would amount to capital expenditure or revenue expenditure?

Analysis:
The appellant, engaged in running a three-star hotel, filed their return of income for the assessment year 2012-13, admitting a total income. The assessment was completed under Section 143(3) of the Income Tax Act, with a disallowance of expenditure towards repairs and renovation expenses. The Assessing Officer treated a significant sum as capital expenditure despite the appellant's contention that the expenses were for repairs and renovation of existing rooms to attract customers and maintain the hotel's standard.

The Commissioner of Income Tax (Appeals) allowed the appeal, stating that the expenses were incurred to preserve the existing asset and attract foreign customers. The Revenue appealed to the Tribunal, which ruled in their favor, leading to the current appeal. The Tribunal's decision was based on the absence of a finding that the expenditure qualified as 'current repairs.'

The Court reframed the question of law to determine if the expenditure was capital or revenue based on the nature of the advantage gained. Referring to legal precedents, the Court emphasized that the enduring benefit test might not apply in all cases and that the nature of the advantage in a commercial sense was crucial. The Court highlighted the need to consider the facts of each case while deciding between revenue and capital expenditure.

In a similar case, the Court cited a decision where expenditure for repairs and modernizing a hotel was considered revenue expenditure. The Court also referred to other judgments emphasizing that expenditure to maintain existing assets without creating new ones typically falls under revenue expenditure. The Court distinguished a case where further construction was undertaken, ruling in favor of the Revenue due to specific circumstances.

The Court noted that the number of rooms remained unchanged, and only a portion of the hotel was renovated. The materials used were not guaranteed to last long, and the renovation did not increase capacity or room tariffs. The Tribunal failed to address these crucial points. The Court held that remanding the matter for fresh consideration was unnecessary, as the facts were clear, leading to the conclusion that the expenditure was revenue and not capital in nature.

Consequently, the tax case appeal was allowed, the Tribunal's order was set aside, and the substantial question of law was answered in favor of the assessee. The order passed by the CIT(A) was restored, with no costs imposed.