2021 (2) TMI 847 - AT - Income Tax

Nature of expenditure - revenue or capital expenditure - amount paid by it to ITC Ltd. at the time of termination of the agreement with ITC Ltd. - second round of litigation before the Tribunal - HELD THAT - We find merit in the arguments advanced by the ld. Counsel that when there was no addition to the capital asset and no change in the capital structure and there was no asset of any enduring nature involved, but, only an alteration in the mode of earning the money from the hotel, therefore, such compensation paid had arisen out of business necessity and should be allowed as revenue in nature. The assessee, in our opinion, in the instant case, has acquired nothing new of enduring nature as it always held the asset of enduring nature. It was not a case where the assessee was acquiring for the first time something which it did not otherwise own or possess. It was, thus, a change in the method of earning profits from the hotel and not a transfer of any asset. We find merit in the argument of the ld. Counsel that the agreement was terminated on business considerations and as a matter of commercial expediency. The various other decisions relied upon by the ld. Counsel in his synopsis also support his case to the proposition that the payment made to ITC Ltd. is allowable as revenue expenditure u/s 37 of the IT Act. The answer to the question referred to by the Hon ble High Court to the Tribunal is accordingly answered in the affirmative, i.e., in favour of the assessee.

Summary

Issues Involved:
1. Whether the payment of ?30.86 crores made by the assessee to ITC Ltd. should be treated as revenue expenditure or capital expenditure.
2. Whether the income shown by the assessee should be taxed as business income or as income from house property or other sources.

Issue-wise Detailed Analysis:

1. Treatment of Payment as Revenue or Capital Expenditure:

The core issue revolves around the classification of the ?30.86 crores payment made by the assessee to ITC Ltd. The Tribunal initially held this payment as capital in nature, attributing it to the hotel building and allowing depreciation at the rate applicable to the hotel building. The High Court remanded the matter back to the Tribunal to reconsider whether the expenditure should be treated as revenue expenditure.

The assessee argued that the payment was made to terminate an onerous agreement with ITC Ltd. and regain control over the hotel property, which was a business necessity and commercial expediency. The payment did not result in any addition to the capital asset or change in the capital structure but merely altered the mode of earning revenue from the hotel. The Tribunal, upon reconsideration, noted that the payment facilitated the smooth functioning of the business and was made out of business necessity. Thus, it should be treated as revenue expenditure under Section 37 of the IT Act.

The Tribunal referred to several judicial precedents supporting the view that payments made to remove restrictions or obstructions in business operations, or to terminate disadvantageous agreements, are revenue in nature. These include decisions from the Supreme Court, High Courts, and various Tribunals, which consistently held that such expenditures, aimed at facilitating business operations or avoiding future commercial inconveniences, should be treated as revenue expenses.

2. Classification of Income:

The second issue was whether the income shown by the assessee should be taxed as business income or as income from house property or other sources. The Tribunal and the CIT(A) consistently held that the only business of the assessee was its hotel business, and thus, the income should be treated as business income. The High Court affirmed this view, stating that the findings of both the CIT(A) and the Tribunal were consistent and justified.

Conclusion:

The Tribunal concluded that the ?30.86 crores payment made by the assessee to ITC Ltd. should be treated as revenue expenditure, allowing the assessee to claim it under Section 37 of the IT Act. The Tribunal dismissed the appeal filed by the Revenue, upholding the treatment of the payment as revenue expenditure and affirming the classification of the income as business income. The decision was pronounced in the open court on 16th February 2021.