2023 (10) TMI 517 - HC - Income Tax

Nature of expenses - renovation and repair expenses partly capitalized in the books of account of the Assessee and payment made to consultancy and supervision of interior d cor of the existing hotel of the Assessee under renovation and refurbishment - whether not the revenue expenditure admissible u/s 37? - treatment of expenses incurred on renovation and refurbishment of Hotel - HELD THAT - As expenses initially capitalized and was claimed as revenue expenditure for the first time before the Tribunal and forms part of the additional grounds raised by the assessee in its appeal preferred before the Tribunal, it would stand remanded to the AO for examination of the character and nature of the expenses incurred, having regard to the principles adverted to 2023 (10) TMI 467 - DELHI HIGH COURT the instant appeal is disposed of with the following directions, as the view taken in the said appeal will apply mutatis mutandis to the instant case as well Appellant/assessee will be entitled to claim the deduction, as, in our opinion, it is in the nature of revenue expenditure.

Summary

Issues involved:
The judgment concerns the Assessment Year (AY) 1995-96 and involves questions regarding the treatment of expenses related to renovation and refurbishment as revenue or capital expenditure.

Question 1:
The first substantial question of law was whether the expenses on renovation and repair, partly capitalized in the books of account, are admissible as revenue expenditure under Section 37 of the Income Tax Act, 1961. The Tribunal disallowed the expenses incurred by the appellant on renovation and refurbishment.

Question 2:
The second question of law was whether the payment made to an interior architect for consultancy and supervision of interior décor should be treated as capital expenditure. The Tribunal, in line with the AO and CIT(A), disallowed the deduction claimed by the appellant for the fees paid to the interior architect.

The judgment noted that a coordinate bench previously framed substantial questions of law in a related matter concerning AY 1992-93. The fees paid to the interior architect in the instant AY were Rs.2,85,170, whereas, in AY 1992-93, the fees were significantly higher at Rs.23,18,695.

The AO disallowed a substantial amount incurred by the appellant on renovation and refurbishment, along with the fees paid to the interior architect. The CIT(A) remanded the issue of renovation and refurbishment back to the AO for further examination.

Upon appeal to the Tribunal, the entire expenditure on repairs and renovation was disallowed, including the fees paid to the interior architect. The judgment referenced a prior case (ITA No.1398/2006) and directed that the appellant could claim deductions for the renovation expenses and the fees paid to the interior architect as revenue expenditure.

The judgment concluded by answering both questions of law in favor of the appellant, allowing the deductions for the renovation expenses and the fees paid to the interior architect, while remanding the issue of additional expenses claimed before the Tribunal back to the AO for further examination.