2023 (10) TMI 567 - 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:
1. Whether the "renovation and repair" expenses are revenue expenditure admissible under Section 37 of the Income Tax Act, 1961?
2. Whether the expenses incurred on replacement of door shutters, bus bar, and MS frames for fixing false ceiling are capital expenditure?

Summary:
Issue 1:
The appellant sought to challenge the order passed by the Income Tax Appellate Tribunal regarding the classification of renovation and repair expenses as revenue expenditure. The Commissioner of Income Tax(Appeals) held these expenses as revenue expenditure due to normal wear and tear in running the hotel. The Tribunal, however, reversed this decision based on the quality and cost of the replacements, considering them to be of capital nature. The High Court disagreed with the Tribunal's reliance on the auditor's observations and annual accounts, emphasizing that expenditure to run the business effectively, without touching fixed assets, should be treated as revenue expenditure.

Issue 2:
Regarding the expenses on replacement of door shutters, bus bars, and fabrication of a frame for fixing the false ceiling, the Tribunal upheld the capital nature of these expenditures based on the quality and purpose of the replacements. The High Court, however, disagreed with this approach, stating that merely installing superior quality items does not automatically make the expenditure capital in nature. Referring to a previous judgment, the High Court directed that these expenses should be treated as revenue expenditure, allowing the appellant to claim deductions for them.

In conclusion, the High Court ruled in favor of the appellant/assessee, holding that the expenses in question were revenue expenditure and not capital expenditure, as determined by the Tribunal. The appeal was disposed of accordingly.