2020 (2) TMI 939 - AT - Income Tax

Expenses under repairs and maintenance to building - Revenue or capital expenditure - HELD THAT - Under section 37(1) any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Expenditure on current repairs to buildings machinery plant and furniture used for the purposes of the business is generally covered by sections 30 and 31 of the I.T. Act. In respect of types of repairs that do not fall under the above description a deduction can still be allowed u/s. 37 if all the requirements for deduction under the said section are fulfilled. The expenses incurred by the assessee towards repairs and whether it is allowable as revenue expenditure or not is a pure question of fact. In this case though the expenses incurred cannot be allowed as deduction as current repairs certainly expenses would not be a capital expenditure and all conditions being satisfied u/s. 37 expenses are to be allowed under the said section. The expenses incurred in a hotel industry may be current repairs which expenses are incurred on yearly basis and expenditure incurred on periodical basis. As mentioned earlier assessee s hotel was already having three star facility from the year 2006 and for renewal of three star facility the assessee had to incur the impugned expenses on periodical basis. On basis of these expenses incurred the assessee did not derive a new asset and there was no increase in the total rooms nor there was an increase in total area of the hotel. The expenditure incurred by assessee such as painting of the hotel replacement of floor tiles glazing works etc. are nothing but periodical expenditure which a hotel has to necessarily incur for its upkeep and cannot be termed as capital expenditure. Assessee is entitled to deduction u/s. 37(1) - Decided in favour of assessee.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Classification of the expenditure as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal was filed with a delay of 27 days. The assessee submitted a petition for condonation of delay, supported by an affidavit from the Managing Director explaining the reasons for the delay. After reviewing the reasons, it was determined that the delay was not due to any fault of the assessee. Therefore, the delay was condoned, and the appeal was allowed to proceed on its merits.

2. Classification of the Expenditure as Capital or Revenue Expenditure:
The central issue was whether the sum of ?60,25,240/- spent on repairs and maintenance should be classified as capital expenditure or revenue expenditure.

Facts and Arguments:
- The assessee, a private limited company operating a 3-star bar-attached hotel, incurred expenses amounting to ?60,25,240/- under the head "repairs and maintenance to building" during the assessment year 2011-12.
- The expenditure was incurred to renovate the hotel for reclassification by the Department of Tourism, which required the hotel to maintain its 3-star status.
- The Assessing Officer (AO) treated the expenditure as capital in nature, arguing that it provided an enduring benefit to the asset by securing the 3-star certification for another five years.

Assessing Officer’s Findings:
- The AO concluded that the expenses were not routine repairs but were aimed at obtaining a 3-star certification, which conferred an enduring benefit.
- The AO relied on precedents such as Ballimmal Naval Kishore vs. CIT and Bony Rubber Co. (P.) Ltd. v. CIT to support the classification of the expenditure as capital.

CIT(A) Findings:
- The CIT(A) upheld the AO's decision, emphasizing that the nature of the expenses (e.g., glazing work, flooring tiles, furniture and furnishings) indicated the creation of new assets rather than routine repairs.
- The CIT(A) noted that the expenditure was significantly higher than the routine repair expenses in previous years, further supporting the classification as capital expenditure.

Tribunal’s Analysis:
- The Tribunal examined the nature of the expenses and the purpose behind incurring them.
- It was noted that the expenses were necessary to maintain the hotel's 3-star classification and did not result in the creation of a new asset or an increase in the hotel's capacity.
- The Tribunal referenced various judicial pronouncements, including CIT vs. Mahalakshmi Textile Mills Ltd. and CIT vs. Chowgule & Co. Pvt. Ltd., which clarified the distinction between capital and revenue expenditure.
- The Tribunal emphasized that expenses incurred to maintain or restore an asset to its original condition, even if they provide an enduring benefit, can be classified as revenue expenditure if they do not create a new asset or increase the asset's value.

Conclusion:
Based on the analysis and relevant judicial precedents, the Tribunal concluded that the expenditure of ?60,25,240/- incurred by the assessee for repairs and maintenance to secure the renewal of the 3-star classification was revenue in nature. The Tribunal allowed the appeal, holding that the assessee is entitled to the deduction of the said amount under section 37(1) of the Income Tax Act.

Judgment:
The appeal of the assessee was allowed, and the expenditure of ?60,25,240/- was classified as revenue expenditure, eligible for deduction under section 37(1) of the Income Tax Act. The decision was pronounced in the open court on 18-02-2020.

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