2022 (7) TMI 901 - HC - Income Tax

Nature of expenditure - revenue or capital expenditure - sum paid for termination of Hotel Operator Agreement - HELD THAT - There has been no addition of capital asset of enduring nature in the hands of the respondent-assessee. In fact, after payment of Rs.30.86 crores there has been no change in the capital structure of the respondent-assessee. It had paid Rs.30.86 crores to get back the possession of its own asset which had been given on license basis under the Hotel Operator Agreement. The Assessee has not acquired something that it did not already own or possess. This Court is of the view that the respondent-assessee spent Rs.30.86 crores to facilitate its business and trading operations. Accordingly, the test of capital expenditure as stipulated in Empire Jute Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT , MADRAS AUTO SERVICE PVT. LIMITED 1998 (8) TMI 1 - SUPREME COURT , ASSOCIATED CEMENT COMPANIES LIMITED 1988 (5) TMI 2 - SUPREME COURT , BHARAT ALUMINIUM COMPANY LTD. 2010 (8) TMI 26 - DELHI HIGH COURT AND HINDUSTAN TIMES LIMITED VERSUS COMMISSIONER OF INCOME-TAX, NEW DELHI 1979 (11) TMI 86 - DELHI HIGH COURT is not satisfied in the present case. Consequently, this Court is of the view that the compensation paid had arisen out of business necessity and is revenue expenditure. Accordingly, no substantial question of law arises for consideration in the present appeal and the same is dismissed.

Summary

Issues:
1. Challenge to the order passed by ITAT regarding the nature of payment made to ITC Ltd.
2. Determination of whether the payment made by the respondent towards termination of Hotel Operator Agreement is capital or revenue expenditure.

Analysis:
1. The appellant challenged the ITAT order, arguing that the payment made to ITC Ltd. should be considered capital expenditure as declared in the income tax return. The Tribunal's decision regarding the nature of the payment and the improvement in lease rights was disputed by the appellant, emphasizing that the expenditure should be capitalized due to clearing defects in the title of the hotel.

2. The appellant further contended that if the amount is a depreciable capital expenditure, depreciation should not be granted on the entire sum as it was not solely for acquiring the building but also included the land, furniture, and fixtures of the hotel. The appellant's ownership of 'Hotel Sea Rock' in Mumbai and the disputes with ITC Ltd. following the bomb blast damage were highlighted to provide context.

3. The main issue addressed was whether the payment of Rs.30.86 crores towards terminating the Hotel Operator Agreement should be classified as capital or revenue expenditure. The court noted that no enduring capital asset was added to the respondent-assessee's holdings, and the capital structure remained unchanged after the payment. It was emphasized that the respondent spent the amount to facilitate its business operations, not to acquire new assets.

4. Referring to legal precedents such as Empire Jute Co. Ltd. vs. CIT and other cases, the court concluded that the payment was made out of business necessity and should be considered revenue expenditure. The court dismissed the appeal, stating that no substantial question of law arose in the case, and the decision was based on the specific facts and circumstances of the matter.