2023 (10) TMI 467 - HC - Income Tax

Nature of expenses - repair and maintenance and payment to GEL - revenue or capital expenditure - current repair u/s 30 - treatment of expenses incurred on renovation and refurbishment of Hotel - HELD THAT - Tribunal misdirected itself in law by not applying the correct principles enunciated by the courts while ascertaining whether a particular expense should be treated as revenue or capital expenditure. Tribunal was wrongly burdened by the fact that the renovation, refurbishment and repairs were carried out over several years and that the total amount incurred which was much more than the cost at which the hotel had been constructed. In coming to its conclusion, the Tribunal, in our opinion, gave undue weight to the director's report, which, inter alia, alluded to the fact that they were carrying out a comprehensive renovation which would ultimately result in the hotel attaining the first rank in the country by bringing into existence a New Hyatt . Tribunal committed an error in disregarding that expenses were incurred concerning an ongoing hospitality business. None of the statutory authorities returned a finding that the expenses incurred by the appellant/assessee had resulted in the acquisition or bringing into existence an asset. Expenses incurred by the appellant/assessee did not result in conferring upon it an advantage of enduring benefit. The advantage of enduring benefit has to be considered from the point of view of business expediency. The fact that the pressurisation of lift shafts resulted in the safety of the lifts being enhanced could not have led to the expenses being incurred in that behalf being characterised as capital expenditure. The expenses incurred were for preserving and protecting existing assets. The categorisation of expenses under various heads, such as renovation, refurbishment or repair, are not necessarily determinative of the nature of the expenditure i.e., whether or not it is on capital or revenue account. The segregation can be carried out by applying the principles enunciated in that behalf to the facts obtaining in each case. The broad-brush approach adopted by the Tribunal concerning expenses which had been capitalised in the books of account and were sought to be claimed as revenue expenditure for the first time before the Tribunal was, undoubtedly, not the right approach. Also renovation and refurbishment of the rooms, including washrooms and other facilities in the hotel, only improved, if at all, the efficiency of the source of profit or income and hence, in our opinion, the expenses incurred for that purpose could not be categorised as capital expenditure. Tribunal overlooked the principle that when an expenditure is incurred to make the profit-earning structure work more efficiently, leaving the structure of the source of profit or income intact, it can only be treated as revenue expenditure, although its impact may last for an extended period. Thus we are inclined to sustain the view taken by the CIT(A) that amount spent on renovation, refurbishment and repairs had to be treated as revenue expenditure. The contrary view taken by the Tribunal cannot be sustained and, hence, is overruled. Treatment of fees paid to GEL - Tribunal has linked its conclusion regarding the treatment of fees paid to GEL with its conclusion arrived at qua categorisation of expenses incurred on renovation, refurbishment and repairs. According to us, this view, on the same logic, cannot be sustained for the reason that if GEL was called upon to plan and supervise the execution of the work involving renovation, refurbishment and repairs (which, as noticed above, should be treated as revenue expenditure), the fees paid in that behalf should also be treated as revenue expenditure. The nature of the expenses incurred, as noticed by the CIT(A), is not suggestive of the fact that they were incurred on the capital account. It is well-established that the manner in which the expense/income is reflected in the books of accounts of the appellant/assessee or in some cases omitted, is not determinative of its true nature, although it may provide a clue. The safest and the surest way to arrive at the true nature of the expense/income in issue is by having regard to the provisions enunciated either in the statute and/or the principles enunciated by the courts. See Kedarnath Jute Mfg. Co 1971 (8) TMI 10 - SUPREME COURT Thus the appellant/assessee was correct in contending before the Tribunal that the expenses which had been capitalised and were sought to be treated as revenue expenditure under the provisions of the Act would require examination by the AO. Current repair u/s 30 - Tenability of the deductions claimed u/s 37 which, inter alia, provides that an expenditure which is not described in Sections 30 to 36 of the Act and is expended wholly and exclusively for the purposes of business or profession, not being in the nature of either capital expenditure or personal expense, can be claimed by the Assessee in computing his income chargeable under the head profits and gains of business or profession . Tribunal, in our view, has correctly mentioned in para 35 of the impugned order that if, for any reason, the owner of a building which is used for business incurs expenditure in the nature of current repairs and the Assessee is not able to claim expenses for current repairs under the provision of 30(a)(ii), he could still lay a claim for deduction under Section 37(1) of the Act provided the conditions stipulated therein are fulfilled. Thus appellant/assessee will be entitled to claim deductions, in the nature of revenue expenditure - as incurred on renovation, refurbishment and repairs. Equivalent to Section 10(2)(xv) of the 1922 Act, expenses incurred on pressurisation of lift shafts and on payment of fees to GEL. And expenses of renovation, refurbishment and repairs of its hotel which was initially capitalised and was claimed before the Tribunal for the first time as revenue expenditure and forms part of the additional grounds raised by the appellant/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, in the light of the principles adverted to hereinabove. - Matter on this issue restored back to AO.

Summary

Issues Involved:
1. Whether the "renovation and repair" expenses, partly capitalised in the books of account of the Assessee, are revenue expenditure admissible under Section 37 of the Income Tax Act, 1961.
2. Whether the payment made to Gherzi Eastern Ltd. (GEL) for consultancy and supervision of interior décor is capital expenditure.

Summary:

Issue 1: Renovation and Repair Expenses

The appellant/assessee, engaged in running a five-star hotel, incurred substantial expenses on renovation, refurbishment, and repairs. The Assessing Officer (AO) disallowed these expenditures, categorizing them as capital expenditure. The CIT(A) partially allowed the expenses, treating them as revenue expenditure, except for costs incurred on pressurisation of lift shafts. The Tribunal reversed the CIT(A)'s decision, treating the expenses as capital expenditure based on several factors, including the scale and duration of the renovation, the substantial payments to GEL, and the director's report indicating a comprehensive renovation aimed at creating a "New Hyatt."

The High Court found that the Tribunal misapplied the principles for determining the nature of expenditure. The Court emphasized that the expenses were incurred for an ongoing business, did not result in acquiring a new asset, and were aimed at preserving and protecting existing assets. The Court concluded that the expenses should be treated as revenue expenditure, sustaining the view of the CIT(A) and overruling the Tribunal's contrary view.

Issue 2: Payment to Gherzi Eastern Ltd. (GEL)

The Tribunal linked the payment to GEL with the overall renovation project, treating it as capital expenditure. The High Court disagreed, stating that since the renovation and refurbishment expenses were revenue in nature, the consultancy fees paid to GEL should also be treated as revenue expenditure. The Court noted that the nature of the expenses incurred did not suggest they were on the capital account.

Conclusion:

1. The High Court ruled that the expenses on renovation, refurbishment, and repairs amounting to Rs. 2,44,00,352/- and Rs. 3,08,703/- incurred on pressurisation of lift shafts are revenue expenditures.
2. The fees paid to GEL amounting to Rs. 23,18,695/- are also revenue expenditure.
3. The issue concerning the additional grounds raised by the appellant/assessee, pertaining to Rs. 600,84,000/- initially capitalised and claimed as revenue expenditure, is remanded to the AO for further examination.
4. Both substantial questions of law were answered in favor of the appellant/assessee and against the revenue.