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TMI Blog2013 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of vehicle expenses of 10% made by the A.O. without pointing out even a single instance of un- verifiable element involved in the said expenses was not sustainable – Decided in favor of Assessee. Nature of expenditure, Revenue or Capital - Professional fees paid by the assessee to the interior decorators etc., AO treating the same as capital expenditure to the extent of Rs. 26,21,380/- - Held that:- the temporary operational plan implemented by the assessee during the construction period really worked effectively resulting into profit of Rs. 7.60 and Rs. 12.03 in financial year 2005-06 and 2006-07 respectively as against the profit of Rs. 5.41 crores earned by the assessee company in A.Y. 2004-05. As regards the other small items of payment made by the assessee on account of professional fees, we are of the view that going by the nature of the corresponding services availed by the assessee as explained by the ld. counsel for the assessee, the said payments were made to upkeep and maintain the existing systems available in the hotel building and the same being in the nature of expenditure regularly incurred for the purpose of assessee's business of running a Five Star Hotel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) being 10% of the total vehicle expenses of Rs. 31,57,630/- claimed by the assessee. 3. The assessee in the present case is a company which is engaged in the business of running a Five Star Hotel and Restaurant. The return of income for A.Y. 2007-08 was filed by it on 30-10-2007 declaring total income of Rs. 12,05,75,580/-. In the P L account filed along with the said return, vehicle expenses of Rs. 31,57,360/- were debited by the assessee. During the course of assessment proceedings, the assessee was called upon by the A.O. to furnish the vehicle-wise and party-wise details of the vehicle expenses duly supported by the relevant vouchers. Although the assessee furnished certain details and also produced some vouchers for verification, the A.O. found that the said details did not contain vehicle-wise and party-wise information. He also noted that the complete vouchers of the vehicle expenses were not produced by the assessee for his verification. He, therefore, disallowed 10% of the total vehicle expenses claimed by the assessee treating the same as unverifiable to that extent. On appeal, the ld. CIT(A) confirmed the disallowance made by the A.O. on this issue for the same reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The issue raised in ground No. 2 of assessee's appeal for A.Y. 2007-08 relates to the disallowance of Rs.21,738/- (10% of the conveyance expenses), Rs. 29,373/- (10% of domestic travel expenses) and Rs. 1,99,007/- (50% of the foreign travel expenses) made by the A.O. and confirmed by the ld. CIT(A). 8. During the course of assessment proceedings, the conveyance and travel expenses aggregating to Rs. 28,55,651/- claimed by the assessee were examined by the A.O. and on such examination, he found that certain foreign travel expenditure were claimed by the assessee in support of which the details of air tickers purchased by the Director along with the supporting vouchers were furnished by the assessee. He also found that besides purchase of tickers, the assessee had claimed other expenditure of Rs. 3,98,150/- on account of foreign travel expenses for which no details or supporting vouchers were furnished by the assessee. In the absence of such details and supporting vouchers, other expenditure of Rs. 3,98,150/- was disallowed by him to the extent of 50%. Similarly, the conveyance expenses of Rs. 2,17,375/- and domestic travels expenses of Rs. 2,93,726/- were disallowed by him to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure to the extent of Rs. 11,25,310/- claimed by the assessee in the immediately preceding year ie. A.Y. 2006-07. The A.O., therefore, proceeded to examine the expenses claimed by the assessee on legal and professions fees and found on such examination that the expenses claimed by the assessee on legal and professional fees were inclusive of the following items:- Sr No. Name Nature of work Amount (Rs) 1 B.S. Vora Consultant for licenses 45,000 2 Shaukat Mukhi Interior Designing 22,44,600 3 Engineering Consultancy Services Engg. Consultancy Charges 1,40,300 4 Design Technic A.C. Consultancy Charges 1,12,240 5 Paritosh Parelkar Designing/Planning Concept 1,12,240 6 Jay Mavani Website Designing 12,000 Total 26,66,380 According to the A.O., the above expenses claimed by the assessee were of capital nature and since no satisfactory explanation was offered by the assessee in this regard, he made a disallowance on account of legal and professional fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee therefore was not entitled for deduction of the same u/s 37(1) of the Act. 14. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the construction of two additional floors in the existing hotel building of the assessee company was carried on during the relevant period for which huge expenditure was incurred as is evident from the fact that such expenditure of Rs. 5.69 crores was capitalized by the assessee to the building account in the year under consideration. As explained by the ld. counsel for the assessee from the copy of relevant plan placed at 184 of the paper book, the use of open space, existing main entrance etc. was restricted and in order to ensure that its normal hotel business continues even during this construction period, a temporary operational plan was prepared and executed by providing alternative access as well as open space without compromising on the strict requirements of Five Star Hotel or expectations of the customers staying in such hotel. This temporary operational plan was prepared by Shri Shaukat Mukhi, a professional interior designer, for which a sum of Rs. 22,44,600/- w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup Gratuity Scheme. In this regard, it was noticed by the A.O. that the fund so created was duly approved and the amount of gratuity credited to the said fund by the assessee was as per the actuarial valuation. The A.O., however, noticed that the payment of gratuity only to the extent of Rs. 2,57,670/- was made out of the said fund to the employees of the assessee company during the year under consideration. He, therefore, allowed the deduction to the assessee on this issue only to the extent of Rs.2,57,670/- and disallowed the balance amount of Rs. 4,79,450/-. On appeal, the ld.CIT(A) confirmed the said disallowance observing that the deduction was allowed by way of contribution towards an approved gratuity fund only to the extent of actual payment. 17. We have heard the arguments of both the sides and also perused the relevant material available on record. The condition for claiming deduction on account of payment of gratuity are stipulated in section 36(1)(v) of the Act and there is no dispute that the said conditions were duly satisfied in the case of the assessee inasmuch as the fund created by the assessee for the purpose was duly approved by the Income Tax Department and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O. to allow the assessee to produce such evidence showing the actual payment of leave encashment and to allow appropriate relief to the assessee on this issue. 20. After having considered the rival submissions and perusing the relevant material available on record, we find no infirmity in the impugned order of the ld. CIT(A) on this issue. It is observed that on the basis of submissions made on behalf of the assessee before him, the ld. CIT(A) has given appropriate direction to the A.O. to allow the assessee to produce the evidence showing the actual payment of leave encashment and to allow the relief accordingly by restricting the disallowance. We, therefore, uphold the impugned order of the ld. CIT(A) on this issue and dismiss ground No. 5 of assessee's appeal. 21. The issue raised in ground No. 6 of assessee's appeal relates to the addition of Rs. 2,37,12,234/- made by the A.O. and confirmed by the ld. CIT(A) on account of repairs and maintenance expenditure treating the same as of capital nature. 22. During the year under consideration, the assessee had claimed total expenditure of Rs. 5,01,67,446/- on account of repairs and maintenance which was inclusive of a sum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Repairs maintenance to computer hardware 9426/- 5656/- 3770/- Repairs maintenance to kitchen equipment 2,41,515/- 24,151/- 2,27,364/- Repairs maintenance to fire fighting equipment 2,12,616/- 21,262/- 1,91,354/- Repairs maintenance to others 71,12,815/- 7,11,281/- 64,01,534/- Repairs maintenance to carpentary/polish 37,64,740/- 3,76,474/- 33,88,266/- Repairs maintenance to furniture 16,13,660/- 1,61,366/- 14,52,294/- Total disallowance 2,37,12,054/- Accordingly total disallowance of Rs. 2,37,12,054/-was made by the A.O. on account of repairs and maintenance expenses claimed by the assessee treating the same as of capital nature. The disallowance made by the A.O. on account of repairs and maintenance expenditure was disputed by the assessee in the appeal filed before the ld. CIT(A) and the following submissions were made on behalf of the assessee in support of the assessee's case on this issue. "[(I) Renovation is different from repairs and the repairs should not be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged area of the existing hotel building of the assessee. He submitted that the construction work was carried out in the compound of the hotel property of the assessee touching the existing hotel building and due to the damage occurred to the several areas of the existing structure, major repair work was required to be done to the entrance lobby as well as the other damaged area. He contended that this major expenditure incurred by the assessee did not result in any enduring benefit to the assessee and since the same was incurred to maintain the existing assets of the assessee, it was rightly claimed as deduction being the expenditure of revenue nature. He contended that wherever certain expenditure debited under the head "repairs and maintenance" was found to be of capital nature giving enduring benefit, the assessee company itself had already capitalized the same. He submitted that the nature of expenditure cannot be decided on the basis of quantum of expenditure alone and it has to be seen that what benefit has accrued to the assessee as a result of such expenditure. He then invited our attention to the details given in Annexure-A of his written submissions giving details of each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. As noted by us, the sum of Rs. 2244600/- was paid by the assessee to Mr. Shaukat Mukhi, interior decorator for designing a temporary operational plan and as submitted by the ld. Counsel for the assessee, the expenditure in question was mainly incurred to implement the said operational plan during the construction period. We have already taken note of the fact that the turnover of the hotel of the assessee during the construction period was increased so also the profit as well as the tax paid thereon. Out of the impugned disallowance on account of repairs and maintenance made by the A.O., a sum of Rs.1,33,86,279/- claimed by the assessee on account of repairs and maintenance in respect of building was disallowed by the A.O. treating the same as capital expenditure. The ld. Counsel for the assessee has furnished before us the details of the said expenditure along with the nature and purpose thereof as under:- The marble slab purchased for the temporary lobby created was required to be dismantled subsequently and could not be reused except in garden area and hence in the light of the explanation to point above in respect of temporary lobby this expenditure is also required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under:- SR No. PARTICULARS INVOICE NO. AMOUNT PAGE NO. 1 1 Nos.SS Salmander 52 13413 192 This is an annual replacement of hearing equipment which undergoes substantial wear and tear due to its 24 hours use. This is part of the equipment and not the equipment itself. SR No. PARTICULARS INVOICE NO. AMOUNT PAGE NO. 2 Water Cooler 159 30825 193 One water cooler is kept outside the hotel for use of drivers, staff and visitors to the parties in the back side lawn of the hotel. The one that was there during the earlier period was spoiled during renovation and had to be replace. SR No. PARTICULARS INVOICE NO. AMOUNT PAGE NO. 3 Conversion of Oven from LPG 607 26051 194 4 2 Nos SS Hot Food Trolly 196 91800 195 It is submitted that Rs. 26051 and Rs. 80715 out of Rs. 91800 had already been capitalized under the head plant and machinery and hence this addition will result in double jeopardy. SR No. PARTICULARS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84,816/- was incurred by the assessee on GIC Pipe and the same being a replacement of part of fire fighting system, it in our opinion, is allowable as revenue expenditure. Similarly, the balance expenditure of Rs. 37,800/- incurred by the assessee on conventional photo electric being part of the fire fighting equipment constituted the expenditure incurred on replacement of part of fire fighting system and the same, in our opinion, is also allowable as revenue expenditure. 33. As regards the expenditure incurred by the assessee on other repairs and maintenance which has been treated as of capital nature to the extent of Rs. 71,12,815/-, the ld. Counsel for the assessee has furnished the details thereof as under:- REPAIR MAINTENANCE : OTHERS SR No. PARTICULARS INVOICE AMOUNT PAGE NO. 1 Steam Coil For Boiler 1417 61875 207 The amount paid for replacement of burnt coil for boiler is not a machinery and has been correctly claimed under the head repair maintenance - other and no disallowance is warranted to treat the same as capital expenditure. SR No. PARTICULARS INVOICE AMO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29 Supply of centrifugal Blower 15 21038 242 The Centrifugal Blowers are required for exhaust air from the basement as well as the kitchen and have to be kept ready in stock for any failure of the existing blower as per the safety requirement of statutory compliance and hence is not a standalone machinery item of a capital nature and therefore needs to be written off as revenue nature. SR No. PARTICULARS INVOICE NO. AMOUNT PAGE NO. 32 Waste Coupling/Elbow 2433 28672 The amount paid to the Krishna Ceramics who are wholesalers for pipes and sanitary fittings are for over 300 hundred of scores items to be kept in stock for repair and replacement from time to time and hence revenue expenditure allowable. SR.No. PARTICULARS BILL NO. AMOUNT PAGE NO. 30 Hand Dryer Purchased 70 29284 243 31 Dry Vaccum Cleaner 056A 92250 244 34 Hand Dryer Purchased 74 14642 247 33 Door Lock Purchased 351 142036 246 35 5 Door Locks/9 Brass Door Logo 247 118853 248 36 Flushing Valve/Stop Cock 450 254541 249 37 Jet Speray/Bottle Spary 441 29691 250 38 GSp 110/EP 4312/Xenon 17 48487 251 39 Centrifugal Blower. Filter 5 42300 252 41 W L Indicator W/L C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase by the assessee were part of intercom system installed in the hotel building of the assessee while there were other items purchased by the assessee such as steam coil for boiler, capacitor, controllers etc. which were parts of assets of the assessee forming the electrical installation. There were also certain expenses incurred by the assessee which were of recurring nature such as AMC charges etc. which were revenue expenditure going by its nature and purpose. Accordingly, we direct the A.O. to recompute the disallowance to be made by treating the other repairs and maintenance expenditure as of capital nature on the basis of our observations/findings given on the various items of expenditure. 35. As regards the carpentry and polish expenses claimed by the assessee under the head repairs maintenance and treated by the authorities below as of capital nature, the ld. counsel for the assessee has furnished the details of such expenditure aggregating to Rs. 37,64,740/- as under:- 6. Repair Maintenance:- Carpantry/ Polising SR.No. PARTICULARS BILL NO. AMOUNT PAGE NO. 1 Labour Charges 1 1400000 258 2 Labour Charges 1 1350000 264 3 Labour Charges 3 439740 270 4 Painting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g business of hotel running during the construction period. The fact that the substantial part of this expenditure was incurred by the assessee on labour charges further substantiates the case of the assessee. The A.O., on the other hand, has not given any basis in support of his stand that the said expenditure was of capital nature. He has not pointed out as to how the said expenditure resulted in creation of any new asset or advantage of any enduring nature in the capital field. As already discussed by us, the temporary operational plan implemented by the assessee during the construction period helped the assessee to keep the existing hotel business going without disturbing the turnover. As a matter of fact, the turnover of the hotel business of the assessee was increased during the construction period as a result of the successful implementation of the temporary operational plan during the construction period which clearly establishes that the expenditure incurred by the assessee for such implementation was incurred to keep the existing hotel business running and it did not result in creation of any new asset or advantage of enduring nature in the capital filed as rightly conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the assessee company namely (1) Neeta Gundecha and (2) Meena Gundecha having profits share of 33% each. The said two partners thus had almost equal share of profit with that of assessee company which was having 34% profit share. As found by the A.O., the entire capital of the said firm, however, was effectively contributed by the assessee company but interest income earned was enjoyed by the other two partners in equal ratio without contributing any capital or without doing any business activity. He held that the assessee company thus was using the tool of partnership basically to avoid accumulation of profits in its hands and accordingly invoking the provisions of section 60 to 63 of the Act, the interest income of Rs. 1.98 crores received by the firm of Sea Princess Investment on transfer of funds by the assessee company was clubbed by him in the hands of the assessee. Similarly, he found that the profit share of the assessee company in other partnership firm of M/s Sea Princess realty was only 19% while the capital contributed by it was 90% of the total capital of the said firm. He accordingly invoked the provisions of section 60 to 63 of the Act and clubbed the interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case had made the investment in the partnership firm by way of capital contribution which cannot be treated as a transfer. He submitted that the partnership firms are governed by Indian Partnership Act, 1932 and as per the relevant provisions of the said Act, the profit sharing ratio of the partners as well as the capital contribution of each partner is to be determined as per the Partnership Deed. He submitted that as per the relevant partnership deeds, the capital was required to be contributed by the partners as per the requirements of the firm and there was no requirement that the said capital should be in the ratio of profit sharing. He submitted that both the partnership firms were independent entities having active existence and the same were governed by relevant partnership deeds. He contended that legal fiction is created u/s 60 to 63 of the Act for the specific purpose and the same cannot be extended beyond such purpose to treat the capital contribution by partners of the firm as transfer. In support of this contention, he relied on the definition of "transfer" and "revocable transfer" given in section 63 of the Act. He submitted that the capital contribution was made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the ld. CIT(A) to the total income of the assessee by clubbing the income of two partnership firms namely M/s Sea Princess Investment and M/s Sea Princess Realty by invoking the provisions of section 60 to 63 of the Act which read as under:- "60. Transfer of income where there is no transfer of assets.--All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income. 61. Revocable transfer of assets.--All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income- tax as the income of the transferor and shall be included in his total income. 62. Transfer irrevocable for a specified period.--(1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer-- (i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, on the other hand, envisages that there should be a transfer first as the same talk about condition involving re-transfer of any part of the income or assets to the transferor. In the present case involving contribution of capital by the partner of the firm, there is no transfer as such and therefore the question of re- transfer directly or indirectly of the whole or part of the income or assets to the transferor does not arise. The capital remains the liability of the partnership firm and the same is payable as such to the partners. The partner is always entitled to receive back his capital from the partnership firm and the question of right to reassume the power of the whole or any part of the income or assets does not arise. 46. As rightly contended by the ld. counsel for the assessee, the share of profit of the partners and the capital contribution made by them are governed by the Partnership Act which provides that the same are to be decided by and between the partners. These aspects are decided by the partners as per the Partnership Deed entered into by between them and it is not necessary that the capital contribution of the partners should always be in the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied to club the income of two partnership firms namely M/s Sea Princess Investment and M/s Sea Princess Realty with the income of the assessee and the ld. CIT(A), in our opinion, was not justified in upholding the action of the A.O. in clubbing the income of the said two partnership firms in the hands of the assessee by invoking the said provisions. In that view of the matter, we delete the additions made by the A.O. and confirmed by the ld. CIT(A) to the total income of the assessee by clubbing the income of two partnership firms with the income of the assessee and allow ground No. 1 2 of assessee's appeal for A.Y.2009-10. 48. The issue raised in ground No. 3 relates to the disallowance of Rs. 1,05,31,756/- made by the A.O. and confirmed by the ld. CIT(A) by treating the repairs and maintenance expenditure claimed by the assessee as of capital nature. 49. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that certain items of expenses claimed by the assessee under the head "repairs and maintenance" were disallowed by the A.O. treating the same as of capital nature on examination of the details filed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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