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TMI Blog2023 (10) TMI 467X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... architect, Rs. 23,18,695/- for consultancy and supervision of interior d cor of the existing hotel of the Assessee under renovation and refurbishment is capital expenditure? 2.1. The first question of law, as extracted above, arises in all appeals [See paras 1.1, 1.2 and 1.3. above] except ITA No. 1342/2007. 2.2. Likewise, the second question of law arises in all appeals [See paras 1.1, 1.2., and 1.3 above] except ITA No.486/2007 and ITA No. 1342/2007. The only difference insofar as the second question of law is concerned, pertains to the amounts paid to Gherzi Eastern Ltd. [in short, GEL ], an architect-consultant appointed by the appellant/assessee. 3. Therefore, for convenience, we would advert to the facts that obtain in ITA No. 1398/2006 to adjudicate the common questions of law arising in the appeals. Backdrop: 4. The appellant/assessee is in the business of running a five-star hotel named Hyatt Regency [hereafter referred to as hotel ], which is located in Delhi. 4.1 In and about 1990, when nearly six (6) years had passed since the hotel went into commercial production, the appellant/assessee embarked on repairing, renovating and refurbishi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of revenue expenditure. Notably, this issue has arisen not only in the AY under consideration, i.e., AY 1992-93, but also in AY 1993-94 and AY 1994-95. 10.2 Evidently, the additional ground concerning capitalised expenditure, which the appellant/assessee wanted to be treated as revenue expenditure, was admitted by the Bench of the Tribunal, which took up the appeal concerning AY 1992-93 via order dated 08.03.2002. 10.3. However, the respondent/revenue, it appears, filed a miscellaneous application for recall of the order admitting the additional ground. The assertion made in the miscellaneous application was that a mistake apparent from the record had occurred, as the admission of the additional ground was pivoted on legal issues, whereas it would require an investigation of facts by the AO. 10.4. The miscellaneous application, however preferred by the respondent/revenue, was dismissed via order dated 22.06.2004 on the ground that no inquiry or investigation concerning facts was required to be made for adjudicating the additional grounds. 11. Against this backdrop, the Tribunal disposed of the cross-appeals filed for AY 1992-93 and other AYs, i.e., AY 1993-94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a five-star deluxe hotel. However, the expenditure incurred on renovation and refurbishment is generically different . The renovation and refurbishment expenditure is not an expense that a five-star deluxe hotel incurs as a normal incidence of its business. The expenditure on renovation and refurbishment is a special kind of expenditure motivated by an ambition to place the hotel in a different league . This aspect emerges upon perusal of the director s report of the appellant/assessee concerning FY 1991-92. Per the director's report, the appellant/assessee had undertaken a comprehensive renovation project of the entire property . The director s report provides the object behind the expenditure incurred by the appellant/assessee which was that after renovation, the hotel would attain the number one position in the country and bring into existence a New Hyatt . (vii) Seventh, having regard to the kind of business the appellant/assessee was carrying on, the area covered by the building alone would not matter. What would also have to be considered would be the quality of construction, the building layout, the d cor and ambience and other functionalities. The fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on repairing damaged roofs, walls, ceilings, air ducts attached to the air-conditioners, lights, grills and flush valves. These expenses were incurred to repair, replace and refurbish the existing utilities to provide efficiency and add to the profitable functionality of the appellant's/assessee's hospitality business. (iii) Importantly, the expenditure incurred by the appellant/assessee was to maintain and preserve the capital assets embedded in its hotel premises. The exercise was motivated by business interest to keep its competitive edge in the hospitality sector. (iv) Replacement and repair of items referred to above were undertaken only to restore the hotel to its original state of efficiency. (v) The Tribunal has not found that any new asset was created and/or acquired due to the exercise carried out by the appellant/assessee. No finding is returned by any of the other authorities concerning this aspect of the matter. (vi) The AO has drawn a false and erroneous distinction by segregating the repairs into ordinary and luxury repairs or repairs, which are incurred based on the choice of the appellant/assessee. The law does not draw any distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, while refuting the submissions made on behalf of the appellant/assessee, primarily relied upon the impugned order passed by the Tribunal. In rebuttal, Mr Zoheb Hossain made the following broad submissions: (i) The appellant/assessee for the period captured by the AYs in issue had incurred an expenditure which was much more than the cost that was incurred by it to bring the hotel property into existence before the commencement of its business operations, an aspect exemplified in the director s report for FY 1991-92. The report categorically alluded to the fact that comprehensive renovation had taken place to bring into existence a New Hyatt . The appellant/assessee had, thus, in the guise of repair work, claimed a deduction on expenditure incurred to replace equipment used in the hotel premises. (ii) The expenses incurred by the appellant/assessee were not aligned with the object of maintaining and preserving existing assets or even restoring them to their original condition. The appellant/assessee had itself distinguished between routine repairs and monies expended on renovation and refurbishment. In this context, the AO allowed everyday expenditure amounting to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptualising, planning and supervision of the execution of the work at hand, the treatment to be accorded to the fee paid to GEL is inextricably linked to the manner in which the expenses incurred on renovation and refurbishment are treated. (viii) The expenses incurred by the appellant/assessee are capital in nature, given that they led to the creation of a new capital asset. This is evident from the finding returned by the Tribunal that the appellant/assessee had purchased five hundred thirty-four (534) guest-room door shutters and five hundred forty (540) toilet doors. It is inconceivable that door shutters would have worn out in such large numbers. Clearly, the old articles were replaced with new and improved articles of superior quality, thereby providing the appellant/assessee with a new and better-quality asset. In this context, illustratively, reference was made to the installation of bus bars for the safe distribution of electricity from automatic circuit breakers, fixation of a mildsteel frame for affixing a false ceiling in the laundry department and replacement of the basin of the cooling tower. [See ITA 486/2007.] (ix) The expenditure incurred by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Expenditure which the appellant/assessee had straightaway claimed as revenue expenditure: Rs. 2,47,09,055/-. 21. The bifurcation of the amount claimed as revenue expenditure, i.e., Rs. 2,47,09,055/- as per the record placed before us, is as follows: (i) Expenditure incurred on building: Rs. 1,68,61,730/-. (ii) Expenditure incurred on plant and machinery: Rs. 73,55,847/- (iii) Expenditure on other items: Rs. 4,91,479/- 22. The CIT(A), after perusing the material on record, has returned the following findings of fact in respect of each limb of expenditure noted in paragraph 21 above: 22.1 The expenditure incurred on building was mainly incurred on the following items: providing roof tiles for waterproofing, door hinges, replacement of floor tiles, fixing granite in toilets, replacement of sanitary appliances, replacing false-ceiling in the bathrooms, expenses incurred in painting the rooms, refixing the doors after they were polished, providing wooden skirting, replacement of wall panelling, replacing false ceilings in the rooms, providing skirting in corridors, painting and waterproofing. 22.2 The expenditure incurred for the abovementione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) noted that no new articles had been purchased and that the costs had been incurred essentially on repairing and replacing old articles. 24. In sum, the CIT(A) concluded that except for the costs incurred on pressurisation of lift shafts, none of the above expenses enhanced the earning capacity of the appellant/assessee since neither any additional space had been created nor any new plant and machinery was installed. 24.1. In CIT(A) s opinion, all that the appellant/assessee had done was to repair old and worn-out articles or replace specific articles with new ones to give the hotel a modern and attractive look. These expenses, as per the view of the CIT(A), had facilitated the hotel operations and in running the business more profitably and efficiently. 25. As regards the disallowance of Rs. 23,18,695/- was concerned, which was the fees paid to GEL, the CIT(A) relied upon the view taken by his predecessor for AY 1991-92, who had sustained the disallowance. It was observed by CIT(A) that since facts had remained the same, there was no justification for taking a different view. 26. Furthermore, the CIT(A) noticed that the appellant/assessee had capitalised the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressurisation of lift shafts. That this conclusion of the CIT(A) was erroneous is apparent because he appears to have run astray of the principles noticed above, which resonates in the following observations made by the Supreme Court in Empire Jute Company v. CIT, (1980) 4 SCC (SC) 1: (ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee's business to be carried on mere efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontext, made the following observation: At the same time, the view taken by the present assessee in its annual accounts cannot be ignored . (v) Fifthly, the reference to the appellant/assessee earning a higher room tariff or registering a higher occupancy rate, with the view to providing a rationale for concluding that the appellant/assessee had secured an advantage by virtue of the exercise undertaken by it was wholly misconceived. The 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. Concededly, the appellant/assessee had not added a single room to the hotel property. The 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. 30. Therefore, for the aforesaid reasons, we are inclined to sustai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. The following observations of the Supreme Court in the judgement rendered in Kedarnath Jute Mfg. Co. Ltd. v Commissioner of Income Tax, (Central), Calcutta (1972) 3 SCC 252 , being apposite, are extracted below: 8. The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of accounts and, therefore, it was debarred from claiming the same as deduction either under Section 10(1) or under Section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law, a deduction must be allowed by the Income Tax Officer, the assessee will lose the right of claiming or will be debarred f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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. 36.1. In other words, the issue concerning the re-characterisation of expenses, which was the subject matter of the additional grounds pleaded by the appellant/assessee, was a mixed question of fact and law. 37. We may note that we had put this aspect squarely to Mr Tarun Gulati. Mr Gulati had agreed that, insofar as this aspect of the matter was concerned, it may have to be remanded to the AO for fresh examination in the light of the well-established principles formulated by the courts for arriving at the true character of a particular expenditure, i.e., whether it was revenue or capital expenditure. 38. Before we conclude, we would like to indicate why the ratio of the judgments cited on behalf of the respondent/revenue does not apply to the instant case. 38.1. The first judgment cited on behalf of the respondent/revenue is rendered by the Supreme Court in the Assam Bengal Cement case. Briefly, the facts of this case reveal that the Assessee had acquired the lease of certain limestone qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into an arrangement with the American Embassy in Delhi. One of the obligations undertaken under the said agreement by the assessee-firm was that it would construct no less than one bathroom with toilet facilities provided with each set of two rooms. The Court was called upon to rule as to whether the expenditure incurred by the assessee-firm for building bathrooms in the AY 1963-64 could be construed as revenue expenditure. The Court, applying the test concerning the existence or creation of an asset or accrual of an advantage of enduring benefit in business, concluded that the expenses incurred in the construction of the toilet were in the nature of capital expenditure. The facts obtaining in the Hotel Diplomat case are distinguishable from those that obtain in the instant case. 38.7. This brings us to the last judgment, i.e., the judgement rendered by the Supreme Court in the Ballimal case . The broad facts obtaining in the said case were as follows: 38.8. The Assessee was in the business of exhibiting films. He purchased a building, which was being run as a ginning factory. The ginning factory ran for about three (3) years. Five (5) years after the Assessee had boug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Conclusion : 42. Thus, for the foregoing reasons, insofar as AY 1992-93 [ITA No. 1398/2006] is concerned, we have arrived at the conclusion that the appellant/assessee will be entitled to claim the following deductions, as, in our opinion, they are in the nature of revenue expenditure: (i) Rs. 244,00,352/-. incurred on renovation, refurbishment and repairs. Equivalent to Section 10(2)(xv) of the 1922 Act. (ii) Rs. 3,08,703/- incurred on pressurisation of lift shafts. (iii) Rs. 23,18,695/- incurred on payment of fees to GEL. 43. Insofar as the amount of Rs. 600,84,000/- is concerned, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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