2018 (12) TMI 327 - AT - Income Tax

Tribunal Upholds Business Expenses in Tax Appeals

M/s. Elel Hotels and Investments Ltd., Versus DCIT, Central Circle-13, New Delhi And M/s. ELEL Hotels and Investments Ltd. Versus ACIT, Central Circle-03, Jhandewalan, New Delhi And ACIT, Central Circle-13, New Delhi Versus M/s. ELEL Hotels and Investments Ltd. And ACIT, Central Circle-03, New Delhi Versus M/s. ELEL Hotels and Investments Ltd.

The Tribunal dismissed the appeals of both the Revenue and the assessee for the assessment years 2010-11, 2011-12, and 2012-13. It upheld the CIT(A)'s ... Disallowance of expenditure on the ground that the same should be capitalized to the cost of building - Held that:- Amount was paid to consultants for planning and concept design, architectural services, designing of AC & ventilation system and basement work relating to the hotel structure. As the hotel structure is yet to be completed and the business is yet to commence, these expenses directly relating to the hotel building are to be capitalized towards the cost of building. In these facts and circumstances of the case, the expenses claimed by the appellant are disallowed which shall be added to the capital cost of the hotel building. Allowable business expenses - Held that:- The finding of the Ld. CIT(A) of holding the expenses as capital expenditure is well reasoned in view of the evidences is available on record. Evidently all these expenses are towards creation of a new asset or for enhancing the capacity of the existing asset and thus same are in the nature of capital expenditure. We do not find any error in the finding of the Ld. CIT(A) on this issue. Disallowing carry forward of the unabsorbed depreciation claimed by the assessee - Held that:- We find that depreciation in the year under consideration was added back by the assessee in the computation of the income and thus we do not understand how the assessee is claiming carry forward of the said depreciation as unabsorbed depreciation. On perusal of the grounds of appeal raised before the Ld. CIT(A), we find that the issue of disallowing carry forward of unabsorbed depreciation was raised in ground No. 2. CIT(A) has also reproduced the submission of the assessee in the impugned order, where the assessee itself has not pressed for adjudication of the ground No. 2. Thus it is evident that CIT(A) has not adjudicated the ground in view of the ground not pressed by the assessee. In the circumstances, we do not find any error in the order of the Ld. CIT(A) on the issue in dispute and accordingly, we dismiss the ground No. 2 of the appeal of the assessee. Issues Involved:1. Disallowance of expenses claimed by the assessee.2. Capitalization of consultancy charges.3. Carry forward of unabsorbed depreciation.4. Absence of business activity and its impact on expense claims.Issue-wise Detailed Analysis:1. Disallowance of Expenses Claimed by the Assessee:The assessee company filed appeals against the disallowance of expenses by the Assessing Officer (AO) for the assessment year (AY) 2010-11, where the AO disallowed expenses claimed due to the absence of business activity. The AO observed that the assessee had shown minimal income from interest and miscellaneous sources and incurred substantial expenses, leading to a significant business loss. The AO allowed only government dues and disallowed other expenses, including depreciation, as there was no business activity.The assessee argued that the expenses were incurred to maintain the corporate structure and preserve assets, citing various judicial precedents. The Commissioner of Income-tax (Appeals) [CIT(A)] allowed most of the expenses as business expenditure, except for consultancy charges, which were capitalized. The Tribunal upheld the CIT(A)’s decision, noting that the expenses were necessary for preserving and maintaining the hotel property owned by the assessee.2. Capitalization of Consultancy Charges:The CIT(A) disallowed Rs. 53,00,209/- paid to consultants for planning and concept design, architectural services, designing AC and ventilation systems, and basement work, holding these as capital expenditure. The assessee contended that these expenses were revenue in nature as the plans were rejected. However, the Tribunal found no documentary evidence supporting this claim and upheld the CIT(A)’s decision, noting that these expenses were towards creating or enhancing assets and thus capital in nature.3. Carry Forward of Unabsorbed Depreciation:The assessee raised the issue of not allowing the carry forward of unabsorbed depreciation. The AO had added back the depreciation in the computation of income, and the CIT(A) did not adjudicate this ground as it was not pressed by the assessee. The Tribunal found no error in the CIT(A)’s order, noting that the issue was not pursued by the assessee at the CIT(A) level.4. Absence of Business Activity and Its Impact on Expense Claims:The Revenue argued that the assessee had not carried out any business activity for several years and only earned income from interest, which was offered under the head ‘income from other sources’. Therefore, the expenses should not be allowed as business expenditure. The Tribunal noted that the assessee’s hotel property was under reconstruction due to damage from a bomb blast, and the expenses were incurred to maintain the property and retain necessary licenses. The Tribunal upheld the CIT(A)’s decision, allowing the expenses as business expenditure, citing judicial precedents that support the allowance of expenses incurred to preserve business assets during temporary suspension of business.Separate Judgments Delivered by the Judges:There were no separate judgments delivered by the judges in this case. The order was consolidated and delivered jointly by the members of the Tribunal.Conclusion:The Tribunal dismissed the appeals of both the Revenue and the assessee for the assessment years 2010-11, 2011-12, and 2012-13, upholding the CIT(A)’s decisions on the allowance of expenses as business expenditure and the capitalization of consultancy charges. The issue of carry forward of unabsorbed depreciation was also dismissed as it was not pursued by the assessee at the CIT(A) level.