2021 (2) TMI 847 - AT - Income Tax

Payment to ITC Ltd. deemed revenue expenditure under IT Act Section 37

ACIT, Central Circle 13, New Delhi Versus ELEL Hotels & Investment Ltd., C/o Ajay Wadhwa

ACIT, Central Circle 13, New Delhi Versus ELEL Hotels & Investment Ltd., C/o Ajay Wadhwa - TMI Issues Involved:1. Whether the payment of Rs. 30.86 crores made by the assessee to ITC Ltd. should be treated as revenue expenditure or capital expenditure.2. Whether the income shown by the assessee should be taxed as business income or as income from house property or other sources.Issue-wise Detailed Analysis:1. Treatment of Payment as Revenue or Capital Expenditure:The core issue revolves around the classification of the Rs. 30.86 crores payment made by the assessee to ITC Ltd. The Tribunal initially held this payment as capital in nature, attributing it to the hotel building and allowing depreciation at the rate applicable to the hotel building. The High Court remanded the matter back to the Tribunal to reconsider whether the expenditure should be treated as revenue expenditure.The assessee argued that the payment was made to terminate an onerous agreement with ITC Ltd. and regain control over the hotel property, which was a business necessity and commercial expediency. The payment did not result in any addition to the capital asset or change in the capital structure but merely altered the mode of earning revenue from the hotel. The Tribunal, upon reconsideration, noted that the payment facilitated the smooth functioning of the business and was made out of business necessity. Thus, it should be treated as revenue expenditure under Section 37 of the IT Act.The Tribunal referred to several judicial precedents supporting the view that payments made to remove restrictions or obstructions in business operations, or to terminate disadvantageous agreements, are revenue in nature. These include decisions from the Supreme Court, High Courts, and various Tribunals, which consistently held that such expenditures, aimed at facilitating business operations or avoiding future commercial inconveniences, should be treated as revenue expenses.2. Classification of Income:The second issue was whether the income shown by the assessee should be taxed as business income or as income from house property or other sources. The Tribunal and the CIT(A) consistently held that the only business of the assessee was its hotel business, and thus, the income should be treated as business income. The High Court affirmed this view, stating that the findings of both the CIT(A) and the Tribunal were consistent and justified.Conclusion:The Tribunal concluded that the Rs. 30.86 crores payment made by the assessee to ITC Ltd. should be treated as revenue expenditure, allowing the assessee to claim it under Section 37 of the IT Act. The Tribunal dismissed the appeal filed by the Revenue, upholding the treatment of the payment as revenue expenditure and affirming the classification of the income as business income. The decision was pronounced in the open court on 16th February 2021.