Revenue expenditure for hotel renovation and consultancy follows the character of repair work, while capitalised items need fresh factual scrutiny.

Expenditure on hotel renovation, refurbishment, repairs and pressurisation of lift shafts was treated as revenue expenditure because it preserved and improved the existing profit-making apparatus without creating a new asset or capital advantage. The consultancy fee paid for conceptualising, planning and supervising that renovation followed the same character and was also deductible as revenue expenditure. Where items had earlier been capitalised in the accounts but were later claimed as revenue, the true nature of the expenditure required factual scrutiny and was remanded for fresh examination by the Assessing Officer.

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Issues: (i) Whether expenditure incurred on renovation, refurbishment and repairs of the hotel, including pressurisation of lift shafts, was revenue expenditure deductible under the Act or capital expenditure; (ii) whether consultancy fees paid to Gherzi Eastern Ltd. for conceptualising, planning and supervising the renovation project were revenue expenditure or capital expenditure; (iii) whether the amounts earlier capitalised in the books and later claimed as revenue expenditure required remand for fresh examination by the Assessing Officer.

Issue (i): Whether expenditure incurred on renovation, refurbishment and repairs of the hotel, including pressurisation of lift shafts, was revenue expenditure deductible under the Act or capital expenditure.

Analysis: The governing tests were whether the expenditure created a new asset or an advantage in the capital field, or merely facilitated the carrying on of the existing business more efficiently while leaving the profit-making structure intact. The fact that the expenditure was incurred in an ongoing hospitality business, that no new room or additional capital asset was brought into existence, and that the works mainly involved replacement, repair and restoration of existing components showed that the expenditure preserved and improved the existing asset base rather than creating a new one. The enduring benefit test could not be applied mechanically, and the commercial character of the advantage had to be viewed from the standpoint of business expediency. On that footing, even the pressurisation of lift shafts did not assume the character of capital expenditure.

Conclusion: The expenditure of Rs. 2,44,00,352/- and Rs. 3,08,703/- was held to be revenue expenditure and deductible, in favour of the assessee.

Issue (ii): Whether consultancy fees paid to Gherzi Eastern Ltd. for conceptualising, planning and supervising the renovation project were revenue expenditure or capital expenditure.

Analysis: The fee paid to the consultant was treated as part of the same renovation and repair exercise. Since the underlying project was held to be revenue in nature, the consultancy expenditure incurred for planning and supervision of that very exercise did not independently acquire a capital character. The nature of the fee had to follow the character of the work for which the consultant was engaged, and the material did not show creation of any capital asset by reason of the consultancy itself.

Conclusion: The consultancy fee of Rs. 23,18,695/- was held to be revenue expenditure, in favour of the assessee.

Issue (iii): Whether the amounts earlier capitalised in the books and later claimed as revenue expenditure required remand for fresh examination by the Assessing Officer.

Analysis: The claim sought re-characterisation of expenditure already capitalised in the accounts. Such a claim required examination of the nature and character of the items on a factual foundation, and could not be finally determined merely from the accounting treatment. The question was therefore mixed one of fact and law and called for scrutiny by the Assessing Officer in the light of the governing legal principles.

Conclusion: The issue was remanded to the Assessing Officer for fresh examination, in favour of the assessee to the extent of reopening the claim.

Final Conclusion: The assessee succeeded on the substantive tax characterisation of the renovation, repair and consultancy expenditure, while the separately claimed capitalised items were sent back for factual verification.

Ratio Decidendi: Expenditure incurred in an ongoing business is revenue in nature when it merely preserves or improves the existing profit-making apparatus without creating a new asset or capital advantage, and consultancy fees for such work take the same character; a re-characterisation claim depending on the true nature of items already capitalised must be examined on facts.

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