2006 (4) TMI 195 - AT - Income Tax

Tribunal Rules Renovation Expenses as Capital Expenditure; Deductions u/ss 80HHD, 80-I Denied.

The Tribunal dismissed the assessee's appeals, affirming that renovation and refurbishment expenses were capital expenditures, disallowing them as revenue ... Allowance of Business Expenditure - deduction of professional fee paid to M/s. Gherzi Eastern Limited, Bombay (GEL), for the purpose of renovation and refurbishing of the assessee's hotel - eligibility for deduction under section 80HHD, on Foreign exchange receipts by the hotel at its money changing counter - interest income, miscellaneous income and short deposits should be taken into consideration for the purpose of computation of deduction under sections 80HHD and 80-I or not - Deletion of short deposits received from new occupants from the computation of income. Allowance of Business Expenditure - deduction of professional fee paid to M/s. Gherzi Eastern Limited, Bombay (GEL), for the purpose of renovation and refurbishing of the assessee's hotel - revenue expenditure or capital expenditure - HELD THAT:- The legal position, thus, emerging from the various authorities cited by us appears to be that if the owner of a building used for the purposes of the business of the owner, incurs any expenditure in the nature of 'current repairs', he is entitled to claim deduction of the same under the provisions of section 30(a)(ii) There is space to argue that even if the nature of repairs is such as not to be considered to be current repairs, viz., accumulated repairs etc., the assessee may claim deduction thereof under the provisions of general section 37(1) of the Act. However, under no circumstances an expenditure of capital nature incurred by the owner on the building premises used by him for the purpose of business can be allowed as deduction either under the provisions of section 30 or under the provisions of section 37(1) of the Act. In the case of expenditure incurred in respect of a building it cannot be said, if the expenditure is not entirely on repairs, that fixed capital has been left untouched. The argument that the assessee being already in business, such expenditure is incurred to facilitate carrying on of the business more efficiently and, therefore, should be treated to be revenue expenditure cannot be raised in respect of such assets, like building, plant, machinery and furniture etc. In the instant case, the assessee has incurred expenditure by way of a long-term project carried over several years by way of Renovation and Refurbishment Project. For the purpose of conceptualising Renovation and Refurbishment activity to be undertaken and supervision thereof the assessee engaged the services of M/s. GEL, to whom alone the assessee has paid professional fees in the vicinity of about Rs. one crore. The total expenditure has been incurred over several years on Renovation & Refurbishment Project and has been in the vicinity of Rs. 35 crores-an amount that far surpassed the original cost to the assessee for bringing the hotel premises in existence prior to the commencement of its business operations. There is no case of any accumulated repairs either because all this while the assessee had been running the business of a super deluxe hotel at a prestigious location in New Delhi - Looked from that angle the expenditure, if at all it can be perceived as repairs, has to be in the nature of current repairs only. In the books of account of the assessee as well as audited annual accounts of the assessee-company approved by the Board of Directors, a major part of this expenditure has been treated as capital expenditure. The learned CIT (Appeals) is not justified in allowing any part of the expenditure under the head 'Renovation & Refurbishment Project' and accordingly we restore the disallowance as made by the learned Assessing Officer in the assessment orders for assessment years 1992-93, 1993-94 and 1994-95 before us. Accordingly the appeals of revenue in this regard are allowed, while the appeals of the assessee are rejected. Foreign exchange receipts by the hotel at its money changing counter should be considered eligible for deduction under section 80HHD or not - HELD THAT:- It is seen that the similar issue has arisen in the assessee's own case for earlier assessment year and the Income-tax Appellate Tribunal, Delhi have by its order in ASIAN HOTELS LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX. [2002 (3) TMI 217 - ITAT DELHI-A] rejected the assessee's contention. Respectfully following the same, we reject the assessee's grounds of appeal in this behalf in the appeals before us. For the purpose of computation of deduction under sections 80HHD and 80-I interest income, miscellaneous income and short deposits should be taken into consideration or not - HELD THAT:- It is seen that the expression employed both under sections 80HHD and 80-I in this behalf is 'derived from'. Hence following the judgments in CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LIMITED VERSUS COMMISSIONER OF INCOME-TAX, GUJARAT II [1978 (4) TMI 1 - SUPREME COURT], COMMISSIONER OF INCOME-TAX VERSUS COCHIN REFINERIES LIMITED [1981 (11) TMI 50 - KERALA HIGH COURT] and PANDIAN CHEMICALS LTD. VERSUS COMMISSIONER OF INCOME-TAX [2003 (4) TMI 3 - SUPREME COURT], we reject such grounds of appeal of the assessee. Deletion of short deposits received from new occupants from the computation of income - HELD THAT:- It is seen that revenue's appeal in this behalf has been rejected by ITAT in its order dated 25-6-2001for assessment year 1991-92. Accordingly these grounds of appeal are rejected. While the appeals filed by the assessee are dismissed, the appeals filed by the revenue are partly allowed. Issues Involved:1. Deduction of professional fees paid to M/s. Gherzi Eastern Limited (GEL) for renovation and refurbishment.2. Classification of renovation and refurbishment expenses as capital or revenue expenditure.3. Eligibility of foreign exchange receipts for deduction under section 80HHD.4. Inclusion of interest income, miscellaneous income, and short deposits in the computation of deductions under sections 80HHD and 80-I.5. Treatment of short deposits received from new occupants.Detailed Analysis:1. Deduction of Professional Fees Paid to M/s. Gherzi Eastern Limited (GEL):The main dispute relates to the assessee's claim of deduction for professional fees paid to GEL for renovation and refurbishment. The assessee claimed these fees as revenue expenditure, arguing that the fees were for services that facilitated the hotel's operations. The Assessing Officer (AO) disallowed this claim, treating the fees as capital expenditure. The CIT (Appeals) upheld the AO's decision, and the Tribunal agreed, stating that the fees were inextricably linked to the capital nature of the overall renovation project.2. Classification of Renovation and Refurbishment Expenses:The assessee incurred significant expenses on a comprehensive renovation and refurbishment project aimed at upgrading the hotel to meet international standards. The AO disallowed the claimed revenue expenditure, treating it as capital expenditure. The CIT (Appeals) partially allowed the assessee's claim, stating that the expenses were for replacing old items with new ones, which did not create new assets. However, the Tribunal noted that the expenditure was part of a long-term project intended to enhance the hotel's standards and thus provided an enduring advantage. The Tribunal concluded that such expenses were capital in nature and not allowable as revenue expenditure.3. Eligibility of Foreign Exchange Receipts for Deduction Under Section 80HHD:The assessee claimed that foreign exchange receipts at the hotel's money changing counter should be eligible for deduction under section 80HHD. The Tribunal referred to its previous decision in the assessee's case for an earlier assessment year, where it had rejected a similar claim. Following the precedent, the Tribunal dismissed the assessee's claim for the current assessment years as well.4. Inclusion of Interest Income, Miscellaneous Income, and Short Deposits in Computation of Deductions Under Sections 80HHD and 80-I:The assessee argued that interest income, miscellaneous income, and short deposits should be included in the computation of deductions under sections 80HHD and 80-I. The Tribunal referred to the legal principle that the income must be 'derived from' the business activity to qualify for these deductions. Citing relevant case law, the Tribunal concluded that such income did not meet the criteria and rejected the assessee's claim.5. Treatment of Short Deposits Received from New Occupants:For assessment years 1992-93 and 1993-94, the revenue disputed the deletion of short deposits received from new occupants from the computation of income by the CIT (Appeals). The Tribunal noted that a similar issue had been decided in favor of the assessee in a previous year. Following that decision, the Tribunal rejected the revenue's appeal on this issue.Conclusion:The Tribunal dismissed the assessee's appeals and partially allowed the revenue's appeals, concluding that the renovation and refurbishment expenses were capital in nature and not allowable as revenue expenditure. The professional fees paid to GEL were also treated as capital expenditure. The claims for deductions under sections 80HHD and 80-I were rejected, and the treatment of short deposits was upheld in favor of the assessee based on precedent.