TaxTMI 
TaxTMI 
2006 (4) TMI 195
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....convenience. 2. The main dispute in these appeals relates to certain expenditure incurred by the assessee over the years under consideration and subsequent years in relation to the Project, "Renovation and Refurbishment Programme". For assessment year 1991-92 the dispute is limited to the assessee's claim of deduction of professional fee amounting to Rs. 11 lakhs paid to M/s. Gherzi Eastern Limited, Bombay (hereinafter referred to as 'GEL'), for the purpose of renovation and refurbishing of the assessee's hotel. In subsequent years the dispute relates to the following:- --------------------------------------------------------------- Particulars A.Y. 1992-93 A.Y. 1993-94 A.Y. 1994-95 (Rs. in lakhs) (Rs. in lakhs) (Rs. in lakhs) --------------------------------------------------------------- Fees paid to Gherji Eastern Ltd. 23.19 2.81 &....
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.... After renovation your hotel should emerge as the No. 1 hotel in the country providing services and facilities of the highest international standards. It is anticipated that the total cost of the renovation project will be approximately Rs. 3,500 lakhs of which an expenditure of Rs. 1,158 lakhs has already been incurred up to31st March, 1992. The finances required for the renovation project are being met through internal accruals. The renovation project is scheduled to be completed by August, 1993. The Directors are also pleased to inform Members that the renovation of the 6th and 7th floors of the hotel comprising the 'new look' regency Club has been completed and rooms are being occupied since1st June, 1992." The inside front cover of Annual Report pictorially gave "Glimpses of the New Hyatt" with the following further write up:- "Asian Hotels Ltd. has always strived to meet the changing individual needs and preferences of the business traveller. The ongoing renovation and refurbishment programme of its Hotel Hyatt Regency is aimed at further enhancing these standards, making it the premier Hotel in the country. Asian Hotels Ltd. has successfully relaunched its executive ac....
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....p; ----------- 5. During the course of assessment proceedings the assessee provided further break-up of the expenditure of Rs. 247.07 lakhs, for which alone the deduction had been claimed, in the following manner:- (i) Repairs to plant & machinery 73,55,847 (ii) Repairs to building 1,68,61,730 (iii)Renovation expenses 4,91,479 The Assessing Officer completed the assessment for assessment year 1992-93 on13-3-1995. After detailed discussion he disallowed expenditure to the tune of Rs. 2,47,07,000 as being in the nature of capital expenditure in addition to payment to M/s. GEL amounting to Rs. 23,18,695. The learned Assessing Officer found that expenditure of Rs. 168.91 lakhs claimed as deduction by the assessee on repairs to building was paid to M/s. Tirath Ram Ahuja (hereinafter referred to as "TRA") in accor....
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....g and engineering facilities therein. As against the original cost of the building Rs. 16.65 crores, the work order given to TRA was of Rs. 9.37 crores. The emphasis, as clear from the Director's report was upon 'upgradation', 'enhancement of standards' and 'new look' so as to make the assessee's hotel "Premier Hotel in the C country". Such expenditure could not be allowed as revenue expenditure. It was one time expenditure for an enduring advantage attached to the capital assets, i.e., building/engineering facilities. The expenditure was not routine expenditure in ordinary commercial sense. It was expenditure on new facilities for which specialist professionals had been engaged. The expenditure was not part of the company's working expenses. It was not ^ laid out as part of the process of profit earning. The expenditure was on acquisition of capital asset. The object of renovation programme was not to maintain status quo, but to upgrade the profit yield. For that purpose the learned Assessing Officer relied upon the following extract from the Director's report:- "During the year under review, an average room occupancy of 68% was achieved (Last year 66%). Barring any further-unf....
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.... replacement of false ceilings in bathrooms and corridors. Panelling on the walls have been replaced and new painting has been done. None of these expenses could be considered to be on the capital field as per the principles discussed above. The nature of expenditure incurred by the assessee and claimed as revenue is similar to the expenditure allowed in the cases of CIT v. Dasa Prakash 114 ITR 210 by Madras High Court and Indian Hotels Co. Ltd. v. IAC 34 TTJ 526 by ITAT, Bombay In the former case, expenditure incurred on plywood panelling, plaster moulding in rooms and installation of mirrors was held as revenue in nature. In the second case, expenditure on wooden panelling, ceiling wall was allowed as revenue. 6.6 The assessee has incurred expenditure of Rs. 73.55 lakhs on the plant and machinery. The details of this expenditure show that this expenditure had been incurred on improvement in the filtration, renewal of electric wiring and appliances, repair of the ducting for air-conditioners, provision of transformers for lights, replacement of A.C. grills, replacement of electrical and sanitary fittings, like flush valves etc. From the details of this expenditure it appears th....
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.... in nature. Accordingly, assessee is allowed relief of Rs. 2,47,09,055-3,08,703 i.e., Rs. 2,44,00,352. This disposes of ground No. 4." Aggrieved by the order of the CIT (Appeals) both the assessee and the revenue are in appeal before us. The assessee has in its appeal disputed the disallowance of this sum of Rs. 3,08,703; whereas in revenue's appeal the relief granted by the learned CIT (Appeals) to the assessee has been disputed. 8. During the course of assessment proceedings for assessment year 1993-94 the assessee claimed deduction of a sum of Rs. 7,98,32,489 under the head 'Repairs and maintenance' out of which admittedly expenditure to the tune of Rs. 3,64,11,478 pertained to Renovation and Refurbishment Project. In addition, according to the assessee, a further expenditure of Rs. 1,043.12 lakhs had been incurred by the assessee shown under the fixed capital heads in the accounts of the assessee and accordingly not claimed as deduction. The learned Assessing Officer held the opinion that the assessee should have capitalized expenditure to the tune of Rs. 3,64,11,478 also instead of debiting under the head 'Repairs and maintenance expenses'. He held the view that out of t....
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.... to the extent of Rs. 3,52,87,351. Aggrieved both the assessee and the Assessing Officer are in appeals before us on this issue. 10. The learned CIT (Appeals) however, found the disallowance made by the Assessing Officer in respect of expenditure claimed by the assessee on account of payments to GEL and HBA to be sustainable, as in his opinion, the expenditure was in the nature of capital expenditure. While the assessee has accepted the disallowance of the expenditure of Rs. 5,62,280 paid to HBA, as per grounds of appeal taken originally the assessee has disputed disallowance of the sum of Rs. 2,81,525 paid to M/s. GEL. 11. During the course of assessment proceedings for assessment year 1994-95 the learned Assessing Officer found that out of the deduction of Rs. 761.55 lakhs claimed by the assessee as repairs and maintenance expenditure, expenditure to the tune of Rs. 3,48,92,811 was part of Renovation and Refurbishment Project being carried out by the assessee spread over a number of years. Relying upon the detailed reasons given in the assessment order for assessment year 1992-93, the learned Assessing Officer held that expenditure to this extent did not relate to normal re....
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....ave considered the rival submissions and perused the record carefully as well as the case laws referred to by the parties. It is to be seen that all the additional grounds sought to be raised by the assessee are purely legal one. It is also a fact that these additional grounds can be disposed of without any enquiry or investigation at the part of Assessing Officer, but on the basis of material on record. If these are the facts then these grounds are to be allowed. So far as non-raising of these grounds before Assessing Officer or CIT(A) is concerned, the learned counsel had submitted that these could not be raised earlier on account of lack of proper advice by the Advocate/C.A. who was representing the case of the assessee. This appears to be the good reason and it is to be kept in mind that if assessee is entitled to get any relief on the basis of any legal interpretation, he should be allowed to agitate the same as income-tax is to be paid on the income which is to be assessed as per provisions of the Act." 14. Revenue filed Misc. Application being M.A. No. 293(Del.)/2003 dated 30-1-2003, inter alia, stating that there was a mistake apparent from record, inasmuch as the Tribun....
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....e on Renovation and Refurbishment Project has received the treatment of both revenue as well as capital expenditure in the books of account of the assessee as well as audited annual accounts of the assessee-company approved by the Board of Directors. The assessee before us is a Five Star Hotel and expenditure over the years is stated to be in the vicinity of Rs. 35 crores. Obviously the decision to treat part of the expenditure as capital expenditure and not to claim deduction thereof in the returns of income filed by the assessee for several years in the assessment proceedings before the Assessing Officer and in the appellate proceedings before the CIT (Appeals) for those assessment years has not been taken without application of mind by the experienced Chartered Accountants and other legal advisors advising the assessee. The assessee has, however, in the course of its appeal for assessment year 1992-93 before the Tribunal sought deduction of the entire expenditure on the ground that it was legally incorrect in not claiming deduction of the amounts earlier and that the matter can be adjudicated upon on the basis of the material already furnished to the Assessing Officer during the....
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....ed right up to the brick and redone with fresh POP and paint. On account of steam or water vapor large mirrors in the bath rooms and their frames were required to be replaced from time to time. In the event of any of the tiles falling off the walls, in the absence of tiles of the same lot and colour of the entire set were required to be replaced. For that purpose the assessee did maintain the stock of tiles but the same could not last for very long. To maintain uniformity amongst the rooms the tiles were required to be replaced in all bath rooms on a floor. Sanitary fittings would loose shine due to scrubbing on a daily basis. In such cases the sanitary fittings of bath rooms had to be replaced. As the designs of the sanitary fittings available in the market change from time to time, in order to maintain uniformity in the rooms they had to be changed in all bath rooms on a floor once in 5 to 6 years. The mattresses get worn out or the foam gets foundry or lumpy. Some time they got badly stained on account of spilling of beverages and other items. In such cases replacement became necessary, otherwise also the life of a mattresses was about 4 to 5 years. Replacement of mattresses did....
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.... would not be allowed and by and large any expenditure treated as long-term advantage or enduring benefit would represent capital expenditure. It was surprising that even the expenditure which was booked as revenue expenditure in the books of account of the assessee and not capitalized even under a mistaken belief and thus the assessee's restricted claim of deduction was not accepted by the Assessing Officer. The learned CIT (Appeals) appreciated the contentions of the assessee and substantially deleted the disallowances made by the Assessing Officer but even the small disallowances that the learned CIT (Appeals) sustained, were uncalled for. For assessment year 1992-93 the learned CIT (Appeals) disallowed the expenditure of Rs. 3,08,703 incurred by the assessee on the pressurization of the lift shafts. It was not the case of the revenue that there was no lift prior to the expenditure. The fact of the matter was that the lift was already there and by this expenditure the performance of the existing lift was improved. That did not result into creation of a new asset and, therefore, the learned CIT (Appeals) erred in treating it as expenditure of capital nature. For assessment years ....
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....arged to profit & loss account; whereas the major remaining part of the expenditure was considered to be of capital nature and capitalized in the books of account of the assessee. The same was not claimed as deduction under erroneous impression and mistaken understanding of the legal position. Hence, the assessee's claim could be entertained and decided even though raised for the first time before the Tribunal without further enquiry into the facts of the case. 21. The learned DR vehemently opposed admission of additional ground in this behalf for assessment years 1993-94 and 1994-95. He argued that the learned Assessing Officer had made assessment based on the claims and representations of the assessee. The learned CIT (Appeals) had viewed the assessee's grounds of appeal influenced by the fact that the assessee had himself not claimed deduction of the major part of the expenditure and treated the same as capital expenditure. The assessee's claim of deduction was of only part of the expenditure after a careful consideration of the facts and circumstances of the case. There was no justification as to why the claim of deduction of the entire expenditure was not made before the As....
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....ent year 1992-93 on the basis of the same assumption. We, therefore, decided to hear the learned counsel for the assessee on merits for all the three assessment years, so as to see whether the assessee's additional ground can be decided one way or the other on the basis of the material placed by the assessee in the paper books filed by it for assessment years 1992-93, 1993-94 and 1994-95. 23. As to the merits of the assessee's claim of deduction as per additional ground, the learned counsel argued that the entire expenditure was an integral part of the specialized business of the assessee as a five-star deluxe hotel. The nature and scale of repairs and replacements in a five-star deluxe hotel was very different from the requirements of other businesses. These repairs and replacements entailed heavy expenditure on account of having been incurred in the ordinary course of the business of a five-star deluxe hotel. As the assessee catered to high spending clientele, the services and facilities being provided by the assessee in return had to be very expensive with quality being the main consideration. The learned counsel emphasized that by all these expenditures over the course of ye....
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....e learned counsel also referred to pages 36 to 40 of the second paper book wherein the same information in relation to assessment year 1994-95 has been presented in shorter form. 26. We have carefully considered the rival submissions. In these appeals the assessee has in relation to its appeal for assessment year 1991-92, filed a paper book comprising of 21 pages, out of which first 17 pages pertain to copy of assessee's agreement with M/s. GEL. Pages 18 to 21 pertain to some other matter. For assessment year 1992-93 the assessee has filed a paper book comprising of 142 pages. The bulk of the paper Hook comprises Xerox copies of the bills issued by various parties. In addition copy of agreement with M/s. GEL running into 17 pages have been filed. After applying for the additional ground of appeal taken, the assessee has furnished second paper book comprising of 29 pages mostly copies of agreement and arguments in support of claim. For assessment year 1993-94 the paper book originally filed by the assessee comprises of 27 pages out of which 17 pages pertain to agreement with M/s. GEL and pages 5 and 6 relate to reserve and surplus and details of interest and miscellaneous income.....
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....be renewed or restored either wholly or in part, in which case the amount expended would not be in respect of repairs, but when renewing or restoring a building, machinery, plant or furniture a need may arise to set right certain defects or flaws and an amount may be spent for this purpose and the result may be that although the original asset has been preserved and maintained, no new asset has come into existence and no additional advantage has accrued to the assessee." Thereafter the Hon'ble High Court have explained the expression "current repairs" in the following words:- "The definition of 'repair' really does not create much difficulty, but the difficulty is created by the adjective which qualifies the expression 'repairs' and that adjective is 'current', and as already pointed out the Legislature did not intend that the assessee should be permitted all repairs, even though the expenditure may be a revenue expenditure, as a permissible deduction under section 10(2)(v). What we have to consider is in what way has the Legislature circumscribed the expression 'repairs' and to what extent has the Legislature limited the right of the assessee to claim deduction in respect of....
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....nd incurred heavy expenditure that was claimed as allowable deduction. The learned Assessing Officer allowed only 10% of the claim as current repairs. The Appellate Assistant Commissioner upheld the finding of the Assessing Officer. On assessee's appeal, the Appellate Tribunal found that expenses under the head "Renovation" could not be regarded as current repairs and, therefore, the sum of Rs. 2,17,182 had been rightly disallowed. On a reference to the Hon'ble Calcutta High Court, the reference was answered in favour of the revenue and against the assessee. In his concurrent judgment Bose, J. explained the expression "current repairs" in the following words:- "It appears to me, however, that the idea which is latent in the expression 'current repairs' is the characteristic of recurrence and the expression has reference to repairs effected with the object of maintaining and preserving the existing and restoring them to their original condition when they have deteriorated as a result of wear and tear. But when the expenditure is incurred to bring into existence a new asset or an advantage of an enduring nature, it cannot be regarded as an expenditure incurred in current repair....
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.... the present case, over a number of years and ultimately they are replaced, then such replacement cannot be regarded as current repairs. The replacement may amount to renovation or repairs which may or may not be entitled to deduction under section 37 of the Act but such an expense has been rightly held by the Tribunal as not being allowable as deduction under the said head 'Current repairs'." As to the applicability of provisions of section 37(1), the Hon'ble Delhi High Court held as under:- "We might, however, observe that, while disallowing the expenditure under section 30(a)(ii), the Income-tax Appellate Tribunal has given direction that the assessee be allowed depreciation on the above expenditure, if otherwise admissible. The implication of this direction seems to be clear, namely, that the expenditure was capital in nature and, therefore, in any event, would not have been entitled to deduction under section 37 of the Act. Question No. 3, therefore, is also answered in the affirmative and in favour of the Revenue." 32. From the various judgments cited in the foregoing paragraphs, the emergent legal position is that under the provisions of section 30(a)(ii) only such ....
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....was carrying on business under the name and style of Hotel Imperial. The assessee incurred expenditure in repairing and renovating the premises and claimed the amount of Rs. 17,24,480 as revenue expenditure. The Assessing Officer disallowed 1/4th of the expenditure as representing capital expenditure. The assessee's appeal before the Commissioner of Income-tax and Appellate Tribunal Failed. On a reference to the Hon'ble High Court, the Hon'ble jurisdictional High Court applying the provisions of section 32(1A) held that any expenditure in the nature of a capital expenditure even if incurred by a tenant on the leased premises will amount to capital expenditure. Further construction of any structure or doing of any work in or in relation to or in any way renovating or extending or improving the building would be regarded as capital expenditure. 34. In the case of Ballimal Naval Kishore v. CIT [1997] 224 ITR 414 (SC), the assessee carried on the business of exhibiting films in a theatre called Naval Talkies at Panipat. The assessee had been exhibiting films in the theatre from 1945 to 1960. During the period 1960 to March, 1961 the assessee extensively repaired the theatre. The amo....
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....ge. This can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure.' In taking the above view, the Bombay High Court dissented from the view taken by the Allahabad High Court in Ramkishan Sunderlal v. CIT [1951] 19 ITR 324, where it was held that the expression 'current repairs' in section 10(2)(v) was restricted to petty repairs only which are carried out periodically. The learned judge agreed with the view taken by the Patna High Court in CIT v. Darbhanga Sugar Co. Ltd. [1956] 29 ITR 21 and by the Madras High Court in CIT v. Sri Rama Sugar Mills Ltd. [1952] 21 ITR 191. In Liberty Cinema v. CIT [1964] 52 ITR 153 (Cal.), P.B. Mukharji, J., speaking for a Division Bench of the Calcutt....
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....ssee 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. Hon'ble Supreme Court have held so in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 also that if the expenditure is in capital field and does not leave fixed capital untouched, the expenditure would be of capital nature even if incurred to facilitate the existing business being carried on more efficiently. It must be remembered that in every case where a business expenditure is incurred the objective is to cater to the interests of business only. Hence, the test is whether or not the expenditure is in the capital field. There cannot be any manner of doubt that building, machinery and plant and furniture are patent illustrations of fixed capital. In the case of Dalmia Dairy Industries Ltd. v. CIT [2000] 241 ITR 9 Hon'ble Delhi High Court have held that there is no merit in the contention that whenever an expenditure is incurred in the course of the business it has to be revenue in nature. Section 37 it....
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.... assessee during the course of assessment proceedings and the proceedings before the learned CIT (Appeals). During the course of appeal before the Tribunal, the assessee has for the first time claimed that the entire expenditure on Renovation and Refurbishment Project should be allowed as revenue expenditure and deducted from the income of the respective years in which the expenditure has been recorded by the assessee. As far as the routine expenditure on repairs is concerned, the same have been allowed by the Assessing Officer. Such expenditure for assessment year 1993-94 amounted to Rs. 4,34,21,011. For assessment year 1994-95 such expenditure amounted to Rs. 412,63 lakhs. It is, thus, seen that each year the assessee has claimed sizeable expenditure as deduction on the ground of normal repairs and the Assessing Officer has not questioned the assessee's claim. However, where the assessee has bifurcated a sizeable part of expenditure on Renovation and Refurbishment Project between revenue and capital expenditure, the learned Assessing Officer has not accepted the assessee's contention. According to him no part of expenditure on Renovation & Refurbishment Project can be allowed as ....
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....hotel in a different league altogether. This aspect is very clear from the Directors' report for the financial year 1991-92, which is the second year of the assessee's project. According to the Directors of the assessee-company the assessee had taken up "comprehensive renovation project of the entire property". The idea behind the expenditure was that "after renovation your hotel should emerge as the No. 1 hotel in the country". The project was supposed to bring into existence "New Hyatt"." 39. As to the contentions of the learned counsel for the assessee that as a result of this expenditure, no additional advantage in the capital field was secured by the assessee and, therefore, the expenditure having been incurred for carrying on the assessee's existing business more efficiently should be allowed as revenue expenditure, we once again do not see much merit in these contentions. An additional advantage of capital nature in a building related business is not a matter of covered up area alone. It is also a question of quality of construction, building lay out, decor and ambience, and various functionalities. That is more so, in such businesses as a five-star hotel, hospital and nu....
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....e expenditure related to replacements, fittings and fixtures, flooring, false ceiling, renewals and so on. The learned CIT (Appeals) has more or less accepted these contentions of the assessee after some minor disallowances here and there on the ground that the assessee had himself capitalized a major part of the expenditure under the head 'Renovation and Refurbishment' and claimed deduction of a part of expenditure only. The expenditure claimed as revenue expenditure was on items like, providing tiles on the roof for water proofing, door hinges, replacement of floor tiles, providing granite in toilets, replacement of sanitary appliances, replacing false ceiling in the bath rooms, providing new paint in the rooms, refixing the doors after polishing, providing wooden skirting, replacement of wall panelling, replacing false ceilings, skirting in the corridors and painting and waterproofing. The learned CIT (Appeals), thus, held that the expenditure had been incurred by the assessee only in respect of replacement of old items by new items. He, therefore, held that none of these expenses could be considered to be in the capital field. While arriving at these findings the learned CIT (A....
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....ntaining and preserving existing asset and restoring them to their original condition, that expenditure would be revenue expenditure. But when the expenditure is incurred to bring into existence a new or additional advantage of capital nature, it cannot be construed otherwise than capital expenditure. The courts have not accepted that the luxury renovation of property not borne out from need, but springing from the fancy of the owner is a revenue expenditure. We, therefore, hold that 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. 42. There are certain other issues in these appeals which we now address to. The assessee has in its appeals for assessment years 1991-92 to 1994-95 claimed that foreign exchange receipts by the hotel at its money changing counter should be considered eligible for deduction under section 80....