TaxTMI 
TaxTMI 
2023 (10) TMI 467
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....ned in ITA 1342/2007]. 1.3. Apart from the appeals mentioned above, ITA 486/2023 [which also pertains to the appellant/assessee], impugns the order of the Tribunal dated 15.09.2006 concerning AY 1997-98. 2. Insofar as the above-captioned appeal is concerned, i.e., ITA No. 1398/2006, the following questions of law were framed by the Court via order dated 18.09.2007: "(1) Whether the finding of the Income Tax Appellate Tribunal that the "renovation and repair" expenses, partly capitalised in the books of account of the Assessee, is not revenue expenditure admissible under Section 37 of the Income Tax Act, 1961, is correct? (2) Whether the Income Tax Appellate Tribunal is correct in law in holding that payment made to Gherzi Eastern Ltd., an interior architect, Rs. 23,18,695/- for consultancy and supervision of interior décor of the existing hotel of the Assessee under "renovation and refurbishment" is capital expenditure?" 2.1. The first question of law, as extracted above, arises in all appeals [See paras 1.1, 1.2 and 1.3. above] except ITA No. 1342/2007. 2.2. Likewise, the second question of law arises in all appeals [See paras 1.1, 1.2., and 1.3 above] except ITA ....
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....On the other hand, the appellant/assessee enlarged the scope of its appeal by not only agitating the disallowance of payments made to GEL and the expenditure incurred on pressurisation of lift shafts but also claimed, for the first time, amounts expended on renovation, which were capitalised in its books of accounts. The amounts capitalised previously that were claimed for the first time before the Tribunal as revenue expenditure was, as noticed above, Rs. 600,84,000/-. 10.1 The record discloses that the appellant/assessee had moved an application for being permitted to plead additional grounds concerning the expenditure which, according to it, had been erroneously capitalised in its books of accounts, although, it was in the nature of revenue expenditure. Notably, this issue has arisen not only in the AY under consideration, i.e., AY 1992-93, but also in AY 1993-94 and AY 1994-95. 10.2 Evidently, the additional ground concerning capitalised expenditure, which the appellant/assessee wanted to be treated as revenue expenditure, was admitted by the Bench of the Tribunal, which took up the appeal concerning AY 1992-93 via order dated 08.03.2002. 10.3. However, the respondent/revenu....
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....quent AYs, the appellant/assessee has drawn a distinction between "routine repairs" and monies expended on renovation and refurbishment. It was emphasised that the expenditure made on renovation and refurbishment has been further segregated by the appellant/assessee into revenue and capital expenditure not only in the books of accounts but also in the course of assessment proceedings before the AO and CIT(A). It is only for the first time before the Tribunal that a large portion of the capitalised expenditure is claimed as revenue expenditure. (vi) Sixth, the expenditure incurred during each of the AYs, which culminated in an assessment order, would take care of the "special needs" of running a five-star deluxe hotel. However, the expenditure incurred on renovation and refurbishment is "generically different". The renovation and refurbishment expenditure is not an expense that a five-star deluxe hotel incurs as a "normal incidence" of its business. The expenditure on renovation and refurbishment is a special kind of expenditure motivated by an ambition to place the hotel in a "different league". This aspect emerges upon perusal of the director's report of the appellant/assessee ....
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....nding Counsel, put forth submissions on behalf of the respondent/revenue. 16. The submissions of Mr Tarun Gulati can be broadly paraphrased as follows: (i) The appellant/assessee provided a detailed breakdown of the expenditure incurred towards renovation, refurbishment and repairs, which included the expenses that were part of the additional claims made for the first time before the Tribunal. The expenditure incurred neither resulted in acquiring a new asset nor an advantage of enduring nature. (ii) The appellant/assessee had only replaced worn-out and old doors, tiles, hinges and other accessories. Besides this, the appellant/assessee had also incurred expenditure on repairing damaged roofs, walls, ceilings, air ducts attached to the air-conditioners, lights, grills and flush valves. These expenses were incurred to repair, replace and refurbish the existing utilities to provide efficiency and add to the profitable functionality of the appellant's/assessee's hospitality business. (iii) Importantly, the expenditure incurred by the appellant/assessee was to maintain and preserve the capital assets embedded in its hotel premises. The exercise was motivated by busines....
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....rbishment of the existing hotel. The distinction in this behalf has been noticed by the Bombay High Court in PCIT, Panaji v. Goa Tourism Development Ltd., (2019) 261 Taxman 500 (Bombay). For the same reasons, the judgment in New Shorrock Spg. & Mfg would not be applicable in the instant case as no new asset has been created. (xii) Lastly, the money expended by the appellant/assessee towards the consultancy fee paid to GEL is revenue expenditure. Since the expenditure incurred on renovation, refurbishment, and repairs is on the revenue account, the consultancy fee paid to GEL should also be treated as such. 17. Mr Zoheb Hossain, while refuting the submissions made on behalf of the appellant/assessee, primarily relied upon the impugned order passed by the Tribunal. In rebuttal, Mr Zoheb Hossain made the following broad submissions: (i) The appellant/assessee for the period captured by the AYs in issue had incurred an expenditure which was much more than the cost that was incurred by it to bring the hotel property into existence before the commencement of its business operations, an aspect exemplified in the director's report for FY 1991-92. The report categorically alluded to ....
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....ervices rendered. The services provided by GEL to the appellant/assessee have to be looked at in the context of what the project sought to achieve- renovating and replacing various capital assets, which brought the advantage of enduring benefit to the appellant/assessee. The CIT(A) has noticed that payments made to other consultants, save and except for GEL, were capitalised by the appellant/assessee. The appellant/assessee has been unable to provide any reason for deviating from the said practice while dealing with expenses incurred on payment of fees to GEL. (vii) Since GEL's engagement required conceptualising, planning and supervision of the execution of the work at hand, the treatment to be accorded to the fee paid to GEL is inextricably linked to the manner in which the expenses incurred on renovation and refurbishment are treated. (viii) The expenses incurred by the appellant/assessee are capital in nature, given that they led to the creation of a new capital asset. This is evident from the finding returned by the Tribunal that the appellant/assessee had purchased five hundred thirty-four (534) guest-room door shutters and five hundred forty (540) toilet doors. It is i....
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....tion, the test of enduring benefit or advantage could be considered as having broken down. (iv) Given the evolved and complicated nature of modern business, in determining the nature of expenditure, the courts' test would have to be applied from the business point of view, after fairly appreciating the entire fact situation. 20. In the instant case, the record discloses that the expenditure qua which deduction was claimed fell under the following broad heads: (i) Expenditure which the appellant/assessee had capitalised in its books of accounts: Rs. 5,73,54,285/-. (ii) Expenditure which the appellant/assessee had straightaway claimed as revenue expenditure: Rs. 2,47,09,055/-. 21. The bifurcation of the amount claimed as revenue expenditure, i.e., Rs. 2,47,09,055/- as per the record placed before us, is as follows: (i) Expenditure incurred on building: Rs. 1,68,61,730/-. (ii) Expenditure incurred on plant and machinery: Rs. 73,55,847/- (iii) Expenditure on other items: Rs. 4,91,479/- 22. The CIT(A), after perusing the material on record, has returned the following findings of fact in respect of each limb of expenditure noted in paragraph 21 above: 22.1 The ....
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....sulted in additional benefits of an enduring nature, as the safety of lifts was enhanced for a considerable period. Thus, out of Rs. 73,55,847/- shown under the head "plant and machinery", only Rs. 3,08,703/- was disallowed. 23. Insofar as other expenditure amounting to Rs. 4,91,479/- was concerned, the CIT(A) concluded that the expenses incurred were of a miscellaneous nature on articles like teak mouldings, replacement of coils and lamp-shades, mirror light fittings, repairs to the chimney, painting etcetera. Qua these expenses as well, the CIT(A) noted that no new articles had been purchased and that the costs had been incurred essentially on repairing and replacing old articles. 24. In sum, the CIT(A) concluded that except for the costs incurred on pressurisation of lift shafts, none of the above expenses enhanced the earning capacity of the appellant/assessee since neither any additional space had been created nor any new plant and machinery was installed. 24.1. In CIT(A)'s opinion, all that the appellant/assessee had done was to repair old and worn-out articles or replace specific articles with new ones to give the hotel a modern and attractive look. These expenses, as per....
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....on it an advantage of enduring benefit. The advantage of enduring benefit has to be considered from the point of view of business expediency. The appellant/assessee operates in the hospitality sector and therefore, its commercial needs should have been taken into account in determining both the character and nature of the expenditure and not necessarily, the period for which the advantage would last. The only exception to this finding was CIT(A)'s conclusion about expenses incurred by the appellant/assessee on the pressurisation of lift shafts. That this conclusion of the CIT(A) was erroneous is apparent because he appears to have run astray of the principles noticed above, which resonates in the following observations made by the Supreme Court in Empire Jute Company v. CIT, (1980) 4 SCC (SC) 1: "(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the a....
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....e company approved by the Board of Directors, a major part of this expenditure has been treated as capital expenditure. We are fully alive to the fact that entries made in the books of accounts of an assessee or the view taken by an assessee of the nature of his transaction cannot be decisive of the tax liability of an assessee that has to be determined in accordance with law..." After having made the observation mentioned above, the Tribunal veered, in our opinion, on the wrong path and, in this context, made the following observation: "At the same time, the view taken by the present assessee in its annual accounts cannot be ignored...". (v) Fifthly, the reference to the appellant/assessee earning a higher room tariff or registering a higher occupancy rate, with the view to providing a rationale for concluding that the appellant/assessee had secured an advantage by virtue of the exercise undertaken by it was wholly misconceived. The Tribunal overlooked the principle that when an expenditure is incurred to make the profit-earning structure work more efficiently, leaving the structure of the source of profit or income intact, it can only be treated as revenue expenditure, a....
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....he parity principle. In his order, the CIT(A) notes that expenses incurred by the appellant/assessee towards payment of monies to other consultants involved in interior design, lighting and illumination had been capitalised. 33. In our opinion, the fact that the appellant/assessee had capitalised the expenditure, which, in law, it could claim as revenue expenditure, would not be determinative of what should be the correct conclusion in the matter. 34. It is well-established that the manner in which the expense/income is reflected in the books of accounts of the appellant/assessee or in some cases omitted, is not determinative of its true nature, although it may provide a clue. The safest and the surest way to arrive at the true nature of the expense/income in issue is by having regard to the provisions enunciated either in the statute and/or the principles enunciated by the courts. The following observations of the Supreme Court in the judgement rendered in Kedarnath Jute Mfg. Co. Ltd. v Commissioner of Income Tax, (Central), Calcutta (1972) 3 SCC 252, being apposite, are extracted below: "8. The main contention of the learned Solicitor-General is that the assessee failed to de....
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....fied at Rs. 600,84,000/-. 35.1. Since the Tribunal disallowed the deduction claimed by the appellant/assessee with regard to expenses incurred on renovation and refurbishment, as well as those expended on the repair of building, plant and machinery, it rejected the additional ground pleaded by the Assessee for characterising expenses which had been capitalised as revenue expenditure. 36. In our opinion, the appellant/assessee was correct in contending before the Tribunal that the expenses which had been capitalised and were sought to be treated as revenue expenditure under the provisions of the Act would require examination by the AO. 36.1. In other words, the issue concerning the re-characterisation of expenses, which was the subject matter of the additional grounds pleaded by the appellant/assessee, was a mixed question of fact and law. 37. We may note that we had put this aspect squarely to Mr Tarun Gulati. Mr Gulati had agreed that, insofar as this aspect of the matter was concerned, it may have to be remanded to the AO for fresh examination in the light of the well-established principles formulated by the courts for arriving at the true character of a particular expenditur....
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....he Ashoka Hotels Ltd. case. 38.5. A perusal of the judgment rendered by the Supreme Court in the Hotel Diplomat case shows that in the said case, the partners of the assessee-firm were also owners of the building qua which the lease was executed in favour of the assessee-firm. The lease deed was executed on 30.11.1962, followed by a supplemental agreement dated 30.03.1963. 38.6. The assessee-firm, via an agreement dated 19.02.1963, entered into an arrangement with the American Embassy in Delhi. One of the obligations undertaken under the said agreement by the assessee-firm was that it would construct "no less than one bathroom with toilet facilities" provided with each set of two rooms. The Court was called upon to rule as to whether the expenditure incurred by the assessee-firm for building bathrooms in the AY 1963-64 could be construed as revenue expenditure. The Court, applying the test concerning the existence or creation of an asset or accrual of an advantage of enduring benefit in business, concluded that the expenses incurred in the construction of the toilet were in the nature of capital expenditure. The facts obtaining in the Hotel Diplomat case are distinguishable from ....