M/S.KOVILAKAM HOTEL P LTD,THRISSUR vs. THE ACIT,, THRISSUR

Per GEORGE GEORGE K.,JUDICIAL MEMBER:

This appeal at the instance of the assessee is directed against the order of the

CIT(A), Thrissur dated 09/08/2019. The relevant assessment year is 2011-12.

petition for condonation of delay accompanied by an affidavit of the Managing

Director of the assessee-company stating the reasons for the delay in filing the

appeal.

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2.1 I have perused the reasons stated in the affidavit of the M.D. of the

assessee-company for not filing the appeal on time. The delay in filing the

appeal by 27 days cannot be attributable to any latches on the part of the

assessee. Hence, I condone the delay of 27 days in filing the appeal and

proceed to dispose off the appeal on merits.

justified in confirming the action of the Assessing Officer in treating the sum of

Rs.60,25,240/- as capital expenditure.

The assessee is a private limited company running a 3 star bar attached

hotel. For the assessment year 2011-12, the return of income was filed on

29/09/2011 claiming a loss of Rs.19,86,712/-. The assessment was taken up for

scrutiny by issuance of notice u/s. 143(2) of the I.T. Act on 28/09/2012. During

the course of assessment proceedings, the Assessing Officer noticed that the

assessee had incurred expenses under “repairs and maintenance to building”

amounting to Rs.60,25,240/-. Notice was issued to assessee seeking its

explanation as to why the said expenditure should not be treated as capital

expenditure. The assessee filed objections vide letter dated 27/11/2013 which

reads as follows:

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"Our hotel had been classified as a three star hotel by the Department of Tourism,.... With effect from 12.04.2006 and this classification was valid for 5 years. As per the condition of the issue of this three star classification, we had to apply for re-classification of our hotel after completion of four years time which was during the year, 2010-11.

When we applied for re-classification during 2010-11, the entire hotel had to be renovated. The entire building, including sanitary, electrical, flooring, aluminium cladding work, painting, interior furnishing had to be renovated. Entire furniture and furnishing had to be refurnished.

The entire hotel had to look like a new one during the visit of the committee for revaluation of allotting three star classification. For executing all the work, we had incurred Rs.60,25,240/. The Tourism Department also awarded three star rating for us from 12.04.2011 to 11.04.2016"

4.1 The Assessing Officer rejected the objections raised by the assessee and

disallowed the sum of Rs.60,25,240/- by treating it as capital expenditure.

The relevant finding of the Assessing Officer reads as follows:

Hence what transpires from assessee's statement is that the expenditure that was booked under Repairs and Maintenance- Bldg is nothing but the cost incurred in obtaining Three Star certification. By incurring this expenditure the assessee had made sure that the value of the asset does not diminish from a three star hotel to an ordinary one, which otherwise would have, had the assessee not renovate the hotel in due time. Thus by incurring this expense, assessee has given an enduring benefit to the asset by another five years. This is nothing but a capital expenditure as this renovation expenses has brought enduring benefit to the company in the form of three star certification issued by the Tourism Department, by virtue of which it shall enjoy the advantage for in future years. Reliance is placed on 1. Ballimmal Naval Kishore vs. CIT (224 ITR 414)(SC) 2. Bony Rubber Co, (P.) Ltd. v. Commissioner of Income-tax

Therefore, this is treated as capital expenditure and disallowed u/s. 37(1) in the assessment Disallowance:Rs.60,25,240/-“

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as capital expenditure, the assessee preferred appeal to the first appellate

authority. The CIT(A) confirmed the order of the Assessing Officer. The

relevant finding of the CIT(A) reads as follows:

In the case relied upon by the appellant the expenditure was incurred on the leasehold premises and it was observed that no new asset was created.

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quite different in which the expenditure consisted of fabric, cutlery, rubber mats civil work, shower mirror etc.

appeal before the Tribunal. The grounds raised read as follows:

Labour Aluminum 37,400 Carpenter 2,22,435

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General 2,39,083 Glazing work 3,90,000 Gypsum work 51,900 Painting 4,06,300 Steel Work 55,000 Tile and Mason work 2,10,645 Loading & unloading renovation 4,708 Material Aluminum work 2,19,202 Bricks 2,502 Glazing work 12,22,855 Gypsum work 51,424 Painting 2,19,259 Flooring tiles 8,74,695 Furniture and Furnishings 13,31,053 Materials others 4,75,135 Transportation incurred for renovation work 11,643 60,25,239

For these and such other grounds that may be urged at the time of hearing it is prayed that, the entire sum of Rs. 60,25,240/- may kindly be allowed as Revenue Expenditure.

6.1 The Ld. AR has filed a paper book enclosing details of the expenses claimed

as revenue expenditure amounting to Rs.60,25,240/-. The assessee has filed a

brief written submission reiterating the submissions made before the Income Tax

authorities.

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6.2 The Ld. DR apart from supporting the orders of passed by the Income Tax

authorities has relied on the judgment of the Hon’ble Delhi High Court in the

case of Bharat Gears Limited vs. CIT in ITA No.14/2005, 1600 & 1670/2019

dated 30/06/2011 and the order of the Cochin Bench of the Tribunal in the case

of DCIT vs. Indus Motor Company Pvt. Ltd. in ITA Nos. 212, 213 &

214/Coch/2014 dated 25/07/2014.

running a 3 star hotel. The assessee is also having a bar. Three Star

classification was originally granted to the assessee in the year 2006. The Three

Star classification which was granted in the year 2006, was to be renewed every

five years. During the relevant assessment year, the assessee had to renew the

classification and for this purpose the assessee had incurred repairs of

Rs.60,25,240/-. The assessee claimed expenditure under the head ‘repairs and

maintenance to building”. The Assessing Officer treated the same as capital

expenditure. However, on perusal of the record, it is not clear whether the said

amount disallowed by the Assessing Officer was capitalised and depreciation was

granted on the same.

7.1 Concise Oxford Dictionary of Current English by Fowler & Fowler explains

the meaning of “to repair” to mean as to restore (buildings, machines, garments,

tissues, strength, etc.) to good condition, renovate, mend by replacing or refixing

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parts or compensating loss or exhaustion. Lexicon Webster Dictionary, 1978,

(Vol II, page 812) defines a “repair” to mean as follows:

“To restore to a sound or good state after decay, injury, dilapidation or partial destruction; to make, amends for, as for an injury by an equivalent; to give indemnity for, as a building in good or bad repair.”

7.2 The distinction between repair and reconstruction is quite narrow and the

meaning attributable to the word “repairs” depends upon the facts and

circumstances of each case. The test of an improvement or an advantage is not

strictly germane or conclusive. The object of every repair is to improve the

condition or the efficiency which has become lost on account of the user, and so

there is necessarily an improvement or betterment. In CIT vs. Mahalakshmi

Textile Mills Ltd.(1967) 66 ITR 710 (SC) the roller stands of textile machinery

were worn out and replaced with parts, manufactured by a different company

said to be better than the older type because the older type was not available. It

was held by the Hon’ble Apex Court that this consideration alone could not be

said to have brought into existence a new asset or enduring advantage to the

assessee’s business and that the expenditure was allowable as deduction. It was

further held by the Hon’ble Supreme Court that the fact that the benefit of

repairs extends beyond the year of expenditure would not make the expenditure

capital expenditure. The concept of ‘current repairs’ has been explained by the

Hon’ble Bombay High Court in the case of CIT vs. Chowgule & Co. Pvt. Ltd. (214

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ITR 523). The High Court has spelt out the meaning of current repairs in

following words:

“(i) The amount should be paid on account of current repairs.

(ii) “Current repairs” means repairs undertaken in the normal course of user for the purpose of preservation, maintenance or proper utilization or for restoring it to its original condition.

(iii) “Current repairs” do not mean only petty repairs or repairs necessitated by wear and tear during the particular year.

(iv) Such repairs should not bring into existence nor obtain a new or different advantage.

(v) Neither the quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of the machine or ship, is decisive of the true nature of the expenditure.

(vi) The original cost of the asset is not at all relevant for ascertainment of the true nature of the expenditure on repairs.

(vii) The replacement cost of the asset may, however, at times be used as an indicator of the true character of the expenditure. If the expenditure on repairs added to the written down value or disposal value exceeds the replacement cost of the asset, a presumption is possible that it is not a revenue expenditure but expenditure of capital nature. Such a presumption, of course, would be rebuttable.

(viii) The expression “current” preceding “repairs” appears to have been used by the Legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradistinction to that incurred on any improvement or an addition thereto.”

7.3 Where the cost of repairs is found not allowable either u/s. 30(a)(i) or

under section 30(a)(ii) and section 31(i), the same may still be considered

allowable u/s. 37. The above proposition has been held so by the Hon’ble Apex

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Court in the case of CIT vs. Kalyanji Mavji & Co. (122 ITR 49). Under section

37(1), any expenditure (not being expenditure of the nature described in

sections 30 to 36 and not being in the nature of capital expenditure or personal

expenses of the assessee), laid out or expended wholly and exclusively for the

purposes of the business or profession shall be allowed in computing the income

chargeable under the head ”Profits and gains of business or profession”. In

other words, expenditure on current repairs to buildings, machinery, plant and

furniture used for the purposes of the business is generally covered by sections

30 and 31 of the I.T. Act. In respect of types of repairs that do not fall under

the above description, a deduction can still be allowed u/s. 37 of the I.T. Act if all

the requirements for deduction under the said section are fulfilled. The expenses

incurred by the assessee towards repairs and whether it is allowable as revenue

expenditure or not, is a pure question of fact.

7.4 In the instant case, the repair works were completed in the month of

March, 2011. The assessee has enclosed details of expenditure incurred for

repairs in the paper book filed by the assessee. The details of all the bills and

relevant vouchers of the expenditure are enclosed in the paper book filed by the

assessee The major portion of the expenditure are detailed below:

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Apart from the above expenditure, the assessee had also incurred painting

expenditure for a sum of Rs.4,06,300/- and Rs.2,19,259/-. From the bills and

vouchers, it is clear that the expenses are incurred for repair and maintenance of

the existing building to keep it fit to get renewal of the three star classification.

The assessee was already having Three Star facility from the year 2006 and the

same was to be renewed for a period of five years. In order to continue the

same business in the same way, the assessee had to incur these expenses. By

no stretch of imagination can it be said that painting and other incidental

expenses are capital expenses. In a Hotel industry huge expenditure has to be

incurred with a view to keep the place fit and beautiful, so that guests can enjoy

good atmosphere and ambience of the place. Without good ambience and

atmosphere, it would not be possible to attract customers for running the hotel

business carried on by the assessee. In this case though the expenses incurred

cannot be allowed as deduction as current repairs certainly expenses would not

be a capital expenditure and all conditions being satisfied u/s. 37 of the I.T. Act,

expenses are to be allowed under the said section. The expenses incurred in a

hotel industry may be current repairs which expenses are incurred on yearly

basis and expenditure incurred on periodical basis. As mentioned earlier,

assessee’s hotel was already having three star facility from the year 2006 and for

renewal of three star facility, the assessee had to incur the impugned expenses

on periodical basis. On basis of these expenses incurred, the assessee did not

derive a new asset and there was no increase in the total rooms nor there was

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an increase in total area of the hotel. The expenditure incurred by assessee

such as painting of the hotel, replacement of floor tiles, glazing works etc. are

nothing but periodical expenditure which a hotel has to necessarily incur for its

upkeep and cannot be termed as capital expenditure.

7.5 The judgment of the Apex Court in the case of Ballimal Naval Kishore and

Another vs. CIT (224 ITR 414) relied on by the Assessing Officer is not applicable

to the facts of the case. The assessee in the case considered by the Apex Court

purchased ginning factory, ran it as such for over five years and then converted

into a cinema theatre and exhibited films. The expenses incurred for converting

the building into a cinema theatre was claimed by the assessee as revenue

expenditure. It was held by the Hon’ble Court that it cannot be allowed as a

revenue expenditure since it was capital in nature.

7.6 The order of the Cochin Bench of the Tribunal in the case of DCIT vs. Indus

Motor Company Pvt. Ltd. (supra) relied on by the Ld. DR is distinguishable on

facts. In the said order of the Tribunal, it was held by referring Explanation 1 to

section 32(1) of the I.T. Act, the construction carried out in the leased premises

would result in enduring benefit and in such cases, the expenditure is to be

capitalized and depreciation should be allowed on the same.

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7.7 The judgment of the Hon’ble Delhi High Court in the case of M/s. Bharat

Gears Limited vs. CIT (supra) relied on by the learned DR, is also distinguishable

on facts. In the said case, the Hon’ble Delhi High Court confirmed the order of

the Tribunal in view of the fact that the impugned expenditure had resulted in

bringing into existence a new machinery and therefore, the expenditure incurred

was held to be a capital expenditure.

7.8 The following judicial pronouncements are in favour of the assessee:

i) The Hon’ble Madras High Court in the case of CIT(Central), Madras vs.

Dasaprakasha reported in 114 ITR 210 had held that periodical

expenditure incurred with a view to beautify the premises is not a capital

expenditure. The relevant findings of the Hon’ble Court reads as follows:

` “These items of expenditure were incurred with a view to beautify the premises obviously with a view to keep the place fit for the purpose for which persons assembled in the place, namely, for taking food and other edibles, as, without the proper atmosphere, it would not be possible to attract necessary customers for running the hotel business carried on by the assessee. The expenses cannot be said to be of an enduring nature as the items for which they were used would be of no use with reference to any other place and they cannot also be removed and used. They are just fixed in the walls so that they will present an inviting appearance to the customers assembled there. Accordingly the Tribunal was right in its conclusion that the expenses were allowable as a deduction u/s. 37 of the Act”.

ii) The Hon’ble Karnataka High Court in the case of CIT vs. Rex Talkies

(148 ITR 560) has held that expenditure incurred to run its business more

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efficiently or more profitable without touching the fixed asset/capital is an

allowable revenue expenditure. The Hon’ble High Court held as follows:

“That from the nature of the expenditure that the assessee had to incur towards effecting repairs to the ceiling and repairs and polishing of the furniture, etc., it was clear that the assessee who was running cinema shows in the theatre as a tenant, had to preserve and maintain the theatre in a fit condition and make it more attractive and comfortable. What was spent by the assessee was only to run his business more efficiently or more profitably leaving the fixed assets untouched. Therefore, the amount spent on repairs and renovation was allowable as revenue expenditure.

Section 32(1A) of the I.T. Act, 1961, is a special provision enacted for the benefit of lessees providing for depreciation on the structure or work put up by them in the leasehold premises which, in the normal course, they are not entitled to, since they are not the owners. However, it cannot be stated that whatever is spent by the lessees or tenants should always be regarded as a capital expenditure.”

iii) The Hon’ble Madras High Court in the case of CIT vs. Ooty

Dasaprakash (237 ITR 902), affirming the decision of the Tribunal, had

held that the expenditure incurred solely for repairs and modernizing the

hotel and replacing the existing components of the building, furniture and

fittings, with a view to create a conducive and beautiful atmosphere for

the purpose of running the business of a hotel was an allowable

deduction. It was further held by the Hon’ble Court that the expenditure

incurred was not of an enduring nature and was allowable as revenue

expenditure under section 37 of the Act.

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iv) The Hon’ble Rajasthan High Court in the case of CIT vs. Lake Palace

Hotels and Motels P. Ltd. reported in 258 ITR 562 had held that the

expenditure incurred on refurnishing/modernizing a hotel is not a capital

expenditure. It was held by the Hon’ble High Court as follows:

“We have scanned through the cases referred to by learned Counsel for the Department as well as for the assessee. Section 37 of the Income-tax Act provides for deduction of any expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purposes of the business or profession. But the expression “capital expenditure” is not defined in the Act and the words employed under section 37(1) “in the nature of capital expenditure” is, therefore, closely akin to the concept of securing something, tangible or intangible property, or corporeal or incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise. To put it differently, ordinarily, “capital” means as an asset which has an element of permanency about it and which is capable of being a source of income and “capital expenditure” must, therefore, generally mean an acquisition of an asset and the asset must be intended to be of lasting nature; while income or revenue expenses are generally running expenses incurred in earning profit or expenses incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return.”:

hold that the assessee is entitled to deduction of the sum of Rs.60,25,240/- u/s.

37(1) of the I.T. Act. It is ordered accordingly.

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9 In the result, the appeal of the assessee is allowed.

Pronounced in the open court on 18-02-2020.

sd/- (GEORGE GEORGE K.) JUDICIAL MEMBER

Place: Kochi Dated: 18th February, 2020 GJ Copy to: 1. M/s. Kovilakam Hotels Pvt. Ltd., Thiruvambady PO, Kovilakkathumpadam, Thrissur-680 022. 2. The Assistant Commissioner of Income-tax, Circle-1(1), Trichur. 3. The Commissioner of Income-tax(Appeals), Thrissur. 4. The Commissioner of Income-tax, Thrissur. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin