PANDYAN HOTELS LTD. vs. DY. COMMISSIONER OF INCOME

The appellant is engaged in the business of running a three star hotel and for the assessment year in question namely 2012-13, the assessee filed their return of income on 29.9.2012 admitting a total income of Rs.19,06,620/- and an intimation under Section 143(1) of the Act was issued. Subsequently, the assessment was selected for scrutiny and the assessment was completed under Section 143(3) of the Act by order dated 31.3.2015, by which, there was a disallowance of the expenditure to the tune of Rs.1,43,37,050/- incurred towards repairs and renovation expenses. 5. The assessee contended before the Assessing Officer that the expenses were incurred for repairs and renovation of 18 rooms out of 57 rooms in the hotel and that there was no capital expenditure incurred by the assessee. It was further contended that there was no increase in the room capacity nor creation of any new asset, but the expenses were incurred only to preserve an existing asset and that the assessee was required to renovate the old rooms in order to attract 3/13 http://www.judis.nic.in TCA.No.226 of 2018 customers and to maintain the standard of a three star hotel. However, the Assessing Officer did not accept the explanation given by the assessee and treated the sum of Rs.1,51,20,800/- as capital expenditure and after allowing depreciation at the rate of 10%, the Assessing Officer added the balance amount of Rs.1,36,08,720/-. 6. Aggrieved by such order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-I, Madurai [for brevity, the CIT(A)], who, by order dated 29.1.2016, allowed the assessee’s appeal primarily holding that the expenses were incurred only to preserve the existing asset and that the assessee had to renovate the old rooms in order to attract foreign customers and to maintain the standard of a three star hotel. With regard to its enduring benefit as applied by the Assessing Officer, the CIT(A) opined that the test of enduring benefit might fail on certain occasions, that the correct test was to see as to whether there was creation of any new asset and that admittedly, the assessee had not created any new asset, but had undertaken repairs and renovation only in the existing rooms and that too, only in 18 rooms out of 57 rooms available in the hotel. 4/13 http://www.judis.nic.in TCA.No.226 of 2018 7. The Revenue carried the matter on appeal to the Tribunal by contending that the Assessing Officer had correctly treated the repairs and renovation expenses as capital expenditure as against the claim of the assessee as a revenue expenditure. The Tribunal, by the impugned order, allowed the Revenue’s appeal and this is how the assessee is before this Court by way of this tax case appeal. 8. On a reading of the order of the Tribunal, we find that the Tribunal had proceeded on a different footing as if the claim was as against current repairs. Though the Tribunal referred to the decisions, which were relied upon by the assessee, it held that those decisions were not applicable because there was no finding as to the expenditure under reference answering the description ‘current repairs’ in the decision of the Apex Court in the case of Ballimal Naval Kishore Vs. CIT [reported in (1997) 224 ITR 414]. 9. When this matter was heard for admission, it appears that the assessee canvassed that the expenditure was erroneously treated to be capital expenditure and the Tribunal erred in relying upon the decision of the Hon’ble Supreme Court in the case of Ballimal Naval Kishore where the claim was for current repairs unlike the case of the assessee where they made a claim that it was a revenue expenditure 5/13 http://www.judis.nic.in TCA.No.226 of 2018 under Section 37 of the Act. For that reason, the question of law was reframed by the Hon’ble First Bench of this Court to consider as to whether the expenditure incurred in the renovation and redecoration of rooms in a hotel would amount to capital expenditure or revenue expenditure. 10. In our considered view, the test to be applied to decide as to whether the expenditure is revenue or capital expenditure has been brought out in the decision of the Hon’ble Apex Court in the case of Empire Jute Company Limited Vs. CIT [reported in 124 ITR 1], wherein it has been held that there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none-the-less, be on revenue account and the test of enduring benefit may break down. It was pointed out that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. It was further held that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. It was also held that if the advantage consists merely in facilitating the 6/13 http://www.judis.nic.in TCA.No.226 of 2018 assessee's trading operations or enabling the management and conduct of the assesse's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 11. The learned Senior Standing Counsel appearing for the Revenue has relied upon the decision of the Hon’ble Supreme Court in the case of Ballimal Naval Kishore and the decision of this Court in the case of CIT, Madurai Vs. Viswams [reported in (2019) 105 Taxman.com 289]. 12. This Court is of the view that there can be a no straight jacket formula, which can be applied while deciding the issue as to whether the expenditure is in the revenue field or in the capital field and facts are very relevant to be taken note of. This would be the approach while deciding such cases. 13. Now, we may proceed to discuss the decision of this Court in the case of CIT Vs. Ooty Dasaprakash [reported in (1999) 237 ITR 902]. We refer to this decision because this is more or less an identical case to that of the assessee before us. The Division Bench 7/13 http://www.judis.nic.in TCA.No.226 of 2018 held that the expenditure was incurred solely for repairs and modernising 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 of a business of a hotel and it goes without saying that the expenditure incurred by the assessee for the relevant assessment years in repairing and modernising the hotel and replacing the existing components of a portion of the building, furniture and fittings cannot at all be stated to be of enduring in nature, in the nature of being a "capital expenditure"; but, definitely such an expenditure would fall under the category of "revenue expenditure" in nature to be allowed, as a deduction under Section 37 of the Income Tax Act. In the aforementioned decision, the Division Bench followed the said assessee’s own case viz CIT Vs. Dasaprakash [reported in (1978) 114 ITR 210 (Madras). 14. In the decision of the Karnataka High Court in the case of CIT Vs. Mac Charles (India) Limited [reported in (2015) 233 Taxman 0177], the assessee, carrying on the business of hotel, incurred expenses under repairs and maintenance of the hotel building. The Assessing Officer disallowed the said expenditure. The 8/13 http://www.judis.nic.in TCA.No.226 of 2018 First Appellate Authority confirmed the said order and the assessee filed an appeal before the Tribunal. The Tribunal held in favour of the assessee, aggrieved over which, the Revenue preferred an appeal before the Division Bench of the Karnataka High Court. The Court, after referring to the decision of the Hon’ble Apex Court in the case of Ballimal Naval Kishore and the decision of the Hon’ble Apex Court in the case of CIT Vs. Saravana Spinning Mills (P) Ltd. [reported in