THE ACIT, COCHIN vs. M/S.MFAR HOTELS & RESORTS LTD, COCHIN
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Income Tax Appellate Tribunal, COCHIN
Before: SHRI INTURI RAMA RAO & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M : The present appeal by the Revenue and the cross-objection by the assessee have been filed against the impugned order dated 19-03-2015, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-1,Kochi [“learned CIT(A)”],for the assessment year 2011-12.
The present appeal and cross-objection have been listed before us pursuant to the order dated 10-10-2022 passed by the Hon’ble Jurisdictional
2 M/s. Mfar Hotels & Resorts Limited High Court in assessee’s appeal being ITAs No. 17& 13 of 2019, whereby the Hon’ble HighCourt set aside the earlier order dated 26-10-2018 passed by the Co-ordinate Bench of the Tribunal and restored the matter to the Tribunal for consideration and decision afresh, in accordance with law.
In its appeal, the Revenue has placed the following grounds:
“1. The Order of the Commissioner of Income tax (Appeals-1), Kochi, in appeal No: ITA-22/R-1/E/CIT(A)-11/2014-15 dated 19-03-2015, is opposed to law, weight of evidence, facts and circumstances of the case. 2. Whether on facts and circumstances of the case, the CIT(A) was right in allowing the claim of expenses by way of repairs and renovation made on hotel building as current repairs relying on the decision of Hon'ble Karnataka High Court in the case of CIT Vs Mac Charles without considering the fact that the Assessing Officer has disallowed the claim treating it as capital expenditure relying on the decision of the Hon'ble Supreme Court of India the case of M/s Ballimal Naval Kishore (224 ITR 414 (SC) )and M/s Saravana Spinning Mills (P) Ltd (2931TR 201(SC) 3. For these and other grounds that may be urged at the time of hearing, it is requested that the order of the Commissioner of Income tax (Appeals) may be set aside and that of the Assessing Officer restored.”
The solitary issue that arises for our consideration, in the present case,pertains to the allowability of the expenditure incurred by the assesseeon repairs and renovation of the hotel building.
The brief facts of the case pertaining to this issue, as emanating from the record, are:The assessee is engaged in the business of running a five- star hotel under the brand name of “Le Meridien”. For the year under consideration, the assessee filed its return of income on 30-09-2011, declaring NIL income, after claiming brought forward losses, which was revised to Rs. 1,99,96,355/- vide a revised return dated 30-03-2013. The return filed by the assessee was selected for scrutiny, and statutory notices
3 M/s. Mfar Hotels & Resorts Limited under sections 143(2) and 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, upon perusal of the profit and loss account filed by the assessee,it was, inter-alia, observed that the assessee incurred expenditure amounting to Rs. 7,13,89,107/- for renovation and refurbishment. Since there was a substantial increase from the corresponding expenditure charged under the same head in the previous year, the assessee was asked to furnish a detailed split-up of the expenses. Responding to the query raised during the assessment proceedings, the assessee also filed a detailed note on the allowability of the expenditure. The assesseesubmitted thatthe expenditureof Rs.7,13,89,107/- for renovation and refurbishment was incurred on the International Convention Centre constructed by it in the financial year 1998-99. The assesseesubmitted thatsince the said convention centre was continuously used for holding various conventions, seminars, marriages and such other functions, the aforesaid expenditurewas required for repair of the wear and tear of the building, and, therefore, necessitated the carrying out of substantialrefurbishment, renovation and replacement to maintain the international standard. The assessee submitted that the refurbishment of the International Convention Centre includes the replacement of the entire flooring, ceiling, electrical and plumbing works to bring the convention halls up to the standard that it was having at the time of its opening in the financial year 1998-99. The assessee further submitted that the various works which were in the nature of additions to the existing building and had resulted in increasing the floor area and additional fittings and fixtures have
4 M/s. Mfar Hotels & Resorts Limited been capitalised. However, the expenditure,which was purely in the nature of renovation and refurbishment, was claimed as revenueexpenditure.
The Assessing Officer (“AO”), vide order 28-03-2014 under section 143(3) of the Act, inter-alia, disagreed with the submissions of the assessee and held that there has been extensive renovation and replacement of the existing hotel and, therefore, the claim of the assessee that no new advantage was gained is not correct. The AO further held that the total look and feel of the convention centre has undergone a thorough revamp. Accordingly, the AO held that what the assessee did was not mere repairs to preserve and maintain the existing facility and has done a substantial refurbishment, renovation and replacement. Therefore, the AO treated the expenditure incurred by the assessee as capital in nature and disallowed the same.
The learned CIT(A) vide impugned order, allowed the ground raised by the assessee on this issue and held that by incurring the impugned expenditure, no new asset has come into existence. The learned CIT(A) further held that the expenses incurred by the assessee on repairs, etc., are allowable as revenue expenditure. Accordingly, the learned CIT(A)directed the AO to delete the addition. Being aggrieved, the Revenue is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is engaged in the hospitality business and is running a five-star rated hotel, by the name
5 M/s. Mfar Hotels & Resorts Limited of “Le Meridien”. The hotel building and the International Convention Centre constitute the major source of revenue for the business of the assessee. The assessee constructed the International Convention Centre in the financial year 1998-99, and the same consists of various halls in a total area of 56,000 sq. ft. The said convention centre is made available by the assessee for holding various (national and international) conventions, seminars, marriages and other functions, etc. There is no dispute amongst the parties regarding the aforementioned basic facts of the present case. As per the assessee, since the International Convention Centre was continuously in use for more than 12 years and owing to the frequent footfall attending the functions, it had undergone various wear and tear. Further, in order to also maintain high standards required in the line of hotel business and to keep abreast with the change in outlook, trends, etc., as per the assessee, the repair and renovation works were carried out during the year under consideration.
As per the assessee, the renovation and refurbishment of the International Convention Centre was carried out to attract more customers, thereby augmenting the business income of the assessee. Thus, as per the assessee, the core purpose of incurring the expenditure for renovation and refurbishment was to bring improvement to the existing International Convention Centre and hotel of the assessee, thereby making it appealing and matching the current industry standards. The assessee claimed that the renovation and refurbishment have neither changed the very nature of the enterprise or its assets in any manner, nor has any new asset been created.
6 M/s. Mfar Hotels & Resorts Limited
However, the AO disagreed with the submissions of the assessee and held that the expenditure on renovation and refurbishment incurred by the assessee does not qualify as revenue expenditure, as the assessee has done extensive repairs and renovations, which are not in the nature of repairs and the same is required to be treated as an addition to the fixed assets. As noted in the foregoing paragraphs, the AO held that the assessee has done a total renovation and revamp of the International Convention Centre. In this regard, the AO has taken into account various factors, such as, head under which these expenses have been declared by the assessee in the profit and loss account, a drop in the income of the assessee from banquet sales during the period of renovation, and comparison with the total cost of the original asset. The AO also placed reliance upon the decision of the Hon’ble Bombay High Court in New Shorrock Spg. & Mfg. Co. Ltd. v/s CIT, reported in [1956] 30 ITR 338 (Bom.), and the decisions of the Hon’ble Supreme Court in Ballimal Naval Kishore v/s CIT, reported in [1997] 224 ITR 414 (SC), and in CIT v/s Saravana Spg. Mills (P.) Ltd., reported in [2007] 293 ITR 201 (SC).
Before dealing with the submissions of both sides and the findings of the lower authorities as regards the issue at hand, it is relevant to note the repair and renovation work carried out by the assessee during the year under consideration, which has been taken note of by the AO on page 5 of the assessment order as follows: –
“a. Gutter modifications, maintenance and replacement of defective items.
7 M/s. Mfar Hotels & Resorts Limited b. CSM Hall (at ground floor) toilets reconditioning and replacing the damaged pipes, fittings and walls. Ceramic wall panelling, changing the toilet flooring, toilet doors and replacement of discoloured and damaged sanitary fittings. c. CSM Hall (at ground floor) renovation works, such as replacing the old worn out flooring with a marble and granite, replacing the worn out ceiling and the painting works. d. Renovation and replacement of damaged and worn out interior and other works at CSM kitchen area. e. Convention centre lobby modification by removing and replacing the existing floors with granite flooring, replacing the damaged glass doors and replacing the worn out ceiling, repainting etc. f. ICC Manapuram Hall (on the first floor) removing the old and worn out finishing work such as fabric panel, veneer cladding etc with the new materials. Fixing out new flooring tiles, marble/granite in place of the existing damaged and discoloured flooring. g. ICC Nayanar Hall (on the first floor) replacement of interior and the fixing of new interiors, replacing the damaged doors and windows, floor etc. h. Replacement of old and damaged interior works, damaged and discoloured plumbing and sanitary fittings, electrical items, electrical cabling, panel boards etc.”
Therefore, we find that the renovation and refurbishment pertained to replacing the faded tiles, worn-out granite floorings, floor tiles, bathroom tiles, panels, echosystem, soundproofing system, and to replace the faded and discoloured bathroom fittings, changing the damaged and leaking electrical cables, etc. In this regard, the assessee has also placed on record the ledger account, the statement of work order/purchase order along with the details of work order, the statement showing purchase of marble/granite, statement showing renovation along with details of bills, payments, etc., in the factual paper book filed before us. Thus, from the perusal of all the details filed by the assessee, it is amply clear that by incurring the impugned expenditure, the assessee has not created any extra floor space. Further, the Revenue has also not brought on record any
8 M/s. Mfar Hotels & Resorts Limited evidence to show any increase in the capacity of various halls in the International Convention Centre. Further, it is pertinent to note that on page 12 of the assessment order, the AO also do not dispute the fact that there is no change to the civil structure, and only the flooring, wall panelling, interiors, kitchen and toilets, etc. have been removed and replaced. In addition to the above, it is pertinent to note that even in para 3.5 of the assessment order, the AO even though alleged that the total look and feel of the Convention Centre has undergone a thorough revamp, however, only noted the change in the marbles and granite, soundproof system and ceramic wall panel.
As regards the findings of the AO that the assessee has grouped the expenditure under the head “renovation and refurbishment”instead of “repairs and maintenance”, which reveals the motive and purpose of the expenditure, it is pertinent to note the trite law that entries in the books of account alone are not conclusive in determining the nature of income. Further, as regards the findings of the AO that there was a drop in income from the banquet function during the renovation period and therefore the same leads to the conclusion that the International Convention Centre was undergoing massive renovation, we agree with the submission of the assessee that being a place of international standard to conduct major functions, it is not possible to carry out any conventions, etc., while any repair work is going on in any part of the Convention Centre because of the noise, dust, etc. As regards the comparison drawn by the AO between the renovation and refurbishment expenditure with the total cost of the original
9 M/s. Mfar Hotels & Resorts Limited asset, we find merits in the findings of the learned CIT(A) that the cost of the original asset amounting to Rs. 9.58 crore of the International Convention Centre is the cost as in the year 1997 and since then there has been a substantial increase in price in 12 years. Therefore, we are of the considered view that such a comparison cannot be considered as a reason for disallowing the expenditure and coming to the conclusion that the assessee wanted to bring out a thoroughly different look and feel of the Convention Centre by incurring the expenditure. Accordingly, we do not find any merits in various factors as noted in the assessment order to disallow the claim of the assessee that the expenditure incurred was revenue in nature.
We find that in CIT v/s MAC Charles (India) Ltd., reported in [2015] 60 taxmann.com 68 (Karn.), the Hon’ble Karnataka High Court, after considering the decisions relied upon by the AO in the present case, held thatthe expenditure incurred towards the interior decoration and refurbishing of the hotel building by the taxpayer carrying on the hotel business is revenue expenditure. The relevant observations of the Hon’ble Karnataka High Court, in the aforesaid decision, are reproduced as follows:–
“3. The appeal was admitted to consider the following substantial questions of law : "1. Whether the Tribunal was correct in holding that the expenditure incurred by the assessee towards interior decoration and refurnishing should be treated as a revenue expenditure when the assessee gained an enduring advantage and the same constitutes Capital expenditure ? 2. Whether the Tribunal was correct in not taking into consideration that after incurring of expenditure towards interior decoration and refurnishing the total receipts of the assessee from
10 M/s. Mfar Hotels & Resorts Limited room rents, restaurants, banquets and other services were increased from Rs. 21.64 crores to Rs. 28.29 crores and hence expenditure is capital in nature?" 4. Learned counsel for the Revenue assailing the impugned order contended that the expenditure incurred on replacement of several items as mentioned in the impugned order would not constitute the nature of repair or current repair. It is incurred not for preserving or maintaining an already existing asset. The improvement so carried out has resulted in a new asset coming to existence and benefit therefrom is enduring in nature and therefore, the said expenditure has to be treated as capital expenditure. In support of his contention, he relied upon a judgment of apex Court in the case of Ballimal Naval Kishore v. CIT [1997] 224 ITR 414/90 Taxman 402 (SC) and another judgment in the case of the CIT v. Saravana Spg. Mills (P.) Ltd. [2007] 293 ITR 201/163 Taxman 201 (SC). 5. In Ballimal case (supra), what the assessee did was not only mere repair, but total renovation of the asset by installing new machinery, new furniture, new sanitary fittings and new electrical wiring besides extensively repairing the structure of building. In that context it was held that by no stretch of imagination, can it be said that the said repairs qualify as "current repairs". It was a case of total renovation and therefore, the High Court has rightly treated the said expenditure as capital in nature. 6. In Saravana Spg. Mills (P.) Ltd.'s case (supra), in the balance sheet of the assessee the expenditure was shown to have been incurred for purchase of a new asset. In that context, it was held that each machine in a segment has an independent role to play in the mill and the output of each division is different from the other. "Repair" implies the existence of a part of the machine which has malfunction. The textile plant consists of about 25 machines. One of such machines is the ring frame and, thus, machinery is replaced by a new machine. Therefore, it was held that the expenditure incurred for replacement of the new machine would not come within the meaning of the words "current repairs". 7. There cannot be any quarrel with the said proposition. In the aforementioned case, the apex Court has prescribed the test. It is stated that the basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. 8. Keeping the above principle in mind, when we look into the facts of this case, it is categorically stated in the assessment order, that the assessee-company though not created any extra room capacity or any extra floor space but, the volume of expenditure incurred when considered to proportion of the total cost of the buildings, it will have to be treated only as a capital expenditure giving enduring benefit to the assessee. Further, the assessee though not created any extra space but by replacing the flooring, the false roofing, furniture, carpets, the
11 M/s. Mfar Hotels & Resorts Limited refurbishing of the rooms in tune with the international standards of 'Meridian SA', the assessee-company definitely derived an enduring benefit by an upward revision of the existing tariffs for the hotel rooms and the upward revision of the charges for various other services rendered and attracting more number of international customers. The increase in the occupancy rate is evident from the total receipts admitted during the previous year from room rents, restaurants, banquets and other services which were Rs. 28.29 crores as against Rs. 21.64 crores in the earlier year. If that income is derived from reserving banquets and other services, that cannot be taken into consideration. 9. Merely because the income of the hotel has increased, it does not necessarily follow it is because of the refurnishing or repair work done to the hotel rooms. That may be one of the factor. The real test is whether all those acts constitute replacing the existing asset. The existing asset is the hotel building and its rooms. When no extra flooring space or extra room capacity is added on account of such repairs, it cannot be said that a new asset has come into existence. All these repairs are done to preserve and maintain an already existing asset. In the course of such repairs, if they have upgraded the facilities to international standards, then that would not constitute a new asset. Therefore, the Tribunal was justified in holding that the expenditure incurred towards repairs and replacement of old parts would be in the nature of revenue expenditure and not capital expenditure.”
We find that similar findings were rendered by the Hon’ble Madras High Court in CIT v/s Ooty Dasaprakash, reported in (1999) 237 ITR 902 (Madras), in the case of a taxpayer who was running the hotel business at Ooty and incurred expenditure for repairing and modernising the hotel and replacing the existing component of the building, furniture and fittings. The relevant findings of the Hon’ble Madras High Court, in the aforesaid decision, are reproduced as follows: –
“8. In the instant case, 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 conductive and beautiful atmosphere for the purpose of running the business of a hotel. Taking into consideration the rationale or reasonings, as had been provided by a Division Bench decision of this Court cited supra, in the assessee’s own case, 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
12 M/s. Mfar Hotels & Resorts Limited 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.”
In this regard, it is also relevant to note the following observations of the Hon’ble Jurisdictional High Court in Joy Alukkas India (P.) Ltd. vs. ACIT, reported in [2014] 49 taxmann.com 437 (Kerala): -
“29. Advantage to facilitate trade operations providing the management to conduct business more effectively to make profits without the need of expanding or extending capital asset (permanent structure), what assessee acquires by spending money is to achieve good ambience which may result in profits without changing the building itself in which the business is conducted. The outgoing expenditure though forms part of profit earning exercise, in the absence of acquiring any asset or a right of permanent nature, it cannot be considered as capital expenditure. There is no replacement of complete structure with the new process. The nature of business prior to expenditure in question and afterwards being the same without any change, except some improvements to augment more profits in order to compete with the other competitors in the business regarding new interior designs etc. it cannot be termed as capital expenditure. There was no fresh venture by the assessee so far as the business is concerned. Intended object and the effect must be with reference to business realities. Whether advantage or benefit is for a shorter or longer period, it is immaterial. Therefore, character of expenditure is alone the deciding factor.”
Before concluding, we may also note the following findings of the Hon’ble Supreme Court in M/s Empire Jute Co Ltd v/s CIT, reported in [1980] 124 ITR 1 (SC): -
“8. …….There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, 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 advantage in a, commercial sence and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed
13 M/s. Mfar Hotels & Resorts Limited capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.”
Therefore, having perused the facts and circumstances of the present case in the light of the decisions cited supra, we are of the considered view that by incurring the expenditure for renovation and refurbishment of the International Convention Centre, no new asset has come into existence. Further, as noted in the foregoing paragraphs, the assessee has neither created any extra floor space nor added any extra room capacity to the already existing asset on account of such repairs. Thus, we agree with the submissions of the assessee that the expenditure on renovation and refurbishment was incurred only to repair and upgrade the International Convention Centre. Further, it is pertinent to note that once the character of the expenditure is revenue in nature and even if the same does not qualify as “current repairs” under section 31of the Act, the same would still be allowable under section 37 of the Act, as there is no dispute in the present case regarding the fact that the impugned expenditure was incurred wholly and exclusively for the purpose of business. Therefore, the decisions relied upon by the AO are distinguishable and thus not applicable to the present case.Accordingly, respectfully following the decisions cited supra, we are of the considered view that the expenditure incurred by the assessee on renovation and refurbishment of the International Convention Centreis revenue in nature.As a result,we do not find any infirmity in the findings of the learned CIT(A). Accordingly, the grounds raised by the Revenue are dismissed.
In the result, the appeal by the Revenue is dismissed.
14 M/s. Mfar Hotels & Resorts Limited
In its cross-objection, the assessee has raised the grounds supporting the findings of the learned CIT(A). Since we have affirmed the findings of the learned CIT(A), the grounds raised in the cross-objection are allowed.
In the result, the cross-objection by the assessee is allowed.
To sum up, the appeal by the Revenue is dismissed, while the cross- objection by the assessee is allowed. Order pronounced on 27-05-2025 by way of proper mentioning on the Notice Board
Sd/- Sd/- [INTURI RAMA RAO] [SANDEEP SINGH KARHAIL] ACCOUNTANT MEMBER JUDICIAL MEMBER Cochin, Dated: 27-05-2025 TNMM
Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT 5) Guard file By Order Asst. Registrar I.T.A.T, Cochin
