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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER आदेश आदेश आदेश
PER D. KARUNAKARA RAO, AM :
This appeal is filed by the Revenue against the order of CIT(A)-6, Pune, dated 02-09-2016 for the Assessment Year 2012-13.
Grounds raised by the Revenue read as under : “(i) Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) was justified in holding that the expenditure of Rs.61,99,546/- on account of repairs and renovations done in current year and earlier year as Revenue in nature when it is a fact that the assessee has carried out extensive renovation with the prime motive of enhancing its business prospects and attract new customers, resulting in enduring benefit to the assessee. (ii) Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) was justified in holding the expenditure of Rs.22,06,998/- on account of repairs and renovations of leased premises as Revenue in nature when it is a fact that the assessee has carried out extensive renovation with the prime motive of enhancing its business prospects and attract new customers, resulting in enduring benefit to the assessee.
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(iii) Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) was justified in following the decision of Hon’ble ITAT for A.Y. 2010-11 in assessee’s own case wherein the Hon’ble ITAT has relied on the decision of Hon’ble Delhi High Court in case of Comfort Living Hotels Pvt. Ltd. (supra) when the Hon’ble Supreme Court in the case of Ballimal Naval Kishore vs. CIT (1997) (90 Taxmann 401)(SC) has laid down that “what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, could it be said that the said repairs qualified a “current repairs” within the meaning of section 10(2)(v). It was a case of total renovation and had rightly been held by the High Court to be capital in nature.”
(iv) Without prejudice the CIT(A) erred in not appreciating the fact that the Hon’ble Supreme Court in the case of CIT Vs. Saravana Spg. Mills Ltd. (163 Taxmann 201) has clearly held that “To decide the applicable of section 31(1) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether the expenditure is ‘current repairs’. The basic 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.
(v) The appellant craves leave to add, amend or alter any of the above grounds of appeal.”
From the above, it is evident that the dispute for adjudication relates to
the issue of Capital/Revenue nature of the expenditure incurred by the
assessee on repairs and renovations of the Hotel Guest rooms/entrance
lobby, coffee shop, toilets etc. Revenue holds that such expenditure
constitutes of capital nature whereas the Assessee contends that the
same constitutes Revenue in nature as in earlier years.
Briefly stated relevant facts of the assessee are that the assessee is
a company and is engaged in the business of Hotel as well as Locomotive.
The Hotel business is located at Khandala and the Locomotive business
is located at Hyderabad. Assessee filed the return of income on
26-09-2012 declaring total income of Rs.3,70,21,960/-. In the
assessment, the expenditure claimed by the assessee on account of
repairs to building was the subject matter for scrutiny of the AO. At the
end of assessment proceedings u/s.143(3) of the Act, AO made addition
ITA No.2918/PUN/2016 The Duke Retreat Ltd.,
of Rs.84,06,544/- on account of (i) expenditure on renovation of hotel; (ii)
expenditure on renovation done in earlier year; and (iii) expenditure on
leased premises. Eventually, the AO assessed the income of the
assessee at Rs.4,14,63,350/- as against Rs.3,70,21,960/- returned by
the assessee. In the First Appellate Proceedings, the CIT(A) relying the
decision of the Tribunal in the assessee’s own case in ITA
No.1726/PUN/2013, dated 10-04-2015 deleted the additions made by
the AO. Contents of Para Nos. 4.1 to 4.3.1 of the order of CIT(A) are
relevant. Aggrieved with the order of CIT(A) the Revenue filed the present
appeal before us with the grounds referred above.
Ld. DR for the Revenue relied heavily on the order of the AO and
contended that the assessee carried out extensive repairs and renovation
with the prime motive of enhancing its business prospects and to attract
the new customers. The same resulted in creation of an asset of
enduring benefit to the assessee. Referring to the decision of the
Tribunal in assessee’s own case in the earlier assessment year, Ld. DR
submitted that the Department preferred appeal before the Hon’ble High
Court and therefore, prayed for allowing the appeal of the Revenue.
Per Contra, Ld. Counsel for the assessee submitted that the AO
made couple of disallowances (i) disallowance of expenditure of
Rs.61,99,546/- on account of repairs and renovation done to the
entrance lobby, coffee shop, toilets etc. and (ii) disallowance of
expenditure of Rs.22,06,998/- on account of repairs and renovation of
the leased premises. On this issue, Ld. Counsel brought our attention to
the decision of the Tribunal in assessee’s own case in ITA
No.1726/PUN/2013, dated 10-04-2015 for the A.Y. 2010-11 and
submitted that similar issue allowability of expenditure on account of
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repairs and renovation came up for adjudication before the Tribunal.
The Tribunal held that the same constitutes Revenue expenditure. In
that year, the expenditure was incurred in connection with some of the
leased premises. Assessee undertook these repairs and renovation work
in a phased manner over the years. Giving our attention to Para Nos. 7
to 11 of the order of Tribunal (supra), Ld. Counsel demonstrated that the
expenditure was held as Revenue by the Tribunal. Further, Ld. Counsel
also mentioned that the Revenue filed an appeal before the Hon’ble High
Court against the said decision of the Tribunal and the decision of the
Tribunal was confirmed dismissing the appeal of the Revenue (ITA
No.1196 of 2015, dated 27-11-2017). Ld. Counsel further submitted that
the Tribunal in the assessee’s own case in ITA No.2085/PUN/2014,
dated 31-05-2016 for the A.Y. 2011-12 gave relief to the assessee on the
same issue. Therefore, Ld. Counsel submitted that, following the rule of
consistency, the appeal filed by the Revenue should be dismissed.
We heard both the parties on both the issues of Revenue/Capital
nature of the repairs and renovation work. We have perused the orders
of the Revenue and the decision of the Tribunal in the earlier assessment
years. We find that the assessee runs a 3 Star Hotel at Khandala and
undertook repairs and renovation work. The said hotel started
functioning since 1990 comprising of 62 rooms. Due to weather
conditions and huge rainfall in the region, where the hotel is located,
there is a requirement of periodic repairs and renovation of the hotel
building. Similar repairs were done by the assessee in the earlier
assessment years 2010-11 and 2011-12 and the Tribunal allowed the
expenditure claimed by the assessee as Revenue in nature. We find the
Tribunal in the assessee’s own case for the A.Y. 2010-11, in para No.11
of the order, categorically held that the said expenditure since spread
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over many years falls in Revenue field and relied on the judgment of
Supreme Court in the case of Empire Jute Company Ltd. Vs. CIT 124 ITR
We also find the said decision of the Tribunal has been confirmed by
the Hon’ble Jurisdictional High Court dismissing the appeal filed by the
Department. Further, we find the Tribunal in the assessee’s own case in
ITA No.2085/PUN/2014, dated 31-05-2016 for the A.Y. 2011-12 gave
relief to the assessee following the order of Tribunal for the A.Y. 2010-11.
For the sake of completeness, we proceed to reproduce the same here as
under :
“5. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. A perusal of the documents on record show that during the period relevant to the assessment year under appeal the assessee had carried out extensive repairs and renovation of 18 deluxe rooms and 8 cottages of hotel situated at Khandala. The details and description of the renovation works carried out by the assessee during the year is as under:
............. .............. Apart from the above the assessee has incurred expenditures of Rs. 15,03,821/- in settling the bills of civil contractor for the repairs of executive rooms and Rs.23,99,852/- towards payment of professional fee to Anand & Associates & SN Joshi Consulters Pvt. Ltd.
The renovation work carried out by the assessee includes:
• Tiles are removed - removing tiles & hacking of floor Chipping of wall for removal of existing door frames Chipping & removal of existing plaster from walls • Injecting chemical emulsions for post construction anti-termite treatment both internally and externally by drilling holes • Cement concrete flooring • Waterproofing - This is essential for protection of wall & interior finish to prevent damages due to moisture absorption. • Removing & Fitting of ceramic tiles inside the toilet wall, old tiles damages. • Removal of cinder (light weight filling material i.e. coal etc) to filling sunken slab in the toilet where WC is fixed. • Remove old wooden & windows frame & fixing granite thresholds & granite slab frames. • Fixed single leaf flush door with door frame for rooms, old door frame damage due to aging. • Changes of frame & door for the duct i.e. maintained access area in contain pipe, AC conditions. • Remove old damage & cracked false ceiling & making new false ceiling. • Use POP punning to give finish to the internal wall • For climatic condition in Khandala to prevent fungus we used plastic emulsion paint.
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• fixing of the headboard • Fixing wall running and wall paneling of MDF / plywood & laminate. • Fixing pelmets on the windows & wall for concealed light fitting & for curtains • Glass partition between toilet & bedroom after removing the existing wall - in deluxe rooms • fitting of bathroom fittings where damage take place i.e. wash basin, cp fittings, showers • false-ceiling work - removal of existing false ceiling and fresh POP work • water-proofing and painting work • There is no increase in the area of the existing rooms
We observe that in the assessment year 2010-11 similar expenditure was incurred by the assessee in renovation of 33 executive rooms. The Co-ordinate Bench after considering the facts of the case and various judgments relied upon by the rival sides held as under:
"7. We have carefully considered the rival submissions. It's a trite law that the question as to whether a particular expenditure is capital or revenue in nature is a mixed question of law and facts and no universal principle is applicable in all situations. In-fact, there are a plethora of judicial rulings on the subject but a singular refrain is that each case has to be decided on the basis of its own peculiar facts. In the present case, assessee is running a hotel at Khandala and during the year under consideration, the impugned expenditure of Rs.1,44,03,077/- has been incurred by way of renovation of the existing rooms. The details of such expenditure have been enumerated in the earlier part of this order and even a cursory glance shows that no new asset has been created. In-fact, Assessing Officer also agrees to the aforesaid proposition in para 6 of the assessment order as the following discussion would show :-
"It is agreed that the assessee has not brought into existence any new asset but the assessee has itself admitted to obtain a new advantage by renovating the hotel in terms of competitive edge in the hotel industry in Khandala."
The aforesaid discussion by the Assessing Officer shows that the case setup against the assessee is that it has obtained a new advantage by renovating the hotel in terms of competitive edge in the hotel industry in Khandala. The moot question is as to whether such an advantage obtained by the assessee as a consequence of the aforesaid expenditure is in capital field or in revenue field. In order to answer the aforesaid controversy, it would also be relevant to understand the commercial reasons which weighed with the assessee to incur the impugned expenditure. Before the lower authorities, assessee made written submissions whereby the commercial expediency was sought to be demonstrated in the follows words :-
"The commercial expediency for incurring the renovation expenses have been stated earlier. Briefly, it is submitted that:
a. The hotel is a three star hotel, located in hilly area and faces very high rainfall and hence the hotel building requires very high maintenance and also requires renovation periodically due to weather and heavy rainfall.
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b. In order to retain regular customers it is necessary that the monotony of the same ambience and facility is broken the hotel necessarily has to be carry out regular updation and renovation, including rooms, conference halls and other facilities like swimming pool, restaurant etc.
c. With the passage of time, new trends emerge in the hotel industry and it becomes essential to incorporate the new trends to attract new customers and also to retain old customers.
d. As per the general practice in the hotel industry, periodic upgradation of facilities and change of ambience, as well as renovation of the infrastructure, including rooms, restaurants etc. is a regular feature.
e. Khandala being a tourist place, there is a lot of competition in this business. In order to compete with the new hotels which have fresh look and have the new and modern facilities, the existing hotels also required to change on a continuous basis.
f. The last major renovation of the hotel was undertaking in the year 2000/2001 which is a very long period by the general industry standards and considering the fact that the hotel is a three star hotel. Further, as stated above, there was a significant amount of wear and tear due to passage of time, usage and weather (rainy conditions)
g. In view of above factors, the management realized that it was high time to create a new ambience in order to retain the faithful customers and to attract new customers."
All the aforesaid aspects of commercial expediency brought out by the assessee before the lower authorities have not been disputed. The assertions made by the assessee clearly point out that what the assessee sought to achieve by incurring the expenditure was to retain its business by offering and upgrading its facilities for existing as well as new customers. In-fact, the detail of the expenditure also reveal that it has been incurred on upgrading the facilities, change of ambience and renovation of the infrastructure including rooms, restaurant, etc. In our considered opinion, in such like situation where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it would be quite appropriate to bear in mind the following observations in the case of Hallstorm's Property Ltd. vs. Federal Commissioner of Taxation, 72 CLR 634, which are as under :-
"What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any secured, employed or exhausted in the process."
The import of the aforesaid observations is that the controversy ought to be addressed in the context of the business necessity or expediency. If the out-going expenditure is targeted to retain the regular customers and also attracted new customers with upgradation of facilities and change of ambience, it would certainly qualify to be an objective of business necessity or expediency. Thus, in such as situation the expenditure can be said to be incurred in the revenue field especially in the present case when there is no
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dispute that no new asset has been created with the incurrence of the impugned expenditure. At the present stage, we may also refer to an argument taken by the Revenue to say that by incurrence of the impugned expenditure a portion of the balcony outside the rooms have been brought into the room space itself thereby increasing the capacity of the room. On this basis, it is sought to be made out that this has resulted in enhanced profit yielding capacity and therefore a portion of the impugned expenditure is capital in nature. In our considered opinion, a mere increase in the room space on account of enclosing of the balcony area would not show any increase in capacity or creation of any new asset so as to render such expenditure as a capital expenditure. In- fact, in this context, the Ld. Representative for the assessee referred to the judgement of the Hon'ble Delhi High Court in the case of Comfort Living Hotels P. Ltd. vs. CIT, (2014) 363 ITR 182 (Delhi) wherein assessee was running a hotel and it had incurred extensive repairs which resulted in increased seating capacity of the existing bar in the hotel. The Revenue had setup a case that such increased seating resulted in enhancement of profit yielding capacity so as to render the expenditure capital in nature. The Hon'ble High Court disagreed with the Revenue by noticing that it was only an increase in seating capacity of the existing bar which did not result in creation of any new asset. By following the aforesaid proposition, the Hon'ble High Court in the case of Comfort Living Hotels Pvt. Ltd. (supra), held the expenditure to be revenue in nature. In our considered opinion, the ratio of the aforesaid decision is squarely applicable in the present context and therefore a mere increase in the room size due to inclusion of balcony area would not result in creation of any new asset or increased profit yielding capacity so as to render the expenditure capital in nature.
In-fact, the benefit to the assessee accruing as a result of the impugned expenditure, though spread over a number of years, is certainly in the revenue field and therefore such an expenditure provides the assessee with an advantage in a commercial sense and therefore the expenditure has to be held to be revenue in nature, following the principles laid down by the Hon'ble Supreme Court in the case of Empire Jute Co. (supra). As a consequence, we therefore set-aside the order of the CIT(A) and direct the Assessing Officer to delete the disallowance and treat the expenditure of Rs.1,44,03,077/- as revenue in nature in terms of section 37(1) of the Act.
In the result, the appeal of the assessee is allowed."
In the assessment year under appeal, the assessee has made identical submissions before the authorities below and in para 6 of the assessment order the Assessing Officer had admitted the fact that the assessee has not brought into existence any new asset. The facts in the present case are identical to the facts decided by the Co-ordinate Bench in assessee's own case in the immediately preceding year and the ld. DR has not been able to controvert the findings of Co-ordinate Bench. In such circumstances, we find no reason to take a contrary view. Accordingly, we hold that the expenditure amounting to Rs.2,51,12,647/- incurred on repairs and renovation on the part of hotel building is revenue in nature, allowable u/s. 37(1) of the Act.”
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From the above, it is evident that the facts of the repair/renovation
are identical to the ones incurred in the past. The Tribunal decided the
issues in favour of assessee for A.Yrs. 2010-11 & 2011-12. Hon’ble High
Court also confirmed the order of the Tribunal. Considering the same,
we are of the opinion that the expenditure of Rs.84,06,544/-
(Rs.61,99,564 + Rs.22,06,998/-) incurred by the assessee on account of
repairs and renovation work is an allowable expenditure as Revenue
expenditure. We therefore uphold the order of CIT(A) being fair and
reasonable. Accordingly, the ground Nos. 1 and 2 raised by the Revenue
are dismissed. Further, the Ground Nos. 3 and 4 are also dismissed as
argumentative ones.
In the result, appeal of the Revenue is dismissed.
Order pronounced on this 19th day of September, 2018.
Sd/- Sd/-
(VIKAS AWASTHY) (D.KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 19th September, 2018. Satish आदेश क� आदेश क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to : आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / The CIT(A)-6, Pune. 3. आयकर आयु� / The Pr. CIT-5, Pune. 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “बी बी बी” / DR ‘B’, बी 5. ITAT, Pune; गाड� फाईल / Guard file. 6.
शानुसार/ BY ORDER,स आदे आदे आदेशानुसार आदे शानुसार शानुसार
// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune.