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Income Tax Appellate Tribunal, KOLKATA BENCH “D” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
O R D E R
PER Waseem Ahmed, Accountant Member:
- This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-12, Kolkata dated 08.07.2016. Assessment was framed by DCIT, Circle-8,Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 07.03.2013 for assessment year 2010-11. The grounds raised by the assessee per its appeal are as under:- “1. Whether of the facts and circumstances of the case Ld. CIT(A) was justified in restricting depreciation to Rs.20,191/- instead of Rs.4,39,9000/-
2. Whether on the facts and circumstances of the case Ld. CIT(A) was justified in allowing Rs.1,03,71,530/- as revenue expenditu9re instead of capital expenditure on account of renovation of room.
ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 2 3. That the petitioner craves leave to amend or alter any/all of the above grounds or introduce any additional grounds of appeal, if necessary at the time of hearing of the appeal.” Shri Soumyajit Dasgupta, Ld. Departmental Representative appeared on behalf of Revenue and Shri Soumitra Choudhury, Ld. Advocate appeared on behalf of assessee.
2. First issue raised by Revenue in this appeal is that Ld. CIT(A) erred in restricting the amount of depreciation to ₹20,191/- instead of ₹4,39,900/-.
3. Briefly stated facts are that assessee is a limited company and engaged in the hotel business. The assessee in the immediate preceding assessment year 209-10 has made the addition under the head “building” amounting to ₹1,35,69,070/- only. The AO in the AY 2009-10 worked out the undivided interest in land @ 1/3rd of the total value of the building. Thus, the AO accordingly disallowed the depreciation made by assessee @ 1/3rd pertaining to the value of land in the AY 2009-10. Thus the AO applying the same basis also disallowed the depreciation by Rs.4,39,900/- only charged on the value of building in the year under consideration and added to the total income of assessee.
4. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that it acquired commercial space measuring 3165 sq.ft. including undivided proportionate share in the land during the assessment year 2009- 10. The commercial space was acquired by it from West Bengal Housing Board. As such, West Bengal Housing Board was the owner of peace of land measuring 4.74 acres of land equivalent 206910 sq.ft. Thus, the assessee submitted that it has acquired commercial space 3165 sq.ft out of total land area of 206910 sq.ft. which comes out @ 1.53%. Accordingly, the assessee worked out the amount of depreciation pertaining to the land as under:- “Therefore value of proportionate land area shall be 1.53 percent of Rs.13679845 = Rs. 209302 Value of commercial space = Rs.13470543 Rs.13679845 In the assessment year 2010-11, Depreciation claimed on commercial space Rs.1319701 ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 3 Depreciation disallowable to the extent of Value of land of Rs.2093302 as computed Hereinabove being 1.53% of Rs.1319701 Rs. 20191 The disallowance of depreciation of Rs.439900 as made in assessment was “ not appropriate. Ld. CIT(A) after considering the submission of assessee deleted the addition made by the AO in part by observing as under:- “4.2 I have carefully considered the submissions of the case and the facts of the case. I find force in the contentions of the appellant. Undivided proportionate share of land was neither identified nor demarcated by the owner and the Developer. Commercial space of 3165 sq. ft was acquired in the 4th Floor of the superstructure. Persons who have acquired commercial space in lower/higher floor, shall have the same proportionate share of such land. Undivided proportionate share of the land only entitles the Assessee to have access/ingress in the commercial complex. Undivided proportionate share of land as commonly used in Deed of Conveyance of Flats at multistoried complex is an enabling clause to have access/ingress in the said complex. Furthermore, it is a safeguard clause to protect the interest of Flat owners, only in the event of happening of total destruction of the complex. Under such happening, the undivided interest/share of land shall standout as protection. In ordinary parlance and at normal times and circumstances, undivided share of land shall not carry any value to the flat owners. Thus I consider it fair to follow the calculation as illustrated by the appellant which is “The relation between commercial space of 3165 sq.ft. and land area of 206910 sq.ft. is 1.53% Therefore value of proportionate land area shall be 1.53 percent of Rs.13679845 = Rs. 209302 Value of commercial space = Rs.13470543 Rs.13679845 In the assessment year 2010-11, Depreciation claimed on commercial space Rs.1319701 Depreciation disallowable to the extent of Value of land of Rs.209302 as computed Hereinabove being 1.53% of Rs.1319701 Rs.20191 Hence, I direct that the disallowance of depreciation is restricted to Rs.20191/- instead of Rs.4,39,900/- as in the assessment order.” Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
5. Before us Ld. DR for the Revenue vehemently relied on the order of AO whereas Ld. AR for the assessee filed paper book which is running from 1 to 77 and reiterated the same arguments that were made before Ld. CIT(A).
ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 4 6. We have heard the rival contentions of both the parties and perused the material available on record. The assessee in the immediate proceeding financial year i.e. 2008-09. However the AO assumed that the value of the building includes undivided interest in the land @ 1/3 of the total value of the building. Therefore the depreciation claimed by the assessee on the value representing the land was inadmissible. Accordingly the AO disallowed the proportionate depreciation claimed by the assessee in the FY 2008-09. The AO for the year under consideration following the same analogy worked the depreciation of Rs.4,39,90.00 by 1/3 representing the depreciation on the value of the land embedded in building and disallowed the same. However the learned CIT-A restricted the amount of depreciation representing on the value of the land at Rs.20,191.00 only. It is undisputed fact the assessee has acquired the space in commercial building of 3165 square feet out of the total pace of 206910 square feet. Thus the relationship between the space acquired by the assessee viz a viz total area of land comes to 1.53% (3165/206910*100). Accordingly the learned CIT-A worked out the amount of depreciation representing on the value of land embedded in the value of the building by 1.53% which comes out 20691.00 only. The learned DR before us has not brought anything contrary to the finding of learned CIT-A. We also note that there was no basis for taking 1/3 value of the building as representing the cost of the land. Thus we hold that the addition has been made by the AO on his own surmise & conjuncture and without any basis, therefore liable to be deleted. In view of above we hold that the learned CIT-A has worked out the share of land of the assessee in the value of the building as discussed above correctly. Therefore we find no reasons to interfere in the order of learned CIT-A, hence, the ground of appeal filed by te Revenue is dismissed.
7. Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by the AO for ₹1,03,71,530/- on account of capital expenditure.
8. The assessee during the year has claimed an expense of ₹1,03,71,530/- on account of repair and renovation of room. The AO during the course of assessment ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 5 proceedings observed that repair and renovation of rooms expense were incurred at Port Blair were inclusive on the following:- i) flooring of marble tiles ii) POP work of ceiling iii) wood work iv) fresh furniture purchase etc. On question by the AO for treating the aforesaid expenses as capital in nature, the assessee failed to provide any evidence to substantiate its claim.
The AO also observed that assessee in earlier year has not incurred repair and renovation expense more than 30% of such expenditure. Therefore, AO treated the same as capital expenditure and allowed depreciation @ 10% on the building and accordingly remaining amount was disallowed and added to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A). the assessee before Ld. CIT(A) submitted that it is occupying of the building as tenant and paid the rent to landlord for ₹1,25,500/- per month and 10% of gross revenue. As per the agreement, the assessee was to pay all the tax such as, municipal tax, building tax, electricity charges, water tax, and all other taxes. The assessee was also under the obligation to maintain the exterior and interior at its own cost. The hotel building is located on the sea front and therefore, it was widespread damaged during Tsunami occurred in 2004. Therefore, the expenses were incurred to maintain the hotel building in working condition. 9.1 The assessee also filed details of the expenses incurred on the renovation and repair of building which is placed on pages 11 and 12 of the appellate order which is reproduced below:-
“08. For purpose of repair and renovation of building, work was entrusted upon: A King Traders, P-2, Ajaynagar, Santoshpur, Kolkata75 Rupees (1) Dismantling of RCC concretes with removal of Rubbish at shirting area, providing and making Plain cement concrete 2 ½ ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 6 To 3” trick mortar, 4” thick wall for luggage room and Passage area 1:5 cement mortar; sand cement platering 1:5 cement mortar luggage room and passage area 261621 (2) Repair and renovation of rooms 11301856 (3) Repair and renovation of lobby and restaurant 2616026 (4) Repair and renovation of ground floor corridor 54845 (5) Renovation and repair of kitchen, bakery chef office, F &B office, security office, garbage store, butchery 668174 (6) Repair and renovation of 1st floor corridor 228407 (7) Repair and renovation of 1st floor ladies & gents toilet 226512 (8) Repair and renovation of ground floor ladies & gents Toilet repair and renovation of lobby and kitchen (9) Repair & renovation of housekeeping and GM office 78735 (10) Repair and renovation of small banquet hall 212878 (11) Repair and renovation of 1st floor banquet hall 131484 (12) Niche wall, ceiling, store case repair and renovation 317193 (13) Fixing of room mirror 676733 (14) Removing of old door and re-fixing the same with necessary 213150 (15) Fitting, polishing & painting removing old shaft Door with modification of shutter, outside 78735 (16) Veneer pasting and inside painting 212606 17505477 B. M.L. Roy & Co Sanitations Pvt. Ltd. 188A Rashbehari Avenue, Kolkata-29 Supply of sanitary materials 949428 C. Indian Marble Traders: Supply of marble tiles 1544685 D 504 Chetla road, Kolkata-27 D. M.Nagrajan Post Box 632, Seashore Road, Anarkali, Haddo Post Office, Port Blair 744102 Supply carriage of loose earth including leveling and Compacting the area using roller, bitumen work door on 1251600 The pathway from the entrance to the cottages E. Others: various other works in connection with repair and Renovation of building 701775 21952965 Expenses included under the head ‘others’ are comprised of Rupees Andaman (1) DMP Nirman Pvt. Ltd. 58/63 Prince Anwar Shah Road, Kolkata-45 A. Electrical Work Low tension feeder pillar box with Hinged door supply and fixing 6304 TDDN fuse switch Unit 630A HRC fuse and feeder Pillar 440 Volt L.T supply For light points, cabling works, distribution arrangement at Panel for light load and power load. Distribution wiring, ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 7 Telephone wiring and earthing 4722195 B. Plumbing work, sanitary work, water supply net work Labour charges for fixing tiles at toilet 3116099 Saroodaya servies (2) Office No.34, A Wing, Trilok, Dr. Ambedkar Road, Bandra West, Mumbaii-400050 Kitchen Utensils 1029174 (3)SAENT India 39 Rifle Range Road, Kolkata-19 Consultancy Services in respect of electrical work 150000 (3) Various other works 879174 9896642 AMC Charges: Kolkata 2780822 Cost of material purchased for maintenance both Civil and electrical repair work 4028223 Pest control 295392 Repair of office equipments 16071 17017150 The assessee before the Learned. CIT-A claimed that the entire expense incurred on the repair and renovation of hotel building was eligible for deduction u/s. 30(a)(i) of the Act. The assessee in support of its claim also relied on the following judgments:- i) Hon'ble Bombay High Court in the case of New Shorrock Spinning and Manufacturing Co. Ltd. vs. CIT (1956) 30 ITR 338 ii) Bombay Steam Navigation Co. Pvt. Ltd. vs. CIT (1965) 56 ITR 52(SC) iii) CIT vs. ICI (India) Pvt. Ltd. (1983) 139 ITR 105, 106 (Cal) Ld. CIT(A) after considering the submissions of assessee deleted the addition made by the AO by observing as under:- “5.2 I have considered the facts of the case and the submissions of the appellant. The AO disallowed an amount of Rs.1,03,71,530/- incurred for repair and renovation of rooms treating them as capital expenditure. the judgements relied upon by the appellant have been carefully perused and I find force in their contentions Bombay High Court in the case of New Shorrock Spinning and Manufacturing Co. Ltd. Vs. CIT (1956) 30 ITR 338 held that “The simple test that must be constantly borne in mind, is that, as a result of the expenditure which is claimed as an expenditure for repairs, what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into evidence, nor, is sits object the obtaining of a new or fresh advantage. This can be the only definition of repairs because it is only by definition of repairs, that the expenditure is revenue expenditure”. The assessee has only renovated the room and other furniture in room which was damaged by the tsunami. The appellant has pointed out that due to the expenditure on repair and renovation of their hotel rooms, room sales which was ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 8 languishing at Rs.49.52 lacs in AY 2009-10 went on increasing in each succeeding year and reached Rs.600.79 lacs in AY 2016-17. This improvement in operations evidences that repair expenses were incurred to facilitate improvement in trading operations. Considering the aforesaid decisions in the case of Empire Jute Co. Ltd. (supra) and other cases relied upon by the appellant, I am of the opinion that the expenditure incurred by the assessee is in the nature of revenue expenditure. Hence the amount of R.1,03,71,530/-- disallowed is deleted.” Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
Before us Ld. DR submitted that the expenditure was incurred by assessee to restore the condition of the damaged building as evident from the expenses discussed in the assessment order. Therefore, it cannot be said that it was a routine repair and renovation work incurred by assessee and assessee. The assessee incurred such expenses in the financial year 2009-10 whereas the tsunami happened in the year 2004. He stated that such expenses were incurred after laps of five years of tsunami. Therefore, the plea taken by Ld. AR that the expenses were incurred as a result of damaged happened in tsunami in the hotel building does not hold good. On the other hand, Ld. AR reiterated the same arguments that were made before Ld. CIT(A).
We have heard the rival contentions of both the parties and perused the material available on record and the case laws cited by Ld. AR for the assessee. We have heard the rival contentions and perused the materials available on record. The assessee in the year under consideration has treated the expenses for the repairs and renovation of rooms for Rs.1,03,71,530/-as revenue in nature. However the above expenses were treated by the AO as capital in nature. Accordingly the AO disallowed the same. However the learned CIT-A reversed the order of the AO by treating the same as the revenue in nature. From the above discussions we note that the following facts have not been disputed:
1. 1. The expenses were incurred by the assessee on the maintenance of the hotels run by it in Kolkata and Port Blair.
2. The hotel property was taken by the assessee on rental basis. As per the agreement the assessee was liable to bear the cost of the repair & ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 9 maintenance on the exteriors and interiors of the property the copy of the tenancy agreements is placed on page 72-77 of the paper book.
The assessee was into the business of Hotels Industries.
There was no fixed asset coming into existence out of the expenses incurred by the assessee as discussed above.
The expenses were incurred by the assessee for its effective running of the business and to restore the building to its original conditions after destruction of TSUNAMI.
As a result of the expenses the revenue of the assessee has increased manifolds. Therefore these expenses are directly connected with the trading operations of the assessee.
The genuineness and reasonableness of the expenses have not been doubted by the lower authorities. In view of above we note that the expenses were incurred by the assessee on the rented premises. There was lot of damage to the properties as a result of tsunami. There was no fixed asset coming into existences out of such expenditure. We also note that in the similar circumstances various courts have decided the issue in favour of assessee. The Bombay High Court in the case of New Shorrock Spinning & Manufacturing Co. Ltd. reported in 30 ITR 338 has held as under: “The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of ‘repairs’ because it only by reason of this definition of repairs that the expenditure is a revenue expenditure.” Similarly we also rely on the order of this Tribunal in the case of DCIT Vs. Kalyanapur Cement Ltd. In & 1397/Kol/2011 for A.Y 2006-07 & 2007- 08 dated 14.10.2014. Te relevant extract of the order is reproduced below:- “10.We have heard rival submissions and gone through facts and circumstances of the case. The assessee has filed complete details of repair and maintenance expenses and also a certificate from Chartered Engineer dated 15.12.2008, who has certified that the expenses under the head repair and maintenance during the year ending 31.03.2007 has been procurement of worn out components and certain capital assets or group of assets. According to him, these worn out parts are in the context of capital asset where these are used and also from a small fraction of the total value of ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 10 corresponding capital asset in each case. He certified the expenses and summarized section wise as under:- ‘1. Line Stone Captive Quarry Rs. 27.15 lacs 2. Crushing Section Rs. 45.53 “ 3. Raw Mill Section Rs.224.90 “ 4. Kiln Rs. 79.89 “ 5. Coal Mill Rs. 25.10 “ 6. Clinker Grinding Section Rs, 69,24 “ 7. Slag Grinding Section Rs. 53.39 “ 8. Packing Plant Rs. 4.63 “ 9. Miscellaneous Rs. 5.64 “ Total Rs.526.46 “ Learned. Counsel for the assessee before us contended that due to unsatisfactory financial position of the company for few years in the past, it could not undertake the repair and maintenance of plant and machinery and its capacity utilisation was in the range of 37.46% against the industry average of 90. According to him to make the situation improve, the assessee company in FY 2006-07 relevant to AY 2007-08 undertook the overdue repairs and maintenance for plant and machinery and repair and replacement of internal control purpose was started. The assessee company has not increased in the rated capacity of any of the plant/equipment by virtue of this repair and maintenance. Factually, the assessee has carried out repair and maintenance, as is evident from the above discussion. In similar circumstances, Hon'ble Bombay High court in the case of CIT vs. Howgule & Co. Pvt. Ltd. (1995) 214 ITR 523 (Bom) has considered the expression ‘current’ preceding ‘repairs’ as under: “i) The amount should be paid on account of repairs. (ii) ‘Current’ repairs’ means repairs undertaken in toe normal course of user for the purpose of preservation maintenance or proper utilisation 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) The quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of machine or ship is decisive of the true nature of the expenditure. (vi) The original cost of the asset is not at all relevant of or ascertainment of the true nature of the expenditure on repairs. (vii) The replacement cost of the asset may however, at times may be used as 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 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 contradiction to that incurred on any improvement or an addition thereto [CIT v. Chowgule & Co. Pvt. Ltd (1995) 125 CGTR (Bom) 442, 448 = (1995) 214 ITR 523 (Bom). In the facts of that case, the Tribunal, on investigation of the ACIT, Cir-8(2) Kol. Vs. M/s Peerless Hotels Ltd. Page 11 nature of the repairs undertaken by the assessee, recorded a categorical finding of fact that it did not result in emergence of a new ship but amounted, in substance, to current repairs to the existing ship. The act that old parts of the ship were replaced by new pats was not relevant for determining whether the expenditure was on ‘current repairs’ or not. Therefore, the expenditure claimed by the assessee amounted to ‘current repairs’, allowable as a deduction under section 31.” Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills (P) Ltd. (2007) 7 SC 298 has held unambiguously that ‘each machine in a segment of a textile mill has an independent role to play in the mill and the output of each division is different from the other.”