ADDLL. CIT, NEW DELHI vs. M/S RAMBAGH PALACE HOTEL PVT. LTD.,, NEW DELHI

Further, Hon'ble madras High Court in case of CIT Vs Dasprakash (supra) has held that many items, which are fixed in the wall that would present an inviting appearance for the customers assembled, are allowable as revenue expenditure. Furthermore, the Hon'ble Madras High Court in 237 ITR 902 also held that expenditure incurred for repairs and modernizing hotel and replacing the existing components of old building furniture and fittings with the object to create a conducive and beautiful atmosphere for running business of hotel is not an expenditure of enduring in nature but is only current repairs. Further Hon'ble Karnataka High Court in 233 Taxman 177 has held that expenditure incurred on replacing flooring, falls roofing, furniture, carpets and refurnishing of hotel rooms in tune with international standard without addition of extra floor space or extra room capacity is revenue in nature. Assessee was incurring expenditure from AY 2002-03 to the present assessment year on repairs and maintenance as under:- Assessment Amount of repair/ Year expenditure claimed (In Rs.) 74120326 2002-03 52409060 2003-04 67692199 2004-05 78384501 2005-06 66788797 2006-07

The expenditure in earlier year though higher or of almost of the similar level incurred are allowed to the assessee. Revenue has not shown that by incurring this expenditure the assessee has made any addition to the room capacity of the hotel. It is also not the case of the revenue that the expenditure has resulted into construction or setting up of a new restaurant or any other new facility in the Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 hotel. The increasing trend in the room tariff itself suggests that incurring such expenditure has resulted into continued occupancy and saleability salability of hotel rooms. The increased room tariff has definitely gone to swell the revenue of the hotel. In view of the several judicial pronouncements cited above as well as failure of revenue to show any increase in the capacity of the room or any new facility, merely because repairs expenditure are on higher side as per perception of the revenue, it cannot be held to be capital expenditure. In view of this we do not find any infirmity in the order of the ld CIT(A) in allowing the expenditure of Rs. 51154867/-. Ground No. 1 of the appeal of the assessee, which is also on the same point wherein, the ld CIT(A) has upheld the disallowance of Rs. 2943060/- on account of renovation of floor. Issue is now squarely covered in favour of the assessee by the decision of the Hon'ble Karnataka High Court in 233 Taxman 177 wherein, expenditure on refurnishing on hotel rooms is held to be revenue in nature. The expenditure disallowed by the ld CIT(A) were wooden purchases for renovation of floor. It does not meet the test of increase in any additional capacity in the hotel. Therefore, the order of the ld CIT(A) to the extent of disallowance confirmed of Rs. 2943060/- cannot be upheld. In view of our above finding, ground No. 1 of the appeal of the revenue is dismissed and ground No. 1 of the appeal of the assessee is allowed with a direction to allow total expenditure on repairs and maintenance incurred by the assessee of Rs. 66788797/- and withdraw the depreciation allowed of Rs. 6010990/-.

Ground No. 2 of the appeal of the revenue is against disallowance of travelling expenses of Rs. 7341050/– deleted by the Ld. CIT (A) out of the total disallowance made by the Ld. AOof Rs. 8 511050/–. Assessee company has incurred travelling expenses of Rs. 1.34 crores, which was examined by the Ld. assessing officer. Out of the total expenses of 1.34 crores the assessee would furnish only the details of 1.22 crores and therefore the details of Rs. 11.70 Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 lakhs was not at all provided by the assessee and no explanation was given before the assessing officer. Further the Ld. AOanalyzed the details of travelling expenses for past 6 years and held that foreign inland travelling expenses incurred by the directors and others as per the details submitted by the assessee company has not been approved in the board of directors meeting of each tour carried out by the directors and others. No business report was also submitted by the directors on their foreign visit. In view of this he identified a sum of Rs. 73.41 lakhs pertaining to the directors’ foreign travel, directors’ domestic travel, airport transport expenses and staff foreign tour expenses. Further a sum of Rs. 11.70 lakhs on which the details could not be given by the assessee before the assessing officer, he disallowed a sum of Rs. 8511050/-. The assessee carried the matter before the Ld. CIT(A), who vide para No. 6 of his order, relying upon the decision of the coordinate bench in assessee’s own case for assessment year 1997-98 deleted the disallowance. Therefore, revenue is in appeal before us.

The Ld. departmental representative submitted that when the assessee has not submitted the details of 11.7 Lacs before the Ld. AO there is no reason mentioned in the order of the Ld. CIT (A) for allowing this expenditure at least. With respect to other expenditure he reiterated the arguments of the Ld. AOin assessment order.

The Ld. authorized representative submitted that the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in its own case for assessment year 1997-98 and the Ld. CIT(A) has followed the same order of the coordinate bench therefore there cannot be any disallowance of travelling expenditure and hence submitted that the order of the CIT (A) may be upheld.

We have carefully considered the rival contentions. In assessee’s own case in ITA No. 279/Del/2001 (Assessment Year 1997-98) when the disallowance was made with respect to the foreign travelling expenses of its director and foreign Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 trip expenses of its Chief Executive, the coordinate bench upheld the finding given by the Ld. CIT (A) who deleted the disallowance vide para No. 4 of that decision the coordinate bench has set aside the issue back to the file of the AOto substantiate the claim of the assessee for disallowance of travelling expenses. Consequent to that order the Ld. AOpassed an order under section 143 (3) read with section 254 of the income tax act on 26/09/2006 wherein he deleted the disallowance of expenditure on account of foreign travel of Rs. 4 326940/–. In the set aside proceedings to the file of the Ld. AO vide reply dated 26/09/2006, which has been incorporated at page No. 2 of the assessment order of the Ld. assessing officer, assessee submitted complete details as directed by coordinate bench, which was examined by the Ld. assessing officer. Therefore following decision of coordinate bench in assessment year 1997-98, we also set aside this issue back to the file of the Ld. AO to decide it afresh after giving assessee an opportunity of addressing the requisite detailed and after examination to allow the claim of the assessee if found in accordance with the law and past history of the assessment of the assessee. Assessee also gets an opportunity to furnish the evidence with respect to the difference in total travelling expenditure incurred by the assessee and the details submitted before the Ld. assessing officer, which has resulted into the disallowance of Rs. 11.70 lakhs. In the result ground No. 2 of the appeal of the revenue is set aside back to the file of the Ld. AO and is partly allowed.

Ground No. 3 of the appeal of the revenue is with respect to the deletion of the addition of Rs. 23546405/- made by the Ld. AO on account of difference in income from room, restaurant and other services etc as reported to IHC and as declared in the profits and loss account ld. AO during the assessment proceedings asked the company to file the details of working of operating fees of Rs. 4.47 crores paid to IHC Ltd. The gross revenue for the purpose of computation of fees payable to IHC Ltd was taken at Rs. 498309022/- instead Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 of Rs. 474762614/- and therefore there was a difference of Rs. 23546408/- and hence the Ld. AO has made any addition to that extent as revenue receipt from undisclosed sources. The assessee challenges the same before the Ld. CIT (A) who deleted the addition after examining the details filed and reconciliation relating to the income from room, restaurant and other services as given in the audited accounts and in the computation of IHC fees. He noted that in the audited accounts, the revenue in respect of rooms and restaurants have been given on net basis as Rs. 47 476 2614/-after reducing the relatable expenses from the gross revenue. He further held that the difference is arising because of the relatable expenses. Revenue aggrieved with the order of the Ld. CIT (A) has preferred an appeal before us.

The Ld. departmental representative strongly relied upon the order of the AO and stated that when there is a difference in the gross revenue shown in the books of accounts as well as the gross revenue for the purpose of payment to IHC Ltd the addition has rightly been made by the Ld. assessing officer.

The Ld. authorized representative submitted that the Ld. CIT(A) has rightly deleted the disallowance /addition made by the Ld. assessing officer. He also took us to the chart submitted which shows the complete reconciliation with respect to the amount on which the remuneration is paid to IHC Ltd and the gross receipt shown in the books of accounts. He therefore submitted that there is no difference in the turnover shown by the company and the Ld. CIT(A) has rightly deleted the disallowance .

We have carefully considered the rival contentions and also perused the computation of the gross revenue on which the fees is paid to IHC limited as well as the gross revenue shown in the books of account. On the perusal of the above chart, we find there is no difference amount of Rs. 23546408/- as it is relatable to the various expenses. The Ld. CIT(A) has given the detailed reason for deletion of the addition made. The Ld. DR could not point out any error in Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 the chart submitted by the assessee and the reconciliation of gross receipt as per books of accounts and gross receipts for the purpose of payment of fees to IHC Ltd. The amount of Rs. 498309022/- is gross income from room sales, food and beverage sales and other services as appearing in the computation of operating fees whereas the amount shown in the audited profit and loss account is Rs. 474762614/- which is income from room sales food and beverages sales and other services after setting off of certain expenses. The difference of those expenses is identical to the sum of Rs. 23546408/- which has been added by the Ld. assessing officer. In view of this we do not find any infirmity in the order of the Ld. CIT (A) in deleting the disallowance of Rs. 23546408/- made by the Ld. AO on account of difference in reconciliation of gross receipts. In the result ground No. 3 of the appeal of the revenue is dismissed.

Ground No. 4 of the appeal of the revenue is with respect to the deletion of the addition of Rs. 9 057751/– made by the Ld. AO on account of disallowance of professional fees. During the year the assessee has incurred the legal expenses of Rs. 11441569/– the Ld. AO examined claim of the assessee with respect to nature of these expenses and justification on the basis of each case for which the fees has been paid and also the details of the cases pending in the Courts for which the legal expenses are incurred by the company. The assessee could not submit these details hence the Ld. AO disallowed a sum of Rs. 9057751/- paid as professional fees as assessee could not demonstrate what nature of services rendered by the professionals to the business of the company. The assessee aggrieved with the order of the Ld. AO preferred an appeal before the Ld. CIT (A) who deleted the above disallowance on the basis of the submission of the appellant. Revenue is aggrieved with the order of the Ld. CIT (A) and therefore in appeal before us on this ground.

The Ld. departmental representative submitted that that assessee has not submitted any detail with respect to the professional fees of Rs. 9057751/- and Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 only filed the breakup of legal expenses as an item. Ld. CIT(A) has deleted it on examination of the complete detail of professional fees along with documentary evidences. The Ld. CIT (A) has not given any opportunity to the Ld. AO for verification of these details and without obtaining the remand the addition has been deleted. He therefore submitted that the order of the Ld. CIT (A) is patently wrong.

The Ld. authorized representative submitted that the complete details of the professional fees/ charges amounting to Rs. 9057751/- along with the documentary evidences were examined which are pertaining to the services rendered for architectural interior designing repairs, company law matters services and income tax, other appellate matters. He further submitted that these are the small retainer ship fees payment made by the assessee to the various consultants. He therefore submitted that the Ld. CIT (A) has completely examined details and thereafter has allowed the claim of the assessee. He therefore submitted that there is no error in the order of the Ld. CIT (A).

We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee submitted complete details before the Ld. CIT (A) but it are not submitted before the Ld. assessing officer. It would have been appropriate had the Ld. CIT(A) would have given an opportunity to the Ld. AO for examination of the details or obtaining the remand report, it would have been allowed them, if there is no adverse inference from assessing officer. The Ld. CIT (A) has completely bypassed the above procedure. In the order of the Ld. CIT (A) he has not given any reference to what kind of evidences he has examined whether it has been examined with respect to the bills of professional services rendered or as the details was required by the AO for examination of these expenses. There is no reference of what is meant by complete details. In view of this in the interest of Justice we set aside this ground of appeal to the file of the Ld. AO with a direction to examine the Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 details filed by assessee before the Ld. CIT(A) and if they are found in order and if incurred wholly and excessively for the purposes of the business then same may be allowed. Needless to say that proper opportunity of hearing may be granted to the assessee. In the result ground No. 4 of the appeal of the revenue is allowed with above direction.

In the result appeal of the revenue in ITA number 3801/del/2009 is partly allowed for statistical purposes.

Coming to the appeal of the assessee, ground No 1 is against disallowance sustained by the Ld. CIT (A) of Rs. 2943060/- out of the repairs and maintenance expenses holding it to be capital expenditure. We have decided ground No. 1 of the appeal of the revenue where we have held that the complete repairs and maintenance expenses of Rs. 66788797/- is allowable to the assessee as revenue expenditure as there is no benefit of enduring nature accruing to the assessee. In view of this ground No. 1 of the appeal of the assessee is allowed.

Ground No. 2 of the appeal of the assessee is against disallowance of Rs. 40 Lacs of establishment expenses sustained by the Ld. CIT (A). These expenses have been incurred by the assessee and paid to IHC Ltd for which assessee could not furnish any justification before the AO hence it was disallowed. The Ld. AO further noted that as per the operating agreement filed by the assessee and as per the various clauses of that agreement these expenses are incurred beyond the operating agreement and no confirmation from IHC Ltd has been filed for the nature of these expenses. Assessee contested this issue before the Ld. CIT (A) who confirmed the finding of the assessing officer. Therefore assessee is in appeal before us.

The Ld. AR submitted that as per terms of the operating agreement all expenses are to be incurred by IHC Ltd in using its good offices and endeavors to obtain for the hotel and its guest the benefit and advantage of the worldwide Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 sales/reservation credit card systems available to other hotels managed , operated and owned by the ITC Ltd solely on the account of the appellant. In addition, for these acts services the above expenditure has been incurred by the assessee. These expenses are supported by the debit notes raised by the IHC Ltd for CRS expenses and expenses of international sales office in United Kingdom and USA incurred. Since the appellant has already filed a copy of debit notes raised by the IHC Ltd with respect to the above expenses which are on the assessee and which has been confirmed by the IHC Ltd also showing that these are the expenses for the purpose of the business of the assessee, it shall be allowable to the assessee. Therefore he submitted that Ld. AO as well as the 1st appellate authority has grossly erred in disallowing the above expenditure.

The Ld. departmental representative vehemently relied upon the order of the lower authorities and submitted that appellant could not produce necessary evidence, which could prove beyond doubt that this allocation has direct nexus with business of the assessee and therefore it is allowable.

We have carefully considered the rival contentions. We have also perused page No. 170 of the paper book showing details of the expenditure of Rs. 40 Lacs incurred as the proportionate expenses of CRS and international sales office expenses in UK and USA up to March 2006. At page No. 171 and. 172 assessee has submitted two debit notes dated 15/06/2006 raised by Indian Hotels company Ltd wherein Rs. 25 Lacs is for proportionate expenses of CRS expenses for the period up to 31/03/2006 and a sum of Rs. 15 lakhs is towards proportionate expenses of international sales office in the UK and USA for the period up to 31/03/2006 . Vide page No. 581 of the paper book assessee has also submitted the confirmation of the party with respect to the above expenditure. The Ld. CIT (A) has merely confirmed the disallowance for the reason that appellant could not produce necessary evidences, which could prove beyond any doubt that the allocation of this expenses has direct nexus with its Rambagh Palace Hotels Private Limited & 3801/Del/2009 A Y 2006-07 ITA No 1693 & 2078/Del/2013 A Y 2009-10 business. We do not find any such phraseology used under section 37 (1) of the Income Tax Act for allowing any expenditure. If the expenditure is wholly and exclusively incurred for the purpose of the business then it is allowable. The assessee has given a reason that why this expenditure are required to be incurred by the assessee for the purpose of its business. In view of this we do not find any merit in the disallowance made by the lower authorities. In the result we reverse the finding of the CIT (A) and delete the above disallowance. In the result ground No. 2 of the appeal of the assessee is allowed.

In the result appeal of the assessee for assessment year 2006-2007 in ITA number 3605/Del/2009 is allowed.

Now we come to the appeal of the parties for assessment year 2009 – 10.

The assessee has raised the following grounds of appeal in ITA No. 1693/Del/2013 for the Assessment Year 2009-10:- “1. That on the facts and in the circumstances of the case and in law, the order passed by the ld Commissioner of Income Tax (appeals) XIX, CIT(A) is bad in law.

On perusal of the above expenses we do not find that there is any increase in the capacity of the hotel or any other new facilities have been added to the existing facilities. Most of the expenditure have been incurred by the assessee for modification of existing facilities to make it more usable looking to the standard of the Hotel and the various tourists and international guests using it. In the appeal of the assessee for assessment year 2006 – 07 we have decided the identical issue and deleted the disallowance on the ground that if there is no increase in the capacity of the hotel and no new facilities have been added , merely renovating or modifying the existing facilities do not result in any benefit of enduring nature and therefore the expenditure incurred on such