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Income Tax Appellate Tribunal, BENCH ‘B’, CHENNAI
Before: SHRI SANJAY ARORA & SHRI DUVVURU RL REDDY
आदेश /ORDER
Per Sanjay Arora, AM:
This is an Appeal by the Revenue agitating the Order by the Commissioner of Income Tax (Appeals)-1, Madurai (‘CIT(A)’ for short) dated 29.01.2016, allowing the assessee’s appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (AY) 2012-13 vide the order dated 31.03.2015.
The sole issue in the instant appeal is whether the building renovation expenses, incurred by the assessee at �. 143.37 lacs, is a deductible business expenditure. The assessee company runs a 3-star hotel at Madurai, operating as 2 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. a franchisee hotel of ITC group of hotels. The hotel is housed in a five storied RCC framed building. The ground floor of the building consists of a multipurpose hall, kitchen, restaurant, bar, visitors’ lounge, reception, etc., while the offices are located at the second floor. The guest rooms, 57 in total, are at the remaining three floors. The repair and renovation expenses were carried out qua 18 of these rooms, six at each floor, as Phase-I of the exercise, to be carried out in parts, at the instance of the ITC group, with the declared object of upgrading it to international standards, so as to remain competitive as well as to meet the expectations of the public, a large segment of it’s clients being foreigners. The Assessing Officer (AO) referred the expenditure for valuation to the Valuation Officer (VO) u/s. 142A of the Act, who valued it at �. 151.21 lacs (vide valuation report (VR) dated 26.06.2014/copy on record), i.e., at a minor difference of �.7.84 lacs. Adopting the same, the AO, regarding the entire expenditure as capital, allowed depreciation thereon at the rate exigible to a building. The ld. CIT(A), in view of it being nominal – less than 10 per cent., deleted the difference, and also directed the AO to allow deduction as a revenue expenditure; the operating part of his order reading as under: ‘3.3.1 The question is whether the expenses incurred by the appellant can be capitalised for the purpose of Income tax Act. As seen from the valuation report, the appellant has not disturbed the super structure and basic structure of the building. The appellant has carried out repairs and renovation in 6 rooms each at 2nd, 3rd, 4th floor. The nature of work carried out by the appellant have been explained in detail by the valuation officer in his valuation report. A perusal of the same shows the appellant has changed the flooring and replaced worn out doors and renovated the bathrooms and by incurring the above expenditure, the appellant did not increase the room capacity or create any new asset. The expenses have been incurred only to preserve the existing asset and the appellant had to renovate the old rooms in order to attract foreign customers and to maintain the standard of 3 star hotels and the appellant did not even increase the status of the hotel from 3 star to 4 star or 5 star. The AO held that the appellant derived benefit of enduring nature but this is not the sole test to be applied. The test of enduring benefit may fail on certain occasions and the correct test to see whether there is creation of any new asset. Admittedly, the appellant has not created any new asset 3 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. and has undertaken repairs and renovation only in the existing rooms that too only in 18 rooms out of 57 rooms available in the hotel. In the circumstances, it cannot be said that the appellant incurred capital expenditure and, consequently, the AO is not justified in treating it as capital expenses. The addition made by the AO is deleted.’ (emphasis, ours) Aggrieved, the Revenue is in appeal against the treatment of the expenditure as a revenue expenditure.
We have heard the parties, and perused the material on record. We may, to begin with, delineate the law in the matter as explained by the higher courts of law. In New Shorrock Spinning & Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom), it was 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 on 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 is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the legislature has permitted under s. 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." (emphasis, supplied)
The afore-stated test was endorsed and applied by the Hon'ble Apex Court in Ballimal Naval Kishore v. CIT [1997] 224 ITR 414 (SC), reproducing it, noting that the same had in fact been followed by the majority of the High Courts in India, and was, rather, in agreement with the view expressed earlier as well, as in CIT v. Darbhanga Sugar Co. Ltd. [1956] 29 ITR 21 (Patna) and CIT v. Sri Rama Sugar Mills Ltd. [1952] 21 ITR 191 (Mad). The Hon'ble Court had, once again, an occasion to consider the issue qua repair to plant and machinery, 4 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. admissible u/s. 31, which is pari materia to s. 30, allowing deduction, inter alia, on account of repairs to a building, in CIT v. Saravana Spinning Mills (P.) Ltd. [2007] 293 ITR 201 (SC). It, affirming its decision in Ballimal Naval Kishore (supra), held as under: ‘(i)…… (ii) that to decide the applicability of section 31(i) the test was not whether the expenditure was revenue or capital in nature, but whether the expenditure was "current repairs". The basic test was to find out whether expenditure was incurred to "preserve and maintain" an already existing asset, and the expenditure must not be to bring a new asset into existence or to obtain a new advantage. (iii) That each machine including the ring frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement thereof would not come within the meaning of "current repairs". The replacement of the ring frame constituted substitution of an old asset by a new asset and, therefore, the expenditure incurred by the assessee did not fall within the meaning of “current repairs" in section 31(i).
Under section 31(i) the deduction admissible is only for current repairs. The afore, the question as to whether the expenditure incurred by the assessee conceptually is the revenue or capital in nature is not relevant for deciding question, whether such expenditure comes within the etymological meaning of the expression ‘current repairs’. In other words, even if the expenditure is revenue in nature, it may not fall in the connotation of “current repairs”.’ It distinguished its’ earlier decision in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC), explaining that if ‘current repairs’ was to be understood as including replacement, s. 31(i) will become completely redundant and absurdity will creep in because repair implies existence of a part of a machine which has malfunctioned, which is impossible in case of such replacement (pg. 209). The same stood affirmed in CIT v. Sri Mangayarkarasi Mills (P.) Ltd. [2009] 315 ITR 114 (SC), explaining that replacement of an old machine part with a new one would constitute the bringing into existence of a new asset in place of an old one and not repair of the old existing machine (pg. 122). Further, consideration of the definition of an ‘asset’ or ‘block of assets’ was not required to be considered to decide as to whether the expenditure 5 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. incurred by the assessee is a deductible expenditure or not, further suggesting that the expenditure could be regarded as an addition to the existing assets for claim of depreciation, as in fact treated in the accounts (pg. 124). As shall be apparent from the foregoing, there has been no deviation in the law as laid down in Ballimal Naval Kishore (supra), which continuous to hold the field over the years. In the facts of that case, extensive repairs to the structure of a building, a theatre, was held as not deductible; the Hon'ble Court explaining the scope of the term ‘current repairs’ u/s. 10(2)(v) (of the 1922 Act), which expression occurs both in s. 30(a)(ii) as well as s. 31 of the Act, with the Hon'ble Court drawing attention to the fact that the expression used is ‘current repairs’ and not ‘repairs’. The scope of the term having been well clarified, it reduces the debate/controversy of revenue versus capital expenditure to largely it being current repairs or not, as explained in Saravana Spinning Mills (P.) Ltd. (supra). At this stage, it may be noted that the test adopted and applied in New Shorrock Spinning & Manufacturing Co. Ltd. (supra), and which has since found adoption by the Hon'ble Apex Court time and again, was qua ‘repairs’ and not qua ‘current repairs’, so that, irrespective of the language, the applicable test is essentially the same. Further, s. 37(1), the residuary clause allowing revenue expenditure, incurred wholly and exclusively for business purposes, specifically excludes expenditure of the nature described in sections 30 to 36, as also noted in Saravana Spinning Mills (P.) Ltd. (supra). Section 37(1), in any case, prohibits capital expenditure. The true test that therefore emerges, where an expenditure is claimed as repairs, to find whether the same falls within the scope of the provision, is whether, as a result of the said expenditure, what is being really done is to preserve and maintain an already existing asset or whether the object of such expenditure was to bring a new asset into existence or to obtain a new or fresh advantage. If it is the former, it is repair. If it is the latter, it should be 6 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. considered as a replacement or renewal. Further, as explained in C.R.Corera & Bros. v. CIT [1963] 49 ITR 188 (Mad), the nature of the expenditure claimed on repairs is to be viewed as a whole and in proper perspective in order to determine whether such repairs have only had the effect of repairing the machinery to its original condition or whether they have introduced any additional advantages or features which have improved its income earning capacity, that is to say, brought a new asset into existence. Needless to add, the new asset or advantage would be a capital asset, eligible for claim of depreciation on being put-to-use, which would be so even in case of a building on a lease hold land (Explanation 1 below s. 32(1)(ii)). In Sri Rama Sugar Mills Ltd. (supra), it was held that the test whether a thing is repair or not is to see whether the act actually done is one which in substance is a replacement of defective parts or a replacement of the entirety or a substantial part of the subject matter. This, then, provides the framework whereunder the expenditure being claimed deductible in the computation of business income u/s. 28 is to be examined. Coming to the facts of the case, the VR dated 26.06.2014, which covers Phase-I of the work, incurred during the period 07/2011 to 03/2013, i.e., carried over 21 months, profiles the expenditure at Annexure 1 thereto. Its perusal reveals it to consist of 58 items under the head ‘Renovation Works’ (for �. 140.79 lacs), and another �. 3.29 lacs under Section II, titled ‘Dismantling Items’, while Section III is qua supervision charges, at �. 7.13 lacs, aggregating thus to �. 151.21 lacs. It may be noted that the difference in value, as claimed to be incurred and as evaluated by the VO, corresponds with the cost estimated for supervision expenses. Excluding the supervision cost, the VO’s estimation of the cost is thus in complete agreement with that claimed, validating both, further endorsing the reliability of the said report. With regard to the nature of the ‘repairs’ carried out, every single aspect of the civil work as well as electrical 7 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. and sanitary fittings, i.e., other than the foundation and the existing superstructure, i.e., the RCC framework and masonary (brick) work, was dismantled and redone, with of course new materials. No wonder the same works to �. 8 lacs per room. This, it is further noted, is on other than the expenditure on refurbishing the rooms, incurring expenditure on furniture, television and cable, carpets, air conditioning, telephone, electrical lamps, curtains, linen, etc., for which another substantial sum has been expended, working to �. 3 to 4 lacs per room (para 2.5 of the VR). Now, it could not possibly be that all the rooms suddenly developed the need for repairs and refurbishing, which is, in any case, clearly a case of substantial replacement, i.e., of all their components – a total renovation. The expenditure is certainly and, in fact admittedly, notwithstanding that a part of a particular room or a particular room may require some replacement, incurred not for preservation and maintenance, but carrying improvement to all the rooms – in phases, with a view to upgrade the hotel at par with international standards. There is in fact no claim as to preservation or maintenance at any stage. It is a clear case of renovation; of substantial (if not total) replacement, so that it is not ‘repairs’ as explained in Sri Rama Sugar Mills Ltd. (supra). The account head ‘building renovation expenses’, under which the expenditure stands booked in accounts, thus, correctly describes the same, i.e., its nature. Phase-II of the modernization program, as planned, followed Phase-I, being in fact under progress at the time of inspection (for valuation) on 08.01.2014. The same may not have translated into higher revenue or yield, as sought to be emphasized by the ld. counsel during hearing, which depends on a variety of factors. Retaining the franchise; retaining or improving the market share (which would accrue only in future as the expenditure itself continues up to March, 2013 – the repair being followed by refurbishing); upgradation/improvement in facilities, are, in our view, definite advantages in the capital field. It is clear that but for the expenditure, 8 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. the assessee would not be able to retain either the franchise or a competitive edge in the market, which it wishes or intends to, and the expenditure is incurred with a long term perspective, objective and goal. It rather advances the argument of the expenditure being incurred at the behest of the ITC group, to contend of the same being ‘repairs’ or revenue in nature. The argument is misconceived in-as-much as both the revenue and capital expenditure are incurred only in response to business decisions, so that that by itself would not determine the nature of the expenditure. It is then said that in-as-much as the floor area of the room/s remains the same, i.e., has not increased, no new asset has come into existence. As explained in Sri Mangayarkarasi Mills (P.) Ltd. (supra), deductibility of expenditure on repairs does not necessarily entail negating the bringing into existence of a new asset. We have in fact already found as a fact the impugned expenditure to result in an advantage in the capital field, which scotches this argument, which is in fact without merit. This is as an asset as both quantitative and qualitative aspects/attributes to it. Two machines with the same production capacity may vary significantly in cost and/or price in view of the quality of their output. As common experience bears out, two pieces of land of the same area and, further, even same dimensions, cost (valued by market) differently depending upon their location, even if subject to the same construction regulations. Could one possibly compare a room (of a particular size) in a downtown lodge with a room (of the same size) in an upmarket hotel, much less in a star hotel? Why, two rooms of the same size in the same hotel may be priced differently depending on their furnishing; locational advantage, as (say) sea facing, etc., or even if priced equally, attract different occupancy rates, indicating being differently valued assets of the business. As explained in C.R.Corera & Bros. (supra), introduction of additional features may result in bringing a new asset or advantage into existence. In fact, to even so suggest, i.e., that no new advantage has come into existence, places a serious question on the 9 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. wisdom (or the business purpose – being not for preservation or maintenance) of incurring the expenditure. It is in fact contradictory in-as-much as it is admittedly incurred to upgrade the accommodation facilities to international standards, so that it is, by implication, presently, i.e., prior to incurring the expenditure, not. Both the parties have relied on case law by the tribunal and the Hon'ble High Courts. We have, as would be apparent, relied on decisions by the Apex Court laying down the law in the matter, as well as by the said Court and the Hon'ble jurisdictional High Court applying the same in different fact settings, to decide the question arising in the present case, based on our factual findings, i.e., of the impugned expenditure as not answering the definitive test laid down for the purpose and, in fact, representing an improvement to the existing asset. We, accordingly, do not consider it necessary to distinguish individually the case law furnished, each of which we have though perused. For instance, in CIT v. Ooty Dasaprakash [1999] 237 ITR 902 (Mad), being by the Hon'ble jurisdictional High Court, there is, with respect, no finding as to the expenditure under reference answering the description of ‘current repairs’ as laid down in Ballimal Naval Kishore (supra) (which, as afore-noted, is the same as for repairs, as expounded in New Shorrock Spg. & Mfg. Co. Ltd. (supra)) or even to the earlier precedents by the Hon'ble jurisdictional High Court referred to in this order. It is, it may be appreciated, only the ratio decendi or the principle of law laid down which is binding. There is further no gainsaying that the subsequent decisions by the Hon’ble Apex Court, referred to in this order, have affirmed the decision in Ballimal Naval Kishore (supra) as well as further dilated on the law in the matter. As clarified in Saravana Spinning Mills (P.) Ltd. (supra), causing a paradigm shift, that the issue to be considered is from the stand-point of the deductibility of the expenditure incurred in terms of the relevant provision and 10 ITA No.1020/Mds/2016 (AY 2012-13) Dy. CIT v. Pandyan Hotels Ltd. not as capital versus revenue. The said decision would thus be of little assistance to the assessee. We, therefore, for the reasons aforementioned, set aside the impugned order on this ground, and restore that by the AO. We decide accordingly.
In the result, the assessee’s appeal is dismissed. Order pronounced on October 16, 2017 at Chennai.