Section 32 applied only on capital expenditure not on revenue for any reason

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “H”, NEW DELHI

BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER

AND

SHRI C.M. GARG, JUDICIAL MEMBER

I.T.A. No. 3225/Del/2012

A.Y. : 2009-10

United Hotels Limited,

The Ambassador Hotel,

Sujan Singh Park,

Cornwallis Road,

New Delhi – 110 003

(Appellant)

(PAN: AAACU0031C)

Vs.

Addl. Commissioner of Income Tax,

Range-18,

New Delhi

 (Respondent)

Assessee by: Sh. Rupesh Jain, Sh. Upvam Gupta, CA

Department by: S mt. Shumana Sen, Sr. D.R.

ORDER

PER SHAMIM YAHYA: AM

This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-XXI, New Delhi dated 19.4.2012 pertaining to assessment year 2009-10.

2. The grounds raised read as under:-

i) That the Ld. Commissioner of Income Tax (A) erred on facts and in law in confirming the disallowance of ` 30,07,454/- made by the Assessing Officer in respect of expenditure on repairs and maintenance of building incurred by the appellant, holding the same to be capital expenditure.

ii) That the Ld. Commissioner of Income Tax (A) erred on facts and in law in not appreciating that Explanation 1 to section 32(1) of the Act was not applicable on the facts of the case, in view of there being no creation of additional space or building capacity by the appellant by virtue of incurring of the aforesaid expenditure.

The appellant craves leave to add to, amend or vary the above grounds of appeal on or before the date of hearing.

3. In this case Assessing Officer noted that during the current assessment year assessee has incurred of ` 58,42,496/- on account of repair and maintenance of building. Further it was noticed that assessee has claimed in the head ‘Office General’ (Renovation) amounting to ` 30,07,465/-. Assessee was asked to submit the details in this regard. Assessee has submitted as under:-

“Office General (Renovation) in the amount of ` 30,07,454/-, we would inform that similar kind of renovation is a continuing process in a hotel industry. The has to be done for various reasons. The main being more foot falls and usage as compared to fabrics, upholstery, curtains etc. used in a domestic house. The other main reason being that the public areas have to be redecorated every so often to maintain the charm and to ensure that customers keep coming and to do not get bored with the same scenario.

It is exactly for this reason that a mockup room was prepared based on which other rooms in the hotel would be renovated. This expenditure amounted to ` 13,49,485/-, similarly, a Bar by the name of Insomnia was renovated on which expenditure of ` 16,57,969/- was incurred thus  aking a total of ` 30,07,454/-.”

3.1 Assessing Officer did not accept this contention. He referred to the several case laws. He held that it was found that the expenses which are providing enduring benefits and enhancing efficiency and effectiveness of hotel have been charged off to profit and loss account. Assessing Officer opined that this should have been capitalized to fixed assets. Hence, treating expenditure involved as capital expenditure, Assessing Officer disallowed the expenditure.

4. Before the Ld. Commissioner of Income Tax (A) assessee submitted as under:-

“The assessee United Hotels Ltd. is engaged in the business of operating Hotel for last more than 50 years under the name and style of 'Ambassador Hotel' from their rented premises at Sujan Singh Parkj, New Delhi. The Hotel premises have been taken on rent from Sir Sobha Singh and Co. Pvt. Ltd. and the building in which the Hotel is located is absolute antique being more than 60 years old. Something or the other in the building like electrical wiring, switches, plumbing, bath room fittings ceiling paints, polishes require maintenance, repair, renewal as an on-going process. Secondly, being a Hotel, the assessee has to keep on making changes to its rooms restaurants, lobbies in their decor as well as in the edibles on offer (i.e. the menu) to keep attracting the customers. The restaurant, bars, public places especially therefore have to be redesigned, refurbished more so often. The assessee company did exactly this kind of thing during the year under assessment by incurring expenditure of Rs. 58, 42,496/- on repair and maintenance of building. The assessee was asked to provide part details of account Head (Office General) (Renovation) amounting to Rs.30,07,454/-. The details of this account head vide page no. 444 together with explanatory letter dated 16th December, 2011 were duly filed. The same are attached herewith. The assessing officer while disallowing the expenditure of RS.30,07,454/- has quoted case law of Ballimal Nawal Kishore vs. ClT 224 ITR 414(SC) and case law of ACIT vs. E.I., Dupont India Ltd., ITAT, Del) 107 ITD 63. The above two case laws are absolutely not applicable to the facts and circumstances of the assessee and the case. In the case of Ballimal Nawal Kishore, the repairs and renewal were done on self owned premises and not on leased premises. On the other hand the assessee company has infact followed the principle enunciated in the second case law i.e. all capital expenditure incurred in lease hold premises which can be removed when leaving the premises has been capitalized. The expenditure charged to revenue account as shown in page no. 444 consists of upholstery, fabric, cutlery, rubber mats, napkins, civil work, shower mirror, room chair cloth etc. No additional asset was created, it is only the existing  assets which were renewed. As mentioned in the note filed with the assessing officer part of the expenditure was on mockup room based on which the other rooms in the Hotel were to be refurbished. The other part of the expenditure was on redoing the bar in the Hotel called Insomnia Bar.”

4.1 Furthermore, the case law relied by the Assessing Officer was distinguished and several other case in support of the case of the assessee were submitted. Assessee further submitted that ITAT

decided the similar issue in assessee’s own case for assessment year 1998-99 in favour of the assessee. Considering the above submissions, Ld. Commissioner of Income Tax (A) held as under:-

“I have perused the written submission and copy of the order passed by CIT (A) for assessment year 1998- 99 and Hon'ble ITAT in the assessee's own for assessment year 1998K99. Vide order dated 28.11.2008, in para 20 of the order, Hon'ble ITAT has held as under:-

"In this year, the CIT (Appeals) has taken a contrary view than what he has taken in the earlier year. From the reasons given aforesaid in the earlier year's appeal, we hold that expenditure which are of revenue in nature are not covered in the Explanation 1 to section 32(1) of the Act and it is only the expenditure which are of capital expenditure would be governed by this. We accordingly set aside the order of the CIT (Appeals) as well as the assessing officer and remit the matter back to the file of the assessing officer to restrict the allowance on account of capital expenditure vis-a-vis the Explanation 1 to section 32(1) only with regard to those items which are of capital nature by itself and not only the ground that they were expenditure on renovation of the building. It should be in the light of our decision in earlier year as discussed above. If the capacity of the assessee has increased or the mere construction is made by the assessee on the building making more space available to it only then that expenditure would be of capital and hit by the Explanation 1 to section 32(1) of the Act. Accordingly, the first ground taken by both the revenue and assessee in assessment year 1999-2000 is allowed for statistical purposes.”

In the light of the observation of the Hon'ble ITAT as discussed above, it is found that appellant's plea that Hon'ble ITAT has decided the issue in favour of the appellant is not so and Hon'ble lTAT has remitted back the issue to the file of AO to decide the issue in the light of Explanation 1 to Sec.32 of the ITAT Act, by making observation that issue should be decided to restrict the allowance on account of capital expenditure vis-a-vis the Explanation 1 to Sec. 32 only. The assessment year involved was 1998-99. In the assessment year 2009-10 AO has given specific opportunity and after getting reply of the assessee vide letter dated 16.12.2011 and relying on the ratio of the judgment of Hon'ble Supreme Court in the case of BaIlimal Naval Kishore vs. CIT 224 ITR (SC) and also putting reliance on various other judgments, AO has held that expenses are providing enduring benefit and thus enhancing efficiency and effectiveness of the Hotel. So, finding of the Assessing Officer is based on facts that expenses should have been capitalized to fixed assets in the books of accounts of the assessee. By doing so Assessing Officer has worked out disallowance of ` 30,07,454/-. The Ld. Ld. Authorised Representative’s reliance on this vaorus case laws has been considered and found to be not attracted on the facts of the case. In view of the above discussion ground no. 2 of the appellant deserves to be dismissed.

5. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that in this case the assessee has a hotel premises on lease. Assessee had to incur various expenditure as on-going operations. Assessee’s submission is that assessee has a hotel and it has to keep on making changes to its rooms restaurants, lobbies in their decor as well as in the edibles on offer (i.e. the menu) in attracting the customers. The restaurant, bars, public places especially therefore have to be redesigned, refurbished more so often. The expenditure is charged to revenue account. The renovation expenditure involved expenditure on items like upholstery, fabric, cutlery, rubber mats, napkins, civil work, shower mirror, room chair cloth etc. Thus, we find that no additional asset was created, it was only the existing assets which were renewed. Assessee has explained the expenditure was on mockup room based on which the other rooms in the Hotel were to be refurbished. The other part of the expenditure was on redoing the bar in the Hotel called Insomnia Bar. The detail of expenditure in this regard have been furnished as follows:-

Bar (Repairs to others)

Mockup Room No. 107 (Repairs to others)

6. On examination of the aforesaid items, it is discernible that the expenditure was of revenue in nature and cannot be said to be capital in nature. The Assessing Officer has himself admitted in the assessment order that expenditure incurred were for enhancing the efficiency of the hotel. In our considered opinion, such expenses cannot be said to be adding to the space of hotel or adding to the capacity to the hotel. In this regard, we find that assessee has relied upon the following cases laws:-

- 293 ITR 432 C.I.T. vs. Lean Logistics Ltd.

- 169 Taxman 41 – Roger Enterprise (P) Ltd. vs. C.I.T.

- 322 ITR 590 C.I.T. vs. Delhi Press Samachar P Ltd.

- 302 ITR 26 C.I.T. vs. Dr. A.M. Singhvi

- 237 ITR 902 C.I.T. vs. Ooty Dasaparkash.

The above case laws are germane and support the case of the assessee.

In 293 ITR 432 CI.T. vs. TVS Lean Logistics Ltd. In this case it was held that where the assessee did not acquire the capital asset, but had put up construction of building only for the business purpose, the entire construction cost admissible as revenue expenditure.

In Roger Enterprise (P) Ltd. vs. C.I.T.- 169 Taxmman 41, it was held that expenditure for renovation of leased premises can be revenue expenditure.

In the case of 322 ITR 590 C.I.T. vs. Delhi Press Samachar P Ltd. the Hon’ble Jurisdictional High Court was considering the case where the assessee had a press building, assessee has incurred expenditure on repairs / replacement/ replacing of dilapidated beams, pillars, walls etc. of existing press building, the Hon’ble court upheld the order of the tribunal which adjudicated that assessee has incurred expenditure only to preserve and maintain the existing assets and expenditure was not of a nature which brought into being a new assets, or created for a new addition of enduring nature. Consequently, the deletion of disallowance was upheld.

In 302 ITR 26 C.I.T. vs. Dr. A.M. Singhvi. In this case Hon’ble Rajasthan High Court was considering the case where the assessee was an advocate and kept a rental premises for office use during the relevant assessment year. He carried out certain repairs and renovation of office premises in order to see that the said premises was kept in a proper condition and professional activity were carried out effectively and smoothly. In these circumstances, it was held that the assessee has incurred expenditure in connection with smooth working of the profession and leaving the fixed assets untouched. The expenditure in question was revenue and hence, allowable un/s. 37(1) of the Act.

In 237 ITR 902, C.I.T. vs. Ooty Dasaprakash. In this case it was held that the expenditure incurred for repairs, modernizing hotel and replacing existing component of the portion of the building for furniture and fitting with a view to create the consultative and beautiful atmosphere for the purpose of running the hotel business should not be said to be of enduring nature and hence, the same was not capital expenditure.

7. We find that this tribunal in assessee’s own case in I.T.A. No. 3464/Del/2005 & ors. Vide order dated 28.11.2008 has concluded as under:-

“In this year, the CIT (Appeals) has taken a contrary view than what he has taken in the year. From the reasons given aforesaid in the earlier year's appeal, we hold that expenditure which are of revenue in nature are not covered in the Explanation 1 to section 32(1) of the Act and it is only

the expenditure which are of capital expenditure would be governed by this. We accordingly set aside the order of the CIT (Appeals) as well as the Assessing Officer and remit the matter back to the file of the Assessing Officer to restrict the allowance on account of capital expenditure vis-à-vis the Explanation 1 to section 32(1) only with regard to those items which are of capital nature by itself and not on the ground that they were expenditure on renovation of the building. It should be in the light of our decision in earlier year as discussed above. If the capacity of the assessee has increased or the mere construction is made by the assessee on the building making more space available to it only then that expenditure would be of capital and hit by the Explanation 1 to section 32(1) of the Act. Accordingly, the first ground taken by both the revenue and assessee in assessment year 1999-2000 is allowed for statistical purposes.”

8. We further find that ITAT, Delhi in the case of G4S Security Services India (P) Ltd. vs. DCIT in I.T.A. No. 4315/Del/2005 vide order dated 31.3.2008 has inter-alia held as under:-

“10. Before parting we may also discuss the arguments advanced from the side of the Revenue. The first argument taken up by the Assessing Officer is based upon the provisions of Explanation 1 to Section 32(1) of the Act. It is urged by the Revenue that the assessee was only entitled to depreciation on the capital expenditure incurred in terms of Explanation 1 to Section 32(1) and not for the deduction of the whole of the amount as a revenue expenditure. In this regard, a perusal of the said Explanation, which has been reproduced by us elsewhere in the order, reveals that it seeks to facilitate the allowance of depreciation in case any capital expenditure is incurred by an assessee in the premises which are otherwise not owned by it and is held merely as a lessee. Ostensibly, the said Explanation does not seek to determine the nature of the expenditure. It only provides that in case a capital expenditure is incurred by an assessee in the premises which are not, owned by the said assessee, still the assessee shall be eligible to claim the depreciation allowance. The Hon'ble Karnataka High Court in the case of Rex Talkies (supra) while considering a similar situation in terms of the erstwhile Section 32(1A) observed that such a provision was enacted for the benefit of a lessee to claim allowance of depreciation on construction of work put up on leased premises which in the normal course such an assessee would not have been entitled to, since such an assessee was not the owner. So however, it is clarified that it is not the same thing to state that whatever is spent by a lessee or a tenant, on the leased premises should always be recorded as a capital expenditure. In our view, the said judicial pronouncement rendered by the Hon'ble Karnataka High Court makes the case of the Revenue weak in so far as the reliance on Explanation 1 to Section 32(1) is concerned.

From the aforesaid proposition laid down by the Hon'ble High Court, an inference that can be drawn is that the nature of expenditure in question has to be examined in the light of the normal principles of law, as has been done by us in the earlier paragraphs. We may also add here that the

rationale laid down by the Hon'ble Karnataka High Court is in consonance with the objects for which the Explanation 1 to Section 32(1) or the erstwhile Section 32(1 A) was put on the Statute. For the above reasons, we therefore, are of the view that Explanation 1 to Section 32(1) does not come in the way of allowing the present assessee's claim for deduction of the impugned expenditure as a revenue expenditure.”

9. In the background of the aforesaid discussion, we hold that in this case assessee has not incurred capital expenditure. The expenditure incurred cannot be said to be adding to the space or the capacity of hotel. The expenditure was only to preserve and maintain existing assets. The Assessing Officer has himself found that the expenditure was for enhancing the efficiency and effectiveness of the hotel. Such expenditure in our considered opinion cannot be said to be capital in nature. Hence, we set aside the orders of authorities below and decide the issue in favour of the assessee.

10. In the result, the appeal filed by the Assessee stands allowed.

Order pronounced in the open court on 19/9/2012.

                                                  Sd/-                                  Sd/-

                                         [C.M. GARG]          [SHAMIM YAHYA]

                                   JUDICIAL MEMBER ACCOUNTANT MEMBER

Date 19/9/2012

“SRBHATNAGAR”

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT (A)

5. DR, ITAT

TRUE COPY

By Order,

Assistant Registrar,

ITAT, Delhi Benches