Pandyan Hotels Ltd., Racecourse, Tallakulam, Madurai v. The Deputy Commissioner Of Income Tax, Corporate Circle-2,Madurai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 16.7.2020 CORAMTHE HONOURABLE MR. JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE MRS. JUSTICE V.BHAVANI SUBBAROYANTAX CASE APPEAL NO.226 OF 2018 & CMP.NO.6584 OF 2018(heard through video conferencing) Pandyan Hotels Ltd., RaceCourse, Tallakulam, Madurai ...Appellant/Respondent Vs The Deputy Commissioner of Income Tax, Corporate Circle-2,Madurai ...Respondent/Appellant APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 16.10.2017 made in ITA.No.1020/Mds/2016on the file of the Income Tax Appellate Tribunal, Chennai ‘B’Bench for the assessment year 2012-13, against the order dated 29/01/2016 made in ITANo.0089/2015-16 on the file of the Commissioner of Income Tax(Appeals-I) Madurai for the Assessment Year 2012-2013 againstthe order dated 31/03/2015 made in P.A.Number:AABCP3656K on thefile of the Deputy Commissioner of Income Tax Corporate Circle-2, Madurai for the Assessment Year 2012-13. For Appellant : Mrs.Pushya Sitaraman, SC forMr.Arun Kurian Joseph For Respondent : Mr.M.Swaminathan, SSC assistedBy Mrs.V.Pushpa, SC &Mrs.S.Premalatha, SC Judgment was delivered by T.S.SIVAGNANAM,J We have heard Mrs.Pushya Sitaraman, learned SeniorCounsel appearing on behalf of Mr.Arun Kurian Joseph, learnedcounsel on record for the appellant - assessee andMr.M.Swaminathan, learned Senior Standing Counsel assisted byMrs.V.Pushpa, learned Standing Counsel and Mrs.R.Premalatha,learned Standing Counsel appearing for the respondent – Revenue. 2. This appeal by the Revenue under Section 260A of theIncome Tax Act, 1951 (for short, the Act) is directed againstthe order dated 16.10.2017 made in ITA.No.1020/Mds/2016 on thefile of the Income Tax Appellate Tribunal, Chennai ‘B’ Bench forthe assessment year 2012-13. 3. The appeal has been admitted on 10.4.2018 on thefollowing substantial question of law : “Whether expenditure incurred in the renovation andredecoration of rooms in a hotel would amount to capitalexpenditure or revenue expenditure ?” 4. The appellant is engaged in the business of running athree star hotel and for the assessment year in question namely2012-13, the assessee filed their return of income on 29.9.2012admitting a total income of Rs.19,06,620/- and an intimationunder Section 143(1) of the Act was issued. Subsequently, theassessment was selected for scrutiny and the assessment wascompleted under Section 143(3) of the Act by order dated31.3.2015, by which, there was a disallowance of the expenditureto the tune of Rs.1,43,37,050/- incurred towards repairs andrenovation expenses. 5. The assessee contended before the Assessing Officer thatthe expenses were incurred for repairs and renovation of 18rooms out of 57 rooms in the hotel and that there was no capitalexpenditure incurred by the assessee. It was further contendedthat there was no increase in the room capacity nor creation ofany new asset, but the expenses were incurred only to preservean existing asset and that the assessee was required to renovatethe old rooms in order to attract customers and to maintain thestandard of a three star hotel. However, the Assessing Officerdid not accept the explanation given by the assessee and treated the sum of Rs.1,51,20,800/- as capital expenditure and afterallowing depreciation at the rate of 10%, the Assessing Officeradded the balance amount of Rs.1,36,08,720/-. 5. The assessee contended before the Assessing Officer thatthe expenses were incurred for repairs and renovation of 18rooms out of 57 rooms in the hotel and that there was no capitalexpenditure incurred by the assessee. It was further contendedthat there was no increase in the room capacity nor creation ofany new asset, but the expenses were incurred only to preservean existing asset and that the assessee was required to renovatethe old rooms in order to attract customers and to maintain thestandard of a three star hotel. However, the Assessing Officerdid not accept the explanation given by the assessee and treated the sum of Rs.1,51,20,800/- as capital expenditure and afterallowing depreciation at the rate of 10%, the Assessing Officeradded the balance amount of Rs.1,36,08,720/-. 6. Aggrieved by such order, the assessee preferred an appealbefore the Commissioner of Income Tax (Appeals)-I, Madurai [forbrevity, the CIT(A)], who, by order dated 29.1.2016, allowed theassessee’s appeal primarily holding that the expenses wereincurred only to preserve the existing asset and that theassessee had to renovate the old rooms in order to attractforeign customers and to maintain the standard of a three starhotel. With regard to its enduring benefit as applied by theAssessing Officer, the CIT(A) opined that the test of enduringbenefit might fail on certain occasions, that the correct testwas to see as to whether there was creation of any new asset andthat admittedly, the assessee had not created any new asset, buthad undertaken repairs and renovation only in the existing roomsand that too, only in 18 rooms out of 57 rooms available in thehotel. 7. The Revenue carried the matter on appeal to theTribunal by contending that the Assessing Officer had correctlytreated the repairs and renovation expenses as capitalexpenditure as against the claim of the assessee as a revenueexpenditure. The Tribunal, by the impugned order, allowed theRevenue’s appeal and this is how the assessee is before thisCourt by way of this tax case appeal. 8. On a reading of the order of the Tribunal, we find thatthe Tribunal had proceeded on a different footing as if theclaim was as against current repairs. Though the Tribunalreferred to the decisions, which were relied upon by theassessee, it held that those decisions were not applicablebecause there was no finding as to the expenditure underreference answering the description ‘current repairs’ in thedecision of the Apex Court in the case of Ballimal Naval KishoreVs. CIT [reported in (1997) 224 ITR 414]. 9. When this matter was heard for admission, it appears thatthe assessee canvassed that the expenditure was erroneouslytreated to be capital expenditure and the Tribunal erred inrelying upon the decision of the Hon’ble Supreme Court in thecase of Ballimal Naval Kishore where the claim was for currentrepairs unlike the case of the assessee where they made a claimthat it was a revenue expenditure under Section 37 of the Act.For that reason, the question of law was reframed by the Hon’ble First Bench of this Court to consider as to whether theexpenditure incurred in the renovation and redecoration of roomsin a hotel would amount to capital expenditure or revenueexpenditure. 9. When this matter was heard for admission, it appears thatthe assessee canvassed that the expenditure was erroneouslytreated to be capital expenditure and the Tribunal erred inrelying upon the decision of the Hon’ble Supreme Court in thecase of Ballimal Naval Kishore where the claim was for currentrepairs unlike the case of the assessee where they made a claimthat it was a revenue expenditure under Section 37 of the Act.For that reason, the question of law was reframed by the Hon’ble First Bench of this Court to consider as to whether theexpenditure incurred in the renovation and redecoration of roomsin a hotel would amount to capital expenditure or revenueexpenditure. 10. In our considered view, the test to be applied todecide as to whether the expenditure is revenue or capitalexpenditure has been brought out in the decision of the Hon’bleApex Court in the case of Empire Jute Company Limited Vs. CIT[reported in 124 ITR 1], wherein it has been held that there maybe cases where expenditure, even if incurred for obtainingadvantage of enduring benefit, may, none-the-less, be on revenueaccount and the test of enduring benefit may break down. It waspointed out that it is not every advantage of enduring natureacquired by an assessee that brings the case within theprinciple laid down in this test. It was further held that whatis material to consider is the nature of the advantage in acommercial sense and it is only where the advantage is in thecapital field that the expenditure would be disallowable on anapplication of this test. It was also held that if the advantageconsists merely in facilitating the assessee's tradingoperations or enabling the management and conduct of theassesse's business to be carried on more efficiently or moreprofitably while leaving the fixed capital untouched, theexpenditure would be on revenue account, even though theadvantage may endure for an indefinite future. 11. The learned Senior Standing Counsel appearing forthe Revenue has relied upon the decision of the Hon’ble SupremeCourt in the case of Ballimal Naval Kishore and the decision ofthis Court in the case of CIT, Madurai Vs. Viswams [reported in(2019) 105 Taxman.com 289]. 12. This Court is of the view that there can be a nostraight jacket formula, which can be applied while deciding theissue as to whether the expenditure is in the revenue field orin the capital field and facts are very relevant to be takennote of. This would be the approach while deciding such cases. 13. Now, we may proceed to discuss the decision of thisCourt in the case of CIT Vs. Ooty Dasaprakash [reported in(1999) 237 ITR 902]. We refer to this decision because this ismore or less an identical case to that of the assessee beforeus. The Division Bench held that the expenditure was incurredsolely for repairs and modernising the hotel and replacing theexisting components of the building, furniture and fittings,Court in the case of CIT Vs. Ooty Dasaprakash [reported in(1999) 237 ITR 902]. We refer to this decision because this ismore or less an identical case to that of the assessee beforeus. The Division Bench held that the expenditure was incurredsolely for repairs and modernising the hotel and replacing theexisting components of the building, furniture and fittings, https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ with a view to create a conducive and beautiful atmosphere forthe purpose of running of a business of a hotel and it goeswithout saying that the expenditure incurred by the assessee forthe relevant assessment years in repairing and modernising thehotel and replacing the existing components of a portion of thebuilding, furniture and fittings cannot at all be stated to beof enduring in nature, in the nature of being a "capitalexpenditure"; but, definitely such an expenditure would fallunder the category of "revenue expenditure" in nature to beallowed, as a deduction underSection 37of the Income Tax Act.In the aforementioned decision, the Division Bench followed thesaid assessee’s own case viz CIT Vs. Dasaprakash [reported in(1978) 114 ITR 210 (Madras). 14. In the decision of the Karnataka High Court inthe case of CIT Vs. Mac Charles (India) Limited [reported in(2015) 233 Taxman 0177], the assessee, carrying on the businessof hotel, incurred expenses under repairs and maintenance of thehotel building. The Assessing Officer disallowed the saidexpenditure. The First Appellate Authority confirmed the saidorder and the assessee filed an appeal before the Tribunal. TheTribunal held in favour of the assessee, aggrieved over which,the Revenue preferred an appeal before the Division Bench of theKarnataka High Court. The Court, after referring to the decisionof the Hon’ble Apex Court in the case of Ballimal Naval Kishoreand the decision of the Hon’ble Apex Court in the case of CITVs. Saravana Spinning Mills (P) Ltd. [reported in (2007) 293 ITR201], held that the basic test to find out as to what wouldconstitute repairs is that the expenditure must have beenincurred to preserve and maintain an already existing asset andthe object of the expenditure must not be to bring a new assetinto existence or to obtain a new advantage. It was held thatwhen no extra flooring space or extra room capacity is added onaccount of such repairs, it cannot be said that a new asset hascome into existence and all these repairs are done to preserveand maintain an already existing asset. 15. In the decision of the Delhi High Court in thecase of Comfort Living Hotels P. Ltd. Vs. CIT [reported in(2014) 363 ITR 182], the Court applied the decision of theHon’ble Supreme Court in the case of Empire Jute Company Limitedthat an action that merely facilitates the assessee’s businessby making it more profitable, while leaving the fixed capitaluntouched, is a revenue expenditure. 16. In the decision of the Gujarat High Court inthe case of CIT Vs. CAMA Hotels Ltd. [reported in (2015) 235 https://hcservices.ecourts.gov.in/hcservices/ Taxman 0206], an identical question arose for consideration. TheCourt, after referring to the decisions in the cases of EmpireJute Company Limited, Ballimal Naval Kishore and Comfort LivingHotels P. Ltd., held that the expenditure incurred by theassessee for renovating a hotel, rooms, conference halls, etc.,was a revenue expenditure. 17. The decision of this Court referred to by thelearned Senior Standing Counsel for the Revenue in the case ofViswams is distinguishable on facts principally because thebuilding was leased out and the assessee firm therein put upfurther construction by raising the building upto five floorsand taking note of the facts therein, the case was decided infavour of the Revenue. https://hcservices.ecourts.gov.in/hcservices/ Taxman 0206], an identical question arose for consideration. TheCourt, after referring to the decisions in the cases of EmpireJute Company Limited, Ballimal Naval Kishore and Comfort LivingHotels P. Ltd., held that the expenditure incurred by theassessee for renovating a hotel, rooms, conference halls, etc.,was a revenue expenditure. 17. The decision of this Court referred to by thelearned Senior Standing Counsel for the Revenue in the case ofViswams is distinguishable on facts principally because thebuilding was leased out and the assessee firm therein put upfurther construction by raising the building upto five floorsand taking note of the facts therein, the case was decided infavour of the Revenue. 18. In the instant case, the Revenue does notdispute the fact that the number of rooms in the assessee’shotel remained at 57 and that there was no increase in thenumber of rooms and only 18 rooms out of 57 rooms were renovatedand repaired. Furthermore, the assessee specifically contendedthat the renovation and repairs neither increases their capacitynor does it empower to revise the basic room tariff because itcan be done only after considering further facts such as marketcondition remaining in Madurai City and with the concurrence ofM/s.ITC Limited, as they only have a franchisee agreement withthe assessee. 19. Further, the granite and marble used by them will notlast long and there is no guarantee and they may develop cracksand lose their shine and even become obsolete in a couple ofyears. These facts were never disputed before the AssessingOfficer or before the CIT(A). As rightly contended by thelearned counsel for the assessee, the Tribunal did not considerthe issue, but was of the opinion that it was neither the caseof the assessee nor that of the Revenue that the claim was forcurrent repairs. 20. It is submitted by the learned Senior StandingCounsel for the Revenue that the matter may be remanded to theTribunal for a fresh decision in order to take a decision as tothe nature of expenditure i.e. whether capital or revenue. 21. We find that the assessment is for the year2012-13 and the facts are not in dispute. It is only anapplication of legal principle to the given facts. Therefore, we https://hcservices.ecourts.gov.in/hcservices/ hold that there is no justification in remanding the matter tothe Tribunal or to any other Lower Authority. In the light ofthe above discussion, we hold that the expenditure incurred bythe assessee is a revenue expenditure and not a capitalexpenditure. 22. Accordingly, the tax case appeal is allowed, theimpugned order passed by the Tribunal is set aside and thesubstantial question of law framed for consideration is answeredin favour of the assessee and against the Revenue. Consequently,the order passed by the CIT(A) stands restored. No costs.Consequently, the connected CMP is closed. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Chennai ‘B’ Bench, Chennai.2.The Deputy Commissioner of Income Tax, Corporate Circle-2, Madurai. 3.The Commissioner of Income Tax (Appeals-I) Madurai.TCA.No.226 of 2018&CMP.No.6585 of 2018 vba[co]srg 25/08/2020