Hotel Deiplomat, New Delhi vs Department Of Income Tax

Appellant by : Shri Vikram Sahai, Sr.DR. Respondent by : Shri Salil Aggarwal, Advocate and Shri Shailesh Gupta, CA.

ORDER

PER G.D. AGRAWAL, VP :

This appeal by the Revenue is directed against the order of learned CIT(A)-XXVI, New Delhi dated 21st May, 2012 for the AY 2008-

09.

2. The first ground of the Revenue's appeal reads as under:-

"On the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in deleting the addition of Rs.23,01,460/- made by the A.O. on account of capital expenditure."

3. The facts of the case are that the assessee derives income from running a hotel. For the year under consideration, the assessee incurred expenditure of `90,40,792/- on repair and maintenance and `16,49,721/- on apartment expenses. The complete details of these expenses were furnished before the Assessing Officer. The Assessing Officer found that the expenses under these heads were higher as 2 ITA-4994/Del/2012

compared to preceding years. He also referred to various bills for the expenses which was for sanitary fittings, bill of decorator which was of plaster of paris, false ceiling etc, bills for glass, door locks etc. He treated 25% of the repair and maintenance expenses and 15% of the apartment expenses as capital expenditure as under:-

(a) 25 percent of 'Repair and Maintenance' expenses claimed at Rs.9040792/- 2260200

(b) 15 percent of Apartment expenses claimed at Rs.1649721/- 247400 2507600 As against Rs.2507600/- amount is wrongly taken at 2707600

4. Accordingly, he allowed depreciation on the above capital expenditure and finally, the addition of `23,01,460/- was made. The CIT(A) deleted the addition by referring to the decision of the ITAT for AY 1996-97 wherein the similar addition made by the Assessing Officer was disallowed. He also referred to various case laws and thereafter concluded as under:-

"In view of the above discussion and since the Assessing Officer has not conducted any enquiries to test the nature of the expenditure incurred by the appellant and brought on record any material contrary to that of the appellant. I hold that the Assessing Officer has not appreciated the facts justifying the needs and necessity of the business of the appellant. Mere mention of the bills describing the items and amounts in the order is not sufficient to substantiate that the said expenditure construes capital in nature because the Assessing Officer has not drawn any nexus between the bills and the resultant asset. Therefore, the addition made by the Assessing Officer is not supported by any evidence and hence an amount of Rs.23,01,460/- is deleted and direct the Assessing Officer to pass a consequential order treating the same as revenue expenditure and at the same time to with

3 ITA-4994/Del/2012

draw the concomitant depreciation which has been allowed on the said amount."

5. After considering the facts of the case and the arguments of both the sides, we do not find any justification to interfere with the order of learned CIT(A). Admittedly, the assessee is running a hotel in which constant repair and maintenance is required. It was pointed out by the learned counsel that the building from which the hotel business is being run is an old rented premises and monthly rent of the building is only `10,000/- per month, while the total receipt of the hotel is more than `5 crores. He, therefore, pointed out that substantial expenditure is required to be incurred by the assessee year after year so as to keep the building properly maintained. He also pointed out that in last ten years, i.e., from AY 1998-99 to 2007-08, no expenditure was disallowed by the Assessing Officer, though, in most of the years, orders were passed under Section 143(3). All these facts stated by the learned counsel have not been controverted before us. The Assessing Officer has not pointed out any specific item of expenditure which was, in his opinion, capital expenditure. Genuineness of the expenditure has not been doubted by him. However, on presumption basis, he treated certain percentage of expenses to be capital expenditure. There is no logic or basis for such presumption. In view of the totality of above facts, we uphold the order of learned CIT(A) on this point and reject ground No.1 of the Revenue's appeal.

6. Ground No.2 reads as under:-

"On the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in deleting the addition of Rs.30,72,418/- made by the A.O. on account of additional compensation."

7. During the year under consideration, the assessee was required to make the payment of additional compensation on the retrenchment 4 ITA-4994/Del/2012

of staff which was amounting to `30,72,418/-. The Assessing Officer disallowed the same holding it also to be capital expenditure. The CIT(A) has discussed the issue at length and thereafter held that the additional compensation paid by the assessee was an allowable deduction. The Revenue, aggrieved with the order of learned CIT(A), is in appeal before us.

8. We have heard both the sides and perused relevant material placed before us. After considering the facts of the case and the arguments of both the sides, we do not find any justification for treating the additional compensation paid to staff as capital expenditure merely because it was a one time payment. The Assessing Officer also observed that the additional compensation was paid after the workmen ceased to be employees of the assessee firm because they were retrenched once the normal compensation was paid to them through an earlier agreement. In our opinion, the nature of additional compensation is similar to the original compensation. When the additional compensation is required to be paid, it only enhances the original compensation. Merely because by the time additional compensation is agreed to be paid by the assessee, the employees cease to be employees of the assessee can be no ground for treating additional compensation as a non-business expenditure. The genuineness of the original compensation or additional compensation is not in dispute. During the year under consideration, the assessee firm paid the compensation to the employees at `19,34,670/- as one time settlement for retrenchment of staff. However, subsequently, it entered into another memorandum of settlement with the staff and paid additional compensation of `30,72,418/-. The Assessing Officer allowed the compensation paid as per original agreement but disallowed the additional compensation. In our opinion, the nature of original compensation and the additional compensation remains the same. Both were paid in respect of 5 ITA-4994/Del/2012

retrenchment of the same staff. Merely because after the payment of original compensation a further memorandum of settlement is entered into and additional compensation is paid, it cannot be said that its nature is different than the original compensation. In view of the totality of above facts, we uphold the order of learned CIT(A) on this point and reject ground No.2 of the Revenue's appeal.

9. In the result, the appeal of the Revenue is dismissed.

Decision pronounced in the open Court on 2nd January, 2015.

Sd/- Sd/- (H.S. SIDHU) SIDHU) (G.D. AGRAWAL) AGRAWAL) JUDICIAL MEMBER VICE PRESIDENT

Dated : 02.01.2015 VK.

Copy forwarded to: -

1. Appellant : Deputy Commissioner of Income Tax, Central Circle- Circle-14, New Delhi.

2. Respondent : M/s Hotel Diplomat, 9, Sardar Patel Marg, Diplomatic Enclave, Chanakyapuri, New Delhi - 110 021.

3. CIT 4. CIT(A) 5. DR, ITAT

Assistant Registrar