The Dukes Retreat Ltd.,, Pune vs Assessee

The Dukes Retreat Ltd., Mumbai - Pune Road, Khandala, Dist. Pune. PAN : AAACT6211F .... Appellant

Vs.

Dy. Commissioner of Income Tax, (HQ) (Admin), Pune. .... Respondent

Assessee by : Mr. C. H. Naniwadekar Department by : Mr. Rajesh Damor Date of hearing : 17-03-2015 Date of pronouncement : 10-04-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal by the assessee is directed against the order of

the Commissioner of Income Tax (Appeals)-V, Pune dated 10.07.2013 which,

in turn, has arisen from an order dated 29.01.2013 passed by the Assessing

Officer u/s 143(3) of the Income-tax Act, 1961 (in short "the Act") pertaining to

the assessment year 2010-11.

2. In this appeal, the solitary issue relates to the action of the lower

authorities in disallowing expenditure of Rs.1,44,03,077/- incurred by the

assessee on renovation or maintenance of a part of the hotel building.

3. In brief, the relevant facts are as follows. The appellant is a company

incorporated under the provisions of the Companies Act, 1956 and is, inter-

alia, engaged in the business of locomotive and running of a hotel unit located

at Khandala. The Assessing Officer noted that in relation to the hotel unit,

assessee claimed expenditure of Rs.1,58,21,689/- under the head repairs and 2 ITA No.1726/PN/2013

maintenance. The said expenditure was incurred by the assessee on

renovation of 33 executive rooms in the hotel, waterproofing of roof top and

restaurant and lobby in front of restaurant. The Assessing Officer did not

accept the plea of the assessee that such expenditure was revenue in nature.

In appeal before the CIT(A), the plea of the assessee was that the expenditure

was allowable as a revenue expenditure inasmuch as no new asset was

created by incurrence of the impugned expenditure and that the said

expenditure was otherwise also justified on the principles of commercial

expediency. The CIT(A) accepted the plea of the assessee partly inasmuch

as the expenditure incurred on waterproofing of roof top and on restaurant and

lobby in front of restaurant amounting to Rs.14,18,612/- was held to be a

revenue expenditure and the balance of Rs.1,44,03,077/- has been held to be

a capital expenditure eligible for the depreciation allowance. Not being

satisfied with the order of the CIT(A), assessee is in appeal before us.

4. In the context of the above dispute at the outset, we may refer to the

details of the impugned expenditure which have been culled out in para 7.1 of

the order of the Assessing Officer, as under :-

Particulars Revenue Expenditure on 33 executive rooms Civil and interior works for 33 rooms comprising of demolition of 65,32,362

internal wall, removal of door frame, anti termite treatment, concrete filling of floor, construction of internal walls, plastering, laying of floor tiles, daddoing, water proofing, skirting, providing and fixing single leaf flush door, sliding door for toilets, glass for bathroom windows, frame for duct, false ceiling work, repairing and replacing furniture items in the room like wardrobe, luggage rack, cabinet for mini-bar, headboard, bed-side table, trap door and mirrors for toilets.

Purchase of tiles 13,93,576 External plumbing work including pipes, valves, thermal insulation for 5,91,341 hot water pipes etc. Breaking and removal of false-ceiling, aluminum window walls, 5,40,400

bathroom flooring, sanitary fitting in bathroom, balcony railings, wager and sewage pipelines, removal of wardrobes, and luggage racks, removal of toilet walls, false ceiling and parapet wall in corridor etc. Painting work 3,89,313 Flooring in corridor in front of the existing rooms, including breaking 11,33,704 3 ITA No.1726/PN/2013

and removing existing flooring tiles and existing plastering of parapet wall, providing and laying Andhra stone flooring and skirting in corridor and staircase, construction of 600 mm wall, plastering, waterproof plastering, providing and fixing of marble skirting.

Bathroom fittings including concealed cistern flush, showers, health 12,82,461 faucets, stop cocks, basin mixer, angle valves, bottle trap, WC toilet seat with covers, wash basins Purchase of various types of steel plates and bars mainly used for 12,00,856 RCC intermediate band on brick wall, extended support to balcony enclosed, roof area outside rooms and windows MDF skirting and MDF T-profile 1,05,348 MS Sheets, polycarbonate sheets and fabrication charges for pergola 5,72,572 (small fittings outside windows and roofing to prevent rain water from coming inside) outside room windows and staircase Plastering of chajjis and pardi 1,21,975 Other miscellaneous items, work and expenses 5,39,169

5. At the time of hearing, the Ld. Representative for the assessee

explained that the hotel at Khandala was opened in 1990 comprising 62 rooms

and it is a three star hotel facility located in hilly area which faces very high

rainfall. Therefore, hotel's building requires very high maintenance and needs

renovation periodically due to weather and heavy rainfall. It was pointed out

that with the passage of time and new trends, it become essential to

incorporate new trends to attract new customers and also to retain old

customers. The Ld. Representative pointed out that last major renovation of

the hotel was undertaken in the year 2000/2001 which is a very long period

and considering that the hotel was a three star hotel facility, the building had

undergone significant wear and tear due to passage of time, weather

condition, etc.. It was felt by the management that expenditure was required

to create a new ambience for better business prospects. With this

background, during the year under consideration, assessee added 18 new

rooms and out of existing 36 rooms, 33 rooms were also renovated. The

expenditure relatable to the new 18 rooms was duly capitalized and only the

expenditure incurred on renovation of 33 rooms has been claimed as revenue

expenditure. It was, therefore, contended that there was no justification to say

that renovation undertaken for the 33 rooms have resulted in creation of any

additional capacity so as to hold such expenditure as a capital expenditure. In 4 ITA No.1726/PN/2013

the course of the hearing, the Ld. Representative vehemently argued that the

impugned expenditure is allowable as a revenue expenditure in terms of

section 37(1) of the Act on account of commercial expediency, which was

adequately brought out before the lower authorities. In this context, it has also

been highlighted that such commercial expediency was narrated in detail

before the lower authorities by way of written submissions, copy of which has

also been placed on record. In the course of hearing, the Ld. Representative

for the assessee relied upon the various decisions viz. Empire Jute Company

Ltd. vs. CIT, 124 ITR 1 (SC), Alembic Chemical Works Co. Ltd. vs. CIT, 177

ITR 377, as also the decision of the Kolkata Special Bench of the Tribunal in

the case of Peerless Security Ltd. vs. JCIT, 94 ITD 89.

6. On the other hand, the Ld. Departmental Representative appearing for

the Revenue pointed out that the impugned expenditure was related to

addition/expenses of the hotel building renovation which provided enduring

benefit to the assessee, and was to be understood as capital in nature.

7. We have carefully considered the rival submissions. It's a trite law that

the question as to whether a particular expenditure is capital or revenue in

nature is a mixed question of law and facts and no universal principle is

applicable in all situations. In-fact, there are a plethora of judicial rulings on

the subject but a singular refrain is that each case has to be decided on the

basis of its own peculiar facts. In the present case, assessee is running a

hotel at Khandala and during the year under consideration, the impugned

expenditure of Rs.1,44,03,077/- has been incurred by way of renovation of the

existing rooms. The details of such expenditure have been enumerated in the

earlier part of this order and even a cursory glance shows that no new asset

has been created. In-fact, Assessing Officer also agrees to the aforesaid 5 ITA No.1726/PN/2013

proposition in para 6 of the assessment order as the following discussion

would show :-

"It is agreed that the assessee has not brought into existence any new asset but the assessee has itself admitted to obtain a new advantage by renovating the hotel in terms of competitive edge in the hotel industry in Khandala."

8. The aforesaid discussion by the Assessing Officer shows that the case

setup against the assessee is that it has obtained a new advantage by

renovating the hotel in terms of competitive edge in the hotel industry in

Khandala. The moot question is as to whether such an advantage obtained

by the assessee as a consequence of the aforesaid expenditure is in capital

field or in revenue field. In order to answer the aforesaid controversy, it would

also be relevant to understand the commercial reasons which weighed with

the assessee to incur the impugned expenditure. Before the lower authorities,

assessee made written submissions whereby the commercial expediency was

sought to be demonstrated in the follows words :-

"The commercial expediency for incurring the renovation expenses have been stated earlier. Briefly, it is submitted that:

a. The hotel is a three star hotel, located in hilly area and faces very high rainfall and hence the hotel building requires very high maintenance and also requires renovation periodically due to weather and heavy rainfall.

b. In order to retain regular customers it is necessary that the monotony of the same ambience and facility is broken the hotel necessarily has to be carry out regular updation and renovation, including rooms, conference halls and other facilities like swimming pool, restaurant etc. c. With the passage of time, new trends emerge in the hotel industry and it becomes essential to incorporate the new trends to attract new customers and also to retain old customers.

d. As per the general practice in the hotel industry, periodic upgradation of facilities and change of ambience, as well as renovation of the infrastructure, including rooms, restaurants etc. is a regular feature. e. Khandala being a tourist place, there is a lot of competition in this business. In order to compete with the new hotels which have fresh look and have the new and modern facilities, the existing hotels also required to change on a continuous basis.

f. The last major renovation of the hotel was undertaking in the year 2000/2001 which is a very long period by the general industry 6 ITA No.1726/PN/2013

standards and considering the fact that the hotel is a three star hotel. Further, as stated above, there was a significant amount of wear and tear due to passage of time, usage and weather (rainy conditions) g. In view of above factors, the management realized that it was high time to create a new ambience in order to retain the faithful customers and to attract new customers."

9. All the aforesaid aspects of commercial expediency brought out by the

assessee before the lower authorities have not been disputed. The assertions

made by the assessee clearly point out that what the assessee sought to

achieve by incurring the expenditure was to retain its business by offering and

upgrading its facilities for existing as well as new customers. In-fact, the detail

of the expenditure also reveal that it has been incurred on upgrading the

facilities, change of ambience and renovation of the infrastructure including

rooms, restaurant, etc. In our considered opinion, in such like situation where

the question is whether expenditure incurred by an assessee is capital or

revenue expenditure, it would be quite appropriate to bear in mind the

following observations in the case of Hallstorm's Property Ltd. vs. Federal

Commissioner of Taxation, 72 CLR 634, which are as under :-

"What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any secured, employed or exhausted in the process."

10. The import of the aforesaid observations is that the controversy ought

to be addressed in the context of the business necessity or expediency. If the

out-going expenditure is targeted to retain the regular customers and also

attracted new customers with upgradation of facilities and change of

ambience, it would certainly qualify to be an objective of business necessity or

expediency. Thus, in such as situation the expenditure can be said to be

incurred in the revenue field especially in the present case when there is no

dispute that no new asset has been created with the incurrence of the

impugned expenditure. At the present stage, we may also refer to an 7 ITA No.1726/PN/2013

argument taken by the Revenue to say that by incurrence of the impugned

expenditure a portion of the balcony outside the rooms have been brought into

the room space itself thereby increasing the capacity of the room. On this

basis, it is sought to be made out that this has resulted in enhanced profit

yielding capacity and therefore a portion of the impugned expenditure is

capital in nature. In our considered opinion, a mere increase in the room

space on account of enclosing of the balcony area would not show any

increase in capacity or creation of any new asset so as to render such

expenditure as a capital expenditure. In-fact, in this context, the Ld.

Representative for the assessee referred to the judgement of the Hon'ble

Delhi High Court in the case of Comfort Living Hotels P. Ltd. vs. CIT, (2014)

363 ITR 182 (Delhi) wherein assessee was running a hotel and it had incurred

extensive repairs which resulted in increased seating capacity of the existing

bar in the hotel. The Revenue had setup a case that such increased seating

resulted in enhancement of profit yielding capacity so as to render the

expenditure capital in nature. The Hon'ble High Court disagreed with the

Revenue by noticing that it was only an increase in seating capacity of the

existing bar which did not result in creation of any new asset. By following the

aforesaid proposition, the Hon'ble High Court in the case of Comfort Living

Hotels Pvt. Ltd. (supra), held the expenditure to be revenue in nature. In our

considered opinion, the ratio of the aforesaid decision is squarely applicable in

the present context and therefore a mere increase in the room size due to

inclusion of balcony area would not result in creation of any new asset or

increased profit yielding capacity so as to render the expenditure capital in

nature.

11. In-fact, the benefit to the assessee accruing as a result of the impugned

expenditure, though spread over a number of years, is certainly in the revenue

field and therefore such an expenditure provides the assessee with an 8 ITA No.1726/PN/2013

advantage in a commercial sense and therefore the expenditure has to be

held to be revenue in nature, following the principles laid down by the Hon'ble

Supreme Court in the case of Empire Jute Co. (supra). As a consequence, we

therefore set-aside the order of the CIT(A) and direct the Assessing Officer to

delete the disallowance and treat the expenditure of Rs.1,44,03,077/- as

revenue in nature in terms of section 37(1) of the Act.

12. In the result, the appeal of the assessee is allowed.

Order pronounced on 10 th April, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 10 th April, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-V, Pune; 4) The CIT-V, Pune; 5) The DR "A" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy// Assistant Registrar I.T.A.T., Pune