Expenditure incurred by assessee such as painting of the hotel, replacement of floor tiles, glazing works etc. are nothing but periodical expenditure which a hotel has to necessarily incur for its upkeep and cannot be termed as capital expenditure.

1. This appeal at the instance of the assessee is directed against the order of the CIT(A), Thrissur dated 09/08/2019. The relevant assessment year is 2011-12.

2. There is a delay of 27 days in filing this appeal. The assessee has filed a petition for condonation of delay accompanied by an affidavit of the Managing Director of the assessee-company stating the reasons for the delay in filing the appeal.

2.1 I have perused the reasons stated in the affidavit of the M.D. of the assessee-company for not filing the appeal on time. The delay in filing the appeal by 27 days cannot be attributable to any latches on the part of the assessee. Hence, I condone the delay of 27 days in filing the appeal and proceed to dispose off the appeal on merits.

3. The solitary issue that is raised in this appeal is whether the CIT(A) is justified in confirming the action of the Assessing Officer in treating the sum of Rs.60,25,240/- as capital expenditure.

4. Briefly stated, the facts of the case are as follows:

The assessee is a private limited company running a 3 star bar attached hotel. For the assessment year 2011-12, the return of income was filed on 29/09/2011 claiming a loss of Rs.19,86,712/-. The assessment was taken up for scrutiny by issuance of notice u/s. 143(2) of the I.T. Act on 28/09/2012. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had incurred expenses under “repairs and maintenance to building” amounting to Rs.60,25,240/-. Notice was issued to assessee seeking its explanation as to why the said expenditure should not be treated as capital expenditure. The assessee filed objections vide letter dated 27/11/2013 which reads as follows:

"Our hotel had been classified as a three star hotel by the Department of Tourism,.... With effect from 12.04.2006 and this classification was valid for 5 years. As per the condition of the issue of this three star classification, we had to apply for re-classification of our hotel after completion of four years time which was during the year, 2010-11. When we applied for re-classification during 2010-11, the entire hotel had to be renovated. The entire building, including sanitary, electrical, flooring, aluminium cladding work, painting, interior furnishing had to be renovated. Entire furniture and furnishing had to be refurnished.

The entire hotel had to look like a new one during the visit of the committee for revaluation of allotting three star classification. For executing all the work, we had incurred Rs.60,25,240/. The Tourism Department also awarded three star rating for us from 12.04.2011 to 11.04.2016"

4.1 The Assessing Officer rejected the objections raised by the assessee and disallowed the sum of Rs.60,25,240/- by treating it as capital expenditure. The relevant finding of the Assessing Officer reads as follows: Hence what transpires from assessee's statement is that the expenditure that was booked under Repairs and Maintenance- Bldg is nothing but the cost incurred in obtaining Three Star certification. By incurring this expenditure the assessee had made sure that the value of the asset does not diminish from a three star hotel to an ordinary one, which otherwise would have, had the assessee not renovate the hotel in due time. Thus by incurring this expense, assessee has given an enduring benefit to the asset by another five years. This is nothing but a capital expenditure as this renovation expenses has brought enduring benefit to the company in the form of three star certification issued by the Tourism Department, by virtue of which it shall enjoy the advantage for in future years. Reliance is placed on

1. Ballimmal Naval Kishore vs. CIT (224 ITR 414)(SC)

2. Bony Rubber Co, (P.) Ltd. v. Commissioner of Income-tax

Therefore, this is treated as capital expenditure and disallowed u/s. 37(1) in the assessment Disallowance:Rs.60,25,240/-“

5. Aggrieved by the order of the Assessing Officer in treating Rs.65,25,240/- as capital expenditure, the assessee preferred appeal to the first appellate authority. The CIT(A) confirmed the order of the Assessing Officer. The relevant finding of the CIT(A) reads as follows:

6. I have considered the submissions of appellant. The appellant is in the business of running a hotel having 3 star classification. As per appellant's own submissions it has to renew application every 5 years and for this purpose it incurred Rs. 60,25,240/- during the year The repair work was completed during the month of March 2011. As per appellant these expenses were incurred in repair of existing building to keep it fit to get the renewal of 3 star classification. Due to repair, there was no increase in the income or decrease in the expenditure. The appellant did not get any enduring benefit. The gross receipts did not increase. The appellant relied upon ITAT Delhi decision in case of United Hotels. (ITA No.3225/Del/2012)

7. Whether an expenditure is in the nature of capital or revenue is largely a question of facts. Nor there can be any binding precedent to decide if any expenditure is in the nature of repair and maintenance is Capital or Revenue, What has to be seen is if the party got any enduring benefit or not.

In the case relied upon by the appellant the expenditure was incurred on the leasehold premises and it was observed that no new asset was created.

8. In the case before undersigned the appellant has furnished the details of repair and maintenance and from these details it can be seen that the major expenditure is on material for glazing work (Rs. 12.22 lakhs), material for furniture and furnishings (Rs. 13.31 lakhs), material for flooring tiles (Rs. 8.75 lakhs), painting material (Rs. 2.19 lakhs), aluminium material (Rs. 2.19 lakhs) apart from labour expenses on painting (Rs. 4.06 lakhs), glazing (Rs. 3.9 lakhs) etc. The nature of these expenses clearly show that the expenditure is not a routine renovation expenditure but an expenditure towards creating assets in the form of furniture and furnishings, new floor, new tiles etc. Moreover premises are owned by the appellant itself. The facts of the case cited by appellant are quite different in which the expenditure consisted of fabric, cutlery, rubber mats civil work, shower mirror etc.

9. The appellant submitted that the expenditure towards repair and maintenance of building in financial year 2007-08 is Rs. 6.24 lakhs. Expenditure in financial year 2008-09 is Rs. 5.88 lakhs and in financial year 2009-10 it is Rs.1.85 lakhs. Thus it can be seen that routine repair is a miniscule amount when compared to expenditure incurred by appellant in the relevant assessment year. The nature of expenses leave no doubt that it was incurred in order to get enduring benefit in the nature of reclassification of hotel and creation of new assets and assets substantially improved from previous one.

10. In view of the above facts and circumstances, I hold that the expenditure Rs. 60,25,240/- on repair and maintenance as capital in nature and order of Assessing Officer is thereby upheld.

11. In result, appeal is dismissed.”

6. Aggrieved by the order of the CIT(A),, the assessee has preferred this appeal before the Tribunal. The grounds raised read as follows:

1. The appellate order of the CIT(A), Thrissur in ITA 149/TCR/CIT(A)/V/2013-14 dated 09.08.2019 for the assessment year 2011-12 is opposed to law, facts and circumstances of the case.

2. The learned CIT(A) has erred in confirming the addition of Rs.60,25,240/- treating it as Capital Expenditure as against the claim of the appellant that the same is Revenue expenditure.

3. The ld. First Appellate Authority has gone wrong in confirming the addition relying on the judgment o the Hon. Supreme Court in the case of Ballimal Naval Kishore & Another vs. CIT reported in (1997) 224 ITR 414 where ginning factory was purchased and converted into a Cinema Theatre for exhibiting cinema.

4. The Ld. ClT(A) ought to have examined the break-up of the expenses of Rs. 60,25,239/-incurred for repairs and maintenance as listed below and found that they are all Revenue Expenditure.

Labour Aluminum 37,400

Carpenter 2,22,435

General 2,39,083

Glazing work 3,90,000

Gypsum work 51,900

Painting 4,06,300

Steel Work 55,000

Tile and Mason work 2,10,645

Loading & unloading renovation 4,708

Material Aluminum work 2,19,202

Bricks 2,502

Glazing work 12,22,855

Gypsum work 51,424

Painting 2,19,259

Flooring tiles 8,74,695

Furniture and Furnishings 13,31,053

Materials others 4,75,135

Transportation incurred for renovation work 11,643 60,25,239

5. The ld. CIT(A) has failed to appreciate the decision of the Hon. Madras High Court (DB). in the case of C1T (Central) Madras v Dasaprakash reported in (1978) 114 1TR 211 wherein it was held that such items of expenditure as in the case of the appellant are of Revenue Nature. Copies of the two judgments may be permitted to be submitted at the time of hearing.

6. The ld. CIT(A) should have noticed the fact that the building tax levied by the Trichur Corporation before and after the renovation work is one and the same and there was no increase in such levy, indicating the fact that there is no new capital asset came into existence after the impugned renovation.

For these and such other grounds that may be urged at the time of hearing it is prayed that, the entire sum of Rs. 60,25,240/- may kindly be allowed as Revenue Expenditure.

6.1 The Ld. AR has filed a paper book enclosing details of the expenses claimed as revenue expenditure amounting to Rs.60,25,240/-. The assessee has filed a brief written submission reiterating the submissions made before the Income Tax authorities.

6.2 The Ld. DR apart from supporting the orders of passed by the Income Tax authorities has relied on the judgment of the Hon’ble Delhi High Court in the case of Bharat Gears Limited vs. CIT in ITA No.14/2005, 1600 & 1670/2019 dated 30/06/2011 and the order of the Cochin Bench of the Tribunal in the case of DCIT vs. Indus Motor Company Pvt. Ltd. in ITA Nos. 212, 213 & 214/Coch/2014 dated 25/07/2014.

7. I have heard the rival submissions and perused the record. The assessee is running a 3 star hotel. The assessee is also having a bar. Three Star classification was originally granted to the assessee in the year 2006. The Three Star classification which was granted in the year 2006, was to be renewed every five years. During the relevant assessment year, the assessee had to renew the classification and for this purpose the assessee had incurred repairs of Rs.60,25,240/-. The assessee claimed expenditure under the head ‘repairs and maintenance to building”. The Assessing Officer treated the same as capital expenditure. However, on perusal of the record, it is not clear whether the said amount disallowed by the Assessing Officer was capitalised and depreciation was granted on the same.

7.1 Concise Oxford Dictionary of Current English by Fowler & Fowler explains the meaning of “to repair” to mean as to restore (buildings, machines, garments, tissues, strength, etc.) to good condition, renovate, mend by replacing or refixing parts or compensating loss or exhaustion. Lexicon Webster Dictionary, 1978, (Vol II, page 812) defines a “repair” to mean as follows:

“To restore to a sound or good state after decay, injury, dilapidation or partial destruction; to make, amends for, as for an injury by an equivalent; to give indemnity for, as a building in good or bad repair.”

7.2 The distinction between repair and reconstruction is quite narrow and the meaning attributable to the word “repairs” depends upon the facts and circumstances of each case. The test of an improvement or an advantage is not strictly germane or conclusive. The object of every repair is to improve the condition or the efficiency which has become lost on account of the user, and so there is necessarily an improvement or betterment. In CIT vs. Mahalakshmi Textile Mills Ltd.(1967) 66 ITR 710 (SC) the roller stands of textile machinery were worn out and replaced with parts, manufactured by a different company said to be better than the older type because the older type was not available. It was held by the Hon’ble Apex Court that this consideration alone could not be said to have brought into existence a new asset or enduring advantage to the assessee’s business and that the expenditure was allowable as deduction. It was further held by the Hon’ble Supreme Court that the fact that the benefit of repairs extends beyond the year of expenditure would not make the expenditure capital expenditure. The concept of ‘current repairs’ has been explained by the Hon’ble Bombay High Court in the case of CIT vs. Chowgule & Co. Pvt. Ltd. (214 ITR 523). The High Court has spelt out the meaning of current repairs in following words:

“(i) The amount should be paid on account of current repairs.

(ii) “Current repairs” means repairs undertaken in the normal course of user for the purpose of preservation, maintenance or proper utilization or for restoring it to its original condition.

(iii) “Current repairs” do not mean only petty repairs or repairs necessitated by wear and tear during the particular year.

(iv) Such repairs should not bring into existence nor obtain a new or different advantage.

(v) Neither the quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of the machine or ship, is decisive of the true nature of the expenditure.

(vi) The original cost of the asset is not at all relevant for ascertainment of the true nature of the expenditure on repairs.

(vii) The replacement cost of the asset may, however, at times be used as an indicator of the true character of the expenditure. If the expenditure on repairs added to the written down value or disposal value exceeds the replacement cost of the asset, a presumption is possible that it is not a revenue expenditure but expenditure of capital nature. Such a presumption, of course, would be rebuttable.

(viii) The expression “current” preceding “repairs” appears to have been used by the Legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradistinction to that incurred on any improvement or an addition thereto.”

7.3 Where the cost of repairs is found not allowable either u/s. 30(a)(i) or under section 30(a)(ii) and section 31(i), the same may still be considered allowable u/s. 37. The above proposition has been held so by the Hon’ble Apex Court in the case of CIT vs. Kalyanji Mavji & Co. (122 ITR 49). Under section 37(1), any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ”Profits and gains of business or profession”. In other words, expenditure on current repairs to buildings, machinery, plant and furniture used for the purposes of the business is generally covered by sections 30 and 31 of the I.T. Act. In respect of types of repairs that do not fall under the above description, a deduction can still be allowed u/s. 37 of the I.T. Act if all the requirements for deduction under the said section are fulfilled. The expenses incurred by the assessee towards repairs and whether it is allowable as revenue expenditure or not, is a pure question of fact.

7.4 In the instant case, the repair works were completed in the month of March, 2011. The assessee has enclosed details of expenditure incurred for repairs in the paper book filed by the assessee. The details of all the bills and relevant vouchers of the expenditure are enclosed in the paper book filed by the assessee The major portion of the expenditure are detailed below:

1. Glazing work Rs.12,22,855

2. Flooring tiles Rs. 8,74,695

3. Furniture and Furnishings Rs.13,31,053

4. Materials others Rs. 4,75,135

Total Rs.39,03,738

Apart from the above expenditure, the assessee had also incurred painting expenditure for a sum of Rs.4,06,300/- and Rs.2,19,259/-. From the bills and vouchers, it is clear that the expenses are incurred for repair and maintenance of the existing building to keep it fit to get renewal of the three star classification. The assessee was already having Three Star facility from the year 2006 and the same was to be renewed for a period of five years. In order to continue the same business in the same way, the assessee had to incur these expenses. By no stretch of imagination can it be said that painting and other incidental expenses are capital expenses. In a Hotel industry huge expenditure has to be incurred with a view to keep the place fit and beautiful, so that guests can enjoy good atmosphere and ambience of the place. Without good ambience and atmosphere, it would not be possible to attract customers for running the hotel business carried on by the assessee. In this case though the expenses incurred cannot be allowed as deduction as current repairs certainly expenses would not be a capital expenditure and all conditions being satisfied u/s. 37 of the I.T. Act, expenses are to be allowed under the said section. The expenses incurred in a hotel industry may be current repairs which expenses are incurred on yearly basis and expenditure incurred on periodical basis. As mentioned earlier, assessee’s hotel was already having three star facility from the year 2006 and for renewal of three star facility, the assessee had to incur the impugned expenses on periodical basis. On basis of these expenses incurred, the assessee did not derive a new asset and there was no increase in the total rooms nor there was an increase in total area of the hotel. The expenditure incurred by assessee such as painting of the hotel, replacement of floor tiles, glazing works etc. are nothing but periodical expenditure which a hotel has to necessarily incur for its upkeep and cannot be termed as capital expenditure.

7.5 The judgment of the Apex Court in the case of Ballimal Naval Kishore and Another vs. CIT (224 ITR 414) relied on by the Assessing Officer is not applicable to the facts of the case. The assessee in the case considered by the Apex Court purchased ginning factory, ran it as such for over five years and then converted into a cinema theatre and exhibited films. The expenses incurred for converting the building into a cinema theatre was claimed by the assessee as revenue expenditure. It was held by the Hon’ble Court that it cannot be allowed as a revenue expenditure since it was capital in nature.

7.6 The order of the Cochin Bench of the Tribunal in the case of DCIT vs. Indus Motor Company Pvt. Ltd. (supra) relied on by the Ld. DR is distinguishable on facts. In the said order of the Tribunal, it was held by referring Explanation 1 to section 32(1) of the I.T. Act, the construction carried out in the leased premises would result in enduring benefit and in such cases, the expenditure is to be capitalized and depreciation should be allowed on the same.

7.7 The judgment of the Hon’ble Delhi High Court in the case of M/s. Bharat Gears Limited vs. CIT (supra) relied on by the learned DR, is also distinguishable on facts. In the said case, the Hon’ble Delhi High Court confirmed the order of the Tribunal in view of the fact that the impugned expenditure had resulted in bringing into existence a new machinery and therefore, the expenditure incurred was held to be a capital expenditure.

7.8 The following judicial pronouncements are in favour of the assessee:

i) The Hon’ble Madras High Court in the case of CIT(Central), Madras vs. Dasaprakasha reported in 114 ITR 210 had held that periodical expenditure incurred with a view to beautify the premises is not a capital expenditure. The relevant findings of the Hon’ble Court reads as follows:

“These items of expenditure were incurred with a view to beautify the premises obviously with a view to keep the place fit for the purpose for which persons assembled in the place, namely, for taking food and other edibles, as, without the proper atmosphere, it would not be possible to attract necessary customers for running the hotel business carried on by the assessee. The expenses cannot be said to be of an enduring nature as the items for which they were used would be of no use with reference to any other place and they cannot also be removed and used. They are just fixed in the walls so that they will present an inviting appearance to the customers assembled there. Accordingly the Tribunal was right in its conclusion that the expenses were allowable as a deduction u/s. 37 of the Act”.

ii) The Hon’ble Karnataka High Court in the case of CIT vs. Rex Talkies (148 ITR 560) has held that expenditure incurred to run its business more efficiently or more profitable without touching the fixed asset/capital is an allowable revenue expenditure. The Hon’ble High Court held as follows:

“That from the nature of the expenditure that the assessee had to incur towards effecting repairs to the ceiling and repairs and polishing of the furniture, etc., it was clear that the assessee who was running cinema shows in the theatre as a tenant, had to preserve and maintain the theatre in a fit condition and make it more attractive and comfortable. What was spent by the assessee was only to run his business more efficiently or more profitably leaving the fixed assets untouched. Therefore, the amount spent on repairs and renovation was allowable as revenue expenditure. Section 32(1A) of the I.T. Act, 1961, is a special provision enacted for the benefit of lessees providing for depreciation on the structure or work put up by them in the leasehold premises which, in the normal course, they are not entitled to, since they are not the owners. However, it cannot be stated that whatever is spent by the lessees or tenants should always be regarded as a capital expenditure.”

iii) The Hon’ble Madras High Court in the case of CIT vs. Ooty Dasaprakash (237 ITR 902), affirming the decision of the Tribunal, had held that the expenditure incurred solely for repairs and modernizing the hotel and replacing the existing components of the building, furniture and fittings, with a view to create a conducive and beautiful atmosphere for the purpose of running the business of a hotel was an allowable deduction. It was further held by the Hon’ble Court that the expenditure incurred was not of an enduring nature and was allowable as revenue expenditure under section 37 of the Act.

iv) The Hon’ble Rajasthan High Court in the case of CIT vs. Lake Palace Hotels and Motels P. Ltd. reported in 258 ITR 562 had held that the expenditure incurred on refurnishing/modernizing a hotel is not a capital expenditure. It was held by the Hon’ble High Court as follows:

“We have scanned through the cases referred to by learned Counsel for the Department as well as for the assessee. Section 37 of the Income-tax Act provides for deduction of any expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purposes of the business or profession. But the expression “capital expenditure” is not defined in the Act and the words employed under section 37(1) “in the nature of capital expenditure” is, therefore, closely akin to the concept of securing something, tangible or intangible property, or corporeal or incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise. To put it differently, ordinarily, “capital” means as an asset which has an element of permanency about it and which is capable of being a source of income and “capital expenditure” must, therefore, generally mean an acquisition of an asset and the asset must be intended to be of lasting nature; while income or revenue expenses are generally running expenses incurred in earning profit or expenses incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return.”:

8. For the aforesaid reasons and the judicial pronouncements cited supra, I hold that the assessee is entitled to deduction of the sum of Rs.60,25,240/- u/s. 37(1) of the I.T. Act. It is ordered accordingly.

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

Pronounced in the open court on 18-02-2020.

sd/-

(GEORGE GEORGE K.)

JUDICIAL MEMBER