Case Law Details
Asian Hotels Ltd Vs CIT (Delhi High Court)
Introduction: The Delhi High Court has recently addressed a crucial matter in the case of Asian Hotels Ltd vs. CIT, focusing on Assessment Year (AY) 1993-94. The appeal seeks to challenge the order passed by the Income Tax Appellate Tribunal (ITAT) concerning AYs 1991-92 to 1994-95.
Background: The appellant, Asian Hotels Ltd, contested the disallowance of expenses related to “renovation and refurbishment” and professional fees paid to Gherzi Eastern Ltd (GEL) for interior décor consultancy.
Key Questions of Law:
- Whether the expenses on “renovation and repair” partly capitalized in the books qualify as revenue expenditure under Section 37 of the Income Tax Act?
- Whether the payment made to GEL for consultancy and supervision of interior décor is capital expenditure?
Court’s Decision: The Assessing Officer (AO) initially disallowed Rs.3,64,11,478 incurred by the appellant for renovation and refurbishment. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted part of the disallowance but sustained Rs.11,24,124 for specific items.
The Tribunal then disallowed the entire expenditure on repairs and renovation, including expenses initially capitalized and claimed as revenue expenditure. The fees paid to GEL (Rs.2,81,525) were also disallowed.
Delhi High Court’s Directive: In line with a similar judgment for AY 1992-93, the High Court allowed deductions for both renovation expenses (Rs.3,64,11,478) and consultancy fees to GEL (Rs.2,81,525). However, it remanded the issue of Rs.10,43,12,000 (initially capitalized and claimed later) to the AO for further examination on merits.
Conclusion: The Delhi High Court’s decision provides relief to Asian Hotels Ltd, allowing deductions for renovation and consultancy fees. The court’s directive aligns with principles established in a related case, emphasizing a pragmatic approach to determining the nature of expenses. This ruling contributes to clarity regarding the tax treatment of renovation-related expenditures and consultancy fees, offering guidance for future cases.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. This appeal concerns Assessment Year (AY) 1993-94. Via the instant appeal, the appel lant/assessee seeks to assail the order dated 28.04.2006 passed by the Income Tax Appellate Tribunal [in short, “Tribunal”] in ITA 1 157/Del/97 and ITA No.1 129/Del/97.
1.1 The impugned order has been passed in the appeals concerning AY 1991-92 to AY 1994-95.
2. Via order dated 18.09.2007, a coordinate bench of this court, insofar as this appeal is concerned, framed the following substantial questions of law:
“(1) Whether the finding of the Income Tax Appellate Tribunal that the “renovation and repair” expenses, partly capitalized in the books of account of the Assessee is not the revenue expenditure admissible under Section 37 of the Income Tax Act, 1961 is correct?
(2) Whether the Income Tax Appellate Tribunal is correct in law in holding that payment made to Gherzi Eastern Ltd., an interior architect, Rs.2,81,525/- for consultancy and supervision of interior décor of the existing hotel of the Assessee under “renovation and refurbishment” is capital expenditure?”
3. have dealt with pari materia substantial questions of law while deciding ITA No.1398/2006, concerning AY 1992-93, which was treated as the lead matter with the consent of counsels for the parties.
4. We may note that the only difference that obtains in the questions of law framed in ITA No.1398/2006 concerns the quantum of fees paid to the
4.1. In the instant AY, i.e., AY 1993-94, the fees paid to Gherzi Eastern Ltd [hereafter referred to as, “GEL”] was Rs.2,81,525/-, whereas, in AY 1992-93, GEL was paid fees amounting to Rs.23,18,695/-.
5. We may note that the AO via the assessment order dated 25.03.1996 had disallowed Rs.3,64,11,478/- incurred by the appellant/assessee on account of “renovation and refurbishment”. Likewise, Rs.2,81,525/- paid by the appellant/assessee as a professional fee to GEL was also disallowed.
5.1 The Commissioner of Income Tax (Appeals) [in short, “CIT(A)”] via order dated 27.11.1996 deleted the disallowance concerning “renovation and refurbishment” amounting to Rs.3,52,87,351/-1 and sustained the disallowance amounting to Rs. 11,24,124/- which was against conference room wall-panelling and writing board unit, board room and corridor wall- panelling on the 6th and 7th floors and lounge and corridor wall-panelling.
6. Insofar as the payment of fees to GEL amounting to Rs.2,81 ,525/- was concerned, the CIT(A) sustained the disallowance made by the AO.
7. Upon the matter travelling to the Tribunal, it disallowed the entire expenditure on “repairs and renovation” amounting to Rs. 14,07,23,478/- [ Rs.3,64,1 1,478/- + Rs. 10,43,12,000/-] (which included expenses that had been initially capitalized by the appellant/assessee and were claimed for the first time before the Tribunal as revenue expenditure).
7.1 Furthermore, the Tribunal in consonance with the view taken by the AO and CIT(A), disallowed the deduction claimed by the appellant/assessee concerning Rs.2,81,525/- paid as fees to GEL.
8. Having regard to the judgment rendered in ITA No.1398/2006, the instant appeal is disposed of with the following directions, as the view taken in the said appeal will apply mutatis mutandis to the instant case as well:
9. The appellant/assessee will be entitled to claim the following deductions, as, in our opinion, they are in the nature of revenue expenditure:
(i) 3,64,11,478/- incurred on renovation, refurbishment and repairs.
(ii) 2,81 ,525/- incurred on payment of fees to GEL.
9.1 Insofar as the amount of Rs. 10,43,12,000/- is concerned, which was initially capitalized and was claimed as revenue expenditure for the first time before the Tribunal and forms part of the additional grounds raised by the assessee in its appeal preferred before the Tribunal, it would stand remanded to the AO for examination of the character and nature of the expenses incurred, having regard to the principles adverted to in ITA 1398/2006.
10. Thus, the first question of law as framed is answered in favour of the appellant/assessee and against the revenue, with the caveat that insofar as the expenses that were the subject matter of the additional grounds taken before the Tribunal, the issue concerning the same shall stand remanded to the AO for further examination on merits.
11. The second question of law is answered in favour of the appellant/assessee and against the revenue.
12. The appeal is disposed of in the aforesaid terms.
Notes:
1 This figure has been arrived at by the CIT(A) after deducting Rs.11,24,124/- from the disallowance made by the AO concerning “repairs and renovation”. The disallowance has been erroneously noted as Rs.3,64,1 1,475/- instead of Rs.3,64,1 1,478/-.