Asian Hotels Ltd Vs CIT (Delhi High Court)
Delhi High Court held that the renovation and refurbishment of the rooms, including washrooms and other facilities in the hotel which only improves efficiency of source of profit/income are revenue expenditure.
Facts- The appellant/assessee is in the business of running a five-star hotel named Hyatt Regency. In and about 1990, when nearly 6 years had passed since the hotel went into commercial production, the appellant/assessee embarked on repairing, renovating, and refurbishing its hotel.
For the accomplishment of the task at hand, the appellant/assessee had appointed GEL as a consultant. The appellant/assessee spent in and about Rs. 847,91,000 towards renovation, refurbishment, and repairs of its hotel, out of which Rs. 600,84,000 was capitalized, while the remaining amount was claimed as revenue expenditure under the heading “repair and maintenance”. The appellant/assessee paid GEL Rs. 23,18,695 during this period.
AO disallowed the expenditures claimed under the heads “repair and maintenance” and “payment to GEL”. CIT(A) deleted, substantially, the disallowance made on account of “repair and maintenance”.
The assessee carried the matter to CIT (A). CIT (A) deleted the disallowance made on account of “repair and maintenance”. The deletion ordered by the CIT (A) was to the extent of Rs. 2,44,00,352. However, the CIT(A) disallowed expenditure amounting to Rs.3,08,703/- incurred on pressurisation of lift shafts, which, according to him, had resulted in a benefit of enduring nature. CIT(A) also sustained the disallowance ordered by the AO concerning Rs.23,18,695/- paid by the appellant/assessee to GEL. This resulted in the appellant/assessee and the respondent/revenue preferring appeals with the Tribunal.
The Tribunal, via the impugned order, disallowed the relief granted by the CIT(A) pertaining to the deletion of disallowance ordered by the AO amounting to Rs.2,44,00,352/- concerning expenditure made towards “repair and maintenance”. Besides this, the Tribunal also rejected the plea advanced on behalf of the appellant/assessee that Rs.600,84,000/-, capitalised in its accounts books, should be treated as revenue expenditure.
Being aggrieved, the present writ is filed by the assessee.
Conclusion- Held that the renovation and refurbishment of the rooms, including washrooms and other facilities in the hotel, only improved, if at all, the efficiency of the source of profit or income and hence, in our opinion, the expenses incurred for that purpose could not be categorised as capital expenditure. We are inclined to sustain the view taken by the CIT(A) that Rs.2,44,00,352/- spent on renovation, refurbishment and repairs had to be treated as revenue expenditure. The contrary view taken by the Tribunal cannot be sustained and, hence, is overruled.
In our opinion, the fact that the appellant/assessee had capitalised the expenditure, which, in law, it could claim as revenue expenditure, would not be determinative of what should be the correct conclusion in the matter. It is well-established that the manner in which the expense/income is reflected in the books of accounts of the appellant/assessee or in some cases omitted, is not determinative of its true nature, although it may provide a clue. The safest and the surest way to arrive at the true nature of the expense/income in issue is by having regard to the provisions enunciated either in the statute and/or the principles enunciated by the courts.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The above-captioned appeal concerns Assessment Year (AY) 1992- 93. Via the instant appeal, the appellant/assessee seeks to assail the order dated 28.04.2006 passed by the Income Tax Appellate Tribunal [hereafter referred to as “Tribunal”].
1.1 The impugned order concerns not only AY 1992-93 but is also common to AY 1991-92 [ITA No.1394/2006], AY 1993-94 [ITA No.1397/2006] and AY 1994-95 [ITA No.1396/2006].
1.2. The Tribunal has followed the impugned order while passing orders dated 09.02.2007 [concerning AY 1995-96, impugned in ITA 844/2007] and 31.05.2007 [concerning AY 1996-97, impugned in ITA 1342/2007].
1.3. Apart from the appeals mentioned above, ITA 486/2023 [which also pertains to the appellant/assessee], impugns the order of the Tribunal dated 15.09.2006 concerning AY 1997-98.
2. Insofar as the above-captioned appeal is concerned, i.e., ITA No.1398/2006, the following questions of law were framed by the Court via order dated 18.09.2007:
“(1) Whether the finding of the Income Tax Appellate Tribunal that the “renovation and repair” expenses, partly capitalised in the books of account of the Assessee, is not 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.23,18,695/- for consultancy and supervision of interior décor of the existing hotel of the Assessee under “renovation and refurbishment” is capital expenditure?”
2.1. The first question of law, as extracted above, arises in all appeals1 except ITA No.1342/2007.
2.2. Likewise, the second question of law arises in all appeals2 except ITA No.486/2007 and ITA No.1342/2007. The only difference insofar as second question of law is concerned, pertains to the amounts paid to Gherzi Eastern Ltd. [in short, “GEL”], an architect-consultant appointed by the appellant/assessee.
3. Therefore, for convenience, we would advert to the facts that obtain in ITA No.1398/2006 to adjudicate the common questions of law arising in the
Backdrop:
4. The appellant/assessee is in the business of running a five-star hotel named Hyatt Regency [hereafter referred to as “hotel”], which is located in Delhi.
4.1 In and about 1990, when nearly six (6) years had passed since the hotel went into commercial production, the appellant/assessee embarked on repairing, renovating and refurbishing its hotel.
5. For the accomplishment of the tasks at hand, as noticed above, the appellant/assessee had appointed GEL as a consultant via an agreement dated 06.11.1990.
6. In Financial Year (FY) 1991-92 [AY 1992-93], the appellant/assessee spent in and about Rs.847,91,000/- towards renovation, refurbishment and repairs of its hotel, out of which Rs.600,84,000/- was capitalised, while the remaining amount was claimed as revenue expenditure under the head “repair and maintenance”. The appellant/assessee paid GEL Rs.23,18,695/- during this period.
7. The AO, via assessment order dated 13.03.1995, among other things, disallowed the expenditures claimed under the heads “repair and maintenance” and “payment to GEL”.
8. The appellant/assessee, being aggrieved, carried the matter to CIT(A). Via order dated 09.11.1995, CIT(A) deleted, substantially, the disallowance made on account of “repair and maintenance”. The deletion ordered by the CIT(A) was to the extent of Rs.2,44,00,352/-. However, the CIT(A) disallowed expenditure amounting to Rs.3,08,703/- incurred on pressurisation of lift shafts, which, according to him, had resulted in a benefit of enduring nature.
8.1 Furthermore, the CIT(A) also sustained the disallowance ordered by the AO concerning Rs.23,18,695/- paid by the appellant/assessee to GEL.
9. This resulted in the appellant/assessee and the respondent/revenue preferring appeals with the Tribunal.
10. The respondent’s/revenue’s appeal before the Tribunal was, thus, confined to the disallowance of the addition amounting to Rs.2,44,00,352/-, ordered by the CIT(A), with regard to “repair and maintenance”. On the other hand, the appellant/assessee enlarged the scope of its appeal by not only agitating the disallowance of payments made to GEL and the expenditure incurred on pressurisation of lift shafts but also claimed, for the first time, amounts expended on renovation, which were capitalised in its books of accounts. The amounts capitalised previously that were claimed for the first time before the Tribunal as revenue expenditure was, as noticed above, Rs. 600,84,000/-.
10.1 The record discloses that the appellant/assessee had moved an application for being permitted to plead additional grounds concerning the expenditure which, according to it, had been erroneously capitalised in its books of accounts, although, it was in the nature of revenue expenditure. Notably, this issue has arisen not only in the AY under consideration, i.e., AY 1992-93, but also in AY 1993-94 and AY 1994-95.
10.2 Evidently, the additional ground concerning capitalised expenditure, which the appellant/assessee wanted to be treated as revenue expenditure, was admitted by the Bench of the Tribunal, which took up the appeal concerning AY 1992-93 via order dated 08.03.2002.
10.3. However, the respondent/revenue, it appears, filed a miscellaneous application for recall of the order admitting the additional ground. The assertion made in the miscellaneous application was that a mistake apparent from the record had occurred, as the admission of the additional ground was pivoted on legal issues, whereas it would require an investigation of facts by the AO.
10.4. The miscellaneous application, however preferred by the respondent/revenue, was dismissed via order dated 22.06.2004 on the ground that no inquiry or investigation concerning facts was required to be made for adjudicating the additional grounds.
Against this backdrop, the Tribunal disposed of the cross-appeals filed for AY 1992-93 and other AYs, i.e., AY 1993-94 and AY 1994-95. Qua the remaining AY [i.e., AY 1991-92], only the appellant/assessee had preferred appeal from the order passed by the CIT(A).
The Tribunal, via the impugned order, disallowed the relief granted by the CIT(A) pertaining to the deletion of disallowance ordered by the AO amounting to Rs.2,44,00,352/- concerning expenditure made towards “repair and maintenance”.
12.1 Besides this, the Tribunal also rejected the plea advanced on behalf of the appellant/assessee that Rs.600,84,000/-, capitalised in its accounts books, should be treated as revenue expenditure.
13. In reaching its conclusion, the Tribunal provided, broadly, the following rationale:
(i) Firstly, the renovation and refurbishment has been carried out over several years.
(ii) Secondly, for conceptualising, undertaking and supervising the renovation and refurbishment of the hotel, GEL had been paid a substantial amount by the appellant/assessee. All told, the amount paid over the AYs in issue was in the vicinity of Rs.1 crore.
(iii) Third, the total expenditure incurred in the AYs mentioned above was 35 crores, surpassing the original cost incurred by the appellant/assessee for setting up the hotel before the commencement of its business operations.
(iv)Fourth, this was not a case involving “accumulated repairs”, as the appellant/assessee had been running a super-deluxe hotel for several years.
(v) Fifth, the appellant/assessee, in its annual audited accounts, has treated a significant part of the deduction claimed as capital expenditure; an aspect which cannot be ignored. In this context, it is concluded that in AY 1991-92 to AY 1994-95 and subsequent AYs, the appellant/assessee has drawn a distinction between “routine repairs” and monies expended on renovation and refurbishment. It was emphasised that the expenditure made on renovation and refurbishment has been further segregated by the appellant/assessee into revenue and capital expenditure not only in the books of accounts but also in the course of assessment proceedings before the AO and CIT(A). It is only for the first time before the Tribunal that a large portion of the capitalised expenditure is claimed as revenue expenditure.
(vi) Sixth, the expenditure incurred during each of the AYs, which culminated in an assessment order, would take care of the “special needs” of running a five-star deluxe hotel. However, the expenditure incurred on renovation and refurbishment is “generically different”. The renovation and refurbishment expenditure is not an expense that a five-star deluxe hotel incurs as a “normal incidence” of its business. The expenditure on renovation and refurbishment is a special kind of expenditure motivated by an ambition to place the hotel in a “different league”. This aspect emerges upon perusal of the director’s report of the appellant/assessee concerning FY 1991-92. Per the director’s report, the appellant/assessee had undertaken a “comprehensive renovation project of the entire property”. The director’s report provides the object behind the expenditure incurred by the appellant/assessee which was that after renovation, the hotel would attain the number one position in the country and bring into existence a “New Hyatt”.
(vii) Seventh, having regard to the kind of business the appellant/assessee was carrying on, the area covered by the building alone would not matter. What would also have to be considered would be the quality of construction, the building layout, the décor and ambience and other functionalities. The fact that the hotel did not have a single room added to it overlooks the hike in room tariff and the increase in occupancy.
(viii) Eighth, the appellant/assessee had failed to provide comparative details to establish that there was no significant improvement in the profit-making structure after it had carried out renovation and refurbishment.
(ix) Nineth, since fees paid to GEL is inextricably linked to the overall work concerning renovation and refurbishment, which has been treated as capital expenditure, the expense incurred on this account by the appellant/assessee would have to be treated as capital expenditure.
(x) Tenth, the CIT(A) allowed a substantial portion of the expenses incurred on renovation and refurbishment by overlooking that the AO had allowed huge expenditure claimed towards routine repairs and replacements in each of the AYs in issue. The expenditure claimed on renovation and refurbishment, allowed by the CIT(A), was not independent of expenses claimed towards repairs, replacement and renewals but was an integral part of the overall object of creating a “New Hyatt”. The CIT(A) lost sight of this aspect of the matter. The courts in the country have yet to accept that luxury renovation of property not borne from a need but springing from the owner’s fancy is revenue expenditure.
14. It is in this background that the appellant/assessee has preferred the instant appeal, i.e., ITA No.1398/2006 and connected appeals against the impugned order dated 28.04.2006 passed by the Tribunal.
Submissions of Counsels:
15. On behalf of the appellant/assessee, arguments were advanced by Mr Tarun Gulati, Senior Advocate, while Mr Zoheb Hossain, Senior Standing Counsel, put forth submissions on behalf of the respondent/revenue.
16. The submissions of Mr Tarun Gulati can be broadly paraphrased as follows:
(i) The appellant/assessee provided a detailed breakdown of the expenditure incurred towards renovation, refurbishment and repairs, which included the expenses that were part of the additional claims made for the first time before the Tribunal. The expenditure incurred neither resulted in acquiring a new asset nor an advantage of enduring nature.
(ii) The appellant/assessee had only replaced worn-out and old doors, tiles, hinges and other accessories. Besides this, the appellant/assessee had also incurred expenditure on repairing damaged roofs, walls, ceilings, air ducts attached to the air-conditioners, lights, grills and flush valves. These expenses were incurred to repair, replace and refurbish the existing utilities to provide efficiency and add to the profitable functionality of the appellant’s/assessee’s hospitality business.
(iii) Importantly, the expenditure incurred by the appellant/assessee was to maintain and preserve the capital assets embedded in its hotel premises. The exercise was motivated by business interest to keep its competitive edge in the hospitality sector.
(iv) Replacement and repair of items referred to above were undertaken only to restore the hotel to its original state of efficiency.
(v) The Tribunal has not found that any new asset was created and/or acquired due to the exercise carried out by the appellant/assessee. No finding is returned by any of the other authorities concerning this aspect of the matter.
(vi) The AO has drawn a false and erroneous distinction by segregating the repairs into ordinary and luxury repairs or repairs, which are incurred based on the choice of the appellant/assessee. The law does not draw any distinction between ordinary and luxury repairs.
(vii) The repairs undertaken by the appell ant/assessee required the statutory authorities to take a holistic view. They could not have treated each room, washroom, lounge, carpet, door, and hinge as independent units or The categorisation of any expenditure as revenue or capital should also bear in mind the premises and the business in which the expense has been incurred.
(viii) The respondent/revenue has issued Circular No.69 dated 27.11.1951, which inter alia, provides that after the initial installation of fluorescent lights, the replacement of the same should be treated as revenue expenditure.The respondent/revenue is bound by its circulars concerning the treatment of expenditure. [See KP Verghese v. Income Tax Officer (1981) 4 SCC 173 AIR 1981 SC 1992 and UCO Bank v CIT (1999) 4 SCC 599].
(ix) It is well-established that the expression provided in Section 37 of the Act for the “purposes of the business” includes expenditure incurred for the preservation and protection of assets and property. [See CIT v. Malayalam Plantations, AIR 1964 SC 1722].
(x) The statutory authorities have wrongly applied the test of enduring benefit to categorise the expenses incurred by the appellant/assessee as capital expenditure. [See Empire Jute Co. Ltd. V. CIT, (1980) 4 SCC 25]
(xi) The statutory authorities have failed to appreciate the correct ratio of the judgment of the Supreme Court rendered in Ballimal Naval Kishore v. CIT, (1997) 224 ITR 414 SC. In Ballimal’s case, expenses were incurred to convert a ginning factory into a cinema theatre. In contrast, in the instant case, the appellant/assessee has incurred expenditure on repair, renovation and refurbishment of the existing hotel. The distinction in this behalf has been noticed by the Bombay High Court in PCIT, Panaji v. Goa Tourism Development Ltd., (2019) 261 Taxman 500 (Bombay). For the same reasons, the judgment in New Shorrock Spg. & Mfg would not be applicable in the instant case as no new asset has been created.
(xii) Lastly, the money expended by the appellant/assessee towards the consultancy fee paid to GEL is revenue expenditure. Since the expenditure incurred on renovation, refurbishment, and repairs is on the revenue account, the consultancy fee paid to GEL should also be treated as such.
17. Mr Zoheb Hossain, while refuting the submissions made on behalf of the appel lant/assessee, primarily relied upon the impugned order passed by the Tribunal. In rebuttal, Mr Zoheb Hossain made the following broad submissions:
(i) The appellant/assessee for the period captured by the AYs in issue had incurred an expenditure which was much more than the cost that was incurred by it to bring the hotel property into existence before the commencement of its business operations, an aspect exemplified in the director’s report for FY 1991-92. The report categorically alluded to the fact that comprehensive renovation had taken place to bring into existence a “New Hyatt”. The appellant/assessee had, thus, in the guise of repair work, claimed a deduction on expenditure incurred to replace equipment used in the hotel premises.
(ii) The expenses incurred by the appellant/assessee were not aligned with the object of maintaining and preserving existing assets or even restoring them to their original condition. The appellant/assessee had itself distinguished between routine repairs and monies expended on renovation and refurbishment. In this context, the AO allowed everyday expenditure amounting to Rs.4.34 crores and Rs.4.12 crores for AY 1993-94 and AY 1994-95.
(iii) The test for determining whether the advantage of enduring benefit has accrued to the appellant/assessee is whether the asset or right acquired due to the expense incurred has generated enough durability to justify the same being treated as a capital asset. [See Hotel Diplomat v. CIT, (1980) 125 ITR 781 (Delhi)]. This principle is required to be examined in the background of the facts obtaining in the instant appeals. The appellant/assessee had taken up the work of renovation, refurbishment and repairs, which covered all 590 rooms, including the lobby, restaurants, business centre, health club, conference halls and other facilities. Since the scope of the work was expansive, the appellant/assessee had to engage consultants. Therefore, from a commercial point of view, it can only be stated that the appellant/assessee incurred the said expense to obtain durability.
(iv) The expense incurred by the appellant/assessee created an enduring advantage, inasmuch as the appellant/assessee would have been able to collect a higher room tariff and register a greater occupancy rate.
(v) The aim and object of expenditure would determine its character, i.e., whether it is in the nature of capital or revenue expenditure. Since the aim and object was to bring a “New Hyatt” into existence, the expenditure could only be characterised as capital expenditure. [See Assam Bengal Cement Ltd. V. CIT, 1955 1 SCR 972; Ashoka Hotel v. CIT, 1969 72 ITR 306 (Delhi) and the judgment of the Supreme Court rendered in the Ballimal Naval Kishore case].
(vi) The fees paid to GEL by the appellant/assessee should be treated as capital expenditure owing to the enduring benefit provided by the services The services provided by GEL to the appellant/assessee have to be looked at in the context of what the project sought to achieve- renovating and replacing various capital assets, which brought the advantage of enduring benefit to the appellant/assessee. The CIT(A) has noticed that payments made to other consultants, save and except for GEL, were capitalised by the appellant/assessee. The appellant/assessee has been unable to provide any reason for deviating from the said practice while dealing with expenses incurred on payment of fees to GEL.
(vii) Since GEL’s engagement required conceptualising, planning and supervision of the execution of the work at hand, the treatment to be accorded to the fee paid to GEL is inextricably linked to the manner in which the expenses incurred on renovation and refurbishment are treated.
(viii) The expenses incurred by the appellant/assessee are capital in nature, given that they led to the creation of a new capital asset. This is evident from the finding returned by the Tribunal that the appellant/assessee had purchased five hundred thirty-four (534) guest-room door shutters and five hundred forty (540) toilet doors. It is inconceivable that door shutters would have worn out in such large numbers. Clearly, the old articles were replaced with new and improved articles of superior quality, thereby providing the appellant/assessee with a new and better-quality asset. In this context, illustratively, reference was made to the installation of bus bars for the safe distribution of electricity from automatic circuit breakers, fixation of a mild-steel frame for affixing a false ceiling in the laundry department and replacement of the basin of the cooling tower. [See ITA 486/2007.]
(ix) The expenditure incurred by the appellant/assessee travelled beyond repairs or renovation and brought into existence new assets.
Reasons and Analysis:
18. As is evident from the narration of the facts and submissions made before us, the broad issue which came up for consideration before the statutory authorities was the manner in which the expenses incurred by the appellant/assessee had to be treated.
19. However, before we proceed to rule on the nature of the expenditure incurred by the appellant/assessee, it would be of some help to advert to the tests enunciated by the courts in the past.
(i) The expenditure incurred by an assessee initially towards setting up the business would ordinarily be construed as capital expenditure. However, if the assessee incurs expenditure in an ongoing business, one would have to ascertain whether the expense was incurred for acquiring or bringing into existence an asset or resulted in creating an advantage of enduring benefit for the business.
(ii) It is not the source and manner in which payment is made but the aim and object of expenditure which would determine its character.
(iii) Any expense incurred for acquiring a source of profit or income, in the absence of any contrary circumstance, would be construed as expenditure on capital account. In contradistinction, an expenditure which enables the profit-making structure to work more efficiently, leaving the source or the profit-making structure untouched, would be in the nature of revenue expenditure. In other words, expenditure incurred by the management to run its business effectively, efficiently and profitably, leaving the fixed assets or other capital structure untouched, would be an expenditure of a revenue nature, even though the advantage obtained may last for an extended period. In such a situation, the test of enduring benefit or advantage could be considered as having broken down.
(iv) Given the evolved and complicated nature of modern business, in determining the nature of expenditure, the courts’ test would have to be applied from the business point of view, after fairly appreciating the entire fact situation.
20. In the instant case, the record discloses that the expenditure qua which deduction was claimed fell under the following broad heads:
