COMMISSIONER OF INCOME-TAX VS OOTY DASAPRAKASH, 2000 PTD-MADRAS-HIGH-COURT-INDIA 3450 (1998)

Income-tax---

----Reference---Business expenditure---Capital or revenue expenditure-- Hotel business---Current repairs--Expenditure incurred solely for repairs and modernising hotel and replacing existing components of old building, furniture and fittings---Object to create a conductive and beautiful atmosphere for running business of hotel---Expenditure not enduring in nature---Is only for current repairs and is revenue expenditure---Is an allowable deduction---Indian Income Tax Act, 1961, Ss.31(1), 37 & 256(2).

The assessee, who was running a hotel, claimed deduction of expenditure incurred towards the repair of the hotel buildings and their maintenance and replacing the existing components of the buildings, furniture and fittings as revenue expenditure under section 31(1) of the Income Tax Act, 1961. The Income-tax Officer held that, since the modernisation programme involved a large amount spread over three years, it resulted in an enduring benefit to the business and hence it was capital expenditure. The Tribunal held that the expenditure incurred by the assessee is substantially replacing the old building during the previous years relevant to the assessment years 1985-86, 1986-87 and 1987-88 was allowable as current repairs under section 31(1) or under section 37 of the Act. On a reference application under section 256(2) of the Act:

Held, affirming the decision of the Tribunal, that the expenditure was incurred solely for repairs and modernising the hotel and replacing the existing components of the building, furniture and fittings, with a view to create a conductive and beautiful atmosphere for the purpose of running the' business of a hotel. The expenditure incurred was not of an enduring nature and was allowable as revenue expenditure under section 37 of the Act.

CIT v. Dasaprakash (1978) 114 ITR 210 (Mad.) fol.

Mrs. Chitra Vehkatraman for C.V. Rajan and Suresh Kumar for the Commissioner.

P.P.S. Janarthan Raja for K.V. Rajan for the Assessee.

JUDGMENT

JANARTHANAM, J---These reference applications, at the instance of the Commissioner of Income-tax, Tamil Nadu-III, Madras, are for issuance of a direction to the Tribunal to state a case and refer the common question of law for the opinion of this Court, as below, for the three assessment years 1985-86, 1986-87 and 1987-88:

"Whether, on the facts and in the circumstances of the cases, the Tribunal was right in holding that the expenditure incurred by the assessee is substantially replacing the old building, during the previous years relevant to the assessment years 1985-86, 1986-87 and 1987-88 is allowable as current repairs under section 31(1) or under section 37 of the Income Tax Act, 1961?"

Arguments of Mrs. Chitra Venkataraman, learned counsel representing Mr. C.V. Rajan, learned junior standing counsel for the income-tax cases representing the Revenue and Mr. P.P.S. Janarthana Raja, learned counsel representing K.V. Rajan and Suresh Kumar, learned counsel appearing for the assessee were heard.

` The assessee runs a hotel business at Ooty. He, it appears, claimed in the assessment proceedings for the assessment years in question, the expenditure incurred towards the repair of buildings and their maintenance as a revenue expenditure to be allowed, as a deduction under section 31(1) of the Income Tax Act, 1961 (Act No.43 of 1961---for short the "Income-tax"). He appeared to have incurred Rs.63,356 for the assessment year 1985-86; Rs.1,90,056 for the assessment year 1986-87 and a sum of RS.3 lakhs for assessment year 1987-88.

The contention of the assessee is that no part of the expenditure is capital in nature, because it was spent only for repairing and modernising the hotel and replacing the existing components of the buildings, furniture and fittings. '

On the other hand, it was the contention on behalf of the Revenue that since the modernisation programme involved a large amount spread over for three years, it should have definitely given the assessee an enduring benefit and, therefore, the Income-tax Officer was justified in treating part of it, as capital expenditure.

The issue falling for consideration in the question under reference is as to whether the expenditure incurred by the assessee for the relevant assessment years is one falling under "capital expenditure" and consequently not allowable as a deduction or falling under "revenue expenditure" and therefore, to be allowed as a deduction under section 31(1) or section 37 of the Income-tax Act:

(a) Our attention had been drawn to the assesses own case in CIT v. Dasaprakash (1978) 114 ITR 210 (Mad.) wherein the assessee claimed a deduction of an expenditure of Rs.37,390 incurred in providing decorated mirrors, plaster-moulded roof plywood panels, etc., in respect of the hotel premises during the previous year and the same was negatived by the Income-tax Officer in the view that the expenditure could not be said to be in the nature of current repairs to the building, as it had brought into existence an asset of an enduring nature and hence it was of a capital nature.

(b) The disallowance was confirmed by the Appellate Assistant Commissioner.

(c) The Tribunal, however, held that the expenditure was incurred wholly for the purpose of the business and was allowable as a deduction under section 37.

(d) On a reference, at the instance of the Department, this Court held that some of the items in question were in the nature of petty replacement of item which already existed and cannot 'be taken as capital expenditure at all. Other items of expenditure were incurred with a view to beautify the premises and 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 the 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 would 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 under section 37 of the Income-tax Act.

In the instant cases, the expenditure was incurred solely for repairs and modernising 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 of a business of a hotel. Taking into consideration the rationale or reasonings, as had been provided for by a Division Bench decision of this Court cited supra, in the assessee's own case in CIT v. Dasaprakash (1978) 114 ITR 210, it goes without saying that the expenditure incurred by the assessee for the relevant assessment years in repairing and modernising the hotel and replacing the existing components of a portion of the building, furniture and fittings cannot at all be stated to be of enduring in nature, in the nature of being a "capital expenditure"; but, definitelysuch an expenditure would fall under the category of "revenue expenditure" in nature to be allowed, as a deduction under section 37 of the Income-tax Act.

In this view of the matter, these reference applications deserve to be and are accordingly rejected.

These reference applications are thus disposed of. No costs.

M.B.A./63/FCOrderaccordingly.