ITAT Cochin Decides: Can Repairs to Improve an Asset be Classified as Capital Expenditure?
- Case name: Kovilakam Hotels Pvt. Ltd. v. ACIT
- Forum: Cochin ITAT
- Member: George George K
- Lawyers (Assessee): K. Kittu
- The assessee is a private limited company running a 3-star bar attached hotel.
- The hotel was to be re-evaluated for re-classification as a 3-star hotel, and hence, the assessee spent INR 60.25 lakhs on repair and renovation
- The return of income, filed by the assessee, showed a loss of around INR 19 Lakhs.
- AO sent a notice to assessee seeking explanation on why expenses to the tune of 60.25 lakhs for repairs and maintenance to the building was not characterised as capital expenditure.
- Expenditure incurred for repair prevents the value of the asset from diminishing and hence is nothing but capital expenditure. He rejected the assessee’s objections and disallowed the sum of INR 60.25 Lakhs.
- Revenue relied on the decisions of the Delhi High Court in Bharat Gears Limited vs. CIT and Cochin ITAT in DCIT vs. Indus Motor Company.
- The addition of INR 60.25 Lakhs is erroneous as it is revenue expenditure and not a capital expenditure.
- CIT(A)’s reliance on the decision of Supreme Court in Ballimal Naval Kishore v. CIT is wrong, as there the ginning factory was purchased and converted into a cinema theatre.
- The CIT(A) failed to consider Madras High Court’s judgement in CIT Madras v. Dasaprakash wherein it was held that items of expenditure as used by the assessee inter alia including furniture and furnishing and painting, are revenue expenditure.
- No new capital asset came into existence after the impugned renovation as the building tax levied before and after the renovation was the same.
- The tribunal referred to various judgements where the word “repairs” has been interpreted and cited the judgement of Bombay High Court (Chowgulle v. CIT) which defined “current repairs”.
- The tribunal further observed that expenditure on current repairs to buildings, machinery, plant and furniture used for the purposes of business is generally covered by sections 30 and 31.
- In respect of types of repairs that do not fall under sections 30 and 31, a deduction can still be allowed under section 37 if all the requirements for deduction under the said section are fulfilled.
- The tribunal examined the breakup of the expenditure from the paper books submitted by the assessee and held that the expenses incurred for repair was to enable the hotel to continue the same advantage that is the status of a three-star hotel. Hence, the same cannot be classified as a capital expenditure.
- The assessee did not derive a new asset and there was no increase in the total rooms nor an increase in the total area of the hotel. The expenditure incurred by the assessee is just a periodical expenditure which a hotel has to necessarily incur for its upkeep and cannot be termed as capital expenditure.
- The tribunal further observed that the case laws cited by the revenue authorities are not relevant to the present fact situation. The tribunal relied on the decisions of CIT (Central) Madras vs. Dasaprakasha, CIT vs. Rex Talkies and CIT vs. Lake Palace Hotels.
- The appeal of the assessee was allowed and it was permitted to claim a deduction of INR 60.25 Lakhs.
Current repairs include repairs undertaken in the normal course of the user for the purpose of preservation, maintenance or proper utilization or for restoring it to its original condition”. Current repairs do not include petty repairs and should not bring about, by its virtue, a new or different advantage.
HC Bombay, Chowgulle v. CIT
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