Madras HC: Renovation and Redecoration Expenses of Hotel Rooms recognised as Revenue Expenditure.

Renovation and redecoration expenses incurred in rooms of the hotel should get considered as revenue expenditure and not capital expenditure stated the Madras High Court while giving judgement in a related matter case.

In this case, Pandian Hotels Ltd. is the appellant which is involved in the business of running a three-star hotel, and for the assessment year 2012-13, the company has filed its income tax return admitting the fact that it had Total Income of Rs.19,06,620 in the relevant assessment year and an intimation under Section 143(1) of the Act was issued to them by the concerned authorities.

The scrutiny was conducted for the ITR filed for A.Y. 2012-13 and the authorities stated its findings that deduction of the repairs and renovation expenses must get disallowed amounting Rs.1,43,37,050 as the authorities consider these expenses as Capital Expenditure.

In front of the Assessing Officer, the assessee explained that the expenses were incurred for repairs and renovation of 18 rooms out of 57 rooms in the hotel and it should be not considered as Capital Expenditure because these expenses did not result in the creation of any new asset nor it increased the capacity of the rooms.

But the Assessing Officer was not accepting this explanation provided by the assessee, so he treated the sum of Rs.1,51,20,800 as capital expenditure and after allowing depreciation at the rate of 10%, the assessing Officer added the balance amount of Rs.1,36,08,720.

The assessee was aggrieved by such order so he preferred an appeal before the Commissioner of Income Tax (Appeals)-I, Madurai (CIT(A)) who, by order dated 29.1.2016, allowed the assessee’s appeal primarily holding that the expenses were incurred only to preserve the existing asset and that the assessee had to renovate the old rooms to attract foreign customers and to maintain the standard of a three-star hotel. And also said that the test of enduring benefit might fail on certain occasions, that the correct test was to see as to whether there was the creation of any new asset and that admittedly, the assessee had not created any new asset, but had undertaken repairs and renovation only in the existing rooms and that too, only in 18 rooms out of 57 rooms available in the hotel.

The Income Tax Appellate Tribunal (ITAT) was headed by a two-judged bench of Justice T.S.Sivagnanam and V.Bhavani Subbaroyan, that gave its order in the favor of the appellant, that the expenditure incurred by the assessee is a revenue expenditure and not a capital expenditure.

With Warm Regards,

CL Bureau.