Delhi High Court Allows Deduction To Hyatt Regency Towards Repair, Renovation, Refurbishment, Consultancy Expenses As Revenue Expenditure

The Delhi High Court has allowed the income tax deduction to Hyatt Regency towards repair, renovation, refurbishment, and consultancy expenses as revenue expenditure.

The bench of Justice Rajiv Shakdher and Justice Tara Vitasta Ganju has observed that ITAT rightly mentioned that if the owner of a building that is used for business incurs expenditure in the nature of current repairs and the assessee is not able to claim expenses for current repairs under Section 30(a)(ii), it could still claim deduction under Section 37(1).

The appellant/assessee is in the business of running a five-star hotel named Hyatt Regency, which is located in Delhi. 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.

The assessee had appointed GEL as a consultant. The 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.

The AO disallowed the expenditures claimed under the headings “repair and maintenance” and “payment to GEL”.

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 pressurization of lift shafts, which had resulted in a benefit of enduring nature. The CIT(A) sustained the disallowance ordered by the AO concerning Rs. 23,18,695 paid by the assessee to GEL.

The department appealed 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 assessee enlarged the scope of its appeal by not only agitating the disallowance of payments made to GEL and the expenditure incurred on pressurization of lift shafts but also claimed, for the first time, amounts expended on renovation, which were capitalized in its books of accounts. The amounts capitalized previously that were claimed for the first time before the Tribunal as revenue expenditure

The Tribunal disallowed the relief granted by the CIT(A) pertaining to the deletion of disallowance ordered by the AO concerning expenditure made towards “repair and maintenance”. The Tribunal rejected the plea advanced on behalf of the assessee that Rs. 600,84,000, capitalized in its accounts books, should be treated as revenue expenditure.

The assessee contended that the money expended by the appellant or 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.

The department contended that 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 or assessee with a new and better-quality asset. The expenditure incurred by the assessee went beyond repairs or renovation and brought into existence new assets.

The court stated that what is given weight, ultimately, is the provisions of the Act and not what is incorporated in or omitted from the books of accounts or annual statements, whether as a part of accounting practice or otherwise”.

The court concluded that the ITAT was wrongly burdened by the fact that renovation, refurbishment, and repairs were carried out over several years with a total expenditure of Rs. 35 crore, which was much more than the construction cost of the hotel.

Counsel For Appellant: Tarun Gulati

Counsel For Respondent: Zoheb Hossain

Case Title: M/S Asian Hotels Ltd. Versus CIT

Citation: 2023 LiveLaw (Del) 952

Case No.: ITA 1398/2006

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