Hotel Replacing Damaged Furniture, Carpets Is Current Expenditure Allowable U/S 37 Income Tax Act: Telangana HC

The Telangana High Court has held that the expenditure incurred by a hotel on replacement of damaged items is a current expenditure, allowable under Section 37 of the Income Tax Act, 1961. Section 37 of Income Tax Act states that any business expenditure, excluding capital expenditure and the individual's personal expenses, that is spent for the business's operations shall be applicable for deduction from business income. A division bench of Justices Sujoy Paul and Namavarapu Rajeshwar Rao was dealing with a Hyderabad based 5-Star Hotel's plea to decide whether the expenditure incurred by it comes under current expenditure or capital in nature. Current repairs means repairs undertaken in the user's normal course preservation, maintenance or proper utilization or for restoring it to its original condition. A capital expenditure is the purchase of long-term physical or fixed assets used in a business's operations. Court held, “The expenditure incurred by the assessee is only on replacement of the damaged items and also it is not for the first time or for expansion of the business. The replacement of existing damaged carpets, mattresses and lamp shades does not come under the capital in nature but it comes only under current expenditure…allowable under Section 37(1) of the Income Tax Act.” It cited Commissioner of Income-Tax V. Lake Palace Hotels and Motels P. Ltd (2002) where the Income Tax Appellate Tribunal had held that expense incurred on purchasing carpets, mattresses, folding tables, lamp shades, etc. for the old wing of the hotel building owned by the assessee was not a capital expenditure. “In the present case also, the assessee is running a Hotel, and he incurred expenditure for the replacement of carpets, mattresses and lampshades and the said expenditure comes only under current expenditure and not a capital expenditure,” the High Court observed. It also cited CIT V. Saravana Spinning Mills (P) Ltd. (2007) where the Apex Court discussed whether the expenditure is revenue or capital in nature, would depend on the several factors i.e. nature of expenses, nature of business activity. For example, the construction of the building for self-use may be capital in nature, whereas in the hands of the builder, a building constitutes his stock-intrade and therefore, on the sale of the building, the expenditure has to be revenue, it was held. “In the present case, the assessee only incurred expenditure for replacing of carpets, mattresses and lamp shades as they were damaged. This expenditure comes under current expenditure but not capital expenses,” High Court said. It then proceeded to distinguish the facts of the case from Ballimal Naval Kishore and another V. CIT where the assessee had not done mere repairs but a total renovation of the theater. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. The Supreme Court held therein that by no stretch of imagination can it be said that the said repairs qualify as "current repairs". It was held to be a case of total renovation, to be capital in nature. “In the present case, there is no renovation of the Hotel and there is no substantial replacement of the equipment, it is only replacement of existing damaged carpets, mattresses and lamp shades. So, the expenditure incurred by the assessee comes only under current expenditure,” High Court said. It also distinguished the facts from Ashoka Hotels Ltd., V. Commissioner of Income Tax, New Delhi (1969) whereby the assessee had incurred expenditure for substantial replacement of equipment for initial outlay of the business. “But, in the present case, it is not an initial outlay or for the extension of a business or a substantial replacement of the equipment, it is only the replacement of existing carpets, mattresses and lampshades. All these three items are in damaged condition, due to damage, they have been replaced with new one,” High Court said. Accordingly, the Court allowed the assessee's appeal and held that expenditure incurred by it is allowable under Section 37(1) of the Income Tax Act. Appearance: Advocate GVS Ganesh for appellant; Senior Standing Counsel JV Prasad for respondent. Case title: Srinivasa Resorts Limited vs The Commissioner Of Income Tax, A.P. Case no.: INCOME TAX TRIBUNAL APPEAL NO.87 OF 2008 Click Here To Read/Download The Order

Hotel Replacing Damaged Furniture, Carpets Is Current Expenditure Allowable U/S 37 Income Tax Act: Telangana HC

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