The Madras High Court held that the expenditure incurred in the renovation and redecoration of rooms in a hotel is a revenue expenditure and not a capital expenditure.
The appellant, Pandian Hotels Ltd. is engaged in the business of running a three-star hotel and for the assessment year in question, the assessee filed their return of income admitting a total income of Rs.19,06,620/- and an intimation under Section 143(1) of the Act was issued.
Subsequently, the assessment was selected for scrutiny and the assessment was completed under Section 143(3) of the Act by order, by which, there was a disallowance of the expenditure to the tune of Rs.1,43,37,050/- incurred towards repairs and renovation expenses.
The issue raised in this case was whether expenditure incurred in the renovation and redecoration of rooms in a hotel would amount to capital expenditure or revenue expenditure.
The assessee contended before the Assessing Officer that the expenses were incurred for repairs and renovation of 18 rooms out of 57 rooms in the hotel and that there was no capital expenditure incurred by the assessee and there was no increase in the room capacity nor the creation of any new asset.
However, the AO did not accept the explanation given by the assessee and 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 preferred an appeal before the CIT(A), wherein it was held that the test of enduring benefit might fail on certain occasions, that the correct test was to see as to whether there was a 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 two-judge bench of Justice T.S.Sivagnanam, and V.Bhavani Subbaroyan while answering in the favour of the assessee held that the expenditure incurred by the assessee is a revenue expenditure and not a capital expenditure and there is no justification in remanding the matter to the Tribunal or to any other Lower Authority.