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March, 27th 2014

%                                             DECIDED ON: 10.03.2014

+                         ITA 67/2001
       M/S COMFORT LIVING HOTELS P. LTD.            ..... Appellant
                    Through: Mr. Prakash Kumar with
                    Mr. Sheel Vardhan, Advocates.


       COMMISSIONER OF INCOME TAX-III              ..... Respondent
                   Through: Mr. Rohit Madan, Sr. Standing Counsel
                   with Mr. Pabitra Roy Choudhary, Jr. Standing


       1. The following questions of law arise for consideration:
                (1) Whether the Tribunal was justified in holding that the
                    sum of Rs. 5 lacs was capital in nature and was not
                    revenue expenditure that could properly be deducted?

                (2) Whether the Tribunal was justified in holding that no
                    depreciation was allowable on a sum of Rs.3,59,803/-
                    claimed as expenditure on temporary constructions?

       2.     Briefly, the facts are that the assessee was carrying on
       hospitality business, i.e., managing a hotel. It had claimed ­ during
       the relevant time in its return for the Assessment Year 1989-90 ­ a

ITA 67/2001                                                            Page 1
       sum of `10,30,253/- towards building repairs and expenses. The
       Assessing Officer compared this sum with the amounts claimed in
       previous years and sought an explanation. The assessee states that it
       had undertaken extensive repairs on the ground floor, removed walls
       in the rear room and constructed a bar. According to it, the changes
       were essential to increase the sitting capacity in the bar and the
       expenses did not bring into existence any new asset but was to
       enhance its profit yielding capacity and, therefore, ought not to be
       considered as capital. The Assessing Officer accepted the explanation
       in part but added `5 lakhs which, according to him, was capital in
       nature. The asssesee appealed to the Commissioner of Income Tax
       (Appeals) ("CIT(A)"), which found that the Assessing Officer was not
       justified in treating half the expenditure as capital merely because
       some walls were removed and sitting capacity in the bar was
       increased. After carrying an inspection and relying upon various
       decisions, the CIT(A) held that the expenditure was revenue
       expenditure and set aside the findings of the Assessing Officer. The
       Revenue carried the matter in appeal to the Income Tax Appellate
       Tribunal ("ITAT"). The ITAT, in its impugned order, held that the
       reversal by the CIT(A) of `5 lakhs addition was not justified. It relied
       upon the judgment in Ballimal Naval Kishore v. Commissioner of
       Income Tax, (1997) 224 ITR 414 and restored the disallowance to the
       extent held by the Assessing Officer.
       3.     Counsel for the assessee-appellant argues that the reasoning of
       both the Assessing Officer and the ITAT is flawed because there is no
       indication as to why even the 50% that was allowed should be treated

ITA 67/2001                                                              Page 2
       as revenue expenditure given the nature of the construction. It was
       argued in this regard that the entire expenses had to be treated in the
       revenue stream because it merely enhanced the income generating
       capacity of the assessee and did not in any manner create any new
       asset. Learned counsel relied upon the decision in Empire Jute Co.
       Ltd. v. Commissioner of Income Tax, (1980) 124 ITR 1 and the
       decision of a Division Bench of this Court in Instalment Supply (P)
       Ltd. v. Commissioner of Income Tax, (1984) 149 ITR 52 (Del).
       4.     Counsel for the Revenue on the other hand submitted that the
       facts in Ballimal Naval Kishore (supra) were closer to the facts of this
       case and that the impugned order cannot be characterized as
       unreasonable. He also relied upon the Madras High Court ruling in
       CIT v. Ooty Dasaprakash, (1999) 237 ITR 902.
       5.     In our opinion, in this case, the ITAT has not adequately dealt
       with the reasoning of the CIT(A) who had, in fact, carried out the site
       inspection after which he held that the entire expenses had to be
       treated as revenue expenditure. We also notice that the ITAT does
       not clearly point to the creation of any new asset. Rather, it is only the
       sitting capacity of the existing bar that was increased with the
       renovation carried out. Considering these factors, the ratio in Empire
       Jute Company (supra) that an action that merely facilitates the
       assessee's business (making it more profitable), whilst leaving the
       fixed capital untouched, is squarely applicable.
       6.     For these reasons, the first question framed has to be answered
       in favour of the assessee.
       7.     The second question, i.e., depreciation @ 100% of roofing was

ITA 67/2001                                                                Page 3
       claimed by the assessee on the basis that the construction was
       temporary in nature. The AO disallowed this on the assumption that
       the construction included two sets of toilets and that it involved the
       use of marble and false ceiling.    The Tribunal was persuaded to
       uphold this view more or less on the strength of the same reasoning,
       i.e., use of marble glaze tiles and fall ceiling. This Court is of the
       opinion that the materials on record show that the construction was
       not authorised and appears to have been put up only for the
       convenience of workers who were engaged by the assessee. The
       record also indicates that the constructions were subsequently
       demolished ­ although after the Commissioner's order.        In these
       circumstances, the depreciation claimed to the tune of 100% cannot
       be termed so unreasonable as to warrant reversal of the CIT(A)'s
       8.      This question is also answered in favour of the assessee and
       against the Revenue.
       9.      In view of the above findings, the appeal is hereby allowed
       without any order as to costs.

                                                     S. RAVINDRA BHAT


       MARCH 10, 2014

ITA 67/2001                                                             Page 4
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