ITAT, DELHI BENCH ‘G’ Allowability of expenditure on modification and renovation of a building before commencement of business

Allowability of expenditure on modification and renovation of a building before commencement of business

Expenditure incurred on modification and renovation of a building before commencement of business is neither allowable under section 30(a)(ii) nor section 37.

ITAT, DELHI BENCH ‘G’, DELHI

Punj Hospitality Pvt. Ltd.
v.
ITO

ITA NO. 3425(Del) of 2009

OCTOBER 23, 2009

RELEVANT EXTRACTS :

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6. We have heard both the parties and gone through the material available on record. The assessee company was incorporated on 5th October. 2005 with the object to carry on business of restaurant and hotels etc. The company entered into agreement on 10th October. 2005 with M/s. Aggarwal Motels P. Ltd. [AHPLJ for a period of 18 months to manage and operate their AHPL business of hotel and bar which they were carrying on for the several years under the name and style as "Tavern on the Greens". The assessee also entered into supplementary agreement for the purpose of management and operation of the existing restaurant and bar with certain modifications and renovations for a period of 18 months by investing a sum of Rs.50.00,000/- to be subscribed by the assessee company from its own resources to provide a new look to the existing set up of the restaurant and bar of AHPL and to run the said business in conducive manner, but under the new name and style as "Climax Tavern on the Greens". In terms of these two agreements the revenue from the said business is to be shared between the parties. Therefore, according to assessee the expenditure had been incurred as business expenditure. There no dispute that expenditure has been incurred on repairs and renovation of the hotel building by the assessee under the terms of the "supplementary agreement". Under section 30(a)(ii) of IT Act. 1961 in respect repairs of a premises, used for the purposes of the business or profession, the amount paid by him on account of current repairs to the premises shall be allowed as deduction. The Explanation to section 30 clarifies that the amount paid on account of current repairs referred to in subclause (ii) of clause (a) of section 30 shall not include any expenditure in the nature of capital expenditure. The provisions of section 30 will be pressed into operations only when the premises are used for the purposes of business or profession. In the instant case the assessee company was incorporated on 5lh Oct. 2005 entered into agreements on 10.10.2005 for the purpose of management and operation of the existing restaurant and bar of AHPL. Certain modifications and renovations to the restaurant and bar building were to be carried out by investing a sum of Rs.50.00.000/- to be subscribed by the assessee from its own funds. Hence the assessee as a matter of fact contributed capital of Rs 50,00,000/- in order to participate in the profit of joint venture. Thus the assessee had incurred the expenditure on modifications and renovations before start of the business of management of hotel and restaurant. It is a different matter that the said contribution was utilised tor the purposes of modifications and renovation of the building so as to make it conducive to the business requirements of running restaurant and bar from clause 5 of the agreement dated IOth October, 2000. We find that the assessee was to complete the renovation and decoration within 30 days from the date of receipt of the possession of the building. Further grace period of 15 days was allowed in case due to any reason the renovation could not be completed within the stipulated period of 30 days. From these facts it is clear that the business of management and operation ot the restaurant and bar commenced after the renovation of the building was over. Hence the contribution made by the assessee is a capital investment brought into the business of joint venture, which was spent by the assessee on modifications and renovations of the building, as per the agreements entered into between the parties before actual commencement of business activities of management and operation of the restaurant.

7. Now we will examine whether expenditure incurred will be allowable as current repairs u/s 30(a)(ii) of the Act. The expression used in section 30(a)(ii) and in section 31(i) of the Income-tax Act, 1961 is 'current repairs' and not mere 'repairs'. It has been held by Hon'ble Bombay High Court in New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is not lor the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage They are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc. requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The test evolved in New Shorrock Spg. & Mfg. Co. Ltd/s case (supra) is the most appropriate one having regard to the context in which the said expression occurs. Hon'ble Supreme Court in Ballinml Naval Kishore v. CIT [1997] 224 ITR 414 (SC) applied the test evolved in New Shorrock Spg & Mfg. Co, Ltd.*s case (supra) by holding as under:

"In our opinion the test involved by Chagh C.J., in New Shorrock Spinning *" Manufacturing Co. Ltd 's case [1956}30 ITR 338 (Bom) is the most appropriate Q*e having regard to the context in whidtijkhe said expression occurs. It has also been followed by a majority of the High Courts in India. We respect fully accept and adopt the test.

Applying the aforesaid test, if we look at die facts of this case, it will he evident thai what the assessee did was not mere repairs hut a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure oj the budding. By no stretch of imagination, can it be said that the said repairs qualify as "current repairs" within the meaning of section l()(2)(v). It was a case of total renovation and has rightly been held by the High Court to he capital in nature. Indeed, the finding of the High Court is that as against the sum of Rs. I ~MOO for which the assessee had purchased the factory in 193?. the expenditure incurred in the relevant accounting year was in the region of Rs. I,20.000.”

From the judicial pronouncements referred to above it is clear that expenditure which is not for the purpose of renewal or restoration and which does not bring a new asset into existence or does not give to the assessee a new or different advantage will be allowable as deduction. . Therefore the expenditure on modifications and renovations of the building cannot be allowed as current repairs u/s 30(a)(ii) of IT Act, 1961.



8. In the case before us the facts of the case are some what different. In this case as discussed above the assessee renovated and modified the building, the bar room, VIP area etc. to suit the business requirement of joint venture for which the assessee was to incur expenditure from its sources and not from the funds of the joint venture. Therefore the expenditure incurred by the assessee was capital expenditure in its own hands. The expenditure was incurred before actual commencement of business activities. The things would have been different had the expenditure been incurred by AHPL during the course normal business activities and assessee had shared the profits from operation of business of restaurant and bar. At the best in view of provisions of Explanation to section 32(1) of the Act any capital expenditure incurred on construction or on renovation or extension of. or improvement to the building in respect of which the assessee holds a lease or other right of occupancy for the purposes of the business or profession the assessee will be entitled to deduction u/s 32 of the Act, as if the said structure or work is a building owned by the assessee. Therefore the entire expenditure will constitute capital expenditure in the hands of assessee.

9. It has also been contended that the assessee had not taken the premises on lease and the expenditure was incurred on joint venture formed by the assessee with the owner with an intention to run the business of restaurant and bar and share the profit of joint venture and hence the expenditure was incurred wholly and exclusively for the purposes of business. This contention of the assessee in our view is also not correct. There is no dispute that actual operation of restaurant and bar took place after modification and renovation of the building to suit the business requirements was over. Hence the expenditure was not incurred during the course of actual operations of business activities. Hon’ble Madras High court in the case of A.Y.S. Paisutha Nadar v. CIT [1962] 46 ITR 1041 (Mad.) had held that section 10(2)(xv) of the Indian income-tax Act, 1922 [section 30(a)(ii) of 1961 Act.] relating to expenditure laid out or expended wholly and exclusively for the purpose of the assessee's business, clearly indicated that the expenditure should relate to a business which is already in existence and not one that is to come into existence in the future. Hence the expenditure incurred on modifications and renovations of the building cannot be treated to have been incurred during the course of business wholly and exclusively for the purposes of business and cannot be allowed as deduction u/s 37 of the Act.

10. From above discussion it is clear that expenditure incurred on modification and renovation is neither allowable under section 30(a)(ii) or section 37 of the Act. The assessing officer had rightly treated the expenditure capital in nature and had allowed the deduction under section 32( 1) of the Act. We accordingly uphold the order of CIT(A).

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