Income Tax Appellate Tribunal - Chennai
Apollo Sindhoori Hotels Ltd., , Chennai vs Assessee on 3 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER
I.T.A. Nos. 827, 828, 829 & 830/Mds/2012
(Assessment Years : 2001-02 to 2004-05)
M/s Apollo Sindhoori Hotels The Assistant Commissioner of
Ltd., Income Tax,
"Anugraha", 41, M.G. Road, v. Company Circle I(1),
Chennai - 600 034 . Chennai - 600 034 .
PAN : AAACO 0347 H
(Appellant) (Respondent)
Appellant by : Shri Viswanathan, CA
Respondent by : Shri T.N. Betgiri, JCIT
Date of Hearing : 03.01.2013
Date of Pronouncement : 10.01.2013
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
These are appeals of the assessee filed for the respective assessment years, directed against orders of Commissioner of Income Tax (Appeals)-III, Chennai. Appeals for assessment years 2001-02, 2003-04 and 2004-05 are directed against orders dated 17.1.2012, whereas, for assessment year 2002-03 is against an order dated 16.1.2012. The issue involved in all these appeals, except for 2 I.T.A. Nos. 827 to 830/Mds/12 assessment year 2004-05, is treatment of expenditure incurred by the assessee in leased premises. For assessment year 2004-05, assessee is aggrieved on the denial of carried forward of losses of earlier years, which primarily arose on account of claim of the assessee on expenditure incurred in leased premises.
2. Facts apropos are that during an assessment proceeding, pursuant to an order dated 28.3.2007 under Section 263 of Income- tax Act, 1961 (in short 'the Act') passed by Commissioner of Income Tax, Chennai-I for assessment year 2002-03, Assessing Officer noted that assessee had claimed an expenditure of ` 18,75,751/- for improvement of certain leased assets. Assessee was engaged in the business of running hotels. It had entered into an agreement with one M/s Central Hotels Pvt. Ltd. in 1995 based on which, a building with three floors were taken on lease for the purpose of carrying on its hotel business. Subsequently, for expansion of such business, assessee required the lessor M/s Central Hotels Pvt. Ltd. to construct and lease out two additional floors. Thereafter, an agreement was entered with lessor for constructing two additional floors, namely 4th and 5th floors on the building, already under lease. Relevant portions of such agreement entered between assessee and lessor, namely, M/s Central Hotels Pvt. Ltd. are reproduced hereunder:- 3 I.T.A. Nos. 827 to 830/Mds/12
"INTERIOR DESIGNING AND DECORATION a. The Party of the Second part (Lessor) hereby permits the Party of the First Part (Lessee) to carry out the necessary interiors and making provisions for and providing amenities that are required for the rooms in the said Premises and also in corridors and stairways, etc., such interior designing and decoration to be carried out by the Party of the First Part at its own cost after obtaining possession of the completed floors in the said premises.
b. The Party of the First Part estimates incurring a capital expenditure to the tune of ` 125 lacs/- for carrying out matters specified in (a) above. The parties agree that the cost of improvements made to the said premises by the Party of the First Part shall be compensated by the Party of the Second Part on termination of the lease of the said Premises or sooner determination thereof, in the following manner.
The party of the First part has an option to take back the items and furnishings which it deems fit and the left overs shall be valued by an approved valuer. The amount so determined shall be paid by the Party of the Second Part to the Party of the First part."
Assessee incurred the following amount of expenditure for the purpose of interior decoration and renovation of leased building:-
Assessment Year 2001-02 : Rs. 95,33,694/-
Assessment Year 2002-03 : Rs. 18,75,751/-
Assessment Year 2003-04 : Rs. 2,60,576/-
3. Assessee claimed the above expenditure as revenue outgo. However, as per Assessing Officer, in view of the Explanation 1 to Section 32(1)(ii) of the Act, such expenditure could only be treated as capital outgo. Assessing Officer noted that the lease agreement 4 I.T.A. Nos. 827 to 830/Mds/12 entered by the assessee with M/s Central Hotels Pvt. Ltd. was for a term running from 1.3.95 to 31.1.07, which was subsequently renewed upto 21.12.2007. As per A.O., assessee derived direct and enduring benefit from the investment made by it in the leased building. Further, the A.O. also noted that M/s Central Hotels Pvt. Ltd., the lessor had incurred only negligible amounts as expenditure towards construction of the two floors in the building. Again, as per A.O., eventhough assessee's counsel could produce bills for most of the expenditure classified as improvement, such bills proved that the expenditure incurred was for purchasing air-conditioners, re-flooring, refurbishing bath rooms and toilets, laying tiles and granites, fixing washbasins, providing electrical fittings, etc. According to him, such expenditure fell within Explanation 1 to Section 32(1)(ii) of the Act. He, therefore, disallowed the claim of the assessee, but, nevertheless, allowed depreciation on such amounts.
4. Assessment for assessment years 2001-02 and 2003-04 were also re-opened for making similar disallowances. Original proceedings for these two assessments were completed under Section 143(1) of the Act. Because of the treatment given by the Assessing Officer on the claim of such expenditure, loss claimed by the assessee for the assessment years 2001-02, 2002-03 and 2003- 5 I.T.A. Nos. 827 to 830/Mds/12 04 disappeared. Since assessee had in its return for 2004-05 claimed set off of such losses, Assessing Officer re-opened the assessment for assessment year 2004-05 also and in such re- opened proceedings, disallowed the claim of carry forward of earlier years' losses.
5. Assessee moved in appeals for all the years, before CIT(Appeals). Argument of the assessee for assessment year 2001- 02, 2003-04 and 2004-05 was that the reopening was not warranted since there was no new tangible material with Assessing Officer. As per the assessee, the reopening was simply on a change of opinion. On merits, for all the years, it was argued by the assessee that the claim was supported by a statement of expenditure and bills. As per the assessee, the expenditure was incurred in a leased premise, and it did not rise to any enduring benefit. Therefore, as per the assessee, decision of Hon'ble Apex Court in the case of Empire Jute Co. Ltd. v. CIT (124 ITR 1) went in its favour. Assessee also argued that the lease period was only for 11 years and 11 months and did not result in any permanent asset being acquired.
6. However, ld. CIT(Appeals) was not impressed. According to him, assessee itself had estimated a capital expenditure of ` 1.25 6 I.T.A. Nos. 827 to 830/Mds/12 Crores for interior and amenities in the leased building. The nature of expenditure had a capital flavour and assessee has to be considered as deemed owner of the structure. As for the reliance placed by the assessee on the decision of Hon'ble Apex Court in the case of Empire Jute Co. Ltd. (supra), ld. CIT(Appeals) noted that the said case pertained to purchase of loom hours by jute manufacturers thereby binding themselves to limited loom hours every week. According to him, facts were entirely different here. The building, which was used for running hotel, was a source of revenue for the assessee. Assessee had derived direct enduring benefit. Assessee had spent much larger amount than the amounts spent by the lessor. In this view of the matter, ld. CIT(Appeals) upheld the view taken by the A.O.
7. For assessment year 2004-05, ld. CIT(Appeals) held that assessee could not claim any carry forward loss since there were no losses remaining for these years, available for a set off.
8. Now before us, learned counsel for the assessee has filed an adjournment petition, in which absence of one of the partners of the firm has been cited as a reason for seeking adjournment. We do not 7 I.T.A. Nos. 827 to 830/Mds/12 find that reason shown to be proper and therefore, the adjournment petition is rejected.
9. Arguing his case, learned counsel for the assessee submitted that the lease was only for a period of 11 years and 11 months and did not give any enduring benefit to the assessee. The hotel was closed in the year 2005. There was no renewal of agreement after 11 years and 11 months. Expenditure claimed was per se revenue in nature. Reliance placed on Explanation 1 to Section 32(1)(ii) was not correct since expenditure by its very nature ought have been allowed as revenue outgo. In any case, according to him, assessee's contention was well supported by the decision of Hon'ble jurisdictional High Court in the case of CIT v. Madras Auto Service Pvt. Ltd. (233 ITR 468).
10. Per contra, learned D.R. submitted that assessee had never given full break-up and supporting bills for the expenses. Expenditure was admittedly for improvement of a leased premises and therefore, fell within Explanation 1 to Section 32(1)(ii) of the Act. In the case of Madras Auto Service Pvt. Ltd. (supra), the lease agreement itself allowed the concerned lessee to demolish the 8 I.T.A. Nos. 827 to 830/Mds/12 building. Further the assessment year involved was 1968-69, when Explanation 1 to Section 32(1)(ii) was not there in the statute.
11. We have perused the orders and heard the rival submissions. It is noted that assessee has not assailed the reopening done for assessment years 2001-02, 2003-04 and 2004-05. The only claim of the assessee is that the outgo incurred in the leased premise was revenue in nature. Admittedly, assessee was in the business of running hotel. It had entered into a lease agreement with M/s Central Hotels Pvt. Ltd. in 1995 and the when the lease agreement was entered, there were already three floors in the building. Thereafter, based on another agreement dated 12.3.99 with M/s Central Hotels Pvt. Ltd., assessee had constructued 4th and 5th floor and also incurred expenditure on interior decoration and renovation. Expenditure incurred was during the previous years relevant to assessment years 2001-02 to 2003-04. During the very same period, M/s Central Hotels Pvt. Ltd. had also incurred certain expenditure for the construction and such expenditure incurred by M/s Central Hotels Pvt. Ltd. has been reproduced by the Assessing Officer in the assessment order and is also reproduced hereunder for brevity:- 9 I.T.A. Nos. 827 to 830/Mds/12
Assessment Year Building under Amount (`.)
construction
1999-2000 IV & V floor 11,53,085
2000-2001 IV & V floor N.A.
2001-2002 IV & V floor 29,07,982
2002-2003 IV & V floor 8,56,238
Comparison of the above, with the expenses incurred by the assessee, listed at para 2 above, clearly show that major part of the construction work, including interior decoration and renovation of building, were done by the assessee. Expenditure incurred by the assessee was much higher than what was incurred by the lessor, namely, M/s Central Hotels Pvt. Ltd. Lower authorities have mentioned that bills of expenditure produced by the assessee showed such expenditure to be in the nature of renovation, improvement for building taken on lease and this has not been rebutted. Thus the fact of the matter is that assessee had incurred expenditure on a building for which it was already holding a lease. At this juncture, it is necessary to have a look of Explanation 1 to Section 32(1)(ii) of the Act. This is reproduced hereunder:-
"Explanation 1.--Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause 10 I.T.A. Nos. 827 to 830/Mds/12 shall apply as if the said structure or work is a building owned by the assessee."
12. Argument of the assessee is that expenditure incurred by its very nature was allowable as revenue outgo and could not be considered as a capital outgo, just because of the above Explanation. However, as mentioned by us, assessee did hold a valid lease resulting in a right of occupancy. In the additional floors constructed, also it was having a right of occupancy. In our opinion, in such a situation, any expenditure incurred for any work by way of renovation or extension or improvement to the existing building would fall within Explanation 1 to Section 32(1)(ii) of the Act. There is no case for the assessee that there was no building whatsoever in the leased area. Admittedly, there was already a building having three floors in which it was already carrying on its business. The question whether Section 37 could be applied for determining the allowability of an expenditure incurred in a rented or leased premises, after Explanation 1 was added to Section 32(1)(ii), has been answered by Hon'ble jurisdictional High Court in the case of CIT v. Madura Coats (TCA 322 to 324 of 2008 dated 22.12.2011). It has been held by their Lordship that expenditure incurred in the leased building could not be allowed under Section 37(1) of the Act. Section 37(1) could be applied only where expenditure was either capital or personal. Explanation 1 to 11 I.T.A. Nos. 827 to 830/Mds/12 Section 32(1)(ii) could not be ignored. Their Lordship held that said explanation enabled capital expenditure incurred on construction of any structure or expenditure incurred for renovation or extension or improvement to a leased building, to be treated as building on which depreciation alone could be claimed. In the said case, Hon'ble jurisdictional High Court had disallowed the claim of an assessee for expenditure incurred on a rented building.
13. As for the decision in the case of Madras Auto Service Pvt. Ltd. (supra) relied on by the learned A.R., the assessment year involved in the said case was 1968-69 and 1969-70, when explanation 1 to Section 32(1)(ii) was not there in the statute. The said explanation was added in the statute by Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1.4.1988. Therefore, in our opinion, the decision of Hon'ble Apex Court in the case of Madras Auto Service Pvt. Ltd. (supra) will not help the case of the assessee. It is also noted that Assessing Officer had fairly allowed depreciation for all the years. We are, therefore, of the opinion that the lower authorities were justified in disallowing the claim of renovation expenses on existing building leased by the assessee, and treating it as capital outgo. Since for assessment years 2001-02 to 2003-04 the loss arose on account of such claim, 12 I.T.A. Nos. 827 to 830/Mds/12 the carry forward of loss claimed by the assessee for assessment year 2004-05 was rightly denied by the Assessing Officer. We are, therefore, of the opinion that the appeals of the assessee have no merit.
14. To summarize the result, all the appeals filed by the assessee are dismissed.
The order was pronounced in the Court on Thursday, the Tenth of January, 2013, at Chennai.
sd/- sd/-
(V.Durga Rao) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 10th January, 2013.
Kri.
Copy to: Appellant/Respondent/CIT(A)-III, Chennai/ CIT, Chennai-I, Chennai/D.R./Guard file