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by Admin
07 May 2024 2:49 AM
“Replacement of worn-out items does not create an enduring asset, qualifying expenditures as current,” Andhra Pradesh High Court allowed an appeal by Srinivasa Resorts Limited, ruling that expenditures on replacing carpets, mattresses, and lampshades in a 5-star hotel constituted current expenditures deductible under Section 37(1) of the Income Tax Act, 1961. The Bench, comprising Justice Sujoy Paul and Justice Namavarapu Rajeshwar Rao, overturned the Income Tax Tribunal’s decision, which had disallowed the deductions by classifying them as capital expenditures. This ruling clarifies distinctions between revenue and capital expenditures for asset replacements that do not enhance or create a new asset.
The appellant, Srinivasa Resorts Limited, incurred expenses of ₹9,21,033 on carpets, mattresses, and lampshades for a 5-star hotel in Hyderabad. The appellant claimed deductions for these costs under Section 31 of the Income Tax Act, labeling them as “current repairs.” The Assessing Officer (AO), however, denied this deduction, asserting that the replacements were capital expenditures under Supreme Court rulings in Ballimal Naval Kishore v. CIT. Although the appellant also requested deduction under Section 37(1) as an alternative, the AO rejected it, maintaining that the items were capital assets.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] sided with the appellant, allowing deductions under Section 37(1), noting that the expenses were for replacements, not initial acquisitions of enduring assets. However, the Tribunal reversed this, reinforcing that the expenditures did not meet the “current repairs” requirement under Section 31.
The appellant argued that since the carpets, mattresses, and lampshades were damaged and replaced to maintain the hotel’s existing condition, the costs qualified as “current repairs” under Section 31. Alternatively, it contended that the costs, serving routine business purposes without generating new assets, were deductible under Section 37(1).
The Court held that replacing worn-out furnishings in a hotel does not amount to acquiring an enduring asset but rather preserves the asset’s functionality. Citing CIT v. Lake Palace Hotels & Motels Pvt. Ltd., the Court concluded that these replacements do not extend the life of the asset but simply maintain its standard, meeting the criteria for revenue expenditures. The Bench remarked, “Expenditures merely for replacement or preservation do not create any new asset nor add enduring benefit; thus, they constitute current expenditures under Section 37(1)”.
Appellant’s Position: The appellant contended that the Tribunal erroneously failed to adjudicate its alternate deduction claim under Section 37(1) and wrongly focused on whether the expenses qualified as “current repairs” under Section 31 alone.
Court’s Response: The Court agreed, emphasizing that the Tribunal neglected to consider Section 37(1) as a “residuary” section for business-related expenditures that do not fall under Sections 30 to 36. The Bench pointed to Supreme Court precedent in Saravana Spinning Mills (P) Ltd., underscoring that even if an expenditure does not qualify as a “current repair” under Section 31, it may still be deductible as a revenue expense under Section 37(1) when serving business needs without creating capital assets.
CIT v. Saravana Spinning Mills (P) Ltd.: This case clarified that an expenditure might not fall under “current repairs” in Section 31 yet qualify as deductible under Section 37(1) if it does not create a new asset.
Ballimal Naval Kishore v. CIT: The Court referenced this case to illustrate the strict standard for “current repairs” under Section 31, noting that Section 37(1) serves as a backup avenue for deductions.
Assam Bengal Cement Co. Ltd. v. CIT: The Court applied this principle, stating, “The aim and object of the expenditure determine its nature. Where expenses do not create enduring assets but maintain an operational standard, they are revenue in nature”.
The replacement expenditures did not add to the hotel’s long-term assets but merely preserved its functioning condition, qualifying the expenses as revenue expenditures under Section 37(1).
The Tribunal’s decision to ignore Section 37(1) was an error, as this section explicitly applies to business expenditures not covered under Sections 30 to 36 but necessary for the business.
The Andhra Pradesh High Court set aside the Tribunal’s ruling, holding that Srinivasa Resorts Limited was entitled to deductions for expenditures on carpets, mattresses, and lampshades under Section 37(1). By acknowledging these as revenue expenditures, the Court reinforced the applicability of Section 37(1) for replacements necessary to maintain operational standards without adding enduring value.
The appeal is allowed, and the Tribunal’s order is reversed. The expenses incurred on replacements are deductible under Section 37(1) as current expenditures.
Date of Decision: November 5, 2024