The Hindu Business Line : A swim in the troubled waters of a hotel pool to fish for missing reason

THE partners owning Hotel Lake End should have been at their wits end when local authorities came and demolished the boundary wall and the hotel swimming pool. Not because the pool did not need any privacy that a wall would have afforded but because of alleged "infringement of local laws". The firm filed a writ petition and, in due course, the High Court ordered restoration of `the demolished portion'.

As one can read in the recently reported judgment of the High Court of Rajasthan in Commissioner of Income-tax vs Hotel Lake End, "the assessee thereafter restored the original swimming pool and boundary wall at the same place and with the same height and incurred expenditure of Rs 59,500 and Rs 74,606 respectively." These expenses were claimed as revenue expenditure, but the ITO swam through the numbers and said that construction of swimming pool and boundary wall created an asset that is "of enduring nature".

On appeal, the Commissioner too endorsed the ITO's view. Thereafter, the issue went to the Tribunal. It said that swimming pool and boundary wall were there prior to demolition and by the court's order both were restored; "therefore, whatever expenditure has been incurred was for the purpose of business and it should be allowed as revenue expenditure." The Department was not happy and so the case landed in the corridors of the High Court.

The Rajasthan HC verdict

By then, it appears that the hotel had lost all interest in the matter and so "none appeared for the assessee". Mr Sandeep Bhandawat argued for the Department and said: "When expenses are incurred on the assets which are of enduring nature, they should be treated as capital expenditure and not as revenue expenditure."

Justices Y. R. Meena and Mrs Gyan Sudha Misra observed that whether the expenditure is in the nature of capital or revenue depended upon the facts of each case. "In the case on hand when the expenses are incurred on construction of swimming pool and boundary wall, which are of enduring nature, it cannot be said that these expenses are revenue expenses, especially when it is not denied that the expenses on assets are of enduring nature."

The court also said: "Whether the swimming pool and the boundary wall have been constructed or reconstructed at the court's order, that does not make any difference in the nature of expenses. Once the expenses are on the assets which are of enduring nature, that expenditure should be allowed as capital expenditure."

Guidance from Kerala

Often, cases are tough and judges have to literally swim in the troubled waters of facts to fish for the missing reason. At times, the catch is elusive. To help in determining the scope of Section 37(1), that is, relating to business expenditure, there is a whole bunch of broad principles that the Kerala High Court laid down in Ram Bahadur Thakur Ltd vs CIT:

*(1) In order to constitute an expenditure falling under Section 37(1) of the Act, the six conditions should concur, viz., i) that the expenditure should not be of the nature described in Sections 30 to 36, ii) that it should have been incurred in the accounting year, iii) that it should be in respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed, iv) that it should not be in the nature of personal expenses of the assessee, v) that it should have been laid out or expended wholly and exclusively for the purpose of such business, and vi) that it should not be in the nature of capital expenditure.

*(2) Though the expression `for the purposes of the business' is wider in scope than the expression `for the purpose of earning profits' and may comprehend many acts incidental to the carrying on of a business, its limits are implicit in it and the purpose shall be for the purpose of the business, that is to say, that expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.

*(3) The expenditure incurred is on the ground of commercial expediency and in order, indirectly, to facilitate the carrying on of the business.

*(4) The fact that there was no compelling necessity to incur the expenditure on which deduction is claimed is irrelevant to constitute expenditure under Section 37(1) of the Act.

*(5) Even an expenditure incurred by an assessee in the course of his or its business voluntarily and without necessity can be allowed as a deduction under Section 37(1) of the Act if it is incurred for promoting the business and to earn profits even though there was no compelling necessity to incur such expenditure.

*(6) If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure to the benefit of a third party also.

*(7) In every case it is a question of fact whether the expenditure was incurred wholly and exclusively for the purpose of trade or business of the assessee.

*(8) Where an assessee seeks to deduct from his or its business profits certain items of expenditure the onus of proving that such deductions are permissible is on the assessee. This particularly so when the claims are based on facts which are exclusively within the knowledge of the assessee. Thus it is for the assessee to plead and prove before the authorities that the expenses were incurred wholly and exclusively for the purpose of the business of the assessee.

*(9) When a claim for deduction of expenditure under section 37(1) of the Act is made by an assessee the assessing officer is bound to conduct an enquiry as to whether the assessee satisfies all the requirements of the section before either allowing or rejecting the claim."

A search for logic

If you repair a broken window, it is revenue spend. Ditto, if you replace a fused bulb. In the case of Lake End, the expenditure in question was incurred to bring the assets back to their original state. In a 1974 case involving Guntur Merchants Cotton Press Company Ltd, that went to the Andhra Pradesh High Court, it was held that the reconstruction of a building that collapsed due to heavy rain was revenue expenditure.

Thus, with due respect to the court, it may be submitted that there is more of revenue colour in the outlay, rather than that of capital.

Tailpiece

"If the Commerce Minister can take the service tax load off exporters' backs... ."

"I know, you want the Petroleum Minister to trim fuel prices by cutting off the tax burden, right?"

Detaxification@TheHindu.co.in

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