November 2022

Business expenditure Compensation Capital or revenue expenditure Assessee owner of hotel managed by third party under agreement Compensation paid towards termination of agreement to receive back possession of building and furniture and fixtures Expenditure arising out of business No acquisition of new capital asset Allowable revenue expenditure

K. B. Bhujle, Advocate

Principal CIT vs. Elel Hotels and Investments Ltd. [2022] 447 ITR 92 (Del.)
Date of order: 31st May, 2022 Section: 37 of ITA, 1961

50. Business expenditure Compensation Capital or revenue expenditure Assessee owner of hotel managed by third party under agreement Compensation paid towards termination of agreement to receive back possession of building and furniture and fixtures Expenditure arising out of business No acquisition of new capital asset Allowable revenue expenditure


The assessee was the owner of a hotel in Mumbai which was initially being managed by ITC Ltd. under a hotel operator agreement effective from 1986. In 1993, the hotel was severely damaged as a result of bomb blasts during the riots in Mumbai. Thereafter, disputes and differences arose between the assessee and ITC Ltd. with respect to responsibility to repair and restore the damaged portion and other consequential issues. The assessee went into litigation with ITC Ltd. Ultimately, the assessee terminated the operator-cum-management agreement with ITC Ltd. and paid a sum of Rs. 43.10 crores during A.Y. 2006-07 to ITC Ltd. which in turn handed over vacant and peaceful possession of the hotel property. On the question whether the amount of Rs. 30.86 crores paid by the assessee out of the total amount of Rs. 43.10 crores was capital or revenue expenditure u/s 37 of the Income-tax Act, 1961 the Delhi High Court held as under:

i) The compensation paid by the assessee had arisen out of business necessity and was revenue expenditure u/s. 37. There had been no addition of capital asset of enduring nature in the hands of the assessee and after the payment of the amount there had been no change in the capital structure of the assessee. It had paid the amount to get back possession of its own asset which had been given on licence basis under the hotel operator agreement and not for acquisition of an asset that the assessee did not already own or possess.

ii) The expenditure was to facilitate its business and trading operations. The expenditure was revenue. No question of law arose.

--->

Keywords Search
HTML View Search
Current Issue