A high-level Church of Scotland delegation has just visited Israel, amid continuing controversy over the Kirk's ownership of a luxury hotel in the town of Tiberias, on the Sea of Galilee.

The Church has invested some £13 million in the hotel over the past 13 years – money many say could have been better spent on overseas aid projects, combating HIV/AIDS in Africa or renovating churches in Scotland.

The Scots Hotel is a magnificent property, set in gorgeous gardens canopied by flowering jacaranda trees and date palms, with a magnificent view over the Sea of Galilee, at the spot where, according to the Bible, Jesus walked and performed some of his miracles.

The buildings originally housed a Scottish hospital, founded in the 1890s. This was later turned into a modest guesthouse, and then – following a fiercely debated decision of the General Assembly in 1999 – into a top-class hotel.

Last month, it became even better, with the inauguration of a £1.5m wellness centre and spa, and this was the occasion for the delegation's visit. To some, that might look like gilding the tusks of a white elephant, for the Scots Hotel is a very expensive venture that the Kirk has long struggled to justify.

It did inherit a tricky dilemma. The old guesthouse was so run-down it was costing a fortune to maintain. The solution chosen was to turn it into a property that would eventually not just pay its own way, but generate profits for the Church's good causes – including support for the Palestinian Christian population of Israel, one of the region's "forgotten minorities". It was argued that a hotel could serve as a place where Christians, Arabs and Jews could come together.

Not much of that dream has come true, yet. Profits have been mainly ploughed back into developing the hotel, including the wellness centre. The hotel does employ staff from different backgrounds (including a Russian barman spotted wearing a kilt), but the idea that ordinary Palestinians and Jews would mingle here is pie in the sky.

Not only is the £200-a-night price tag beyond the means of most Palestinians, but Israel makes it virtually impossible for Arabs to travel from the West Bank into Israel.

There was another, more contentious argument: that if the buildings and land were sold, they would end up in Jewish hands. Tiberias is a Jewish town with an increasingly Orthodox population and this could wreck the Church's relations with its Palestinian Christian partners in the Middle East.

The Church's support for the Palestinians is proclaimed at every General Assembly. But some argue the hotel – which relies on Israeli goodwill and even tourism grants – actually ties the Kirk's hands.

Last year, the General Assembly backed away from a call for a boycott of goods from illegal Jewish settlements for fear of falling foul of Israeli legislation.

Critics called it "intimidation", saying the Church's support for the Palestinians was undermined because it did not dare offend the Israeli government, whose "blessing" was needed for "a hotel for rich people in Galilee".

Rev Johnston McKay, a prominent minister and religious broadcaster, describes the decision to spend millions on the hotel as "strange, bizarre and totally unjustifiable", adding, "the need for Israeli support has compromised the Church of Scotland's stand on the terrible things happening to the Palestinians".

Andrew McLellan, a former moderator of the Kirk and now convener of its World Mission Council, which runs the Church's overseas projects, initially led a campaign to close down the hotel, but has now changed his mind.

"Since the hotel now exists," he argues, "it would be criminal to allow the money already put in to be frittered away. The profits generated are for the purposes of God, to help us build peace and reconciliation, and stand for justice, and for the poor people in our sister churches across the world."

It was put to him that since the hotel was run professionally, as a commercial business – the manager is the highest paid official on the Church's payroll – it would make sense to market it properly.

Why not advertise package tours in Life And Work, offering people a chance to visit the Holy Land, with a few days in Jerusalem and a few days in the Scots Hotel?

"We tried that last year," was the response, "but had to call it off for lack of interest."

You can hear the full story in A Scottish Hotel In The Holy Land on BBC Radio 4 at 11am on Wednesday, October 31.