Income Tax Appellate Tribunal - Delhi
Sunair Hotels Ltd., New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : 'G', NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.2729/Del/2010
(ASSESSMENT YEAR : 2007-08)
M/s. Sunair Hotels Limited, vs. Addl.CIT, Range 9,
A - 7, Ist Floor, Geetanjali Enclave, New Delhi.
New Delhi - 110 017.
(PAN : AAACS1463L)
(Appellant) (Respondent)
ASSESSEE BY : Shri Vinod Bindal & Ms. Sweety Kothari, CAs
REVENUE BY : Shri Gajanand Meena, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the assessee arises out of the order of the CIT (Appeals)-XII, New Delhi dated 4.3.2010 for the assessment year 2007-08. The grounds of appeal taken by the assessee read as under :
"1. The Ld. CIT(A) erred in law and on facts in disallowing 30% deduction for repairs u/s 24 amounting to Rs.79,63,877/- on rental income received by the appellant by holding that the relevant income was service charges and not rent since there was a separate service agreement between the appellant and the tenant, while ignoring the lawful explanation of the appellant that the impugned service agreement was a part of the rent agreement only. Thus, the lawful deduction claimed by the appellant should be allowed by following the appellate order for the preceding assessment years by the Hon'ble ITAT.
2. The Ld. CIT(A) erred in law and on facts in considering Rs.2,65,46,255/- as 'Income from other sources' instead of 2 ITA No.2729/Del/2010 'Rental Income', while ignoring the lawful explanation of the appellant that the impugned service agreement was a part of the rent agreement only. Thus, the lawful deduction claimed by the appellant should be allowed by following the appellate order for the preceding assessment years by the Hon'ble ITAT.
3. The Ld. CIT(A) erred in law and on facts in disallowing litigation fees of Rs.20,67,650/- by stating that the same was not incurred wholly and exclusively for the purpose of business, while ignoring the facts and lawful explanation of the appellant that the said litigation expenses were incurred for defending cases filed against the appellant company challenging its operations and, thus, interfering in the functioning of its business. Thus, the litigation expenses were incurred wholly and exclusively for the business purpose of the appellant company and should be allowed fully.
4. The Ld. CIT(A) erred in law and on facts in not disposing of the ground of appeal regarding addition to income of the sum of Rs.1,24,06,266/- towards depreciation on the basis of finding given in the block assessment order which has already been decided in favour of the assessee by the CIT(A) in the preceding assessment years as well as so confirmed by the Hon'ble ITAT; and also without considering the lawful explanation of the appellant justifying the said claim of depreciation. Thus, the addition so made should be deleted.
5. The appellant craves the leave to add, substitute, modify, delete or amend all or any ground of appeal either before or at the time of hearing.
6. The appellant craves the leave to add, substitute, modify, delete or amend all or any ground of appeal either before or at the time of hearing."
2. After hearing the parties, we find that ground nos.1 to 4 are covered in favour of the assessee and against the revenue by the earlier decision of the Tribunal in ITA Nos.3737 to 3739/Del/2006 for assessment years 2001-02 to 2003-04 vide order dated 27.6.2008. This order is later on followed by the 3 ITA No.2729/Del/2010 Tribunal in favour of the assessee in the appeals for assessment years 2004- 05 and 2005-06, copies of the orders are placed before us.
3. Ground No.1 related to deduction u/s 24 of the Income-tax Act and ground no.2 related to assessing the rental income under head 'Income from other sources' are covered by the observations made vide paras 11 to 13 of the order of the Tribunal, referred to supra, as under :
"11. The assessee impugned above disallowance in appeal and drew ld. CIT (A)'s attention to two agreements dated 29.10.97 with Mitsui & Co. Ltd. for letting out its commercial center to that concern. One agreement was for rent and the other was for services claimed to have been entered at the insistence of the tenant. The assessee also placed on record subsequent changes in the agreement between the tenant and the assessee. It was contended that the appellant never provided any services to the tenant nor claimed any deduction of any expenses for such services. What was received from the tenant under the two agreements was rent for letting out of the premises. Even the tenant has deducted tax at source from the entire amount treating it as rent and not as services charges u/s 194(c). The ld. CIT(A), after considering facts and circumstances of the case, treated the entire amount as rent and held that the assessee was entitled to full deduction towards repairs u/s 24 of the LT. Act. The Id. CIT(A) observed as under:-
"I have considered the facts and circumstances, the reasoning of the AO and the submissions of the assessee. After considering the same 1 am of the opinion that though two agreements had been made for sublicense fee, i.e" rent and service charges separately, yet the fact remains that no services of any kind were provided by the appellant to Mitsui Co. To compound the issue, the AO has also failed to bring on record the fact, whether any expenses in respect of the services allegedly provided to Mitsui & Co., were claimed by the appellant. In view of the above, I am of the opinion that no services were actually provided by the appellant, and, factually the so-called service charges were nothing but rent received by it. Further, it is settled law, that form and 4 ITA No.2729/Del/2010 substance of the transaction, and not· the nomenclature assigned to it, determine the nature of the income. Accordingly, the appellant is eligible to claim standard deduction u/s 24 of the Act from the same and the disallowance of Rs.54,39,600/- so made is deleted."
Similar orders were passed in subsequent two years.
12. The revenue being aggrieved has brought the issue in appeal before the Appellate Tribunal.
13. We have heard both the parties. During the course of assessment proceedings, it was not disputed that the assessee did not render any service nor any expenditure towards any services has been claimed in the account. The entire amount received from the tenant has been shown towards rent. There is no dispute about the receipt. In these circumstances, as the entire receipt has been treated as rent assessable under the "house property income", the statutory deduction towards repairs at 25% of the gross amount was required to be allowed. Therefore, on facts and circumstances of the case, we see no error in the approach of the ld. CIT(A)."
4. Respectfully following the decision of ITAT, we allow ground nos.1 & 2 of assessee's appeal.
5. Ground No.3 related to litigation fees is covered by the decision of the Tribunal, referred to supra, vide paras 15 to 17 as under :-
"15. The assessee challenged above disallowance in appeal and furnished detail of total sum of Rs.31,53,844 incurred towards legal and professional expenses in the period relating to A Y 2001-02. Similar details have been filed before us. With regard to details, it was pointed out that all the expenditure claimed related to proceedings before the Hon'ble Delhi High Court and before the arbitrator appointed by High Court to resolve the dispute arising out of agreement between the parties. The ld. CIT(A) has noted the detail of litigation and of claim made by the appellant company against the opposite party. The appellant further contended that assertion of AO that disallowed 5 ITA No.2729/Del/2010 amount related to professional fees for defending criminal cases was totally incorrect. In fact, no criminal case has been filed against the assessee by V.L.S. Finance Ltd. The assessee further relied upon case law allowing litigation expenses u/s 37(1) of the I.T. Act incurred to defend its business or actions arising out of business. It was explained that entire litigation related to actions which arose during the course of business and it was stated that litigation expenses were normal expenses which are incurred by a businessman wholly and exclusively for purposes of business.
16. The ld. CIT(A) allowed the claim with the following observations :
" I have considered the facts and circumstances of the case, the reasoning of the AO and also the submissions of the assessee. After considering the same I see no merit in the contention of the AO that the impugned litigation expenses did not relate wholly and exclusively to the business of the appellant company, but pertained to some personal dispute of the promoters of the appellant company. Merely because the names of the promoters wee also included as claimants in the claim filed before the arbitrator appointed by the Delhi High Court, does not suffice to warrant any inference that the expenditure is attributable to the promoters in their individual capacity. It is abundantly clear from the text of the claim filed by the appellant that all claims pertained to the losses and additional expenses incurred by the appellant company due to delays in arranging or non- arrangement of finance by VLS Finance Ltd. Thus, in no manner there was a question of personal dispute raised in the said arbitration proceedings. Moreover, all these claims were definitely related to the hotel business of the appellant company for which it incurred litigation expenses. Further keeping in view the ratios given in the judgments cited by the appellant, I am inclined to agree with the appellant and I delete the addition of Rs.12,89,000/- so made, as the expenditure, in my opinion, has been incurred wholly and exclusively during 6 ITA No.2729/Del/2010 the course of business carried out by the assessee company.
Similar orders have been passed in two subsequent assessment years.
17. The revenue has brought the issue in appeal before the Appellate Tribunal. The ld. DR relied upon the order of the AO. The ld. Counsel for the assessee, on the other hand, drew our attention to the detail of litigation expenses in all three years and contended that all the expenses were incurred by the company in respect of litigation carried on by the company against V.L.S. Finance Ltd. in different courts. No expenses pertaining to personal litigation or other litigation of the directors were debited in the books of account of the assessee. If directors were carrying any litigation in their personal capacity, those expenses were separately debited in the personal account of the partners and not claimed by the assessee company. In the light of categorical finding of ld. CIT (A), in our opinion, it was for the revenue authorities to show from the detail of expenses that expenses disallowed related to criminal proceedings against directors or were otherwise inadmissible and were wrongly claimed by the assessee company. This has not been shown. Therefore, on facts and circumstances for the case, we are unable to interfere with the finding of the ld. CIT(A) that no inadmissible expenditure was claimed by the appellant under the head 'litigation expenses'. Addition made was rightly deleted in all the three years. This ground of appeal is also rejected."
5. Respectfully following the decision of ITAT cited supra, we allow this ground of assessee's appeal.
6. Ground No.4 related to depreciation is also covered by the observations made vide para 18 to 22 of the order of the Tribunal, referred to supra, as under :
"18. The last common ground relates to disallowance of depreciation on "protective basis". The amount for AY 2001-02 is Rs.3,43,06,165. The background of this disallowance is that 7 ITA No.2729/Del/2010 the search operation was conducted on the assessee company on 21.11.00 and the block assessment u/s 158BC was made for the period 1.4.90 to 21.11.00. While making above assessment, the AO treated certain expenditure on construction of hotel as bogus and disallowed them. The AO had held that certain parties from whom capital goods were claimed to have been purchased did not support the claim of purchases. He further recorded a finding that certain construction was not undertaken as alleged and expenses claimed for such construction were bogus expenses. The depreciation claimed on such construction/expenses was disallowed. This disallowance made in the block assessment u/s 158BC was followed in the regular assessment, though made on a protective basis. The disallowance of depreciation is entirely based on what was held by the AO in the block assessment u/s 158BC of the LT. Act.
19. The assessee impugned above disallowance in appeal before the CIT(A) and explained that disallowance in block assessment was based on certain evidence and statements collected at the back of the assessee without affording opportunity to the assessee to explain them. The Appellate authority in the impugned order found that in earlier proceedings u/s l58BC, CIT (A) had remanded the issue of bogus expenses to the AO to allow opportunity to the assessee to cross-examine the concerned parties. After considering the report of the AO, the ld. CIT(A) vide order dated 15.4.04 in block assessment in appeal No. 223/2002-03 had deleted the entire addition. It was also explained in these proceedings that valuation of construction of hotel was got done by TFCI and, expenditure shown on construction was fully supported by the report of above leading financial institution. The assessee also relied upon government approved valuer's report. The detail of expenses incurred on construction of hotel were again submitted with ld. CIT(A). The ld. CIT(A) in the impugned order for AY 2001-02 deleted the addition with the following observations:-
"9. I have considered the facts and circumstances of the case, the submissions of the assessee and the reasoning of the AD for disallowing the claim of the assessee. After consideration of the same, 1 find that my 8 ITA No.2729/Del/2010 predecessor CIT(A)-I, New Delhi, has already given a finding in the appellate order pertaining to the block assessment period of this assessee that there was no justification for the AO to disallow depreciation there. In view of the above, it is my considered opinion, that no such disallowance of the claim of depreciation can be made in the regular assessment, albeit on protective basis, without any legal and independent reasoning as to why this claim of the assessee is to be disallowed. In view of the totality 'of the facts and circumstances of the case, as there is nothing on record to legally justify the disallowance of the claim, I am left with no alternative but to agree with the claim of the assessee for allowing depreciation in regular assessment. The AO is accordingly directed to allow claim of depreciation amounting to Rs.16,04,19,433/- as claimed by the assessee."
20. Similar addition made in the other two Asstt. Years is also deleted in the appellate proceedings.
21. The revenue is aggrieved and has brought the issue in appeal before the Appellate Tribunal. During the course of hearing, a copy of order of ITAT 'D' Bench, New Delhi in ITA NO. 248/D/04 and 398/D/04 in the case of DCIT, CC-11 Vs Sunair Hotels Ltd. (assessee company) dated·26.10.07 was filed before us. The order was passed in the appeal filed by the revenue in the block assessment. The Tribunal considered the question whether any disallowance by treating expenditure on construction as bogus was justified. The Tribunal noted that certain material collected by the A.O. was not put to the assessee by the AO. Subsequently, on direction of the appellate authority, the matter was re-examined. The assessee had further produced material to show that cost of construction declared was lower than similar cost shown by other hotels. The Tribunal also noted that cost of construction in the books was supported by valuation carried by DVO. The Tribunal accordingly saw no justification for upholding any disallowance or addition on account of bogus expenses on construction. The order of the ld. CIT(A) on the issue was upheld by the Tribunal.
9 ITA No.2729/Del/201022. In the light of above order of the Tribunal, we see no justification in sustaining any disallowance of depreciation. As noted earlier, the impugned disallowance as "protective" is made solely based on similar disallowance and addition made in the block assessment year. No new or fresh material was placed on record to justify addition/disallowance of depreciation in the three years under appeal. The disallowance in block assessment year was deleted by ld. CIT(A) for the reasons already discussed above. The said order has been confirmed by IT AT and disallowance of depreciation or of expenses claimed to be incurred on construction has not been sustained. The assessee has placed all the relevant material on record to justify cost of construction. In the above circumstances, we uphold the order of the CIT(A) deleting the disallowance on depreciation in all the years before us."
7. Respectfully following the decision rendered in the appeals for the earlier years, referred to supra, the facts and circumstances being similar to this case, we allow the ground no.4 raised in this appeal.
8. Ground Nos.5 & 6 are general in nature and do not require any adjudication.
9. In the result, the appeal of the assessee is allowed.
Order pronounced in open court on the 20th day of August, 2010.
Sd/- sd/-
(C.L. SETHI) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : the 20th day of August, 2010/TS
Copy forwarded to :
1. The Appellant
2. The Respondent
3. CIT
4. CIT(A)-XII, New Delhi.
5. DR, ITAT.
Asstt.Registrar
ITAT, New Delhi.