Income Tax Appellate Tribunal - Kolkata
E.I.H. Ltd., Kolkata vs Assessee on 11 September, 2015
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IN THE INCOME TAX APPELLATE TRIBUNAL,
KOLKATA 'A' BENCH, KOLKATA
Before Shri Maha vir Singh, Judicial Member and
Shri M . Ba la ganesh, Accountant M ember
I.T .A. No . 316 /KOL/ 2 0 06
Assess ment year : 2002 -2 00 3
&
I.T .A. No . 180 8 /KOL/ 2 00 7
Assess ment year : 2002 -2 00 3
EIH Limite d ,..... ............... .............................. ........ ..................Ap p ellan t
4, Ma ngoe La ne,
Kol ka ta -700 001
[ PA N : A AA CE 6898 B ]
-Vs.-
Dep u ty Com mis si one r of Income Ta x,... ............................Re sp ond ent
Circle-8, Kolka ta ,
A a ya ka r Bha wa n,
P-7, C howring hee Squa re,
Kol ka ta -700 069
&
I.T .A. No . 426 /KOL/ 2 0 06
Assess ment year : 2002 -2 00 3
Dep u ty Com mis si one r of Income Ta x,... ...............................Ap p ella n t
Circle-8, Kolka ta ,
A a ya ka r Bha wa n,
P-7, C howring hee Squa re,
Kol ka ta -700 069
-Vs.-
EIH Limite d ,..... ............... .............................. ........ ..................Resp ond e nt
4, Ma ngoe La ne,
Kol ka ta -700 001
[ PA N : A AA CE 6898 B ]
Appeara nces by :
Dr. Adhir Ku mar Bar, CIT, D.R., for the Department
Shri R . N. Baj or ia, Senior A dvocate & Shr i A.K. G upta, FCA, f or the assess ee
Dat e of concluding t he hearin g : August 20, 2 015
Dat e of pr onouncing th e order : S ept emb er 1 1, 2015
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O R D E R
Per Shri M. Balaga nesh, A.M.:
1. These appe als a ri se out of the o rders o f the Learn ed Commis sione r of Inco me Tax (App eals)-VI II, Kolkata in Appeal Nos. 44 /CIT( A)- VIII/KOL. /CI R.8/2005-06 dated 22.12.2005. The ass es sment fo r th e A sst Yea r 2002-03 was f ramed by th e Learn ed A ssessin g Office r u/s 143(3) of the Inco me Tax Act, 196 1 (hereinafter ref erred to as the "Act") m aking various disallowan ces. Agg ri ev ed, the as ses se e pref erred an app eal before th e Learned CIT(App eals ) who gave p artial reli ef to the a sse ss ee co mpany a gain st which bo th the a sse ss ee an d the Revenue are in appeal before u s and h ence th ey are t aken up to gether fo r the pu rpos e of co nvenience and di sp osed off acco rdin g ly by a com mon ord er.
I.T.A. No. 316/ Kol/ 2006 - ASSESS EE's APPEAL
2. Disallowance of Deduction u/s 80HHD - Exclusion of payments received in Indian Rupees from Fore ign Airlines and Emba ssies - Rs.2,20,87,392/-
2.1. The brief fa cts of th e c as e are th at the asses see cl aimed d eduction u/s 80HH D of the Act in respect of p rofit derived fro m the services provided to the fo reign touri st s in ac cordanc e with th e p rovision s of sect ion 80HHD of the Act. The a sse ss ee comp any clai med total forei gn exchan ge rec eipts o f R s.182,7 7,99,427/- fo r th e pu rpose of computin g ded uction u/ s 80H HD of the Act. Ou t of this, th e Lea rn ed A ss essin g Officer observ ed that a su m of Rs. 2,20,87,39 2/- mad e by the Forei gn Embassi es received in Indi an Rupees and accordin gly held that the sa me should not be considered for ded uction u/s 80H HD of the Act as th e sa me was not rec eived in fo rei gn cu rrency. Aggri eved, the asse ssee p ref erred an app eal befo re the Lea rned CIT(App eals) who upheld the disallowan ce of the L earned Ass es sin g Offi ce r.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 3 of 73 Aggri eved, the assessee p referred f urther appeal befo re this Trib unal on the fo llo win g g round :-
"1. That on law as w ell as on the facts and in the cir cu ms tan ces 'of th e case th e Learn ed Commissioner o f Inco me Tax (A)-VI II, Kolkata erred in confirming the disallowance of Rs.22,087,39 2 paid in Indian Rupee by Foreign Airlines out of thei r r epa triable a mount and RS.1 71 ,829.661 paid by th e Diploma ts of foreign countri es who are exempt ed from making payment in Foreign Curren cy for th e pu rpo se of dedu ction U/s, 80HHD of the Act, ign oring th e fact th at definition o f "Convertibl e F oreign Exchange" has been pro vided in the sta tut e, whi ch includes payments, whi ch are r ecognised by Reserv e Ban k o f India as paymen t in foreign exchange and th es e paymen ts ar e so consider ed by Cir cu la r No. 60/97-2002 dated 24.1 2.98 issued by t he Joint Di rector Gen eral of Foreign Trade, Govt. of India a nd con firmed by Res er ve Bank Of India, F oreign Exchang e Department, New Delhi".
2.2. Shri R.N. Bajoria, Senio r Adv ocate, the Learned A.R., appea red on beh alf of the ass es see and D r. Adhir Kumar B ar, Learned CIT, D.R., app eared on behalf of the Revenue.
2.3. The Lea rn ed AR argu ed that the as sessee comp any has received a sum of R s.2,2 0,87,392/- f rom Forei gn Embas si es who are exemp ted fro m makin g pay ment in Forei gn Exch an ge u nder the Vi en n a Conventio n where India is also on e o f th e si gnatori es. He furth er argu ed that the term "Convertible Forei gn Exchan ge" as p er expl anation in clau se (b) of Section 80HHD(7) re ad with claus e (a) of Expla nation to Sect ion 80HHC me an s, "forei gn exchan ge which is fo r the time bein g treat ed by the Res erve Bank of In dia as Conv ertible Fo rei gn Exchan ge for the purpos es of the Fo rei gn Exch an ge Regulation Act, 1973 and any rules m ad e thereunder." H e pl aced reliance o n th e Ci rcula r No. 60 / 97-2002 dat ed 24.12.1998 issued by the Joint Director General, Foreign Trade, Minist ry of Com merce that the afo res aid t wo rup ee receipts shall be consid ered by the RBI as p aym ent mad e in Fo rei gn Exch an ge and acco rdin gly all the I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 4 of 73 ben efits avail able under E PCG sch eme shall be available to the Hotel s. Accordin gly, he pleaded th at the moni es we re received by the a sse ss ee co mpany in acco rdance with a sch eme approved by RBI and hence the as se sse e should be g ran ted deduction u /s 8 0 HHD of the A ct. The Learned AR further argued th at s imil ar disallowance made in Asst Year 1999-2000 by the Lea rn ed A ssessin g Officer in a ssess ee's own case c ame up befo re this Tribunal and th e same in ITA No. 89 1/Kol/2004 d ated 29.6.20 05 had set a side the m atter to th e file of th e L earn ed Ass essin g Officer to ve rify the natu re of receipt with RBI and di rected th e Learned As ses sin g Offi ce r to grant deductio n u/s 80 HHD i f the RB I co nfi rms that the s aid receipt to hav e come in agreed mo de as per the Circular. The Learn ed AR st ated that in th e said set asid e ass es sment, t he Lea rned As sessin g Of fice r had grant ed deduction u /s 80HHD of the Act in respect of th e amoun t received in Indian Ru pees by ag re ein g t o the RBI Ci rcular.
2.4. In re spons e to th is, th e Learned DR argued that th e RBI Ci rcula r i s issu ed in th e context of EPCG scheme and not applicable for income tax purpose s and pleaded that the p ay ment s received in Ind ian currency fro m forei gn airlin es and embassies do es not fall in the catego ry of conve rtible forei gn exchan ge as defin ed in FERA and the Inco me Tax Act does no t permit to go bey ond this provision to look for the definition of fo rei gn exchan ge eli gib le for deduction u/ s 80HHD. He furth er argu ed that forei gn exchan ge eli gib le for a p arti cular s cheme of the Minis try of Commerce may not be regarded as fo reign exch an ge fo r the purpose of Incom e tax, more so, wh en the Ci rcular of the Commerce Minist ry seeks for a larger d efinition of fo reig n exc hang e fo r the pu rpos e of EPCG scheme including the d efinition o f fo rei gn exch an ge u /s 80HH D as on e of the parameters p rovided fo r the sa me. H e fu rther a rgu ed th at simila r issu e for th e As st Year 2000-01 in ITA No. 490/Ko l/2005 and fo r Asst Yea r 2001-02 in ITA No. 833/Kol/200 5 was re stored to the file of the Lea rn ed A ss essin g Of ficer by this Tribunal.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 5 of 73 2.5. We have heard the rival submi ssions and p erus ed the det ailed pap er boo ks of the asses se e, chart f iled by the Learn ed AR at th e time of hea rin g, written submissions of th e Lea rn ed DR and perused the mate rial s available on reco rd. The short point th at aris es fo r co nsideration is that wh ethe r the mon ies receiv ed in Indian rup ees by as se sse e f ro m fo rei gn ai rlin es and emb assi es which we re accept ed as amount s receiv ed in con vertible forei gn exch an ge by the RBI pursuant to its Ci rcular issued in the context o f E PCG sch eme, could be applied fo r the purpose of grantin g d ed uction u/s 80 H HD of the Act. In this co nnection, it is relevant to look into the p urpose behind grantin g deduction u/s 80H HD of the Act by the legislatu re to an asses ss ee. From the said intentio n, it co uld be easily infe rred that the pro vision s of section 80HHD bein g ben efici al in nature need s to be viewed liberally. Moreover, the provision s of s ection 80HHD relie s on the meanin g of "convertible fo rei gn exchan ge" in clause (a) of Explanation t o section 80HHC. It is relevant to rep ro duce claus e ( a) of Explan ation to section 80H HC here:-
"convert ible foreign exchange" means foreign excha nge which is for th e tim e b eing tr eat ed by the Res er ve Ban k of India as con vertible foreign exchan ge for the purpo ses of th e For eign Excha nge Ma nagemen t Act, 1 999 and any rules made th ereund er .
From the above meanin g, it is very clear that once th e RBI accepts a part icular receipt to have be en receiv ed in conv ertible fo rei gn ex chan ge, the deduction u/s 80HH C and 80HHD shou ld be granted to the as sessee. In the instant cas e, admittedly, the asse ssee had receiv ed mon ies in acco rdanc e with the sch eme app roved by RBI and hence the assessee i s entitled fo r deduction u/ s 80H HD o f the Act in respect of amounts received in Ind ian Rup ees f rom Forei gn Airlin es and Forei gn Emb assie s. It is p ertinent to note th at the L earn ed As sessin g Officer had grant ed ded uction u/s 80 HHD of the Act in the set a sid e as sessment p roceed in gs for th e A sst Y ear 1999-2000 on the same is sue to the sam e as se sse e.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 6 of 73 Henc e in view of th e afo res aid facts and ci rcum stan ces and provision s of the Act, we direct the L ea rn ed Assessing Off icer to g ran t ded uction u/s 8 0HHD of the Act to the as se sse e. Hence Gro und No.1 rai sed by the a ss ess ee i s allowed.
3. Disallowance of dedu ction u/s 80HHC for sa le proceeds of Fligh t Kitchen Services -
Rs.1,96,89,591/-
3.1. The brief fact s of this issue are that the ass ess ee derived s ale proce eds on account of fligh t kitch en services (sal e of food and bev erages ) to o ut bo und flights of Fo rei gn Airlin es and claimed deduction u/s 8 0HHC of the Act and p roceed s received thereon in I ndian Rup ee s. As the p roc eed s were not received in convertible fo reig n exch ange, the Lea rn ed Assessin g Of fice r den ied deduction u/s 80H HC on th e said turno ver which was also in line with the deci sion taken by him in the ea rlier yea rs which was lat er upheld upto ITAT.
However, th e assessee h ad p ref erred an app eal again st ITAT o rde r before the Ho n'ble Calcu tta Hi gh Court and it was pendin g at that ti me. The add ition mad e by the L earned A ss essin g Offic er was also upheld by the Le arn ed CIT(App eal s) on the si milar grounds mentioned hereinabo ve.
Aggri eved, the assessee is in appeal before u s on the fo llo win g grounds:-
"2. That on law as well as on the facts a nd in the cir cu ms tan ces of th e case the L earn ed CIT (A) err ed in confirmin g disallo wan ce o f the d eduction claimed U/s. 80HHC based o n the judgment o f the Tribu nal in earlier years even tho ugh the princip le o f RES JUDICATA has no app lication in the ta x s ta tut e and ea ch claim shall be decided on th e basis of its own merit.
3. Alterna tively, following the p ri nciple suggest ed U/s.158A for avoiding repetitive appea ls on the same issue I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 7 of 73 the matter may be referr ed back to th e file of the A.O. with direction to follow th e judg men t o f the High Co urt for ea rlier year".
3.2. The Lea rn ed AR argued th at the asses se e h ad expo rted food and bev erages to o ut bou nd flights of Int ernational Airlin e s and rec eived th e proce eds thereon in Indian Rupees an d the same a mounts to rec eipt in co nvertib le forei gn e xchan ge by virtue of Explanation (a) and (aa) of Section 80HHC of the Act. He also furt her pleaded that th e very fact that the customs authoritie s had cleared those articl es to the aircraft at the airpo rt which i s a cus tom s station wi th in the meanin g of Cu stoms Act itself ind ic ates th at the a fo res aid t ransp ort ation o f fo od items to the forei gn bound ai rcraf ts amou nts to exp ort of th ose articles and as such, the benefit of d eduction u/ s 80H HC sho uld be grant ed. He fu rther argued that in any cas e, this issu e is no w s quarely covered in f av our of the as se sse e by the deci sion of the Ju risdi ct ional Hi gh Co urt for the Asst Year 1998-99 in assess ee's o wn c ase of EIH Ltd vs CIT repo rted in (2011 ) 338 ITR 5 03 (Cal) dated 12.8.2 011 and pleaded that the same may kindly be followed. In respons e to this, the L earn ed DR f ai rly conceded to the same.
3.3. We have heard the riv al submi ssion s and hold that the issue is squarely co vered by the decision of the Juri sdictional Hi gh Court in as se sse e's own case repo rted in 338 IT R 503 (Cal). The questions raised before the Hon'b le Calcu tta Hi gh Cou rt are rep ro duced b elow for the s ake of convenience :-
(a) Wh eth er on th e facts a nd in the cir cumstances o f the case th e supply o f food and beverages to the int ernationa l airlin es in s ealed containers consti tut es expo rt o f goo ds out of India for the purposes of section 8 0HHC of th e Act?
(b) Wh ether on th e facts a nd in the cir cumstances o f the case th e sa le p roceeds receiv ed for su pply of such food and bevera ges wa s in convertible fo reig n ex chang e within the m eanin g of section 80HHC of th e Act?
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(c) Whether on the facts and in the cir cumstances o f the case your petition er is entitl ed to the deduction cla imed under section 80HHC of th e A ct ?
The relev ant operative portion of the said judgement is rep roduced below:-
"13. After hearing the learned Counsel for the parties and after going through the aforesaid provisions of law, we find that in order to get the benefit of deduction under Section 80HHC of the Act, the assessee must comply with the terms of the said section. In the case before us, the only grounds of refusal of the benefit are that first, that the sale of such food and beverages to the foreign airlines did not amount to export out of India and secondly, that the payment received from the said foreign airlines in India in the form of Indian rupees could not be treated as payment in convertible foreign exchange within the meaning of the provisions of Section 80HHC of the Act. The word "export" has not been defined in the Act and thus, the said word is to be interpreted in the light of the language of Section 80HHC of the Act including the explanation added thereto and if the formalities required in Section 80HHC are fully complied with, in our opinion, it is not necessary that all the other formalities prescribed in the Customs Act for export of the articles are also required to be fully complied with by an assessee in addition to those prescribed under Section 80HHC.
14. As for instance, under the Customs Act, a transaction by way of sale or otherwise in a shop, emporium or any other establishment situate in India in exchange of Indian currency does not amount to export but for the purpose of getting benefit of deduction under Section 80HHC, if a transaction takes place by way of sale or otherwise in a shop or establishment situate in India involving clearance at any customs station as defined in the Customs Act and at the same time, the Reserve Bank of India treats such transaction in lieu of Indian currency as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder, the transaction should be treated as export out of India for the purpose of Section 80HHC of the Act by virtue of the added Explanations (a) and (aa) quoted above.
15. In this connection, we may profitably refer to the decision of the Supreme Court in the case of CIT Vs. Silver and Arts Palace, reported in (2003) 259 ITR 684where the said Court has approved the decision of the Allahabad High Court in the case of Ram Babu and sons Vs. Union of India, reported in (1996) 222 ITR 606 laying down the proposition of law that if both the conditions mentioned in Explanations (a) and (aa) are complied with in a given situation, the transaction should be treated to be an export out of India for the purpose of Section 80HHC of the Act.
21. Now the most vital question that arises for determination in this appeal is whether the appellant has complied with the conditions prescribed in both the Explanations (a) and (aa) of the Act.
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22. We have already indicated that in this appeal we have on the prayer of the appellant admitted some additional pieces of evidence in support of its contention that it has complied with both the above conditions. In spite of giving opportunity to lead evidence in rebuttal to the Revenue for the purpose of disputing the genuineness of those additional pieces of evidence, the Revenue did not lead any evidence. We, therefore, accept the veracity of the statements contained in the additional pieces of evidence as well as the authority of the persons who issued the letters admitted as additional evidence and proceed to consider whether the appellant has complied with the conditions mentioned in both the Explanations (a) and (aa).
23. The Certificate issued by the office of the Commissioner of Customs dated April 13, 2004 certifies that all bonded goods and catering food supplies are carried in a sealed Hl-Lift of M/s. Oberoi Flight Services, the appellant before us, which is escorted by the Customs Preventive Officer on duty, to the Air Crafts of International Airlines catered by them at the tarmac at Chhatrapati Shivaji International Airport, Mumbai, as required under the regulations of the Customs Act, 1963. In our opinion, the aforesaid certificate indicates that the appellant in the process of selling the food and beverage in the said airport has complied with the condition mentioned in Explanation (aa) of the Section 80HHC.
24. Similarly in reply to the letter written by the assessee to the General Manager of the Reserve Bank of India to issue a certificate showing that the payments made in Indian rupees to the hotels by Foreign Airlines and diplomats are being treated by Reserve Bank as Convertible Foreign Exchange for the purpose of Foreign Exchange Regulation Act, 1973 and the Rules made thereunder as also the Foreign Exchange Management Act, it appears that the Assistant General Manager, Foreign Exchange Department has written a letter dated November 7, 2005. By the said letter the said officer has certified that the provisions of the DGFT Circular No.60/97-2002 dated December 24, 1998 regarding treatment of the amounts received in rupees by a hotel company out of repatriable funds would also apply under the FEMA Regulations. In the absence of any evidence disputing the said assertion of the officer concerned, we hold that the appellant has also complied with the condition mentioned in Explanation (a) added to section 80HHC of the Act.
25. We, thus, find that the appellant has successfully established before this Court by uncontroverted additional evidence that the transaction in question satisfies the conditions indicated in both the Explanations (a) and (aa) of section 80 HHC of the Act in respect of the disputed items at the Chhatrapati Shivaji International Airport, Mumbai, and thus, it is a fit case where the orders passed by the authorities below should be set aside and the Assessing Officer should be directed to consider the claim of deductions under Section 80HHC of the Act on merit as the appellant has proved that the transaction in question from the said airport amounts to export out of India.
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27. We, therefore, allow this appeal by setting aside the orders of the authorities below and by answering all the three formulated questions indicated above in the affirmative and against the Revenue".
Resp ectfully following the deci sion of t he Ju risdi ction al Hi gh Court, we hold th at th e ass ess ee is entitled for d eduction u/ s 80HH C o f the Act in re spect of export of fo od and be verages to out bound flight s of Intern atio nal Airlin es and fo r the pro ceed s received thereon in co nvertib le forei gn exch ange and hold that the assessee had compli ed with the provision s of section 80HHC of the Act in this regard. Accordin gly, the Ground Nos. 2 & 3 rai sed by the assess ee a re allowed.
4. Disallowance of running and maintenance expenditure of aircra fts - Rs.42,80,883/-
4.1. The brief f act s of the ca se are that th e asse ssee in curred runnin g and mainten ance exp enditu re of its aircraft s to the tune o f Rs. 2,14, 04,416/- d uring the as sess ment year under ap peal. The Learned Assessing Officer in line with the deci sion taken by him in the earlie r years sou ght to disallow 20% o f the sa me amountin g to Rs. 42, 80,883/- on acco unt of pe rson al elem ent of usag e of ai rcrafts by the Directors and their relativ es fo r p erso nal pu rposes.
This was also upheld by the Le arn ed CIT(Appe als). A ggri eved, the as se sse e had p referred an app eal before us on the followin g ground:-
"4. That on law as well as on the facts a nd in the cir cu ms tan ces of the cas e th e L earn ed CIT(A) erred in confirmin g the estimat ed disallo wan ce of Rs.4,28 0,883/-, being 20% of Rs.21,4 04,416 a s aga inst the actual ma in tenance an d running expendit ure o f aircra fts amounting to Rs.9.465,89 2 even th ough the air crafts wer e exclusively us ed fo r th e purp ose of busin es s".
4.2. The L earn ed AR argued that th ere c an not be any personal elemen t of expenditu re in the hand s of the company as the comp any b eing a non-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 11 of 73 natural perso n. He relied on the d eci si on of the Gujarat Hi gh Court in the case o f S ayaji Iron and Engin eerin g Co. -vs.- CIT rep orted in 253 ITR 749 in support of this cont ention. He fu rthe r a rgu ed that even assumi ng without concedin g th at if at all, the sam e i s p reval ent, then the same co uld have to be taxed as perquisit e in the hands of th e respective directors and TD S p ro visions th e reo n c ould become app lic able, and th at cannot beco me a det erren t fo r the as ses se e to clai m th e same as legiti mate busines s e xpenditu re. The L ea rn ed AR fu rthe r argu ed tha t the as se sse e's main business is to run luxury hotels of internation al st anda rd and to meet the requiremen t of the int ernational guests of the hotels, and for that purpose, the assessee m ain tains t wo aircrafts fo r bu siness co nvenience. The expenditu re fo r m aintenan ce o f the ai rcraft has no direct nexus with it s e arnin g as even th ough, no custome r i s availab le fo r ch art erin g the ai rcrafts, the assessee is requ ired to incur expenditu re fo r main ten ance and rep air which includ es undergo p rocess of fitnes s ce rtificat e f rom Int ernatio n al Auth ority as per Av iatio n rules. It was al so furthe r argued b y the Learned AR that the Learn ed Asses sin g Officer had inadv ertently calculat ed 20 % on Rs. 2,14,0 4,416/- and disallowed Rs. 42,80,883/-, whereas runnin g and maintenan ce exp enditure ultimat ely deb ited to p rofit and loss acco unt was o nly Rs. 95,64,995/- and hen ce the disallowance, if an y, without p rejudice to the main ground, ought to have been rest ricted to R s. 18,92,999/- (20% of Rs. 95, 64,995) only. He also stated that the d etail s of runn in g and mainten anc e incu rred i s filed at pag e 1 85 of the Pap er Book. The Lea rned AR fu rther argued th at the version of th e L earn ed A s sessi ng Officer a s to revenu e gen erated fro m ch art erin g of aircraft s a mountin g to Rs. 1,19,3 9,421/- was basic ally inco rrect and al so objected to the statem ent of the L ea rn ed Ass es sin g Officer that th e ass es see co uld not link th e revenue gen erat ed b y the aircraft s with th e fli ghts undert aken . He argued that a ccordin g to L earn ed AO the to tal expenditu re on maint ena nce and run nin g of ai rc raft s was Rs. 2,14,04,41 6/- , wherea s the revenu e gen erated therefro m was only Rs. 1,19, 39,421/-. The Learn ed AR a rgued that this comparison is basically I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 12 of 73 inco rrect. He stated th at the n et exp end iture on main te nance and running of ai rcrafts after recovery from p arti es amo unted to R s. 95 ,64,995/- which wa s debited to p rofit an d lo ss a cco unt and to tal income g en erat ed by the assessee out of chart erin g of ai rc ra fts was R S. 2,02, 52,452/- (detail s giv en in p age 186 of p aper book) and thereby , the assessee had only derived a surp lu s of R s. 1,07,87,457/- ( 20252452 -956 4995). The Lea rn ed AR fu rthe r argued th at full det ails of expen s es and the lo g book of fligh ts unde rt aken by the aircraf t has been p rov ided fro m wh ere it co uld be seen that the exp en diture wa s incu rred only for bu siness purpose s. He fu rthe r argued that in A sst Years 1999-2000 and in Asst Yea r 2001-2002, on the same s et o f f ac ts, th is tribunal had resto red the issu e to the file o f the Learn ed As sessin g Offic er fo r veri fica tion o f details to find out whether the sa me has bee n incurred fo r busin ess purpo ses only. He also stated that durin g the asses sment y ear u nder app eal, the as se sse e h ad fu rnish ed all the d etail s o f the s aid expenditu re befo re the Lea rn ed As ses sin g Off icer and without giving any cat egori cal findin g on the same, the L earned A ssessin g Officer reso rted to make th e disallowance o n esti ma ted basi s on the basis of su rmise and conjectu re s.
4.3. In response to this, the Learn ed DR heavily relied on th e written submission s filed by him on thi s ground.
4.4. We h ave hea rd th e rival submi ssion s an d p erused the materi als av ailable on reco rd. It is seen that th e net exp enditure to ward s runnin g and maint enan ce of aircraft s debited i n pro fit an d loss account is on ly Rs. 95,64,995/- and hence the p remis e of th e Le arn ed A ss es sin g Of ficer that a sum of R s. 2,14,04,416 /- is d ebited to profit and lo ss acco unt i s gros sly inco rrect.
It is observed that u lti mately the asse ss ee h ad derived su rplus of Rs. 1, 07,87,457/- being the diff eren ce between the ch arte rin g inco me of Rs. 2,02 ,52,452/- and ma inten anc e and runnin g o f ai rcrafts expenditu re I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 13 of 73 to the tune of R s. 95,64,995 /-, even though deriving su rplus thereon is not a p re-requisite for allowance of exp enditure incu rred. We also find that co mplet e details of th e enti re e xpenditu re to wa rd s runn in g and main ten ance of aircraft s tog ether with the log book has been filed before the Lea rned A ssessin g Offic er and h en ce th ere is absolutely no case for the Learn ed A ss essin g Of ficer to reject the same and proc eed to make disallowance o n esti mated basi s to be in line with the di sallowan ces mad e in earlier y ears. We also find that the earlie r yea rs ITAT ord er on this issu e ne ed not be followed fo r the asst year und er app eal as in th is yea r, the enti re d etail s were very much befo re th e Le arn ed Asse ssin g Off ice r. We also find lo t of force in the argu ments o f the L earn ed AR that the as se sse e comp any bein g a non -natu ral person c annot have any p ersonal ele ment thereon and all the exp endit ure incu rred thereon had to be co nst ru ed only for busin ess pu rposes.
To th is extent, the relian ce on the Gujarat Hi gh Court deci sio n in 253 ITR 749 is well placed and supports th e c as e of the assessee. We also f ind lot of force in th e argu ments of the L earned AR that if at all there i s any pe rson al elem ent in volved in the afo resaid exp enditu re, the same have to be taxed as perquisit e in the hands of the directors and it is only for the TD S o ff icer to lo ok into the violation s, if any , on the s ame and hen ce on that g roun d also , no disallowance of expend itu re could be app reci ated. We find that the L earn ed Ass essin g Of ficer had made the enti re addition ba sed on su rmi ses and co njectures and mad e on a d h oc basis. It i s well founded proposition that wh at i s app arent i s real and the alle gation to p rov e th e cont rary is on the person makin g such allegation. The follo win g d ecision s support our v iew in this regard:-
(i) CIT vs Daulat R am Ra wat mull (1973) 87 ITR 349 ( SC) ;
(ii) Suk hdayal Ra mbilas vs CIT (1982) 136 ITR 414 (Bom.);
(iii) Madura Knittin g Co vs CIT (1956) 30 IT R 764 (Mad);
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 14 of 73 In v iew of the afo resaid fact s and ci rc umstances and resp ectfully following the judicial preced ent s thereon, we have no hesitation in deletin g the addition mad e in th e sum of Rs.42,80 ,883/- on an e sti mat ed basis. Acco rdi ngly , th e Gro und No. 4 rai sed by the a ssessee is allowed.
5. Addition towards notional ga in on fore ign currency loan
- Rs.4,15,36,381/ -
5.1. The brief facts of this i ssue is that th e assessee comp any availed 2603.9 9 Million in Japan ese Yen on 13th August 2001 (equivalent to R s 100 crores) under Forei gn Cu rrency Non Resid en t - Bank Sch eme (in short F CNR(B)) Loan for the pu rpose of its wo rking cap ital busin es s. Henc e this go es to prov e that the loan has been o btained fo r revenue accoun t. Th is lo an was o utstanding as on 31.3.2 002 and the same wa s rest ated at the exch an ge rat e p revai ling at the end of the year in co nsonance with the Accountin g Stan dard 11 (A S-11) issued by the Institut e of Ch artered Acco untants o f India (ICAI) by the assessee co mpany . The as ses se e d eriv ed a no ti onal g ain on such rest atement in view of dec rease in liability payable on the loan account amountin g to Rs. 4,15, 36,381/-. This is wo rked ou t a s un der:-
Loan balan ce - Rs.100 ,00,00,000 /-
Less: Value of loan a s on 31.3.2002
2603.9 9 Million JPY @ 0.3 68075 - Rs. 95,84,63,6 19/-
_________________________
Difference representing gain by
wa y of reduction in liability Rs. 4, 15,36,381/-
________________________
The a ss ess ee reduced the same f ro m it s taxable inco me as th e sa me was notional gain which was un re alized as on the d ate of balance sh eet date and acco rdingly filed i ts return of i ncome.
5.2. The L earn ed A ss essin g Of ficer added t he same as inco me ea rn ed as the forei gn exch an ge fluctu ation was e arn ed on rev enue accoun t relying I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 15 of 73 on the d ecision of the Su p rem e Court in the case of Sutlej Cotto n Mills Ltd vs CIT repo rted in 116 ITR 1 (SC). Agg riev ed, the assessee p re fe rred an app eal before th e Learned CITA who upheld the deci sion of the L earn ed Assessing Offic er. A ggri ev ed, the asses see i s in appeal befo re u s on the following ground:-
"5. That on law as well as on the facts a nd in the cir cu ms tan ces of th e case the L earn ed CIT (A) err ed in confirmin g addition made by th e As sessing Officer of Rs.41,53 6,381 on acco unt of notional ga in o n fo reig n curr en cy swap overlo oking the fact that redu ction in liability of the existing loan in terms of India n Rupee was not actua l and the company was not ent itled to claim any r efund o r adju stment on that accoun t".
5.3. The Learn ed AR a rgu ed that th e gain d erived on acco unt of fo rei gn exchan ge flu ctuat ion b y restatin g the f orei gn cu rren cy loan at the year end and henc e th e same cannot be brou ght to tax b y the Learn ed Assessing Of ficer as it is only notio nal and not realized by the assessee. The Learn ed AR fu rth er argued that si milar fo rei gn excha nge fluctuation on rest atem ent of forei gn cu rrency loan in A ss t Yea r 2003-04 (i.e. immedi ately suc ceedin g a ssessment year), the exchange fluctuation resulted in a lo ss and th e asses see had suo moto no t claimed the s ame as ded uction, bein g a notional loss, as it h ad not of fered the no tional gain to tax in the asst y ear und er app eal. Al ternatively, he argu ed that if th e notional gai n in asst yea r unde r ap peal is b rought to t ax, th en a di rection be given to the Learn ed As se ssin g Offi cer to allow the notional loss in Asst Year 2003-04 to meet the en d s of justice.
In respon se to this, th e Le arned DR relied on the ord e rs of the lower autho rities.
5.4. We have heard the rival sub missio ns and perus ed the materi als av ailable on record. Ad mittedly, the ass es see on 13.8.200 1 had av ailed I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 16 of 73 forei gn currency loan o f JPY 2603.99 Millio n (equ iv alent to Rs.100 cro res) for th e purpo se of its wo rking capital bu sin es s.
Henc e it c an be s af ely con cluded that the loan was bo rro wed on reven u e account. Based o n thi s, it co uld lo gically be concluded that any exchan ge fluctuation arisin g out of rest atem ent of the s aid loan at the end of the year, be it gain or lo ss, would also fall on revenue accoun t and hen ce autom atically comes und er the ambit of ta xation if it is a g ain and allowable as an e xpenditu re if it i s a lo ss. This i ssu e is squarely covered by the d ecis ion of th e Sup re me Court in the cas e of CIT v s Woodwa rd Governor India P. Ltd reported in 312 ITR 254 (SC) wh erein the ques tions rai sed befo re th ei r Lord ships were as u nder:-
(i) Wh ether, on th e facts and cir cu mst ances o f the ca se and in law, th e additional liability arising on acco unt o f fluctuation in the ra te of exchange in respect of lo ans taken for r ev enu e purposes could be allow ed as deduction under s ectio n 37(1) in th e y ear o f fluctu atio n in the rat e of exch ange o r wh eth er th e same co uld only be allowed in the y ear of r epayment of su ch loan s?
(ii) Wheth er, th e a ss essee is entitled to adjust the actua l cost of imp orted asset s acq uired in foreign cur rency on accou nt of fluctua tion in the ra te of exchange at each balan ce sh eet dat e, p ending actu al payment of the va ri ed liability?
Their Lo rd ships h ad c at ego rically held that since th e loan was borro wed for work in g capit al purpose s i.e. on revenue account, any loss ari sin g out of rest atem ent at th e end of the y ear wou ld be squarely allowable u/s 37(1) of the act. In the instan t case, the situ at io n is reverse a s the exchan ge fluctuation results in a gain which would definit ely b ecome t axable.
We R ep roduce P ara 13-15 of the Hon'ble Sup reme Court judg ement as und er:-
"13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 17 of 73 us was that the word "expenditure" in Section 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-`-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in presenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business". In Sections 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation" has also been used. For example, depreciation and allowances are dealt with in Section 32. Therefore, Parliament has used the expression "any expenditure" in Section 37 to cover both. Therefore, the expression "expenditure" as used in Section 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee.
14. In the case of M.P. Financial Corporation v. CIT reported in 165 ITR 765 the Madhya Pradesh High Court has held that the expression "expenditure" as used in Section 37 may, in the circumstances of a particular case, cover an amount which is a "loss" even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in 225 ITR 802. According to the Law and Practice of Income Tax by Kanga and Palkhivala, Section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by Sections 30 to
36. This Section, according to the learned Author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 18 of 73 the provisions of Section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under Sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid" in Section 43(2), which is used in several Sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under Section 28/29. That is why in deciding the question as to whether the word "expenditure" in Section 37(1) includes the word "loss" one has to read Section 37(1) with Section 28, Section 29 and Section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under Section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L account the value of the stock-in- trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading Section 37(1) with Section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where Section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under Section 209 of the Companies Act, mercantile system of accounting is made mandatory I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 19 of 73 for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by Legislative intervention. However, but for such intervention or in cases falling under Section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that the assessee has not complied with the accounting standards.
15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the 1961 Act".
In view o f the afo resaid judgement of t he ap ex co urt, we ho ld that the su m of Rs.4,15,3 6,381/- being the e xch an ge gain would be taxable in the han ds of the as ses se e for the A sst Year 2002-03 and co rresp ondin gly the Lea rn ed AO is also direct ed to gran t deduction for the exch an ge loss due to rest at emen t for th e A sst Year 2003-04.
Accordin gly, the Ground No. 5 rais ed by the assessee is d is mis sed.
6. Disa llowance of Interest on borrowe d funds used for non- business purpose s- Rs.6,27,16,642/ -
6.1. The brief facts o f this issue i s th at the assessee h ad advanced th e following sums to the followin g p art ies an d th e su ms out standin g as on 31.3. 2002 toward s that account are as belo w:-
(i) Lake P alace Hot els & Motel s Ltd - R s.2,50, 00,000/-
(ii) Jyoti Pvt Ltd - . ........ ............... ....... .............Rs. 58,28,690/-
(iii) N andi Hills & Resort s Ltd -........ ............... .Rs.9,01,50,000/-
(iv) Balamu ri e I sland Reso rt Pvt Ltd -............. Rs. 69,60,000/-
(v) Balaji Hotel s & Enterp ri ses Ltd...............Rs.15,12,00,000/-
(vi) Green Fi elds Hotels & R eso rt s P L td ..... Rs. 10,00,00,0 00/- Advance to ward s equity particip ation in
(vii) M ashobra R eso rt Ltd...............................Rs.13 ,00,00,000 /-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 20 of 73
(viii) Oberoi Keral a Hot els & Reso rt Ltd. .......Rs. 40,00,000/-
(ix) Loan to Mu mt az Hot el Ltd......................... Rs.9,50,00,000/-
(i) Amounts paid to La ke Pa la ce Hotels & Motels Ltd...Rs.2,50,00,000/ -
This was paid as s ecu rity deposit for t aking land of the Hotel s at Udaipu r, Rajasthan and int erest @ 9% h as be en ch arged fo r such depo sit. The said p arty h ad also duly deducted tax at source on the interest pay ment made to the assessee .
(ii) Amounts paid to Jy oti Pvt Ltd - R s.58,28,690/- The amount rep resen ts the balan ce re coverab le f rom the co mpany which was pendin g fo r certain disputes. The asses se e has duly charged interest @ 18% on the lo an amo unt both for FY 2001-02 & 2002-03 and the a mount wa s received in full in the F Y 2002-03.
(iii) Amounts paid to Na ndi Hills & Resorts Ltd - Rs.
9,01,50,000/-
This repre sent s ad van ce giv en fo r the Joint Ventu re p roject with Jan son G roup o f Ban galore to con struct an d op erat e Golf cou rse in Bang alore. The amount p aid is to ward s advance for acquisition of land for th e project.
(iv ) Amounts paid to Balamurie Island Re sort Pv t Ltd
- Rs. 69,60,000/ -
This was paid to ward s adv ance for p urc hase of sha re s.
(v) Amounts paid to Balaji Hotels & Enterprises Ltd.-
Rs.15,12,00,000/-
The amou nt was advanc ed for co nstruction of hotel cum comm erci al co mplex at Ch ennai in Tamiln adu. The Hotel was un der const ruction but due to financial p roblem the o wner could no t complete the same and was in litig ation with th e Finan cial Institution s who had initially lent fund for the project. The loan I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 21 of 73 given is interest bearin g and the company has A greement to o perate the Hot el to be constructed ti ll such time the loan with interest is not rep aid.
(vi) Amounts paid to Gre en Fields Hotels & Resorts P Ltd.-
Rs.10,00,00,000/-
The a mount wa s adv anced fo r acquisiti on of land for Golf course in Khandala fo r th e Joint Ventu re project out of own gene ra tion of fund.
(vii) Amounts paid to Mashobra Resort L td - Rs. 13,00,00,000/- The company is a joint venture co mpany owning Ho tel Wildflowe r Hall at Shi mla. Acco rdin g to Joint Ven tu re Agreement, the Co mp any is requi red to fin ance fo r con structio n of hotel which was initi ally co nsidered a s advanc e fo r equity share s. Th e amo unt paid sh all be adjusted again st equity shares to be i ssued to the co mpany .
(viii) Amounts paid to Oberoi Kerala Ho tels & Resort Ltd -
Rs.40,00,000/-
The same i s al so a Joint Ventu re Co mpany and accordin g to the ag ree ment th e comp any is required to advance on equity shares part icipation. The company has al so been allotted 400000 share s of Rs. 10 in As st Yea r 200 3-04 .
(ix ) Amounts paid to Mumtaz Hote l Ltd - Rs.9,50,00,000/- This was p aid as loan a nd interest i s ch arg ed on the s ame by the as se sse e. Durin g the course of as ses sment p ro ceedin gs , the a sse ss ee mention ed the pu rpos e of advancin g mo nies to afo resaid pa rti es and pleaded that the sa me were advan ced d urin g the course of th ei r bu siness and to pu rsu e furth er busine ss inte rest s of the assessee and al so ple aded that own fund s were very much ava ilable with the ass ess ee and no borro wed fund s were used fo r adv an ci ng the moni es to afo res aid parties and hence no int erest di sallowance sho uld be invok ed on the ass essee.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 22 of 73 6.2. The Lea rned Assessin g Officer di sallowed int erest p aid on borro wed funds @ 12% pe r annu m to th e extent of the afo resaid moni es advan ced to v ario us parti e s by concluding that the same were advanced for non- business purpo ses. Ag grieved, the asses se e challen ged this i ssue before the Learned CITA who upheld the di sallowance o f int erest mad e by the Lea rn ed AO except in resp ect of amounts advanced to L ak e Pal ace Hot els & Motel s Ltd; Jyoti Pvt Ltd and Mumt az Hotel Ltd fro m whom the asse ssee had charged inte rest.
Aggri eved, the a ssess ee has p refe rred further app eal before us on the followin g ground:-
"6. That the Learn ed CIT(A) was not justified in rest rictin g the ad dition on account of inter est t o Rs.51,4 01,920 /- being 12% of inter es t fr ee adva nces g iven to Associa te Enterprises having business conn ections in operating the hotels own ed by su ch Enterpris es ".
6.3. The Learned AR argued th at th e ent ire det ails a s to fo r what purpose the moni es were paid by the asses see comp any to the afo resaid part ies were given before th e L earned Assessing Offic er. He argued that the asse ssee had suffici ent o wn fund s at its disp o sal and henc e the borro wed funds we re not utilized for advan cin g monies to a foresaid part ies and henc e there shou ld not be any disallowance of in te rest on borro wed fund s. H e fu rther a rgu ed th at all th e advances were mad e in the n ature of advances pu rsu ant to ei ther joint venture agreem ent s o r adv ance for sh ares and i s not p aid as loans and h ence th ere i s no q uestion of chargin g any inte rest on the advanc es. The Learn ed AR fu rther argued that all the advance s were mad e as St rategic Inv est ment s to pursu e its furthe r busin ess in terest s and those co mpani es were also usin g th e brand of the as ses se e, rende rin g technical s ervices and asse ss ee's sta ff were used by the group co mpanie s and hence had to b e construed as ad vances I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 23 of 73 mad e du rin g th e course of assessee's business. He also relied on the following d eci sions in supp ort of his contentions :-
(i) CIT - Vs.- Britanni a Indu st rie s Ltd rep orted in 280 ITR 525 (Cal);
(ii) CIT- vs.- Texmaco Ltd - ITA No. 607 & 641 / Kol / 2012 fo r As st Yea rs 2006-07 & 2007-0 8 dated 9.6.2 015 rendered by Ko lk ata T rib unal "A" Bench.
In respons e to this, the L earn ed DR ap art f rom pl acin g reli an ce on the written submissio n s filed , vehemen tly supp orted the orders of the lower autho rities.
6.4. We have he ard th e rival sub mis sions an d peru sed the mate ri als and case laws available on reco rd. It is seen th at th e ass essee had on one han d ad mitt edly adv anced i nterest f ree funds to ce rtai n group comp anies and in te rest bearin g loan s to cert ain group companies. On the other hand the as se ss ee has been payin g int erest o n its borro wed capital. In resp ect of amou nts advan ced by the assessee to certain group co mp ani es where interest is charged by it, there is absolutely no dispute. In resp ect of interest f re e adv ances, it has to be seen whether the same were advan ced out of own fun ds o r out of borro wed f unds by the asses see. It is seen fro m the as ses sm ent ord e r that the Learned A ss essin g Offi cer had neithe r disputed the av ailability o f own funds with the assessee to th e tune of Rs. 646.65 crores (bein g the net own ed fun ds at the beginn ing of th e yea r to the tune of Rs.574.46 crores plus c ash profit fo r th e year amountin g to Rs. 72.19 crores), nor bro ught out th e nexus between the b orro wed funds and the inte rest free advan ces made by the as sessee. The L earn ed Assessing Of ficer si mply states that th e ass es see on one hand is p aying interest on its borro wed fun ds and on the other hand advanc es int erest free monies to it s group comp anies. Moreover, it i s well settled I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 24 of 73 proposition that it is n ot for the income tax depa rt men t to sermoni ze how the business man sho uld conduct his business and have his a ffa irs. The business man kno ws his interest best. Relianc e in this rega rd is placed on the decision of th e Hon'ble Sup reme Court in the ca se o f CIT vs Dhanraj Girji Raja Na rasin gherji (19 73) 91 ITR 544 (SC). Furthe r reli ance is also placed on th e d eci sion o f the Hon'ble Ap ex Cou rt in the case of CIT vs Walchand and Co. (19 67) 65 ITR 381 (SC), wherein it wa s held that in applying the test of co m merci al e xpedi ency whether the expendi ture was exc essively laid down fo r the purp ose of business, reasonablen ess of the expenditu re is to be judged f ro m th e point of v iew of a b usinessm an and not that of the rev enue. It i s well decid ed th at what is to be seen for the pu rpose of allo wability of in terest u /s 36(1)(ii i) of the Act i s as to whether th e borrowed f unds we re utili zed for th e purpo se of business. In the in sta nt cas e, the a ssese e had in f act mad e borrowin gs and utilised th e same fo r the pu rpose of its busin ess. The borro wed funds and the o wn fu nd s in the fo rm of share c apit al, re serves & surplus, cash p rofits de rived durin g the year, etc were ine xt ricably mixed in the same ban k account and hen ce p resu mp tion cou ld be drawn th at interest free advan ces were mad e out of own fu nds pro vided the own funds are more than the amounts advanced interest free to parti es. It i s rel evan t to get into the fe w d eci sion s on thi s sub ject:-
CIT v s Gopalakrishna Muralidhar rep orted in (1963) 47 ITR 469 (AP) " The l ear ned counsel m aintains that s ince the capital b or rowed was util ised by the f amil y f or per s onal us e, no r el ief coul d be cl aimed under that cl aus e.
We d o n ot thin k that w e can g ive ef f ect to this ar gum ent. Indis putab l y, thes e am ou nts were bor r owed onl y f or the purp os e of the b usines s of t he f amil y. The as s es see d rew out f r om tim e to time var ious s um s of money agg reg ating to R s. 1, 77, 984/- f r om the b us iness . It is not a case where any par ticul ar sum pur por ti ng to be b or rowed on b ehal f of the b us ines s wa s s pent f or hous ehol d expenses. This is a case where the l oans wer e taken f or carr yi ng on the b us ines s but the f amil y used t o withdr aw s om e am ou nts f r om I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 25 of 73 the b usines s whenever occas ions arose. The f am il y was s ur el y entitl ed to withd raw f r om the capital s uppl ied b y it with th resul t of the capital being depl eted. Ther e is , ther ef ore, no s ubs tance i n the submis s ions that the f act, that par t of the amount bor r owed was l ater on used f or per sonal exp enses, wo ul d d eprive the as s es s ee of the benef its of cl aus e (iii) of sub-s ection (2) of section 10" .
Woolcombers of India Ltd vs CIT re ported in 134 ITR 219 (CAL)-
"The as s es s ee had an overd raf t account with a bank. On Decem ber 12, 1969, i. e. a f ew days b ef ore the end o] the as s es s ee's accounting year on Decem ber 31, 196 9, the account sh owed a d eb it bal ance of R s. I, 39, 412. The as s essee paid advance of R s. 18, 05, 000 on Decem ber 15, 1969. which i ncreas ed the overd raf t to R s . 14, 63, 593/-by December 31, 1969. The ITO hel d that the payment of ad vance tax was not a b us ines s ex penditur e a nd d isall owed the pr oportionate interes t am ou nting to R s . 6, 769 payabl e by the as s es s ee to the b ank. On ap peal , the A AC hel d that though the prof its of the b us ines s wer e emb edd ed in the com bined f inancial tr ans actio ns , yet at the tim e of p aym ent of ad vance ta x, the as s es s ee had not ad eq uate cas h s ur pl us and it had res or ted t o the over dr af t f acil ity s pecificall y f or the pur pos e of paym ent of advance tax, and af f ir med the or der of the ITO. On f ur ther appeal , the Trib unal af firm ed the ord er of the AAC. On a ref er ence, the ass ess ee contended that wher e the pr of its of the as s es see's b us iness was s uf f icient to cover the p aym ent of ad vance ta x d ur ing the rel evant acc ounting year, if such amo unt was paid f r om an account w hich incl ud ed the am oun ts of prof its as well as the overd raf t take n f or the pur pose of the bus iness , the pres umption was that the tax was paid o ut of the prof its and not out of the ov er dr af t am ount an d since the am ount of the pr of its f or the r el evant year f ar excee ded the l iabil ity f or advance ta x and the entir e amount of pr of its of R s. 27 lak hs was d epos ited in the ov er dr af t acco unt o ut of which t he bank r em itted the adv anc e tax, the tax was paid o ut of the ear ning of the pr of its and n ot out of the over draf t am ou nt t ak en Jar ot her b us ines s pur poses . The r evenue c onte nde d th at t he conte ntion, viz. , wher e ther e was a m ixed accou nt and the prof its were s uf f icient to m eet the ta x l iabil ity fr om the said account then the pr esumption s houl d not b e d rawn that the t ax l iabil ity was m et out of the overd raft account and n ot out of the prof its , was not raised bef or e the Tr ibunal and, ther ef or e, that c onte ntion s houl d not be al l owed to be ag itated f or the f ir st tim e b ef ore the Hig h Cour t:
Hel d , (i) that thoug h a c ontention which was not ur ged bef or e the Tr ibun al coul d n ot be agitated f or the fir s t tim e bef or e the High Co ur t in a re f er ence, yet it was appar ent f r om the Tr ibunal 's ord er that the conte ntion that the prof its were s uf f icient to m eet the ad vance tax l iability was ur ged bef or e the I. T. author ities and, theref or e, in view of the am pl itud e of the q ues tion pos ed bef or e t he Hig h I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 26 of 73 Co ur t it coul d not b e said that the conte nt ion was not ur ged bef or e the I.T. authorities .
(ii)T hat, on the facts of the case, the pr of its were s uf f icient to meet t he advance t ax l iability. The entire prof its were d epos ited in the over dr af t account, it shoul d b e pr es um ed that in its ess ence and tr ue character the taxes were paid o ut of the pr of its of the r el evant year and not out of the over dr af t accou nt f or the r unning of the busines s .
Ther ef or e, the interest am ou nting to R s . 6, 769/- paid by the as s es s ee on t he ban k over dr af t accou nt which was dis al l owed as b eing r el atab l e to payment of adva nce l ax s houl d al s o ha ve bee n al l owed as a n ad mis s ibl e d eduction in t he com putation of the as s es s ee's bus iness incom e".
CIT -v s.- Hotel Sa vera [1999] 239 ITR 795 (Madra s)-
"We have carefully considered the submissions made by learned counsel for the Revenue as well as learned counsel for the assessee. The fact remains that there was a total amount credited in the partners' capital as well as current account. A sum of Rs.10,95,010/- was arrived at in the partners' account after taking note of all the drawings made by them and the losses that were incurred in the business for the year ended March 31, 1972. Even after debiting the drawings and the loss in the business, the facts show that there are sufficient funds with the firm to cover the entire advance to the hotel. The Revenue has not made any attempt before the Tribunal to show that the firm has paid interest on the amount outstanding in the accounts of the partner. Though the third question raised proceeds on the basis that the firm had paid interest to the partner on the credit balance, there was no finding either by the assessing authority or by the Appellate Assistant Commissioner that the firm had paid interest to the partners on the credit balance. It is significant to note that there is also no finding by the Appellate Tribunal that the firm had paid interest on the credit balance to the partners. In such a situation, the position that remains is that the firm had its own funds as well as borrowed funds. It is not clear that the firm had not advanced money out of its own funds and in the absence of any material or evidence to indicate that the firm had advanced moneys to the hotel out of funds borrowed for business purpose the presumption would arise, where there is a common fund that the money advanced came only out of its own funds. The decision of the Andhra Pradesh High Court in the case of Gopikrishna Muralidar [1963] 47 ITR 469, would support the ease of the Revenue (?) to that extent. In that case, the assessee--a Hindu undivided family--had a large capital of Rs. 20 lakhs and also made large borrowings during the relevant year and had paid interest amounting to Rs. 93,611. During the relevant previous year a sum of Rs. 1,77,984 was withdrawn from time to time for household expenses and the question that arose before the Andhra Pradesh High Court was whethera part of interest paid on the borrowed capital could be disallowed. The Andhra Pradesh High Court held that it was not a case that where any particular sum purported to be borrowed on behalf of the business was spent for household expenses and this was a case where the loans were taken for I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 27 of 73 carrying on the business of the assessee-firm, but the family used to withdraw some amounts from the business and which were within the limit of capital supplied by the family. In that situation the court held that presumption can arise that where the assessee had both his own money as well as borrowed capital, the money lent came out of his own funds.
The above decision of the Andhra Pradesh High Court was followed by the Gujarat High Court in the case of Shree Digvijay Cement Co. Ltd. v. CIT [19821 158 ITR 45, and the Gujarat High Court held that where the material on record showed that the assessee had a common fund it cannot be predicated that the money lent came only out of borrowed funds. The learned author, Sampath Iyengar in his book Sampath lyengar's Law of Income-tax, 9th edition, at page 2349, observed as under :
"For the same reason a presumption appears to be permissible that where the assessee has his own capital as also the borrowed funds, the former rather than latter to have been utilised for the non-business or personal expenses."
In the facts of the case the Tribunal has found that the money borrowed has been inextricably mixed up with the own funds of the assesses and it was impossible to delineate whichever funds were advanced to Savera Hotels (P.) Ltd,, free of interest, and in that factual situation, we are of the opinion that the finding of the Appellate Tribunal that no disallowance is called for is a finding of fact and the finding of the Tribunal that it can be inferred that Savera Hotels made the advance out of its own funds and not the borrowed capital is sustainable in law.
..........
We hold that the Appellate Tribunal was correct in deleting the sum of Rs. 30,063 and it is also right in holding that no part of the interest should be disallowed especially in the absence of any finding that the money borrowed was advanced to Savera Hotels (P.) Ltd., free of interest.
The questions raised need reframing as they proceed on some wrong assumption and accordingly we reframe the first question as under :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the sum of Rs. 30,063 sustained by the Appellate Assistant Commissioner?"
In so far as the second question is concerned, that also is reframed as under :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that no part of interest should be disallowed?"
The third question is also reframed as under :
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 28 of 73 "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that there was sufficient credit balance and, therefore, the amount advanced to Savera Hotels (P.) Ltd., were not out of the borrowed amount was not based on valid and relevant materials?"
We answer the questions referred to us in the affirmative and against the Revenue. However, in the circumstances, there will be no order as to costs".
CIT vs Britannia Industries L td report ed in 280 ITR 525 (CAL) "The as s es s ee had a packing cr edit s anctioned b y Synd icate Ban k, to the extent of R s. 25l akhs . This was enhanced to R s. 175 l akhs . One the ver y dateof enhanceme nt of the packin g cr ed it, a s um of R s . 165 l akhs was ad vanced to M thr ough a c heq ue d rawn o n Sy ndicate Bank. The As s es sing Of ficer f ound that t he f ir m to which i nteres t f ree l oa n was ad vanced was co ns tituted by t he r el atives of the dir ector s of the as s es s ee. The A ss es s ing Off icer pointed out that t he ad vance was mad e to M without any s ec ur ity and without an y s tipul ation f or paym ent of interest, wher eas the as s es see had paid 12 per cent, interest on th e packing credit to Syndicate Bank. The A ssess ing Of ficer dis al l owed the interest. The Tr ibunal f ound that t he total sal e pr oceed of the rel evant f inancial year were R s. 114. 08 crores and t hat the entir e s al e proceeds us ed to be d epos ited i n the mixed account and the ad va nce was al s o gr anted f r om the mixed account. Theref or e, there were suf ficient f unds f or m aking adv ance of R s. 1. 65 cr or es out of total tr ans action of R s. 114. 08 crores. T he Tribunal al so found that out of the tot al export of the cashew- nut ker nel s of Rs . 129 l a. khs in the as ses sm ent year 1985- 86, an e xtent of R s. 91lakhs was su ppl ied b y M and t hat t her e was r egul ar cour se of b us ines s between the as s es s ee and M and the advances wer e made to M in the reg ul ar cours e of b us ines s . The rel atives of dir ector s did not com e within the def inition of r el atives as d ef ined in s ection 2(41). It hel d that inter es t was ded uctib l e. On appeal :
Hel d , dis mis sing the appeal , that in r el ation to each of the as sess m ent year s invol ved in t he appeal , the r ecipient of inter es t-f ree l oan was not a f ir m of r el atives ; the ad vance was m ade f or obtaining suppl y of raw m ater ial s and the ad va nce was mad e f or the pur pos e of b us iness within the m eaning of s ection 36(1) (iii) and not f or any other cons ideration; there was reg ul ar cour s e of b us ines s betwe en the as s es s ee and the f ir m; and t he adv ances were made to M in t he reg ul ar cour s e of b us ines s; s uch ad vances were m ade in the cour se of b us ine ss f or com mercial expedience and f or the purp os e of b us iness ; the f inding s ar r ived at by the Tr ibunal wer e not per ver se; the e ntire expend iture was m ad e f r om the m ixed account. T her ef ore, there wo ul d b e a pres umption t hat t he ad vance was m ade out of the ass ess ee's own f u nds and not f r om the bor r owed ca pital . Ther ef or e, the Com mis s ioner (Appeal s) and the Trib unal w er e r ight in pr es um ing that t he as s es see was el igibl e f or the benef it of s ection 36(1 )(iii)".
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 29 of 73 S.A. Builde rs Ltd. -vs.- CIT(Appeals) & Another re ported in 288 ITR 1 (SC) :
"In or der to decide whether inter est on f unds bor r owed by the as s es s ee to give an interest-f r ee l oan to a si s ter concer n (e. g. , a s ubs idiary of the ass ess ee) s houl d be al l owed as a d ed uction un der s ection 36( 1)(iii) of the Incom e-tax Act, 1961, one has to enq uir e whether the l oan was given b y the as ses see as a m eas ur e of comm ercial expediency. T he exp res sion "comm er cial expedie ncy" is one of wide import and i ncl ud es s uch expe nditure as a prud ent b us iness man i ncur s f or the p ur pos e of busines s . The expe nditur e may not hav e b een inc ur red und er any l eg al obl ig ation, b ut yet it is al l owabl e as b us ines s expe nditure if it was incurr ed o n gr ounds of comm er cial expedie ncy.
Decis ions r el ating to section 37 wil l al so be appl icabl e to s ection 3 6(1) (iii) b ecaus e in s ection 37 al s o the e xpres sion us ed is "f or the pur pos e of b us ines s ". "For the pur pose of b us iness "
incl ud es expe nditure vol untaril y inc ur re d f or comm er cial expedie ncy, and it is im m ater ial if a third par ty al s o be nef its thereby.
ATHER TON (H. M. INSPE CTOR OF TA XE S) V. BRITISH INSUL ATE D AND HE LSBY CABLE S LT D. [1925] 10 TC 155 (HL ), E ASTER N INVE STME NTS LTD. v. CIT [1951] 20 ITR 1 (SC) ; [ 1951] 21 Cam p Cas 194 AND CIT -VS. - CHA NDULA L KE SHAVLAL AND CO. [ 1960] 38 ITR 601 (SC)f ol l owed.
The expr es s ion "f or the purpose of bus ines s" is wider in s cope than the ex pr es sion "f or the pur pose of ear ning pr of its".
CIT v. MALAY A LA M P LANTATIONS LTD. [ 1964] 53 ITR 140 (S C) and CIT v. BIR LA COTTON SPINNING AND WE AVING MILL S LT D. [ 1971] 82 ITR 166 (SC) f ol l owed .
To consid er whether one s houl d al l ow d ed uction und er section 36(1 )(iii) of inter es t paid by the as s es s ee on amo unts borr owed by it for advancing to a sis ter concer n, the authorities and the cour ts s ho ul d examine the pur pose f or which the as s es s ee ad vanced t he m one y and w hat t he s is ter c oncer n did with the m oney. That the borr owed am ount is not util ized b y the as s es s ee in its own bus iness but h ad been advanced as inter es t f r ee l oan to its sister concern is not r el eva nt. What is r el evant is whether t he amo unt was advanced as a meas ur e of com mercial expediency and not f r om the point of view w hether the am ount was advanced for ear ning pr of its .
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 30 of 73 Once it is establ is hed that ther e was nexus between the expe nditure and p ur pos e of the b usines s (which need not neces saril y b e the b us ines s of the as s es s ee its elf ) the R evenue cannot j ustif iab l y cl aim to put its el f in the ar m-chair of t he busines s man or in the position of the b oar d of dir ector s and as s um e the r ol e to decide how m uch is r easonab l e expend iture having r egard to the cir cums tances of the cas e. No busines s man can b e com pel l ed to maxim ize his pr of its ".
Addl. CIT vs Tulip Star Hotel s Ltd in CC No. 7138-7 140 / 2012 dated 30.4. 2012 by the Supreme Cou rt , wh erein it wa s held as belo w:-
"In our view, S.A. Builders Ltd vs CIT reported in 288 ITR 1 , needs recon sideration".
Though it is stat ed that the decision in S.A. Builders Ltd in 28 8 ITR 1 (SC) requires recon sideration, notice has been ord e red to be i s sued to both the parties and the matt er i s still pend in g befo re the Sup reme Cou rt as on date. Hen ce the decision in 288 ITR 1 (SC) is very much applicable as on dat e until the judgem ent in Tulip Star Hotel s Ltd is p ronounced by the Supreme Cou rt.
Munjal Sales Corporation vs CIT and Another re ported in 298 ITR 298 (SC ) "16. As stated above, in this batch of civil appeals we are concerned with the Assessment Years 1993-94, 1994-95, 1995-96, 1996-97 and 1997-98. At this stage, it may be mentioned that as far back as in August/September 1991 assessee herein had given interest free advances to its sister concerns. These advances stood reduced over a period, till AY 1997-98. Each year the balances stood reduced. Further, vide Order dt.3.1.03 the Tribunal held, for AY 1992-93, that the assessee had given interest free loans from its Own Funds and not from interest bearing loans taken by the firm from third parties and consequently the assessee was entitled to claim deduction under 36(1)(iii). In other words, the Tribunal held that loans were given for business purposes. Similarly, for AY 1993-94, the Tribunal had taken the view that the said loans given to the firm's sister concerns were for business purposes. Accordingly, the Tribunal had deleted the disallowances during the AYs 1992-93 and 1993-94. It is equally true that for the AY 1994-95 the Tribunal took a contrary view in view of change in law brought about by Finance Act 1992. Prior to 1.4.93 payment of interest to the partner had to be added back to the assessable income of the firm whereas after Finance Act 1992 such payment became an item of deduction for computing the assessable income of the firm and it became part of the business income of the partner. In view of this change of law, the Tribunal disallowed payment of the interest in the present case for AYs I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 31 of 73 1994-95, 1995-96, 1996-97 and 1997-98. However, the point which has been left out from consideration is that the loans which were given in August/September 1991 to the sister concerns got wiped out only in AY 1997-
98. As stated above, for AY 1992-93 and AY 1993-94, the Tribunal held that the loans given to the sister concerns were out of the firm's Funds and that they were advanced for business purposes. Once it is found that the loans granted in August/September 1991 continued upto AY 1997-98 and that the said loans were advanced for business purposes and that interest paid thereon did not exceed 18/12% per annum, the assessee was entitled to deductions under Section 36(1)(iii) read with Section 40(b)(iv) of the 1961 Act.
17. One aspect needs to be mentioned during the AY 1995- 96, apart from the loan given in August/September 1991, the assessee advanced interest free loan to its sister concern amounting to Rs.5 lacs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee-firm out of its Own Funds and, therefore, it was not entitled to claim deduction under Section 36(1)(iii). This finding is erroneous. The Opening Balance as on 1.4.94 was Rs.1.91 crores whereas the loan given to the sister concern was a small amount of Rs.5 lacs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs.5 lacs".
CIT -vs.- Reliance Utili ties & Power Limite d [2009] 313 ITR 340 (Bom.)-
"The as ses see cl aimed ded uction of inter es t on b or rowed capital . The As sessing Off icer r ecor ded a find ing that the s um of Rs . 213 cr or es was inves ted out of its own f und s and R s . 147 crores was inves ted out of the bor r owed fu nds . Accord ingl y he dis al l owed inter es t amounting to R s . 4. 40 croes calculated at 12 per ce nt. per annum f or three mont hs f r om Ja nuar y, 2000 t o March, 20 00. The Com mis s ioner (Appe al s ) f ound t hat the ass ess ee had enoug h inter es t-f ree f und s at its dispos al f or investm ent and accor dingl y del eted the ad dition of R s. 4. 40 cores m ad e by the A ss es s ing Of f icer and dir ected him to all ow the ded uctio n under s ection 36(1)(iii). The ord er of the Com m is sioner (Appeal s) was uphel d by the Trib unal . On appeal to the High Court:
Hel d , dis missing the appe al , that if ther e were f und s avail abl e both inter es t-f r ee and ov er dr af t and /or l oans taken, then a pr es um ption woul d aris e that inves tments wo ul d b e out of the interest-f r ee f unds ge ner ated or avail abl e with the com pa ny, if the interes t-f r ee f unds wer e s uff icient to m eet the inves tments . In this cas e this pr es um ption was estab l ished cons idering the f inding of f act both by the Com mis s ioner (Appeal s ) and the Trib unal . The interes t was d eductibl e".
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 32 of 73 In v iew of th e afo resaid f acts and ci rcumst anc es and the judicial preced ents on the impu gn ed is sue, we hold that the advances we re mad e by the asses see to various parti es duri ng the course of its busines s and are st rate gic investment s. We also hold th at the borro wed fu nds were not diverted for non-business pu rpos es as su ffici ent own fund s were av ailable with th e ass essee to m ake in terest f ree advan ces to its group co ncerns. We also hold that when borrowed funds and own fun ds were inextricably mixed in th e same b ank account and i f the own funds are more th an th e amou nts adv anced inte re st free to si ste r conce rn s, then the presu mptio n could be dra wn in fav our of the ass ess ee that tho se adv ance s were made only out of o wn f unds of the ass essee. We furth er hold that from the aforesaid fact s available on record , the as sessee had adv anced moni es to various concerns d urin g the course of its business to furthe r stren gthen its business int ere sts with the said parti e s and as a me asure of co mmerci al e xpedi ency. A ccordin gly we hold that the action of the Lea rn ed Asse ssin g Offic er in disallowin g a su m of R s.6,27,16,642/- is not warranted and G round No. 6 rai sed by the as sesse e is allowed.
7. Disallowance of legal expenses - Rs.38,49,317/- 7.1. The brief f act s of th is is sue i s that th e a ss ess ee d ebited a su m of Rs. 1,18,63,40 1/- in its profi t and loss ac count and out of thi s, the L earn ed AO disallowed a su m of Rs. 38,49,317/- for want o f bills / evidences. The bills / evidences we re filed by the assessee durin g the course of appellat e proce edin gs b efo re th e L earn ed CIT(Ap peals) which were verifi ed by the Lea rn ed Ass essin g Offi cer du rin g re mand p roc eedin g s. However, the Lea rn ed A ssessin g Office r g ave a co mment in the remand report that original bills were not p roduced by the as sessee for authentication. The as se sse e ple ad ed that the ori gin al bills were n ever called fo r by the Lea rn ed AO during remand proceedin gs and hence the same could not be submitted before him. The Learned CIT( Appeal s) uph eld the disallowan ce mad e by the Learned AO in thi s regard. A ggrieved, the a ssess ee h as preferred an appe al ag ain st this is sue before u s on the following ground:-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 33 of 73 "7. That the L earn ed CIT(A ) was not justified in co nfirmin g the disallowance by th e Ass essin g Officer an amou nt of Rs.3,849 ,317 out of Legal expens es when the full details of the a fo resaid exp enditure w ere filed".
7.2. The L earned AR argu ed that the Learn e d CIT(Appeals) erred in not admitt ing th e additional eviden ces filed in terms of Rule 46A of the IT Rules in the fo rm of d etail s of legal expens es of Rs. 38,49,317/- toge the r with th e copie s of the bills the reo n. H e fu rthe r argued th at th e L earn ed CIT(App eals) havin g c alled for a remand repo rt fro m the Learned Assessing Off icer in this regard ought not to have rejected the admis sion of add itional eviden ces. In fact only on admis sion of additional ev idences filed before him, he sought to give an op portunity to the Learned Assessing Officer in remand p roc eed ing s seeking fo r his co mm ent s.
Henc e on this g rou nd its elf, the a ss ess ee i s entitled fo r reli ef. Even otherwi se, th e en tire d et ails filed befo re the lower authorities a re fil ed before thi s tribunal and f rom the s aid detail s, it could be seen that the enti re p aymen ts were mad e to reno wn ed counsel s fo r pursu in g the le gal dispute s of the a ssess ee comp any and acco rdin gly he prayed for allowanc e of the same. In response to this, the L earn ed DR vehe men tly support ed the o rders of the lower authoriti es.
7.3. We h ave heard the rival submissio n s and it is seen from the det ails filed in the fo rm of Paper Book by the asses see, the leg al exp en ses incu rred by the as ses se e were in resp ect of paym ents made to various reno wn ed co unsels fo r pursuing the v arious legal disput es of the a sse ss ee ari sin g out o f its busi ness. We do not appreciate the view of the Learned CITA th at addition al ev id ence s filed by the asses see in the form of detail s and bills fo r legal expen s es were not a dmitted b y him after callin g fo r a remand repo rt f ro m the L ea rn ed A sses sin g Offic er. In f act th e re mand repo rt it self was c alled for fro m the Le arn ed A sse ssin g Offi cer on ly afte r admi ssio n of additio nal eviden ces by the Learn ed CIT(App eals ). Mo reov er, the asses see had duly filed objections to the remand repo rt I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 34 of 73 that had the ori ginal bills for legal exp en ses be en called fo r by the Lea rn ed Asse ssin g Office r, it could have been fil ed by th e assessee. It i s also obse rved that no adve rs e commen ts were given by the Le arned AO regardin g th e incu rrenc e of l egal exp e nse s except st atin g that ori gin al bills were not filed. In view of th is, we have no hesitatio n in del etin g the add ition mad e to ward s di sallowance of legal exp ens es of Rs.38 ,49,317/- and accord in gly the G round No. 7 rai sed by the asses see is allo wed.
8. Disallowance of proportionate manageme nt ex penses u/s 14A of the Act -Rs.10,00,000/-
8.1. The brief f act s of thi s i ssu e i s that the asses see had ea rn ed dividend inco me of R s.2,4 5,84,822/- out of the investment of Rs. 280,01,93,396/-. The Lea rn ed A sses sin g Offic er di sall owed a su m of R s.50, 00,000/- towa rd s proport ionate mana gem ent expen ses fo r earnin g dividend inco me which was b rought do wn to Rs.10,00,0 00/- by the Learned CIT(App eals ) in fi rst app eal. A gg ri eve d, the asse ss ee h as p ref erred an app eal befo re u s on the fo llo wing g roun d:-
"8. That on law as well as on the facts a nd in the cir cu ms tan ces of th e case the L earn ed CIT (A) err ed in r estricting disallowa nce U/s.14 A of the Act to Rs.10,00 ,000/- on accou nt of expenditur e relata ble to ea rning of dividend income".
8.2. The Learn ed AR argu ed that mo st of the inve st ment in sha res were mad e in ea rlier y ears and are p racti cally old inv estment s and mo st of them we re made in g roup co mpani es which does not require any incu rren ce of any man a gemen t e xpen ses. He al so argued th at onus i s on the reven u e to p rove th at the int erest paid on borro wed funds relat ed to acquisition of sha res yielding tax free i ncome and pl aced relian ce on the following d eci sion in support of hi s con tentions:-
Maruti Udyog Ltd vs DCIT reported i n (2003) 92 ITD 119 (Del) I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 35 of 73 "R eg ar ding bur de n of pr oof , it is the s ettl ed l egal pos ition that bur de n is on the per s on who al l eg es the exis tence of a f act. If the question of genuinenes s of expenditur e is r ais ed, the bur den wo ul d b e on ass ess ee to prove the s am e Hence, w here as s es s ee claims deduction in respect of any expendit ur e, than on us w oul d be on the ass ess ee to pr ove t hat cond itio ns f or its al l owab il ity ar e s atis fied. R ef er ence can be m ade to Supr em e Court j udg ment 1 11 the cas e of Cl T v Cal cutta Agency L td . [ 1951] 19 ITR 191 On the other hand. If the r evenue wa nts to dis al l ow an expe nditur e u nder a particul ar pr ovision, then the on us woul d b e o n the depar tment to pr ove t hat c on ditions f or dis al l owance ar e satis f ied. R ef er ence can b e made t o J ud gment of Punj ab & Haryana Hig h Court 111 t he cas e of Saras wati Ind us tr ial Synd i cate Ltd. vs . CIT[ 1982] 13 6 ITR 361. In the pr es ent cas e, it is the r evenue who wants to d isall ow the ex penditur e under s ection 14A. Hence t he onus is on t he reve nue to pr ove that interes t paid by as s es see on bor rowed f und s r el ated to acquisition of s har es yiel ding tax f r ee incom e".
The L earned AR fu rthe r argued that th e as ses ee had suff icien t funds in the form of share capital, res erves a nd surplus and cash p rofit fo r the year which worked out to Rs.646.65 crores ( b eing the n et owned funds at the begin nin g of the year to th e tune of Rs. 574.46 crores plus cash p rofit for the ye ar amou nting to R s. 72.19 crores) and th e to tal investm ent s mad e by the assessee is only Rs.280. 01 cro re s and henc e it cou ld be ea sily inferred th at the invest ments were mad e only o ut of own fund s.
In response to thi s, the L earn ed D R suppo rted th e ord ers of the lower autho rities.
8.3. We have heard the rival sub missio ns and perus ed the materi als av ailable on record. The relevant assessm ent yea r unde r app e al is 2002- 03 at which point of time, the p rovisio n s of Rule 8D was not in fo rc e and the same was mad e applicable only from Asst Year 2008 -09 as decided in the d ecision of Godrej & Bo yce Man u factu rin g. However, it is not in dispute th at th e as se sse e h ad derived t axable incom e as well as t ax f ree inco me and i ncurred expenditu re fo r deriving both the incom es and hence disallowance is de finitely wa rrant ed in term s o f section 14A which i s brought in the st atute book with ret ro spective ef fe ct from 1.4. 1962. The disallowance had to be mad e on ly o n an e sti mated b asi s with re gard to I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 36 of 73 the exp enditure incu rred for th e purpos e of ea rnin g tax f ree income. The Hon'ble Ju risdictional Hi gh Court in the case of CIT vs M/ s R.R. S en & Bro thers P Ltd in GA No. 3019 of 2 012 in ITAT NO. 243 of 2012 dated 4.1.2 013 had h eld as under:-
"The assess ee did not sho w any expenditure in cur red by him for the pu rpose o f earning the mo ney whi ch is ex empted under in come tax. Th e T ribu nal has computed expen ditu re at 1% of such dividen d in come, wh ich, according to them, is the thumb ru le ap plied consist ently. W e find no reason to interfere.
The appeal is d ismissed."
Resp ectfully following the judicial p recedent, we d irect the L earn ed AO to disallow 1% of dividend income under th is i ssu e and acco rdin gly, the Ground No. 8 raised by the as ses see is set aside to th e file of Learned Assessing Officer to make addition as d irected abov e.
In the re sult, the appeal of the assessee in ITA No. 316/Kol/2006 is partly a llowed.
I.T.A. No. 426/ KOL/2006 - Depa rtmenta l Appea l
9. Addition of indire ct taxes such as sa les ta x, expenditure tax, etc as part of turnov er for the p urpose of deduction u/s 80HHD - Rs.73,61,14,470/-
9.1. The brief facts of thi s i ssu e i s th at f rom th e t ax audit rep ort filed by the ass es see, it was seen that the as ses see is followin g the p ractice of excluding indirect t ax es f rom th e total turnov er of R s.374,71,9 5,919/-. The Learn ed AO in the co mputation u/s 80HHD of th e A ct add ed indirect taxes to the total tu rnov er on the co ntentio n that the p ra ctice of excluding th e ind irect t ax es i s in violation of section 145A of the Act and the verdi ct o f th e Sup reme Co urt in th e case of Chowrin ghee Sale s Bureau vs CIT repo rt ed in 87 ITR 542 (SC) wherei n it was h eld that indirect taxes co llected should form pa rt of t radin g receipts and shou ld be in cluded in the total receipts of th e asses see. Acco rdingly a su m of Rs.73,61, 14,470/-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 37 of 73 rep resentin g indi rect taxes such as sales tax (R s.20,63,24, 681/-) , expendi ture tax (Rs.29,91,32, 503/-) , luxu ry tax (R s.22,2 6,24,683/-), serv ice tax (R s. 68,13,106/-), entertain ment tax (R s.10 ,500/-) and wo rk co ntract tax ( Rs.12 ,08,997/-) was add ed to the total turnover for the purpose of a sc ertainin g th e perc ent age of receipt in fo rei gn cu rrency for granti ng deduction u /s 80HHD of the Act. The L earn ed CIT(Appeals ) deleted th e addition mad e on this cou nt. Aggrieved, the reven ue i s in app eal befo re u s on the fo llo wing g roun d :-
"1. On the fa cts and in the ci rcumsta nces of th e cas e Ld. CIT[A] has err ed in deleting th e Assessing Officer's add itions of Rs.73,61,14,470/- on account of collectio ns o f sales tax, exp enditur e tax, luxury tax, service tax, en tertainment tax and wo rk co ntract ta x forms p art o f total turnover in co mputing deduction u/s.80 HHD of I.T. Act in reliance with provisions of sectio n 145A o f I.T. Act and verdict of Hon'ble Supr em e Court in th e cas e o f Cho wringhee Sales Bu reau -vs- CIT [87 ITR 542.]".
9.2. The Learned DR vehemen tly supported the o rders of th e L ea rn ed AO and reli ed o n th e decision of the ap ex cou rt in Chowrin ghe e Sale s Bureau vs CIT (87 ITR 542). In respo nse to th is , the Le arned AR a rgu ed th at it is no w well s ettled l aw that co mputatio n of deduction under Chap ter VIA is an in d epend ent cod e by itself fo r co mputin g reli ef av ailable und er the rel evant p rovisions and indi rect taxes are not in cluded in the total turno ver fo r comput ation of deduction u/s 80HHC and 80 HHD o f the A ct as no element of p rofit i s invo lved in it an d placed reliance on th e decision of the Sup reme Court in th e cas e o f CIT vs L akshmi Machine Works L td (2007) 290 ITR 667 (SC).
9.3. We hav e heard th e rival submi ssi ons an d we find that thi s i ssu e is now squarely covered by the deci sion o f the apex cou rt in the ca se of CIT vs Laksh mi Machine Works Ltd (2007) 290 ITR 667 ( SC) wh erein it was held that " Section 8 0HHC(3 ) is a ben ef icial section. It was int ended to provide incen tives to promote expo rts. The incentive was to ex empt profits I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 38 of 73 r elatable to expo rts. In th e ca se of combi ned busin ess of an assessee ha ving export bu sin ess and domestic bu siness, the Leg islatur e int ended to ha ve a formula to a scertain exp ort profits by apportioning the tota l busin ess profits on the basis of turnov ers. Appo rtionment of profits o n th e basis of turn over was accepted as a metho d of arriving at export pro fits. This method ea rlier exist ed under th e Excess Profits Tax Act and it existed in the Business Profits Tax A ct. Therefo re, ju st a s commission r eceived by an assess ee is r elatable to exports a nd yet it canno t form pa rt o f turn over, excis e duty a nd sales tax also canno t form part of th e "tu rn over" . The excis e d uty and sales tax are indirect taxes and a re recover ed by th e assess ee on behalf of the Governm en t. Therefore, if they are made relatable to exports, the formula u/s 80 HHC would beco me unwo rka bl e."
This is sue is al so covered by th e decisi on of the Jurisdiction al Hi gh Court in ass ess ee's o wn cas e of CIT vs EIH Ltd in ITA No. 3 of 2001 dat ed 31.03. 2011, wherei n thei r Lord ships of Calcutta Hi gh Cou rt had h eld as under:-
"The last q uestio n befor e us is wh eth er th e tribuna l b elow committ ed su bstantial error of la w in re-computing d eductio n u/s 80HHD of th e Act at Rs.77,6 2,17,3 03/- by not including 'receivables' in its computatio n although th e r eceipt in clu des r eceivables as p er mercan tile syst em of accounting.
A plain reading of th e section 80HHD ma kes it cl ear that for computation of the r elief u/s.80HHD, th e total turno ver alone is in conseq uen tial but th e AO has relied upon it. In our opinion, for compu tation of gro ss total receip t in business, th e open in g sundry debtor should be add ed to the total turnover and from that the clo sing su ndry debtor should be ded uct ed in o rder to arrive at the correct figu re and that h as been fo llo wed by th e Auditor who h as certifi ed th e entitl ement of 61.07% o f the busines s profit. Our a fo resaid view find s support from the decision of the Su preme Cour t in the cas e of CIT vs Lakshmi Ma chine Wo rks r eport ed in (2 007) 290 ITR 6 67 while interpreting the similar pro visio n of section 80HHC(3 ) of the Act. It furth er a ppears that co py of Account ant's certificate in F orm 10CCAD has a lso been p rodu ced. Theref ore, th e Ass essing Officer I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 39 of 73 wron gly consid er ed the total turnover of Rs. 3 95,62,34,559 /-
instead of g ross receipt in business amounting to
Rs.390,9 3,27,318/- certified by th e Aud itor and accordingly, the
r elief a llowed u/s 80HHD sh ould be enhanced to
Rs.77,62 ,17,303 /- instead of Rs.77,53,58,471/- allo wed by the
Assessing Officer."
In view o f the afores aid d ecision s, we are not inclin ed to interf ere with the decisio n of the Learned CIT(Ap peals ) o n this issue. Acco rdingly, the Ground No. 1 rais ed by the revenue is dis mi ssed.
10. Apportionme nt of commo n expenses to Bangalore uni t fo r claiming dedu ction u/s. 80IA of the Act - Rs.2,70,86,842/-
10.1. The brief fac ts of this i ssue are t hat the as ses ee h ad incu rred head office e xpen s es and had allocat ed the s ame to the resp ective co mpan y or unit of th e group. The remainin g comm on exp en se s which is no t di rectly allocable a re appo rtioned as pe r ratio of s aleable hotel roo m av ail able in the resp ective unit s, average roo m rat e of such unit, nature and mixtu re of inward traf fic -whether dome stic o r forei gn touri st, corporate clien t or free in wa rd tou rist etc. B as ed on t he afo resaid ratio, the co mmon expen s es a re allo cat ed to diff erent unit s an d recovered ou t of thei r G ros s Operatin g Profi t.
Accordin gly such cont ributions to wards common exp ens es are co nsidered a s exp enditure ch a rge able t o the Gro ss Operatin g Pro fit of the resp ective units. Accordin gly a sum of Rs.2, 07,72,000/- was allocated as co mmon exp en ses to wards Ban galo re u n it by the as ses se e.
10.2. The Learned AO fo und that the to tal ro oms o f the ass essee co mes to 1626 and the rooms in respect of Oberoi, Ban galo re co me to 158 and therefo re the p roportion ate averag e ro o m revenu e fo r Ban galore unit was worked out at 9. 71% (158 / 1626 * 100). Based on this percenta ge, the proportion ate head office exp ense s at tributable to Bangalore unit was I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 40 of 73 worked out at R s.4, 78,58,842/- and since the ass ess ee had allocated Rs. 2,07,72,00 0/- , a sum of Rs.2,70,86,8 42/- was treated as co mmon expen s es att ribu table to Ban galo re u nit and acco rdin gly the eli gible profit of Ban galore unit h as be en red uced by the same amount fo r the purpose of c alcu latio n of deduction u /s 80IA of th e Ac t. The Learn ed CIT(App eals ) d elet ed this ad dition by relying the decision o f his pred ec essor on the sa me i ssue p assed fo r the A sst Yea r 2001-02. Aggri eved, the revenue i s in app eal befo re us on the followin g ground:-
"2. On the fact s and in the cir cu ms tan ces o f the ca se Ld. CIT[A] has err ed in a llo wing proportiona te hea d office expen ses fo r Ba ngalore Un it of Rs.2,07,72,000 /- for the purpose of computation of deduction uls.80IA of I.T. Act calculated by the ass es see relying o n assess ee's explanation as well as decision of Ld.CIT [A] in appeal No.11/CIT[A]-VIII/Cir-8/2004-05 dated 07.02.2005 for assess ment year 2001-02 in a ssessee's own cas e on the similar issue inst ead of Assessing Officer's allocatio n o f Rs.2,70,86,842/- with ref er en ce to sp ecific find ings r eco rd ed in his assess ment ord er" .
10.3. The Learn ed DR argued that fo r t he A sst Years 2000 -200 1 & 2001- 02 in ITA No. 833/Kol/2005 and ITA No. 109 0/Kol/2005 resp ectively vide order d ated 8 .9.2006, this Tribun al had set asid e thi s i ssu e to th e file of th e L earn ed AO and p rayed for similar di rection fo r thi s as st yea r also. In respon se to this, the Learn ed AR plead ed that no order has been pas sed by the L earn ed AO fo r the As st Y ea rs 2000-01 & 2001-02 pursuan t to old tribu nal o rders. Ho wever, he als o agreed fo r set asid e of this issue to the file of the Learn ed AO to consider this i ssu e in line wi th the directions given by this T ribunal fo r the Asst Years 2 000-0 1 & 2001-02.
10.4. We have heard th e rival submi ssion s and p erused the materi als av ailable on record. We find that this tribunal on a si milar is sue fo r the Asst Yea rs 200 0-01 & 20 01-02 had set aside to the file o f the L earn ed Assessing Of ficer in ITA No. 8 33/Kol/2005 and ITA No. 1090/Kol/2005 resp ectively vide order d ated 8 .9.2006 with the followin g di rection s :-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 41 of 73 "Considering th e to ta lity of the facts o f the case a nd following the d ecision o f the T ribu nal in assess ee' s o wn cas e for A.Y. 2000-01, we r estore the matter back to th e file of the AO to decide the is su e afresh on the basis of the deta ils filed by th e assess ee. The A.O. sho uld give adeq uate opportunity of bein g heard to the a sses see as p er law. W e direct acco rdingly. Ground of appeal no. 1 by th e r evenu e is allowed fo r statisti cal pu rposes."
Resp ectfully followin g th e deci sion of t he co-ordinate bench of the Trib unal, we restore this i ssue to the fil e o f the L earn ed A ssessin g Officer to d ecide the issue af re sh on the basi s of detail s filed by the as se ss ee. Needle ss to ment ion that the asses see be given reasonable opportunity of being heard. Acco rdingly, the ground no. 2 raised by th e revenue is allowed for st atistical pu rposes.
11. Disallowance of Pre-opening expenses as capital i n natu re relating to Vanyavilas - Rs.1,61, 98, 830/ - and relating to Udayvilas - Rs.1,42,67,177/-
11.1. The brief fac ts of thi s issue are that the ass essee h ad incurred a sum of Rs.1,61,98,830/- pertainin g to Vanyavilas hotel and Rs. 1,42,67,17 7/- pertainin g to Ud ayvilas hotel and it relate s to the p e riod prior to the d ate of co mmenc ement o f c omme rcial p roduction of the said hotels but after th e set tin g up of the said ho tels. The Learn ed Asses sin g Officer observ ed that in the boo ks of accounts, these exp en ses were writte n off over a p e riod of 5 years treating the same as def erred rev enu e expen s es and fo r the pu rpos e of inco m e ta x had clai med the full amount as exp enditu re on the p retext that the sam e are only pre-com mencement business expen diture incu rred on trai ning of e mployees, adv erti sement expendi ture, etc to make them fit fo r ta king up the job o n commencemen t of the activ itie s for which the a ss ess ee also reli ed on certain d ecis ions in its suppo rt. Bu t the L earned A s sessin g Office r sought to disallow the su m of Rs. 3, 04,66,007/- in the asses sment by treat in g the sam e as capit al expendi ture. In first appeal, the Learn ed CIT(App eal s) app reciat ed the I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 42 of 73 co ntentio ns o f th e as ses se e and d eleted the addition. A ggri eved, the reven u e i s in appeal befo re u s o n this issue o n th e followin g ground:-
"3. On the fa cts and in the ci rcumsta nces of th e cas e Ld. CIT[ A] has err ed in deleting the disallowance o f Rs.3,04,66,007/- tr eating revenue exp en d iture as against Assessing Officer's disa llowan ce uls.37(1) of the I.T. Act treating ca pital exp enditur e with ref erence to specific findings record ed in th e Assessing Officer's assessmen t order" .
11.2. The Learn ed DR a rgued that th e asses see had s et up a new unit and all the expen se s incu rred upto the date of commen cemen t of commerci al production are to be capitalized an d argu ed th at th e p re-o penin g expen s es are at p ar with p re-operative exp en se s and are only capital in nature. In respo nse to this, th e Learned AR a rgued th at th e as ses see had set up t wo sev en st ar hotel s and all the expen s es fo r con st ruction of th e said hotels were duly capitalized by the assessee. The subject mention ed pre-openi ng expen ses are nothing b ut exp en ses in curred on salari e s, recruit ment, trainin g an d d evelopment etc o f Gen e ral Managers, S erv ice Engin eers etc who are di rectly relat ed t o th e operation of the Hotel afte r opening so that no obstruction ari ses while prov id in g s erv ices to the gue st s when the h otel co mmen ces its bu siness. Henc e these a re only expendi ture incu rred f ro m the ti me of set up of busin es s to the ti me of co mmen cement o f business. He furth er argued th at the se exp en ses are neces sarily to be incurred fo r smooth fun ctioning of the post co mmen cement o f business of the ho tel and n o way it is connected with the const ruction of the project. H e argued th at the expenditu re in curred on the personn el are co nsid ered as revenue expenditu re for income tax purpose s and treated as d ef erred reve nue exp enditu re in the books of accoun ts as the Income Tax A ct d oes not reco gnize d eferred rev enue expendi ture other than those co nte mplated in th e speci fic p rovisions such as sectio n 35D o f the Act. H e reli ed on th e decision of the Jurisdictional Hi gh co urt in the case of CIT vs Kanoria General Deal ers P I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 43 of 73 Ltd repo rt ed in 159 ITR 524 (CAL) an d the d eci sion of th e D elhi H igh Court in the case of CIT vs Relaxo F ootwea rs L td repo rted in (2007) 293 ITR 231 (Del) in suppo rt o f his conten tions. He furth er argu ed that the Spe cial L eave Petitio n p referred by the revenu e ag ain st this Delhi Hi gh Court o rder h as been dismis sed by th e Hon 'ble Sup reme Co u rt in CC No. 12361/2007 dated 3.1.2008 . Accordi ngly, he pleaded for allowance of the enti re expenditu re as d eductio n in th e year o f in cu rrence.
11.3. We have heard the rival submissio ns and p eru sed the mat erial s av ailable on record. We find th at the as sesse e had s et up two st ar hotels (Vanyavilas and Udayvilas) durin g the asses sment y ear under app eal and ce rtain expen ses in th e fo rm of s alaries, trainin g and d evelo pmen t of gen eral man age rs, service en gin eers et c, we re incu rred by the assessee aft er the settin g up of its busin ess but b efore the date of com men cemen t of busines s to en able smooth fun ctioning of th e activiti es po st co mmen cement o f busin es s to prov id e uninterrupt ed and bett er services to the guest s in th e hotel wi tho ut any obstruction. These exp en ses though treat ed a s defe rred revenue exp enditure in the b ooks o f accounts, as accord in g to the assessee, the benefi t out of these exp enditures could be sp re ad over a perio d of 5 years, b ut for the pu rpose of inco me tax, the same we re clai med as revenue exp enditure in full in the year of incu rren ce. No w the sho rt point that arises for o ur con side ration is as to wheth er th e exp en diture incu rred f rom the date of settin g up o f bu sines s till the d ate of commenc ement of business co uld be charged off as reven u e exp enditu re o r not. We find that th is i ssu e has been el aborat ely dealt with in th e followin g cases:-
CIT -vs.- Kanoria Ge neral Dealers (P) Ltd. [1986] 159 ITR 524 (Ca l.) "W her e a bus ines s unit has been set up b y the as ses see which is ready to com mence prod uction, the as sess ee will b e entitl ed to cl aim deduction of ex penditur e a nd the expe nditur e can not b e dis all owed on the gr ound that t he same had b een inc ur red pr ior to the com mencem ent of the actual busines s of comm er cial pr od uction.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 44 of 73 (2 n d para at pag e 525) : Hel d, that t he Tr ibunal had f ou nd that the as seses e had s et up its bus iness in th e ass es s ment year 1966-67. The finding of the Tr ibunal had not b een chal l enged as per ver se. Ther ef or e, the ass ess ee was entitl ed to d epreciation and ded uction of expend itur e for t he as s es s ment year 1966-67 and d epreciation for the ass ess ment year 1969-70".
CIT vs Ra maraju Surgica l Cotton Mills Ltd (1967) 63 ITR 478 (SC) Held that "wh er e a bu siness had been s et up by th e assess ee, the expen ses incu rr ed in su ch setting up could not be disallowed on the ground that the assessee had not co mmenced commercial p rod uction in such busin ess".
CIT -vs.- Hughe s Escorts Communications L imited [2009] 311 ITR 253 (Delhi) "A pla in reading o f section 2(34) of the In com e- tax A ct, 1961, shows that for a n ew busin ess th e previous year is th e period beg inning with the date of setting up of the business. Ther e is a distinctio n betw een setting up and commencement of a busin ess. Wh en a busin ess is established and is ready to compliance busin ess th en it can be said o f that business th at it is set up . But before it is ready to commen ce busin ess it is not set up. But there may be an interregnum, there may be an inter val between a bu siness which is s et up and a business which is commen ced a nd all exp ens es incurr ed during the in terr egnu m after th e s ettin g up of the business and befo re the commen cement of th e busin ess, all expenses wou ld be permissibl e dedu ctions".
Held, dismissing th e appeal, that the busines s of the assess ee invo lved differ ent activiti es in which th e first st ep was the pu rchase of the VSAT equipment . There was no question o f the ass ess ee having to p lace a purchase ord er with H, for a p urpo se other tha n that o f its business. The purchase ord er wa s placed o n Ju ly 28, 19 94. The a pplication to the Departmen t o f T elecommunica tion s for licen ce and the receipt of th e sat ellite signals wer e th e consequential stages. The signals were to b e r eceived a fter the VSAT eq uipment was in stalled in th e premis es of the cus tomer. In th e circums tances, th e busin ess o f the assess ee should be held to have been set up on July 28, 1994. This was the r elevant dat e fo r determining the nature of th e expen ses incu rr ed thereafter. T h e exp ens es in cu rr ed in the previous year, prior to the co mmen cemen t o f the business but a fter th e setting up its business, whi ch two da tes n eed n ot be th e same, would be deductible as r evenu e expens es.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 45 of 73 CIT -vs.- Relaxo Footwares Limited [2007] 293 ITR 231 (Delhi) - SLP by revenu e a gain st this order di s mi ss ed.
"The ass es s ee-company, eng aged in tr ad ing in al l kinds of rubber footwear, in the as s es s ment year 1995-96, com menced the bus iness of m anuf acture and sal e of hawai cahhaps . The as s es see cl aim ed ded uctio n of pr e-oper ative expe ns es in the comp utation of total income, expens es occurr ed on the new f actor y and c apital iss ue expe ns es . The As s es sing Of ficer dis all owed t hes e cl aim s. The appeal f il ed by the as sess ee was par tl y al l owed by the Com mis s ioner of Income Tax (Appeal s). This ord er was chal l enged b y the R evenu e as wel l as the as s es s ee. The T rib unal al l owed the appeal f il ed by the as sessee and d ismiss ed the appeal of the R evenue. On f ur ther appeal by the R even ue contend ing that
(i) the e xpens es incurr ed in a new unit ear l ier to the com m encem ent of the m an uf acturing pr oces s had to be capital ised and the new b us ines s of the ass ess ee coul d not b e s aid to b e an e xtens ion of t he e xis ting b usines s , (ii) the ex pe nditur e incurr ed in con nection with the p ur chase an d instal l ation of pl ant a nd m achi nery w as capital in nat ur e and thus dis al l owab l e, and (iii) the pr e-oper ative expenses coul d not b e written of f at one go b ut had t o be capital is ed and ad mis sibl e depr eciation al l owed thereon:
Hel d, d ism is sing the appeal , that the new unit was a part of the existing b us iness and ther e was no dis pute that ther e was unity of control a nd i nterl acing of the units . Thus the ex penses incurr ed by the as s es s ee for the s etting u p of the new u nit which was a par t of the exis ting busines s were th er ef or e to be al lowed as a r evenue expenditur e".
The spe cial leave petition filed by the re venue aga inst this orde r is dismissed by the Supreme Court in CC 12361/2007 dated 3.1.2008.
Delhi ITAT - 15 SOT 348 (Del) Hote l H ans P Ltd vs ACIT "It is well-settl ed propo sition of law that setting up of busines s and co mmen cement of business are two separate activities. On ce a busin ess is set u p, all the exp ens es of r evenu e natur e ar e to be allowed, no twithstand ing th e fact that co mmercial operation start ed su bsequen tly. Wh en a busines s is esta blished and is read y to be commen ced, then it can be said that business is set up, bu t before it is r ead y to be comm en ced, there may be interval betw een a business which is s et up and a bu siness which is commenced. All th e r evenu e exp enditur es incu rred aft er setting up of th e I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 46 of 73 busines s but befor e its commen cem ent are permissibl e deductions while co mputing the income under th e head 'Income f rom busines s an d p rofession. Thus, a business can be said to have commenced as soon as it is being set up. In the insta nt case, th e ass ess ee was alr eady in h otel and th e hotel building wa s already in exis tence. Aft er r enovatio n, the h otel ro oms w ere l et out with effect f rom 1 6-9-2000 an d, thus, th e same w er e also put for comm er cial use. Th erefore, ther e was n o r eason to disallow the ex pend iture in cur red after 1 6-9-2 000. If the d ate of 1 6-9 -2 000 wa s ta ken as th e date of setting up of the business, th e assets of the hotel could be said to have been us ed for mo re than 180 days. Therefo re, ther e was no r eason to disallo w claim of depreciation. [Para 5 J Therefo re, the ma tt er was r estored back to the file of th e Assessing Officer wi th a direction to allow pro portio nate expen ditu re in curr ed after 16-9-2000, as reven u e expen ditu re". [Para 6 J Kerosam Industries & Cotton Mills -vs. - CIT (1992) 196 ITR 845(Cal.) "If expenses are inc ur red in connection wit h the setting up of a ne w busines s , s uch expens es wil l be on capital accou nt. But, wher e the s etting up do es not amo unt t o s tar ting of a ne w b us iness but expa ns ion or extens ion of the busines s al ready b eing carr ied on by the as s es s ee, expenses in connection w ith s uch ex pansio n or extension of the b usines s m us t b e hel d to be d eductibl e as r even ue expe ns es ".
We hold th at the exp enditu re we re in curred for e xpan sion of the same busines s and not fo r settin g up of the n ew business. In stead thes e expendi tures we re incurred by the asses se e af te r the busin ess is set up. It is ultimately on ly a new unit of the asses see by way of two fresh hotels (Vanyavilas and Uday vilas) whi ch is nothing b ut an exp ansion of the exi stin g hotel business of the a ss ess ee with compl ete int erconnection and interlacin g of funds with co mmon ad m inist ration, commo n m anagement, co mmon fund and common place of business.
Resp ectfully followin g the aforesaid judicial preced ent s on th e impugn ed i ssu e, we h old that the en tire exp en ditu re of R s.1,61,98,830/-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 47 of 73 rel atin g to Hotel Vanyav ilas and R s.1, 42,67,177 /- relatin g to Hotel Udayv ilas to be treated as revenue e xp end iture. Accord in gly, the ground no. 3 raised by the revenu e is di s mi ss ed .
12. Addition on account of prov ision fo r re pa irs and replacement of bad and doubtful debt s - Rs.28,91,127/-
12.1. Th e L earn ed AO added back an amount of Rs. 28,9 1,127/- while co mputing inco me f rom te chnical fe es receiv able f rom hot els und er the ag ree ment fo r technic al as sistance o n the ground that such amounts rep resent p rovision for repai rs and replacem ent of bad and doub tful deb ts which a re no t allowable u nder th e Act. This additio n was del eted by the Learn ed CIT( Appeals) by relying on the ord e r of his p red ecessor on the sa me is sue for th e ea rlier year. Aggri eved, the rev enue i s in app eal befo re u s on the fo llo wing g roun d :-
"4. On the facts a nd in the cir cu mstan ces of the case Ld . CIT[A] ha s err ed in deleting the addition o f Rs.28,91,127 /- on a ccount of provision for repairs and rep lacemen t of bad and do ubtful debts in relying on the decisio n o f Ld. CIT[A)'s ord er in appeal No .11/CIT[A]-VIII/Cir-8/04 -05 dated 0 7.02.2005 for asstt. year 200 1-02 and the decisio n of Hon'ble ITAT in ITA No .891/Kolkata/2 004 dated 29.06.2005 for asstt. yea r 19 99-2000 both in assesses' s own case no t app reciating the Assessing Officer's ad ditio n under th e head with r efer en ce to specific findings recorded in his asstt. order".
12.2. The Lea rned DR a rgued that the p ro vision fo r repai rs and repl acemen t o f bad and doubtful debts is not allowable as d eduction under the Act and acco rdingly pleaded f or settin g aside of L earn ed CIT A's order on this issue. In response to t his, the Learn ed AR argued that technical as sistance fees were det ermi ned by the terms of the contract s with the hotel owni ng comp anies. He f urthe r argued th at this i ssu e was co vered by th e d eci sion of thi s t ribuna l in ITA No. 833/Ko l/2005 dat ed 8.9.2 006 for the A sst Year 2001-02 in as se sse e's own case.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 48 of 73 12.3. We have heard th e rival submi ssion s and p erused the materi als av ailable on reco rd. It is see n that this is sue is squarely covered by the decision o f thi s Tribunal in asses see's own case fo r the A sst Year 2001-02 in ITA No. 833/Ko l/2005 dated 8 .9.2006. The operative port ion of the said judge ment is rep roduced hereinbelow:-
""2 5.1. We fu rth er find that th e above issu e is covered in favour of assess ee by th e decision of the Tribunal in assess ee' s own case vide ITA No. 8 91/K/2004 dated 29 t h June, 2005 for a ssessm en t year 199 9-2000 wher e th e ITAT dismissed the app eal filed by the r ev enu e against th e order of the CIT(A). We find that the Tribunal at para 1 5 of the order has held as under:-
"15. We h ave h eard both th e parti es and per used the ord ers o f ta x au tho riti es. W e have a lso consid ered th e paper bo ok filed by th e ld. counsel for the ass essee. From the p eru sal of the agreemen t between th e assessee and Hot el Raj Bilash, it is apparent that th e disallowa nce was ma de by the AO out of misconcepti on abou t contractu al obligation in earnin g managemen t fees an d arbitrarily a dded back a n amoun t of Rs.5,55,639/- on account of managemen t fees from Hot el Raj Bilash. It is a con tra ctual o bligations a s w ell as entitl ement of assess ee-company a nd which was in no way comparable with the co mputation of ta xable income under th e In com e Tax Act. Therefo re, in our con sidered opin io n, the ld. CIT(A) was justified in deletin g the addition made by th e AO. W e, ther efor e, uphold the same and r eject th e ground raised by th e r ev enu e.
25.2 . We also find that the T ribuna l vide ITA No . 607/K/2005 da ted 30 .06.20 00 in assess ee's own case for AY 2000-01 had dismissed the ground raised by the r evenu e o n this issu e.
26. Con sidering the totality of the fa ct s of the ca se an d following the decision of the Tribunal in assess ee's own case in th e immediately preceding two a sses sm ent years, w e do not find any infirmity in th e order o f the ld . CIT(A) and a ccording ly uphold the same. Groun ds of appeal No. 2 by th e r evenue is th er efor e d ismiss ed".
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 49 of 73 In view of th e fact that th ere i s n o change in the f acts and circu mstanc es of thi s i s sue, re spect fu lly following the d eci sio n of th e co ordinate bench of the Tribunal, we are not inclined to interfe re with the decision of the Learn ed CITA on th is issu e. Accordin gly, the ground no. 4 raised by th e revenue is di s mi ss ed .
13. Addition on account of excess pr ovision of technica l fees -
Rs.4,62,806/-
13.1. The Learn ed Ass essin g Officer added back an amount of Rs. 4,62, 806/- on account o f excess p rovision o f technic al fees fo r earlie r years writt en back i gn ori ng the cl arification given at th e ti me of as se ssm ent p ro ceedin gs that th e said a mount wa s provided in accounts of that year on the p rov isional ba si s p ending audited accounts and as such exces s a mount wa s off ered for taxation in th at year. Af ter audit wa s ov er and the amo unt recovered was det ermined , the exces s p rovision was writte n back durin g the year und e r assessment and s ince th e amount was deleted and of fered for taxation in earlie r ye ars it was cl ai med as dedu ction.
13.2. The Learn ed CIT(Appe als) foun d that th e as ses see ha s placed on record a st at em ent showi ng that a p rovision of Rs.1,31,5 8,251/- from which R s.4, 09,037/- had been adjust ed on account of exces s p ro vision of ea rlier years and that the technic al fees for th e yea r was dete rmined and ce rtifi ed by a Chart ered Accou ntan t at Rs.1 ,32,12,020/-. The learn ed CITA al so held that the as se ssee had pleaded th at the diffe ren ce of Rs. 4,62,806/- has been simila rly accounted fo r in th e n ext year. Aggri eved, the revenue i s in app eal befo re us on the followin g ground:-
"5. On the facts a nd in the cir cu mstan ces of the case Ld . CIT[A] has er red in deleting th e addition of Rs.4,62,806 /- on account o f ex cess provision of technical fees o n accepting fresh explanation of assessee which the assess ee has failed to exp la in before th e Ass es sin g Officer fo r verificatio n during assessmen t pro ceedings for th e year".
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 50 of 73 13.3. The Learn ed DR v ehemently supported the o rders of the L earn ed Assessing Of ficer. In response to this, the Learn ed AR a rgu ed th at in the absen ce of audited acco unts of man a ged hotels at th e ti me of fin alization of accoun ts, the as se ssee ac cou nts fo r i ncome on account of technical fee s on provisional basi s and on fin al co mpu tation , the entitlement of th e co mpany is either red uced or inc rease d. The exces s p ro vision made o r short p rovision is adjusted accordin gly. This is the re gular sy stem followed by the ass es see and which ha s been accepted by the revenu e. H e acco rdingly p le aded tha t the addition made on thi s account be del eted.
13.4. We have heard th e rival submi ssion s and p erused the materi als av ailable on reco rd and we find lot of fo rce in the argu ments of th e Lea rn ed AR th at the in come o n account of technic al se rvices in respec t of man aged h otels are initially booked o n prov isional basi s by the a ssessee for want of fin alization of acco unts o f those managed hotels, and late r based on Ch art ered Account ant's certifi cate th e co rrect inco me is bo oked and provision al ready mad e is adjust ed acco rdin gly . It may either be increa sed o r reduced. Hence we h ave n o hesitation to delete this addition mad e in the su m of Rs. 4,6 2,806/-. Accordin gly , the gro und no. 5 rais ed by the revenue is di smiss ed.
14. Addition on account o f advances written of f - Rs. 86,21,700/-
14.1. The brief f act s of thi s is sue i s that the as ses se e had p aid ce rt ain adv ance s as p er the di rections of th e D elhi High Court in the earli er years towa rd s a pos sible claim that might a ri se in the fo rm of compen sation due to the de ath of a gu est in th e s wimmin g pool of the hotel in the yea r 1997-98 and this i ssu e was und er litiga tion before the Hon'ble Delhi Hi gh Court. Durin g the A ss t Year 200 2-03 , the ass essee received the final order f rom th e Delhi Hi gh Court where in, it wa s held that th e adv ance s I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 51 of 73 already p aid shall be t reat ed a s co mpens ation p aid by the as sessee. Accordin gly, this advance was written off in the books of the a sse ss ee durin g Asst Year 2002-03 and deductio n claimed ac cordin gly as expendi ture incurred wholly and exclusively for th e purp ose of busines s. The L earned A ss es sin g Officer record s this fact but proceed ed to disallow the s ame a s th e copy of th e D elhi Hi gh Court o rder was not placed before him. A g grieved, th e assessee ch allen ged this i ssu e befo re the Learned CIT(App eals ), befo re whom the D elhi H igh Cou rt o rd er wa s pl aced by the as se sse e wherein, the asse ssee accept ed th e advanc e p aid of Rs. 86,21,700/- to the respon dent of th e clai m ca se on thei r agreein g not to lay any further clai m in futu re arisin g out of the death of the p laintiff. Accordin gly, the Learn ed CIT(App eal s) deleted this additio n. Agg rieved, the revenue i s in app eal before us on th e followin g ground:-
"6. On the facts and in the circums tances o f the cas e Ld . CIT[A] ha s err ed in deleting the addition o f Rs.86,21,700 /- on acco unt o f ad vance writ ten off on accepting fr esh eviden ce and fresh explan atio n made by ass es s ee in vio latio n of Rule 46A of I.T. Rules".
14.2. The Lea rn ed D R argued that th e order of Delhi Hi gh Cou rt in the claim ca se was filed before the L earn ed CIT(App eal s) by the as ses se e and the Le arn ed CIT(Appe als) did no t reso rt to obtain the rem and repo rt f rom the Learned Ass essin g Officer for his co mment s an d thereby leadin g to violation of Rule 46A of the Income Tax Ru les. Acco rdin gly he pleaded for set aside o f this i ssue to the file o f t he Learned A s ses sin g Offic er.
14.3. We have heard th e rival submi ssion s and p erused the materi als av ailable on reco rd. It is se en th at the a ss ess ee h as d ebited the su m of Rs. 86,21,700/- in its p rofit and los s account und er the head "Ad van ces writte n off" pursuant to the di rection s of the D elhi High Cou rt ord er received du rin g th e A sst Year 2002-03 (i.e. the year und er appeal). Thi s co urt ord er i s ve ry much in the p ublic domain and cannot be con strued as an additional evidence fil ed by the ass es see befo re the Learned I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 52 of 73 CIT(App eals ). Even otherwi se, we fin d that the reven ue's cas e is no t goin g to get st ren gthen ed by setting a side this i ssu e to the file of the Lea rn ed AO as the conclusion could not be any thing di ff erent in this issu e.
We hold that the Learned CIT(Appeals ) had adjudicated this issu e and g ran ted relief to the ass ess ee with proper reasoning. Henc e we are not in clined to interf ere with the L earned CIT(Appe als)'s o rder on this issu e. Acco rdin gly, the ground no. 6 rai sed by the revenu e is d is mi ssed.
15. Disallowance of interes t on borr owed funds as diverte d for non-business purpose s 15.1. Th e bri ef facts of thi s i ssu e are that th e as sessee h ad advanced mon ie s to two pa rti es n amely Lak e Palace Ho tels & Mo tels Ltd (Rs.2,50, 00,000/-) ; Mumta z Hotel Ltd (Rs.9,50,00 ,000/-) wherein as se sse e h ad du ly charg ed in te rest and offered the sa me to tax. Accordin gly, it was plead ed by Learned AR that no dis allowan ce of interest sho uld be mad e. The L earned CIT(App eals) delet ed the addition mad e to ward s di sallowan ce of in terest on borrowed fund s in re spect of funds advanced to afores aid two p artie s as th e sam e are int ere st bearin g and confirmed the addition to ward s in tere st disallowance in resp ect of other p arties. A gain st thi s relief grant ed to asse ssee, the revenue is in app eal befo re u s on the fo llo wing g roun d :-
"7. On the facts and in the circums tances o f the cas e Ld . CIT[ A] has erred in restri cting the addition to the ext en t of Rs.5,14,01,920/- as against Assessing Officer's ad ditio n of Rs.6,27 ,16,642 /- on acco unt of interest paid on loan free advances mad e to sister con cern o n accepting fresh explanation made by assessee witho ut a ppreciating the fact and circumstances o f th e loan transactio ns recorded by Ass essin g Officer in his assess ment o rder" .
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 53 of 73 15.2. We have hea rd the riv al submis sion s. This issu e has been elaborately dealt with in Ground No . 6 rai s ed by the assessee in thi s order. The decision rende red the reon will be equ ally applicable to Gro und No. 7 rais ed by the revenue. A ccordin gly, ground no. 7 rai sed by the revenue i s di smis sed .
16. Disallowance on a ccount of s ta ff we lfare expense s -
Rs.50,00,000/-
16.1. The brief fact s o f this i s sue is th at the as se sse e comp any is in the hab it of providing f ree / subsidi zed meals to i ts employ ees on duty. The Lea rn ed As se ssin g Offic er proceed ed to disallow a su m of Rs.50, 00,000/- on account of staff welfare exp ens es on an ad hoc basis based on the disallowances mad e in the earlier y ears i.e. Asst Y ears 2000-01 & 2001-
02. On first ap peal, the L earn ed CIT(App eals) on the b asi s of earlie r year's o rde r of his predece ssor del eted the ad dition mad e to wards sta ff welf are e xpen s es o n a n ad hoc basi s wi th a findin g that it is q uite u sual and stand ard practice in hotel busin ess to prov ide meals to its e mployees and the re was no d ispute on the f act s t hat exp enditu re on such m eal was allowable busine ss expenditure. He also gave further findin g that the Lea rn ed AO did no t dispute the fact that the expend itu re had b een incu rred and that bein g so , he had no occasio n to dis allow a p art o f the same. Aggri eved , the Revenue i s in appeal befo re u s on the fo llo win g ground:-
"8. On the facts and in the circums tances o f the cas e Ld . CIT[A] has err ed in d eleting the Assessing -Officer' s disallowance of Rs.50,0 0,000/- on acco unt o f 5Uif welfare expen ses relying o n the decision o f Ld. CIT[A]'s o rder in app eal No.11/CIT[A]-VIII/Cir-8/04-05 dated 07.02.2005 for asstt. year 20 01-02 in the case of assessee on the similar issu e not appreciating th e facts a nd circumstan ces r eco rd ed by Ass essin g Officer in his asstt. order ".
16.2. The L earn ed DR relied on the order of the Le arned Ass es sin g Officer on this i ssu e. In respo nse to this, the L earn ed AR argued th at th e I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 54 of 73 as se sse e had on ly prov id ed meal s to its employ ees on duty pursuan t to a me mo randu m of s ettlemen t dated 27.9.99 entered into with the employee s of Obe roi Tower and Oberoi Mu mbai u/s 18(1) r.w.s. 2(p) of Industrial Disputes Act, 1947 Rule 62 of Ind u strial D isput es (Bombay ) Rules, 195 7 an d also stat ed th at thi s issu e i s covered in f avou r of the as se sse e in its own case by the order of this Tribunal for the ea rli er yea r. He also argued that the reven ue h aving agit ated this issue befo re the Hon'ble Calcutta Hi gh Court in the e arlier year by rai sin g subst anti al question of law in ITA No. 3 of 2 001 dated 28.3.20 01 at the time of admi ssio n of app eal before th e Hi gh Court, the learn ed coun sel fo r th e reven u e so ught to withd raw the s ame on instruction s f rom the incom e tax dep art ment at the time of final disp o sal of appeal by th e Hon'ble High Court.
16.3. We hav e heard the rival submis sions. It is seen th at the addition has been mad e only on an ad hoc basi s by the Learned A s ses sin g Office r. It i s seen th at th e lea rn ed couns el fo r the revenue h ad sought to withd raw this ground before the Ho n'ble Hi gh Co urt while pursuin g the app eal in th e earlier y ear based on the inst ru ctions f ro m the Inco me Tax Depart ment which is clea rly st ated in para 2 of th e ord er of th e Hi gh Court. This only leads to a situ ation th at probably the rev enu e in its wisdom thou ght it fit not to pursue this issu e befo re the Hi gh Court a s th e add ition mad e thereon may not get su s tained in the High Court. We find that thi s i ssu e i s covered in favour o f t he assess ee b y the d eci sion of this Trib unal in asses see's own case for t he Asst Y ear 2001 -02 in ITA No. 833/Ko l/2005 dated 8.9.2006 . The op erativ e portion of the s aid judgement i s rep roduced h e reu nder:-
"32. After h earin g both th e sides w e find th at th e comp any has entered into a memora ndum of settlemen t da ted 27 t h Sept ember, 1999 with th e employees of Oberoi Tower, and Oberoi Mumbai und er section 18(1) read with sectio n 2(P ) of the Indu stria l Dispute Act, 1947 and Rule 62 of th e Industrial Disp utes (Bombay) Rules, 195 7. We find tha t Clau se No . 13 of the said settl ement reads as under:-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 55 of 73 "13. Outdoor Allowance/Lu nch Allowance -
The L unch allowance of the staff who are r equ ir ed to g o o n ou tdo or duty during lu nch hours will be increased from Rs.40/- to Rs.75/- per day from the date of signing the Settl ement, subject to having their meals o utside th e hotel".
32.1 . Further w e find that Clause No. 2 2 of the said settlement r ea ds a s un der:-
"22. It is agr eed by and betw een th e parties that a sum o f Rs.70 /- per month will be d educted toward s br eakfa st, t ea, sna cks and m eals serv ed i n the cafet eria fro m the salaries of th e employees w.e.f. 1 s t January, 2000".
32.2 . We fu rth er find that the ITAT in asses see's own cas e vide ITA No. 607 /K/20 05 dated 30.06.2006 for the AY 2000- 01 dismissed the g roun d raised by th e revenu e ho lding as under:-
"55. Con sidering the totality of the facts of the case and considering th e Memorandum o f Set tlemen t en tered in to between th e man agement and the employees union for pro visio n of mea l to employees on duty and in absen ce of any contra ry material brought on record by th e r ev enu e against th e fin dings of th e ld. CIT(A) and further considering that th e addition ma de by the AO is based purely on estimat e basis. W e do not find any infirmity in the o rder of the ld. CIT(A) del eting such a ddition and accord ingly up hold the same. Grounds of a ppal no . 7 by the revenu e is th er efor e, dismissed".
33. Con sidering th e totality of the fa cts of the cas e and following on the order of the ITAT in assess ee's own cas e in the imm ediately preceding assessmen t wh er e th e gro und raised by th e rev enu e was d ismiss ed, the grounds o f app eal No. 4 by the r ev enu e is dismiss ed".
Resp ectfully followin g the coo rdin ate bench of th e T ribunal on thi s impugn ed i ssu e in as ses se e's own case for the earli er y ear, we are no t inclined to in te rf ere with the decision o f the L earn ed CIT( Appeals) on this is sue. A ccordin gly, ground no . 8 rai sed by the revenu e is dismi ssed .
17. Disallowance of repairs, renewals, repla cement and adve rtisement - Rs.1,07,42,335/ -
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 56 of 73 17.1. The bri ef f acts of this issue are t hat th e ass essee was ask ed by the Lea rn ed A sses sin g Of ficer to furni sh t he det ails as requisitio ned i n the questionnai re u /s 142(1) o f the Act. In re spons e, the assessee submitt ed that the info rm ation is not readily available in th eir syst em s and offered to give the details in elect ronic med ia which was al so not given by as se sse e later durin g as se ss ment proce edin gs. But the assessee submitted the u nit wi se detail s of ex pens es incu rred on this account. The Learn ed Assessin g Offic er felt that the detail s furn ished by assessee are of no use as the det ails si mply indicate the amount in cu rred by an individual unit b ut the detail s of exp enses are not available and hen ce genuini ty of the s ame could not be v eri fied. A ccordin gly he d is allowed a sum of R s.1,0 7,42,335/- being 2% of total exp enditure on that ac count on an esti mat ed basi s. On first app e al, the Lea rn ed CIT(App eals) d elet ed this ad dition on the grou nd that the rea sons given by the Learned Assessing Of ficer fo r makin g th e di sal lowance is vague and can not be sust ained . Ag gri eved, the revenue i s in appe al before us o n the fo llowing ground:-
"9. On the facts and in the circums tances o f the cas e Ld . CIT[A] has erred in deleting th e disallowance of Rs.1,07,42,335/- out o f total exp en ses incurr ed on r epa irs, r enewals, replacemen t an d advertis emen t etc. on the ba sis of fresh explanatio n made by assess ee whi ch was unverifiable durin g a sstt. proceedin gs for the y ear d u e to failure on the p art of assess ee to produce before Ass es sin g Officer" .
17.2. The L earn ed DR relied on the order of the Le arned Ass es sin g Officer. In response to this, the L earned AR argued that no disallowance co uld be made on an ad h oc basi s and p laced reliance o n the d eci sions of Mumb ai ITAT in the c as e of ACIT v s A rt hur An dersen & Co (2005) 94 TTJ 736 (Mumbai) and as se ssee's own case in DCIT v s EIH L td in ITA No. 1760/Cal/199 9 fo r A s st Year 1996-97 in support of his cont entions.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 57 of 73 17.3. We have heard th e rival submi ssion s and p erused the materi als av ailable on record. We find th at the additio n of R s.1,07,42 ,335/- has been mad e on ly o n an ad hoc basi s whi ch is not in acco rdan ce with la w. We also fi nd that this issue h as b een d ealt with by this Tribunal in as se sse e's own cas e in ITA No. 1760/Cal /1999 for Asst Year 1996-97.
Resp ectfully following the deci sion of th e coordin ate bench of the Trib unal on this impugned i ssu e in as ses se e's o wn ca se for th e Asst Year 1996-97, we a re no t inclined to interfe re with th e deci sion o f the Learned CITA o n thi s i ssu e. Acco rdin gly, grou nd no. 9 rais ed by th e rev enue is dismi ssed.
18. Disallowance of interest u/s 14A on the ground that loan has been utilized for investm ent in shares for e arning dividend which is exempt - Rs.3,47,34,798/-
18.1. The brief f act s of this is sue i s t hat f rom the Balance she et o f the as se sse e, it could be s een that the a ssess ee has a to tal invest ment in share s amo untin g to Rs.280.02 crores on which dividend was de rived to the extent of R s.2.4 6 cro res which was exempt. Th e Learned A ssessing Officer held th at f ro m the balance sh eet it appears that th e ass es see h as utilized loan funds amounting to R s.464 .80 crore s that comes to 31% of total fund utilized. Therefo re, th e Learn ed Asse ssin g O ffic er a ssumed that 31% of total fund invested in sh are s has been utilized f rom borro wed fund. In the pro fit and loss account , the asses see has debited total interest amountin g to Rs.18.60 crores and hen ce in te rest relat able to 31% of investment in shares is R s.3,47 ,34,798/- was dis allowed u/s 14A of the Act. On first app eal, the Le arn ed CIT(App eals) deleted the addition mad e u/s 14A on this account on the g round that no evidence h as been brought on record by the Learned AO to prove that the borro wed funds were utilized fo r inves tm ent in sha res for earnin g t ax free dividend inco me. A ggrieved, the revenue is in app eal before u s on th e fo llowing ground:-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 58 of 73 "10. On th e fa ct s a nd in the circums ta nces of the cas e Ld .
CIT[A] has err ed in deleting the d isallowance u/s .14A of the I.T. Act th e proportionate int er es t on loan fund utilized in shares for earning exempt ed dividend income on the basis o f facts and ci rcumstances p leaded befor e him which was u nverifiable d uring a sstt. p roceedings for the yea r du e to failure on the part of assess ee to produce befor e th e Assessing Officer".
18.2. The L earn ed DR relied on the order of the Le arned Ass es sin g Officer. In respon se to this, the Learned AR argued th at most of the invest ment s in shares were made in ea rlier years a nd are p ractic ally old invest ment s. He also argued that on us is on the reven ue to prove that the interest paid on bo rrowed fund s related to acqu isition of shares yielding tax f ree inco me. The Le arned A R further argu ed that the asses ee h ad suffici ent funds in the form o f sha re capital, rese rv es and su rplus and cash p rofit fo r th e year which wo rked out to Rs.646.65 crore s (bein g the net own ed funds at th e b egi nnin g of the year to the tune of R s.574.46 cro res p lu s cash p rofit for th e y ear amo u nting to Rs.72.19 crores) and the total invest ments mad e by the asses see i s o nly R s.2 80.01 crores and hen ce it co uld be easily inf erred that th e inves tm ent s were mad e only out of own funds. Even assu min g without concedin g, he fu rth er argued that out of the to tal investmen ts of Rs.280.0 1 crore s, a su m of Rs.120.91 cro res has b een in vested in forei gn c ompan ies, wherein th e dividend derived , if any, wo uld become t axable and hence i s auto matically o utside the a mbit of di sallo wanc e of section 14 A of the Act.
18.3. We have heard th e rival submi ssion s and p erused the materi als av ailable on record. The relevant assessm ent yea r unde r app e al is 2002- 03 at which point of time , the prov isio ns o f Rule 8D was not in fo rc e and the same was mad e applicable only from Asst Year 2008 -09 as decided in the d ecision of Godrej & Bo yce Man u factu rin g. Howeve r, it is not in dispute th at th e as se sse e h ad derived t axable incom e as well as t ax f ree inco me and i ncurred expenditu re fo r deriving both the incom es and hence I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 59 of 73 disallowance is de finitely wa rrant ed in term s o f section 14A which i s brought in the sta tu te boo k with retro spect ive eff ect f rom 1. 4.1962. We also find lot of force in th e argu me nts of the Lea rn ed AR that the invest ment s mad e by the as se ss ee are st rat egic inves tm ent s and out of co mmerci al e xpedi ency to furth er th e busine ss int erests and obtain co ntrolling st ake in the respective co mpanie s. Acco rdin gly we hold no disallowance u/s 14A o f the Act could operat e on the same fo r which reli ance is placed on the followin g d eci sions:-
EIH Associa ted Hote ls Ltd vs DCIT - Chennai Tribunal de cision:-
"Invest men ts made by th e ass essee in s ubsidiary comp any were not on accoun t of investmen t for earning ca pital gain s or divid end income. Su ch inv estm en ts had been made by the assess ee to promo te subsidiary company into the hotel industry and wer e on a ccount of business ex ped iency a nd d ividen d ther efrom is purely inciden tal. Ther efor e, the inv es tm ent made by th e ass ess ee in its subsidiary is n ot to be recko ned for disallowance u /s 14A rea d with Rule 8D".
Interglobe Enterpri ses Ltd vs DCIT - D elh i T ribunal decis ion:-
"Ass essee had utilized in terest fr ee fun ds for making fresh investm ents a nd that too into its su bsid ia ries which w er e not for the pu rpose o f earning exemp t income but for strateg ic purposes only. No disallowance of int erest is req uired to b e made u nder Rule 8D (i) or (ii) as no direct or in direct int er est expenditure has incurred fo r ma king in ves tmen ts . S trat egic in ves tment has to be excluded for the purpos e of arriving at disa llo wan ce u nder Rule 8D(iii)".
However, wh en it is found that th e ass es see h as go t suffi cient o wn funds in the fo rm of share capit al, rese rve s and su rplus to the tune of Rs. 646.65 crores and cash p rofit for the yea r amountin g to Rs.72.19 cro res and th e tot al inv estments (including fo rei gn comp any invest ment s) is only Rs.280.01 crore s, and mo re so when these invest ment s were made years ago by the ass essee, it could easily be co ncluded that no disallowance u/s 14 A of the Act could o perate in th e I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 60 of 73 facts and ci rcum stan ces of the ca se. W e d raw suppo rt f ro m the decision of Delhi Trib unal in th e cas e of Ma rut i Udyo g L td vs DCIT reported in (2003) 92 ITD 119 (Del), wherein it was held as below:-
"R eg ar ding b ur den of pr oof , it IS the settl ed l egal position that burd en is on the pers on wh o al l eges the exis tence of a fact. If the ques tion of ge nui nenes s of expend iture is r ais ed, the bur de n woul d b e on ass es s ee to prove the same Hence, where ass ess ee cl aims deduction in r es pect of an y expend iture, than onus woul d be on the ass es s ee to pro ve t hat c onditions f or its al l owab ility ar e satis f ied. R efer ence can be mad e t o S upr em e Court j ud gment 111 t he cas e of Cl T v Cal cutta A gency Ltd. [ 1951 19 ITR 191 On the other ha nd. If the revenue wa nts to disal l ow an e xpend itur e un der a particul ar provis ion, the n t he o nus woul d b e on the depar tment to prove t hat cond itions f or dis al l owance are s atisfied. R ef er ence can be ma de to Jud gm ent of Punj ab & Har yana High Co ur t 111 the cas e of Saraswati Industr ial Synd icate Ltd. vs. CIT[ 1982] 136 IT R 361. In t he present c as e, it is the revenue w ho wants to disal l ow the expe nd iture un der s ection 14A. Hence t he on us is on the r evenue to pr ove t hat interest paid by as s es see on bor r owed f und s rel ated to acquisition of s har es yiel ding tax f r ee incom e".
62. . .. .. ... ... .. Adm ittedl y, this is a cas e of mixed accounts wherein al l kinds of r eceipts ar e de pos ited . A ss es s ee's counsel has s pecif ical l y rais ed the pl ea at pag e 94 of the wr itten s ubm is sions that at "the beginning of the year t here were interest-f r ee f unds of R s . 2143. 35 cr or es w hil e at the end of the year at R s. 2622. 37 cr or es. Thus , ther e was incr ease in the interest, the extent of R s. 479 crores . Bes ides this, prof its of the year amounting t o R s . 975 cr or es were al so pumped in s uc h accounts . Thus, inter es t-f ree f unds of R s. 1454 crores were avail ab l e to as s es s ee for m aking inves tme nt which f ar e xceede d inves tment i n s har es of R s . 217 crores. T his f act s tated b y as s es s ee r em ains uncontr over ted. The CJT(A) coul d not ig nor e s uch f acts . T he nexus between borr owed f unds and inves tme nt can b e s aid to b e es tabl is hed onl y wher e it is s hown that int er es t f r ee f unds were not avail abl e with the ass ess ee. The f ail ur e to take into acco unt has com pl etel y vitiated t he w or king ma de b y CIT(A). We ar e not concer ned with the dis all owance under s ection 36(1)(iii) as no such dis al l owance w as m ad e. The dis all owance was s oug ht to be m ade und er s ection 14 A. Hence, it was f or the r evenue to dis char ge the o nus which the reve nue has m iserabl y fail ed to dis char ge. Accor dingl y, the ord er of CIT (A) is s et asid e on t his is s ue and c ons eque ntl y, the ad d ition of R s . 4, 59, 08, 287 s us tained b y her is her eb y d el eted".
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 61 of 73 Resp ectfully followin g the d ecision o f the coo rdinat e ben ch of Chennai and Delhi Tribunal as cited above, we hold that the assess ee i s hav ing suffi cient int ere st f ree funds t o make inv est me nt in sha res of domestic comp anies to the tu n e of Rs.1 44.08 crores, whe rein the dividend ea rn ed would be ta x f ree and in v iew of the fact that the Learned Assessing Off icer had not brought the nexus between the borrowed funds and the amou nt inv ested in th e sha res o f domestic comp ani es, and in v iew of the fact that the investm ents in subsid iari es we re made out of strate gic invest ment s, we are not inclin ed to i nterfere with th e decision of the Lea rn ed CIT(Appe als) on this is sue.
We al so h old that dividend , if any, deriv ed fro m inve stment in share s of fo reign comp anies made by the ass ess ee would become taxable and hen ce disallo wanc e u/s 14A would not o perat e in this re gard. We place relianc e on the fo llowin g deci sio n s in thi s reg ard :-
(i) CIT- vs- Su zlon Ene rgy Ltd (2 013) 354 I TR 630 (Guj);
(ii) Birla Group Holdings Ltd -vs- DCIT (20 07) 1 3 SOT 642 (Mu m.
Trib);
(iii) ITO -vs- Strid es Acrolab Ltd (2012) 138 ITD 323 ( Mum. Trib).
Accordin gly, ground n o. 10 rai sed by the rev enue is di smissed.
19. Disa llowance of proportionate mana gement expenses u/s 14A - Rs.50,00,000/-
19.1. The brief facts o f this i ssu e i s that the asse ssee had earn ed dividend income of Rs.2,45, 84,822/- out of the investm ent of Rs. 280,01,93, 396/-. The Learn ed AO disallowed a su m of Rs.50, 00,000/- towa rd s proport ionate mana gem ent expen ses fo r earnin g dividend inco me which was b rought do wn to Rs.10,00,0 00/- by the Learned I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 62 of 73 CIT(App eals ) in fi rst ap p eal. A ggrieved , the rev enue i s in appeal befo re us on the followin g ground:-
"11. On th e fa ct s a nd in the circums ta nces of the cas e Ld . CIT[A] ha s err ed in restri cting the d isallowance u/ s.1 4A of the I.T. Act to the ext en t of Rs.I0,0 0,000/- on accou nt or proportio nate mana gement exp enses as against Asses sin g Officer's disallowance of Rs.50,00 ,000/- with out app reciating the finding recorded by Ass essin g Officer in his assessmen t order".
19.2. We h ave heard the rival submi ss i ons and we f ind that th is i ssue i s elaborately dealt with in this o rder in Ground No. 8 rai sed by the as se sse e in ITA No. 316/ Kol/ 2 006, wherein we have held that 1% of dividend income is to be d isallo wed u/s 14A in acco rd ance with the decision of Juri sdiction al High Court in the cas e of CIT vs R.R. Sen & Bro thers P Ltd in GA No. 3019 of 2 012 in ITAT NO. 24 3 of 2012 dated 4.1.2 013. Acco rdin gly, the ground no. 11 rais ed by the revenue is p artly allowed.
20. Disa llowance of depreciation on additions of assets -
Rs.11,33,20,825/-
20.1. The Lea rn ed A sse ssi ng Offic er disallowed th e dep reciation on add itions to fixed a ssets to the tune of Rs.11, 33,20,825/- on the ground that the bills for the same were no t prod uced by the as ses se e du rin g as se ssm ent p roc eed in g s. Ho wever, bef ore th e L earn ed CIT(Ap peals ), the same we re p roduced a s an additional evidence. Hence in te rms of Rule 46A of In come Tax Rules, the L earned CIT(App eals) sou ght for a remand repo rt f rom th e Le arned A s sessi ng Of fi cer with rega rd to the impu gn ed issu e. Since the Learned A ssess ing Office r did not make any ad verse remarks on thi s i ssu e but si mply stated th at only Xerox copies of th e bills were produced by the ass essee, the Lea rn ed CIT(App eal s) sought to delete th e ad dition mad e in the sum of Rs.11,33,20, 825/- toward s disallowance of dep reci ation. Aggrieved, the revenue i s in appeal before us on the followin g ground:-
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 63 of 73 "12. On th e facts an d in the circumstances of the ca se Ld .
CIT[A] has erred in deletin g th e disallowance of Rs.11,33 ,20,825 /- on account of d epr eciatio n on the amount of a dditio ns in assets on accep ting assessee's explanation withou t appreciating the facts an d cir cu ms tan ces record ed by Assessin g Officer in his assess ment ord er as well a s r ema nd report dated 06.12.2005 ".
20.2. The Learned DR reli ed on the o rder of the Learn ed Asses sin g Officer. In respons e to th is, the Le arne d AR argu ed that sinc e no ad verse findings were given by the Learn ed Asse ss ing Of fic er du rin g re mand proce edin gs towards this i s sue, he prayed for deletion of this disallowance.
20.3. We have heard th e rival submi ssion s and p erused the materi als av ailable on record. I t is not in di sp ute that the bills fo r add itions to fixed as sets were filed by the assess ee before the Learned CIT(Appeals ) for the f irst ti me and acco rdingly a rem and report was called for f ro m the Lea rn ed A sses sin g Off icer who had not given any adv ers e findin gs with regard to th is issu e. Hence there cann o t be any grievance o n the part of the rev enue to a gitate this ground bef ore u s. Accord in gly, we are no t inclined to in te rf ere with the decision o f the L earn ed CIT( Appeals) on this issue. Acco rdin gly, ground no. 12 raised by the revenue i s dismi ssed.
In the re sult, the revenue' s appeal in ITA NO. 426/Kol/2006 is Partly Allowed.
ITA No. 1808/KOL/2007 - ASS ESSEE's APPEAL21. Th is appeal of the assessee ari ses ou t of the order of the Learned CIT(App eals ) u /s 15 4 of th e Incom e T ax Act, 1961 (h e rein afte r re ferred to as th e "Act") d at ed 16.5.2007 for the Asst Year 20 02-03 . The brief background of this appe al is that th e a ss ess ment wa s f ra med u /s 143(3) I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 64 of 73 of the A ct fo r the A sst Year 2002-03 on 28.3.2 005 making various add itions to the retu rned inco me. All the additions we re cont ested by the as se sse e befo re the Learned CIT(Appeal s). Th e Learned CIT(Appeals) had disposed off th e app eal in App eal No. 44/CIT( A)-VI II/KOL/CI R. 8/2005-06 dated 22.12.2005 with out d isposin g off Ground No. 4 rais ed by the as se sse e be fo re him. This mi stake was brou ght to the notice of the Lea rn ed CIT (Appe als) by preferrin g a rectific ation p etition u /s 154 of the Act by the asses see on 21.2.20 06 and in response to the sam e, the Lea rn ed CIT(Appeals ) p as sed an o rder u/ s 154 of the Act on 16. 5.2007 mod ify in g his earli er o rde r by adjudicatin g Ground No. 4 raised by the as se sse e in the ori gin al g rou nds of app eal. F or the sake of con venience, the Grou nd No. 4 raised befo re the L earn ed CIT(App eal s) i s rep roduced herein:-
"That on law as well as on th e f acts a nd in the cir cu ms tan ces of the case th e L earn ed Assessing Officer while computing the ded uction u/s 8 0IA had wrongly r educed the eligible profit of Bangalore Unit by 3 6.21% o n the grou nd that the same ha d already been allo wed as deduction u /s 80HHD."
21.1. The Learned CIT (Appeals ) held this ground ag ain st the as sesse e by a detailed o rde r, The relev ant op erative portio n is in p ages 3 to 6 of th e Section 154 O rder of the L earned CIT(Appeal s). Aggri eved again st thi s sect ion 154 o rder, the a ss ess ee i s in appeal befo re us on the fo llowing grounds:-
"1. Th at on the facts a nd in th e ci rcumstances of th e case, the L earn ed CIT(Appeals) err ed in holding that if deduction is claimed u /s.80HHD of th e In com e Tax Act, 1961 (h erein after ref err ed to as Act ) o n pro fits of a un it deduction u nder any other section of Ch apter V IA canno t be allowed on th e profits of th e sa me un it.
2. Th at on the facts and in th e cir cu ms tan ces of the cas e, the L earn ed CIT(Appeals) was n ot justified in confirming the action of the AO in reducing the eligible profit of Banga lore un it by 36.21 % while computing ded uction u/s. 80 IA on the gro und that the sa me had already been allowed as d eductio n u/s. 80 HHD.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 65 of 73
3. Th at on the facts and in th e cir cu ms tan ces of the cas e, the L ea rn ed CIT(Appeals) failed to appr eciate the fact that deduction claimed u/s. 80HHD and that under section 80 IA in the ag gregate did not exceed th e profits of the un it eligible for deduction under th ese s ectio ns and hence th ere was no d ouble deduction.
4. That without preju dice to the grounds taken h er ein abo ve, th e Learn ed CIT (App eals) err ed in confirming the actio n of the AO in redu cing 36 .21% of the eligible profit of the Banga lore unit while computing deductio n u/s. 80IA igno ring the fact that th e actu al relief gra nted u/s. 80HHD was r es tri ct ed to only 30% of the eligible pro fits.
5. That witho ut prejud ice to th e grounds ta ken here-in - abo ve, the Learn ed CIT(Appeals) sho uld have held tha t deduction u/s. 80IA should be first computed and deduct ed from the profits and ga ins o f the busines s before computing deduction u/s. 80HHD of the Act.
6. That th e appellan t craves leave t o add, amend, mo dify, rescind, supplement or a lter any o f the ground s sta ted her e-in-above eith er b efor e or at the tim e of hearing of the app eal".
21.2. The Learned A R a rgued that the issu e is co vered by the decision of the Su preme Court in the case of JCIT vs Mandid eep Engi neering & Packagin g India P Ltd repo rt ed in (2007) 2 92 ITR 1 ( SC) and acco rdin gly pleaded for allowance of the i ssue un der appeal.
In respon se to this, the Learned DR vehemently support ed the orders of the lo wer authoriti es.
21.3. We have heard th e rival submi ssion s and p erused the materi als av ailable on record. Ch apter VI-A of th e In come Ta x A ct, 1961 deal s with various d eductions. P art 'A' o f this Chapter d etail s the sch eme of ded uction, while Part 'C' cont ains th e provisions for allowin g ce rtain ded uctions in resp ect to profit s and gains f ro m a business. Sectio n 80A falling in Pa rt 'A', p rovides that d eductio ns are to be made f rom the g ro ss I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 66 of 73 total in come, and th at the ag gre gate amount of the deductio ns shall not exceed th e gross total inco me.
21.4. Section 8 0AB, also falling in Chapt er of VIA, provides that where any deduction is required to be mad e or allowed unde r any section f alling in Part 'C' of that Chapt er, in re spect of any income of the natu re speci fied in any of the rel ev ant sectio n which is included in th e g ros s total income, the amo unt of income of that nature as computed in acco rdanc e with the p rovisio ns of the I ncome T ax Act shall be de emed to be the amoun t of income of that n ature deriv ed or rec eived by the as se sse e an d included in hi s g ros s total income.
21.5. Section 80IA(9) which falls in Part 'C' of Chapter VIA, provides as under:-
"Wher e any a mount of pro fits a nd gains of an Und erta king or a n ent erpris e is claimed and allo wed u nder this section for any assessment year, dedu ction to th e ext ent of such profits and gains shall not be allo wed under an y other provisions of this Chapter under th e hea ding 'C' - Deductions in respect of cer tain in comes ", and shall in n o case ex ceed the profits and gains of such eligible busin ess of Undertaking or Enterpris e, as th e case ma y be".
21.6. The question th at repeatedly ari ses f or the consid eration of the Court is ab out that q uantum of d eduction in case where an ass essee i s eligib le to clai m d eductio n under mo re than one Sectio n of Part 'C' of Chapte r VI-A b ased on dif ferent crit eri a, fo r in stan ce, unde r s ection 80HHC fo r expo rt p ro fit s and section 80IA fo r n ew Indu strial Undert aking, and th e mann er o f co mp utation of deductio n s under both thes e s ections. Hon'ble Bombay High Court in the case o f As so ci ated Cap sul es Pvt. Ltd. -vs.- DCIT reported i n 237 CTR (Bom.) 408 con sidered the deci sion of the Hon'ble D elhi Hi gh Court in the case o f Great Eastern I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 67 of 73 Expo rt - vs.- CIT reported in 237 CTR 26 4 noted that the Hon'ble Delhi High Court h ad f ailed to consid er one of the arguments of th e ld. coun sel for the rev enue in that ca se. L d. counsel had a rgu ed that i n the matter of grant of deduction, the first stage was comput ation o f deduction and secon d stag e was th e allowance of de duction, and that co mput ation of ded uction had to be made as p rovided in their re spe ctive section s and it was only at the st age in allowin g d ed uction under sectio n 80IA(1) and also under other p rov isions of Part 'C' of Chapter VIA, that the provisions of se ction 80IA(9) came into ope ration . The Hon'ble Bombay High Court noted that th e Hon'ble Delhi Hi gh Court h ad not rejected thi s argu men t and therefo re could not have arrived at the conclusion th at ind eed without rejectin g that argument. The Hon'ble Bombay Hi gh Court exp re ssed its dec ent with the views that Hon'ble Kerala Hi gh Court in the case of Olem Expo rts ( In dia) L imited -vs.- CIT reported in 229 CTR (Ker.) 206 for the s ame rea sons.
21.7. The Ho n'ble Bo mbay High Cou rt noted that the object of section 80IA(9) wa s to p rev ent tax p ayers fro m cl aimin g repeat ed deduction s in resp ect o f the same amoun t of th e eligible in come an d in excess of th e eligib le profits, and not to curtail d eductio n allowable un der various provision s of Part 'C' of Chapter VI A. The Hon'ble Bombay H igh Court, therefo re, held that section 80IA(9) did n ot affect the co mputation of ded uction under various pro vision s of Part 'C of Chapter VIA, but af fect ed the allowability of such deduction s, so that the aggre gat e d eduction under section 80 IA and other p rovisions under p art 'C' of Chapt er VI-A did not exce ed 100% of the p ro fit s of th e b usines s of th e asse ssee. We hold th at a prov ision in troduced for restrict ing the scope of a benefit ano the r p rovision has to con tain a n on-obstante clau se which i s found in sect ion 80HHD and on this count alo ne, any attempt to curt ail the basi s of the profi t eli gible fo r dedu ction und er section 80H HD should b e av oided.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 68 of 73 21.8. Section 80IA (9) shou ld at the most be seem to b e a chiev in g the same thing a s is achiev ed by section 80AB and may be taken a s a provision introduced to achieve greater clari ty on this subject.
22. We a re o f the v iew that Redu ndancy should no t be att ributed to the legislatu re. Thi s i s a ca rdinal pri nci ple of co n st ruction of statute s. Further, if the re i s ambi guity , it is an equally accept ed p rin ciple of interpret ation that such ambi guity should be resolved in f avo ur of th e as se sse e p aying taxe s and not in favour of the revenue. At this juncture, it is rel evant to get into th e notes on clauses on th e i mp ugn ed i ssu e of am end ment i n sectio n 80IA and sec tio n 80HHD to p revent double ded uction of s ame p rofit :-
"Un der any p ro visions of Chapt er VI A of th e In come Tax Act, various d eductions fro m the p ro fit s an d gai ns were allowed to spe cifi ed as se sse s, subject to fulfillin g certain requiremen ts sp ecifi ed under th e rel evant sections. The total d eductions under Ch apt er VIA of the Income Tax Act were restrict ed to the g ros s total income in respect o f assessee as a whole".
"Ho wever, in c ertai n c ases, it was n oticed th at ce rt ain ass es see's claim mo re than 100 % deduction on such profit s and gains of the sa me Undert aking, when they were entitled t o dedu ction under more th an one sect ion of Chapte r VI A. With a view to providing suitable statuto ry safegua rd in the Inco me T ax Act to prevent tax paye rs fro m takin g undue adv antage of exi stin g p ro visions of the Act by clai min g repeated ded uctions in re spect of th e sa me a mount of eli gible in co me, ev en in cases whe re it exceeds such eli gible p rofit of an Undertakin g o r Ho tel, it is propos ed to provide inbuilt rest rictio ns in section 80HHD a nd 80IA, so that such unint end ed benefits are not p as sed on to the asse ssee.
This amendment is sou ght to be int ro duced ret rosp ectively w.e.f. 1.4.1 990 (empha sis supplied)".
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 69 of 73
23. It is also pertin ent to get into the p ro visions of section 80P(3) of the Act at thi s juncture. Section 80P(3) re ad s a s un der:-
"In a case wh ere th e ass essee is en titled a lso to the ded uction under section 80 HH o r s ectio n 80HHA or section 8 0HHB o r section 80HHC or s ectio n 80HHD o r s ecti on 80I or section 80IA or section 80J the deduction under s ub-section (1) of this section, in relatio n to th e sums specified in clause (a) or clause
(b) o r clause (c) of sub-s ectio n (2 ) s hall be a llo wed with r efer en ce to th e in come, if any, as refer red to in those clau ses included in the gross total inco me as r ed uced by th e d eduction s under s ection 80HH, section 8 0HHA, section 80hh B, section 80HHC, section 80HHD, section 80I, section 80IA section 80J, and section 80JJ".
23.1. From the abov e, it could be seen th at simila r l an gu age "as reduced by" is mi ssin g in section 80I A(9). This goes to pro ve that it was neve r th e intention of the legisl ature th at the d ed u ctions un der section 80IA should be grant ed on the profits aft er red ucing the d eductio n under section 80HHD of th e Act.
23.2. We are al so of the o pinion that d educti ons und er Chapte r VI-A are objective specific. It is possible that an assessee 's busin ess fulfils mo re than one object sought to be achieved. In such a situ atio n, an assessee should be entitled to cl aim deduction u n der another s ection coverin g the different o bjective, altho ugh with refe rence to each of the o bjectives, he cannot cl aim more than one d eductio n. In other word s, for diffe ren t objectives, sep arat e d eduction may be simultan eously clai med. Wh at i s prohibited is that in respect o f th e same o bjective, mo re th an one ded uction sho uld not b e claimed. If an as ses se e claims a deduction under sect ion 8 0I, it shou ld not be able to claim a deductio n under s ection 80HH. If an asses see clai ms ded uction under section 80HHE, it should not be able to clai m a deduction u nder sectio n 80HHF.
I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 70 of 73 23.3. The whole is sue cannot also be loo ked into f rom an othe r an gle. Section 80I A postul ates a fic tion that in d et erminin g the p rofit s eligib le fo r d ed uction, the eligible und ertaking shall be d eem ed to be the only source o f income. Consequently, therefo re, one would have to ignore the profits mad e by other Undert aking or activ ities of the as se ssee. Quantum of deduction under secti on 80IA would therefo re, be uninfluenced by the result of other operation o f the ass essee. There i s also no p riorit isation o f d eduction unde r section 80HH D or unde r section 80IA. This is unlike sectio n 80G for example, where sp ecific p rovisions hav e been ins erted that the deduction shall be given only after allo win g or giv in g eff ect to all other deduc tions. In the absen ce of such priori tisation and keepin g i n v iew the f act th at the comput ation me chan ism under the s ection s have nothing in co mmon, as also the fact that the objectiv es sough t to be achi ev ed or different, there sho uld be no occasion to t ake one deduction into the other.
23.4. The rule of harmonious int erp reta tion is a well accept ed rule of interpret ation. A section o r p art of sect ion should be in te rp ret ed so that it is in h armony with other p rovisions of the Act. Fu rthe r no p art of th e statut e sho uld be rega rd ed as a su rpl us age. Allo win g deductio n unde r only one se ction will make the l ater part of su b-section (9) of section 80IA redundan t. Such an interp retation should be avoided.
23.5. The Hon'ble MP High cou rt decision in JP tobacco Pro ducts Pvt. Ltd. case repo rted in [19 98] 2 29 ITR 12 3 held as unde r: -
"Section 80HH(9) as it s tood prior t o ins er tion of s ection 80-1 by t he Finance (No. 2) Act, 1980, with eff ect f r om 1-4-1981 or iginal l y incl ud ed o nl y s ection 80J. Section 8 0) pr ovid ing f or d ed uction in r es pect of the prof its a nd g ains f r om newl y estab l ished ind ustr ial un der takings or s hips or hotel bus ines s in cer tain cas es did not m ake any pr ovis ion f or r ed uction of the gr os s total income by the am ou nt of deduction admis s ibl e to the as sess ee und er section 80HH. It was onl y by an ame ndm ent of the s aid section 80J that the pr ovision f or r educing the g ross total incom e by the amount of d eduction under I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 71 of 73 s ection 80HH b y t he Dir ect T axes (Am end ment) Act. 1974. with ef f ect f r om 1-4-1974 w as ins er ted. Section 80-I was ins erted in its present f or m by the Finance (No. 2) Act, 1980 wit h e f f ect f rom 1-1-1981, and b y the s am e Finance (N o. 2) Act. Section 80HH(9) was ame nded and the wor ds s ection 80-I or were i ns er ted to mak e the s ame pr ovision appl icabl e to section 80-I as wel l . However , no pr ovis ion was m ade in s ection 80-I t o pr ovide f or ded uction of the gr os s total income b y deduction al l owed u nder section 80HH f or the purpos e of al l owing deduction u nder s ection 80-I. It woul d thus , b e s een that whe n s ectio n 80J al read y exis ted i n s ub-s ection ( 9) of s ection 80HH, an am endme nt was m ad e in s ectio n 80J i n the y ear 1974 but no s uch pro vis ion was m ade in so f ar as s ection 80-I was c onc er ned. This cl earl y contr a- ind icates that s ection 80HH(9) by its el f m eant that ded uctio n al l owed un der section 80HH is to be r educed f r om the gr os s total incom e f or gr anting t he benef it of s ection 80J and , f or the m atter , of s ection 8 0-I. It was pro vided in section 80J its el f by l ater am endm ent whil e no s uc h pr ovis ion was m ade in s ectio n 80-I eve n thoug h ins er ted on a l ater date. The pr ovision of l aw, is, ther ef or e cl ear that i n s o f ar as t he benef it of s ection 80-I is concer ned, it has to be g ranted on the g ross total incom e and not o n the income r educ ed by the amo unt al l owed un der s ection 80HH. In the res ul t the Trib unal was not r ight in hol ding that d ed uction under s ection 8 0-I was t o be al l owed o nl y on the bal ance of the inc om e af ter ded ucting the r el ief under section 80HH f r om the g ross total income.
23.6. In the case of Bajaj Tempo Ltd vs CIT - 196 ITR 188 (SC) it was held th at "Sections conferrin g a d eduction o r an inc entive h ave to be co nst ru ed in a m anner that p ro mot es th e objectives sought to be achieved and not frustrate it".
23.7. We al so find that the i mpugn ed issue is sq uarely covered by the decision o f th e apex court in the case of JCIT vs M andideep En gin eerin g & Packagin g Ind ia P L td reported in (200 7) 292 ITR 1 (SC). The qu estion rai sed before the Hon'ble Sup re me Court and th e deci sion taken th ereon is rep roduced h erewith fo r the s ake of conv enience an d cl ari ty :-
"The point involved in the present case is: whether Sections 80-HH and 80-I of the Income Tax Act, 1961 are independent of each other and therefore a new industrial unit can claim deductions under both the sections on the gross total income independently or that deduction under Section 80-I can be taken on the reduced balance after taking into account the benefit taken under Section 80-HH.
The Madhya Pradesh High Court in J.P. Tobacco Products Pvt. Ltd. vs CIT, Jabalpur reported in 229 ITR 123 took the view that both the sections are I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 72 of 73 independent and, therefore, the deductions could be claimed both under Sections 80-HH and 80-I on the gross total. Against this judgment a Special Leave Petition was filed in this Court which was dismissed on the ground of delay on 21.07.2000 [see 245 ITR 71 (St.)]. The decision in J.P. Tobacco Products Pvt. Ltd. (supra) was followed by the same High Court in the case of CIT vs. Alpine Solvex (P) Ltd. in ITA No. 92 of 1999 decided on May 2, 2000. Special Leave Petition against this decision was dismissed by this Court on 12.01.2001 (see 247 ITR 36 (St.)). This view has been followed repeatedly by different High Courts in a number of cases against which no Special leave Petitions were filed meaning thereby that the department has accepted the view taken in these judgments. See CIT vs. Nima Specific Family Trust reported in 248 ITR 29 (Bom.); CIT vs. Chokshi Contacts P. Ltd. 251 ITR 587(Raj.); CIT vs. Amod Stamping 274 ITR 176(Guj.); CIT vs. Mittal Appliances P. Ltd. 270 ITR 65 (MP); CIT vs. Rochiram & Sons 271 ITR 444 (Raj.); CIT vs. Prakash Chandra Basant Kumar 276 ITR 664 (MP); CIT vs. SB Oil Industries 274 ITR 495 (P&H);
CIT vs. M/.s SKG Engineering Pvt. Ltd. 119 (2005) DLT 673; and CIT vs. Lucky Laboratories 200 CTR 305 (All.).
Since the special leave petitions filed against the judgment of the Madhya Pradesh High Court have been dismissed and the department has not filed the special leave petitions against the judgments of different High Courts following the view taken by the Madhya Pradesh High Court, we do not find any merit in this appeal. The department having accepted the view taken in those judgments cannot be permitted to take a contrary view in the present case involving the same point. Accordingly, Civil Appeal is dismissed. No costs".
In view of the afo res aid provisions of the Act and respectfully following the decision of the Hon'ble Apex Cou rt st ated supra, we hold that for the pu rpos e of compu tin g d edu ction u/s 80IA, th e deduction u /s 80HHD n e ed not be reduced a s both th e deduction s are indep endent and acco rdingly the grounds of app eal rai sed b y the asse ssee in this rega rd are allo wed.
23.8. In the result, the appea l of t he assessee in ITA No. 1808/Kol/2007 is allowe d.
24. To sum up, the appea l being ITA No. 316/KOL/ 2006 file d by the a ssessee is partly allowed. The appeal being ITA No. I .T.A . N os . 31 6 & 4 26/ KOL ./2 00 6 As s e ssme n t y ea r : 2 00 2- 2 0 03 & I TA N o. 1 80 8/ KO L/ 2 00 7 A s se ssm e nt Ye ar: 20 02 - 20 0 3 Page 73 of 73 426/KOL/2006 filed by the Revenue is partly allowed. The appeal being ITA No. 1808/ KOL/2007 filed by the assessee is a llowed.
Orde r p ronounced in th e open Co urt on S eptembe r 11, 2015.
Sd/- S d/-
Mahav ir Singh M . Ba la ganesh
(Judi cial Member) (A ccounta nt M ember)
Kolkata, the 11 t h day of September, 2015
Co pies to : (1) EIH Limite d ,
4, Ma ngoe La ne,
Kol ka ta -700 001
(2) Dep uty Commi ssi oner of Inco me Tax,
Circle-8, Kolka ta ,
A a ya ka r Bha wa n,
P-7, C howring hee Squa re,
Kol ka ta -700 069
(3) Comm iss ioner of Income-tax (Appeal s)-VIII, Kol kata (4) Com mis sioner of Incom e Tax, Kol kat a (5) The Depar tmental R epr es entative (6) Guard Fil e B y order Assistant Registrar Inco me Ta x Appellate Tribunal, Kolkata Ben ch es, Kolkata Laha/Sr. P.S.