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Income Tax Appellate Tribunal - Delhi

Hotel Excelsior Ltd., New Delhi vs Department Of Income Tax

        IN THE INCOME TAX APPELLATE TRIBUNAL
                    DELHI BENCH 'C'
BEFORE HON'BLE VICE PRESIDENT SHRI G.E.VEERABHADRAPPA
       AND SHRI RAJPAL YADAV, JUDICIAL MEMBER

                      ITA Nos. 4461 to 4465/Del/2010
                       Asstt.Year: 2003-04 to 2007-08

Dy. C.I.T.             vs            M/s Hotel Excelsior Ltd.
Cent.Cir-6, New Delhi.               S-1, American Plaza International
                                     Trade Tower, Nehru Place,
                                     New Delhi.

                                     (PAN: AABCH1744C.

(Appellant)                          (Respondent)

               Appellant by: Shri Rajni Kant Gupta, CIT/DR
               Respondent by: Sh.Pradeep Dinodia, CA and
                          Shri R.K.Kapoor, CA.

                                ORDER

PER VEERABHADRAPPA, V.P These departmental appeals arise out of the different orders of the CIT(Appeals) for the assessment years 2003-04 to 2007-08.

2. The grounds raised are common and are being disposed of by this consolidated order.

3. The common ground in all these departmental appeals relates to the addition made by the A.O on the ground of excessive depreciation claimed in respect of building. The assessee is a company which acquired the Hotel Kanishka from ITDC under the disinvestments policy of the Government of India, during the period relevant to assessment year 2003-04. The A.O 2 ITA No.4461 to 4465/D/10 observed that the company made certain payments to NDMC, which according to him, are in the nature of penalty for unauthorized occupation, construction of diesel storage tanks and fire fighting tank without approval and for covering sanitary lines without approval. Such payments were to the extent of Rs 66,73,323/-. The depreciation claimed at 10% on this amount was added by the A.O as an excessive claim. This addition is common in all the years.

4. The contention of the assessee is that the payment of these amounts to NDMC was part of the total consideration amount payable by that company to Government of India for taking over of Hotel Kanishka. These payments were made for regularizing procedural lapses committed by ITDC 20 years ago and should be treated as a part of purchase consideration and not payment by way of penalty for contraventions of the statutes or infringement of civic regulations.

5. The learned CIT(Appeals) was of the view that these payments were part of the bid amount submitted by the company at the time of disinvestments of Hotel Kanishka owned by ITDC and these amounts were paid for regularization of procedural lapses and only after payment of these amounts completion certificate of Hotel was issued by NDMC. The ex facto sanction obtained by the assessee showed that there was no breach of a provision against public policy and the acceptance of compensation could not be for any illegal act against the public policy. The CIT (A) accepted the contention of the assessee and the revenue is aggrieved.

6. The learned D.R strongly relied upon the evidence in the assessment order and pointed out the payment or the damages paid to NDMC for 3 ITA No.4461 to 4465/D/10 unauthorized construction does not make any difference if the unauthorized constructions were carried out by ITDC prior to taking over by the company. The payments, according to the learned D.R were clearly for indulging unauthorized constructions and are not to be allowed.

7. The learned assessee's counsel, on the other hand, submitted that the company had acquired Hotel from ITDC in the disinvestments policy of the Government of India. The assessee's bid for Rs 95,95,01,000/- was accepted by the Government but the amount was directed to be paid to different parties which included NBCC, L&DO, NDMC, VRS Fund etc. as per the details provided by the authorized agency Lazard India Ltd. appointed by Govt. of India in this behalf. Copies of letters issued by authorized agency and receipt of payments have all been submitted by the assessee. The sum in dispute was paid to NDMC to regularize certain unauthorized occupations and unauthorized constructions and also construction of diesel storage tank and fire fighting tank without proper approval and also for covering sanitary lines without approval of NDMC. These payments were made for regularizing the procedural lapses by NDMC and the issue in dispute, according to the learned counsel for the assessee, is directly covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT vs. Lok Nath and Co. 147 ITR 624 (Del). Further reliance was placed on the decision of CIT vs. Tarun Commercial Mills Co.Ltd. 107 ITR 172 ; and CIT vs. Vasantha Mills Ltd. 120 ITR 321.

8. We have carefully considered the rival contentions and gone through the records. In our view, the order of the CIT (Appeals) does not require any interference. The same is based on the decision of jurisdictional High Court 4 ITA No.4461 to 4465/D/10 in the case of CIT vs. Lok Nath and Co. (supra) which is the subject matter of detailed discussions in para 3.3 of the order of CIT (A). It must be appreciated that qua the assessee it is only a part of purchase consideration paid and the payments were made to perfect the title of the buyer in the property which it had acquired from the Government of India under the disinvestments policy. The assessee has paid certain amounts which were accepted as part of purchase consideration. The payment of purchase consideration was made to different people having regard to the liabilities of the erstwhile ITDC which was the owner. Infact it could not have had a perfect title to the property which it had purchased, had it not got these things regularized from NDMC by payment of the sums in question. The payments made for perfecting the title or ownership of the business asset represents the expenditure for the purpose of the business and the assessee has rightly capitalized the sums in question which also represent as a part of purchase consideration of the asset. In the light of the principle laid down by the jurisdictional High Court, we decline to interfere.

9. The next common dispute in these appeals relates to the claim of excessive depreciation claimed in respect of UPS and Printers. The assessee purchased the UPS and Printers and claimed these items to be a part of computer and claimed higher rate of depreciation at 60%. The A.O classified the same as part of general machinery and allowed 25% per annum instead of 60% claimed by the assessee.

10. We have heard both the parties on the issue and find that the issue is now concluded by the decision of Delhi High Court in CIT vs. BSES Yamuna Powers Ltd. (ITA 1267/2010 dated August 31,2010) wherein 5 ITA No.4461 to 4465/D/10 their Lordship have agreed with the view of the Tribunal and expressed that computer accessories and peripherals, such as printers, scanners and server etc. form an integral part of the computer system. In fact, the computer system cannot be used in isolation or without the computer accessories and peripherals. Accordingly the High Court upheld the assessee's claim for higher rate of depreciation at 60%. Following the same, we do not find any need to interfere in the order of the CIT (A) who directed the allowance of higher depreciation on these peripherals and computer accessories at the same rate as applicable to computers.

11. One of the common issue in the Departmental appeal for the assessment years 2004-05, 2005-06 and 2006-07 relates to deletion of interest income which was added by the AO as income from other sources. The assessee explained that during the assessment year 2004-05, the assessee company was engaged in renovation of the Hotel Kanishka acquired from ITDC which was obtained under the disinvestments scheme made by the Govt. of India. During this period, the company imported raw materials under EPCG licenses having reduced rate of import duty, for renovation of Hotel, the company was required to furnish bank guarantee. The company approached the bankers for issuance of bank guarantee and the bankers asked for the stipulated 10% margin in the form of FDRs and FDRs were kept as margin money with Punjab & Sind Bank to issue the bank guarantee required for EPCG licenses and then the assessee placed orders for import of raw materials and other equipments required for renovation. Interest earned on these FDRs, which according to the assessee, had direct nexus to the renovation of the Hotel and were deducted from the expenses capitalized during pre construction period as part of cost of construction.

The assessee claimed that these receipts are intrinsically linked with the setting up of the hotel unit of the assessee company.

12. The learned CIT (A) after having elaborately discussing different case laws on the point, followed the decision of the jurisdictional High Court of Delhi in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO 20 DTR 107 (Del) wherein their Lordship of Delhi High Court distinguished the ratio laid down in Tuticorin Alkali Chemicals & Fertilisers Ltd. 227 ITR 172 and CIT vs. Autokast Ltd. 248 ITR 110. According to him the earning of interest and deposits which are kept as margin money which were required for the purpose of issuance of bank guarantee and letter of credit for import of raw material are inextricably linked with the renovation of the hotel and such interest income earned should go to reduce the cost of construction.

13. The Revenue is aggrieved and the learned D.R vehemently supported the findings of the A.O in the light of the Supreme Court decision in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra).

14. The learned counsel for the assessee, on the other hand, strongly relied upon the discussions in the order of the CIT (A) and has relied upon the decision of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) which is directly on the facts of this case and according to him, there is no dispute as to the fact that the FDRs are inextricably linked with the bank guarantees and the letter of credit which were obtained in connection with the renovation of the Hotel business and the interest is treated as a part of cost of construction.

15. We have carefully gone through the records and the discussions in the impugned orders and respectfully following the decision of the jurisdictional High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), wherein their Lordships have clearly laid down the principle that when interest earned is inextricably linked with the setting up of the plant, such income is required to be set off against pre-operative expenses. There is no dispute in our mind that the interest income earned by the assessee in the instant case is inextricably linked with the setting up of the Hotel, the bank guarantees and letter of credit required the margin money and the margin money has been provided in the form of fixed deposit which incidentally earned some interest. Such interest, in our view, has inextricably linked with the setting up of the Hotel and the order of the CIT (A), having regard to the facts and circumstances of the case cannot be found fault with. The orders of the CIT (A) on this issue in the respective assessment years are confirmed.

16. In the assessment year 2007-08, the revenue has raised one more ground relating to the landscaping expenses. The AO was of the view that the term 'building' does not specifically include landscaping under the Income-tax Rules and the claim of depreciation on the expenses incurred on landscaping cannot be allowed as deduction.

17. The learned CIT (Appeals), following his own view on the issue for the assessment year 2006-07 accepted the claim of the assessee and deleted the addition.

18. The learned D.R pointed out that the expenditure on landscaping is more in connection with the land which is not entitled for any depreciation and he justified the action of the A.O. 8 ITA No.4461 to 4465/D/10

19. The learned counsel for the assessee, on the other hand, strongly relied upon the order of the CIT (A) for the assessment year 2006-07 and pointed out that the Department has accepted that order for the assessment year 2006-07 and cannot challenge the consequence of that order in the assessment year 2007-08 which is the second year in respect of the claim.

20. We have carefully considered the rival contentions and gone through the record including the discussions in the impugned order. The term 'building' has not been defined in the Act. The nature of the asset has to be ascertained and we have to understand the meaning of the term 'building' depending upon the context to which a reference has been made. Here the assessee is in a Hotel business. His building is not merely a structure of four walls but includes all such things as are necessary to give the building a better look and is a matter of attraction for the customers to use it. Having regard to the assessee's nature of business it cannot be said the landscaping done by the assessee cannot be considered as a building. After all the assessee has given a better look to this building by provision of this landscaping which has become an integral part of the building to be used as a Hotel. In order to acquire a Star category, all these artistic looks are very much necessary. The Commissioner, in our view, has correctly applied the principle laid down by the jurisdictional High Court in the case of CIT vs. Delhi Airport Service 255 ITR 90 and also the decision of the Supreme Court in CIT vs. Gwalior Rayon Silk Mfg.Co.Ltd. 196 ITR 149 and the decision of the Madras High Court in CIT vs. Southern Petro Chemicals Industries Corporation Ltd. 233 ITR 391 to give an extended and more meaningful definition of the term 'building'. We agree with his view and 9 ITA No.4461 to 4465/D/10 decline to interfere on this aspect of the matter. Moreover it must be appreciated the revenue has accepted the order of the CIT (A) for the assessment year 2006-07 and it has only challenged that issue in the assessment year 2007-08 which is second year which is the year of consequence of the decision in the first year which remains unchallenged. In other words, the Department having accepted the finding of the CIT (Appeals) for the assessment year 2006-07, cannot question the same while giving effect to that in the assessment year 2007-08. Even on this ground we decline to interfere with the order of the CIT (Appeals) for the assessment year 2007-08 on the disputed matter.

21. The next dispute in the departmental appeal for the assessment year 2007-08 is to an addition of Rs 86,83,766/- made on account of the liabilities. The A.O went through the balance sheet and found certain constant amounts were outstanding from the assessee for more than 3 years and are being carried forward as a liability from year to year and there has been no transactions during the year. According to the A.O these liabilities have ceased to exist to the extent of Rs 86,83,766/- and the addition was accordingly made.

22. The CIT (A) was of the view that the liability in question did not cease to exist. It would not prevent the creditor from enforcing the debt and, therefore, the invoking provisions of section 41(1) having regard to the facts and circumstances of the case, are not justified. The Revenue has questioned these findings.

23. The learned D.R strongly argued in support of the impugned order of the A.O. The learned counsel for the assessee, on the other hand, pointed out 10 ITA No.4461 to 4465/D/10 that these liabilities have not been written off to the profit and loss account and they are as debts or liabilities acknowledged in the balance sheet from year to year and there is no evidence to show that these liabilities have ceased to exist on the date of the previous year and therefore, question of invoking the provisions of section 41(1) does not arise.

24. We have carefully considered the rival contentions and do not find any material to come to a view that the liabilities in question have ceased to exist on the date of the balance sheet. Merely because the accounts have become non-operational or the period of 3 years have expired, it does not mean that such liability has ceased to exist. It is not open to the A.O to conclude that such liabilities have ceased to exist. The liability cannot become unenforceable merely because the period of 3 years have expired. Moreover in this case, the assessee has not even written off such liability to its profit and loss account. Having regard to the facts and circumstances of the case, we do not find any error in the order of the CIT(A) on this point.

25. In the result, all the appeals of the revenue are dismissed.

Pronounced in Open Court on 30.12.2010.

                Sd/-                                                      sd/-
        (Rajpal Yadav)                                              (G.E.Veerabhadrappa)
        JUDICIAL MEMBER                                             VICE PRESIDENT

Dated: December 30,2010.
DRS
Copy of the order forwarded to:
   1. Dy.CIT, Cent.Cir-6, New Delhi.

2. \M/s Hotel Excelsior Ltd. S-1, American Plaza, International Trade Tower, Nehru Place, New Delhi.

3. CIT

4. CIT(A)-I, New Delhi.

5. DR Asstt.Registrar, ITAT 11 ITA No.4461 to 4465/D/10