Income Tax Appellate Tribunal - Jaipur
Deputy Commissioner Of Income Tax vs Hotel Samode Palace on 22 December, 2005
Equivalent citations: (2006)100TTJ(JP)1080
ORDER
B.P. Jain, A.M.
1. This appeal arises from the order of learned CIT(A)-II, Jaipur, vide his order dt. 14th July, 2003 for the asst. yr. 2000-01. The Revenue has raised in all three grounds of appeal as under :
On the facts and in the circumstances of the case and in law, the learned CIT(A)-II, Jaipur, has erred in :
1. Holding that receipts of Rs. 1,67,20,025 being bar and catering sales are eligible for deduction under Section 80HHD ignoring the definition of services provided to foreign tourists in Explanation to Section 80HHD(7) and further in directing the AO to allow deduction under Section 80HHD accordingly.
2. Reducing the disallowance of Rs. 17,72,256 out of travelling expenses to Rs. 1,45,210 only, thereby allowing relief of Rs. 16,27,046 when the assessee failed to prove that such expenditure was exclusively and wholly incurred for assessee's business.
3. Deleting the addition of Rs. 36,59,103 made by the AO on account of preemptive utilization of reserve as chargeable to tax under Section 80HHD(5) of the IT Act, 1961.
In ground No. 1 the grievance of Revenue is treatment by learned CIT(A) regarding bar and catering sales, eligible for deduction under Section 80HHD of the Act. The AO in this regard, vide para B of his order has observed as under:
In P&L a/c the assessee has shown receipts on account of bar Rs. 40,34,893, catering Rs. 1,33,64,161 and towards sales of foreign liquor Rs. 98,389. Also in the Annex-A to the report under Section 80HHD, sales consideration for bar and catering are on estimation basis Rs. 3,48,950 (10 per cent of Rs. 34,89,496 which is the total realization against foreign currency exchanged with the tourists of foreign exchange).
Since bar and catering items are physical commodities and are consumed by the person who purchases them, i.e. these items are sold and then consumed by the purchaser insofar there is an income of these items whereas service does not have a physical form and moreover it is not consumed. Actually the term service refers to operation of such an activity whereby certain facilities are provided to the customers for sake of convenience, enjoyment, pleasure, etc. Not that these facilities are consumed (intake of the item) but they are utilized for fulfillment of needs, viz.--accommodation, phone service, health club service, etc. So accordingly, a show-cause notice was issued to the assessee as to why such sales should not be construed as sale of commodity and not providing of services to the foreign tourists on which benefit of deduction under Section 80HHD is available.
A reply was submitted by the assesses wherein it is stated that it is wrong interpretation of the AO to exclude bar and catering out of the purview of the definition of services because they are very much linked with the service provided by the assessee and in the absence of which a hotel in its true form cannot function because boarding and lodging are the two facilities which are provided. The services of sale of accommodation is in the nature of boarding whereas services in the nature of catering and bar are covered under lodging. The facility of bar and catering so provided where foodsstuff and beverages were consumed by the resident guests cannot be construed as sale of commodity. Hence, it is a misinterpretation of the statute.
Submission of the assessee has been examined thoroughly. In order to appreciate the implications of the fact that bar and catering should not be considered as sale of service but as sale of commodity, I would like to analyze the corresponding statute. Section 80HHD provides for deduction in respect of earnings in convertible foreign exchange to the assessee being an Indian company or a person other than a company resident in India, who is engaged in the business of the hotel or of the tour operators for the services provided to the foreign tourists. The expression service is explicitly defined in Explanation of Section 80HHD. Service provided to foreign tourists shall not include services by way of sale in any shop owned or managed by the person who carries on the business of a hotel or of a tour operator or of a travel agent.
This is also clarified by Commentary of Chaturvedi & Pithisana's that the intention is to exclude only the sale of goods/mercantile in any such shop from benefit of exemption under the section.
Therefore services at health club, beauty parlour, barber shop, etc. owned or managed by the person who are entitled to deduction under the section will be included in the term service provided to foreign tourists and will be entitled to deduction under this section. However, if such health club, beauty parlour, etc, also sells any goods or merchandise to the foreign tourist, such sale cannot be included in the term services provided to the foreign tourist and therefore, shall not be entitled to the benefit of deduction under the section.
As it is evident from the section itself deduction is to be made available to person engaged in business of a hotel or of a tour operator or of a travel agent. It clearly implies that the intention of the legislature is that deduction should be available only by virtue of such activity or service by which the foreign tourists are brought here. Specially in the case of tour operators and travel agents they are merely the channels through whom the foreign tourists are brought to India and does not anywhere include the deduction to be claimed in respect of food and liquor consumed by the tourists. This shall be clarified by citing a illustration. For example, if a foreign tourist comes to India and stays at any five star hotel but dines and takes lunch at some other restaurant, then that restaurant cannot claim deduction under Section 80HHD by virtue of the [act that they have rendered service to foreign tourist in form of lunch and dinner.
Also insofar bar and catering items and sale of foreign liquor are concerned they are sold as items/commodities. Moreover another distinction is made on the fact that these items sold for consumption are liable for sales-tax whereas service/ amenities of hotels used, i.e., health-club, phone service, accommodation, swimming pool, etc. are liable for levy of service-tax. Therefore, they are two entirely different things and should be construed separately. Had the said items been through sale of service, then service-tax should have been levied on them. The contention of the assessee in this regard is wrong and cannot be accepted.
In this regard, I would like to mention that, the fact of receipts in view of bar/catering/sale of foreign liquor is not disputed at all. But insofar the question of treating the same as receipts in lieu of services rendered to foreign tourists and accordingly deduction under Section 80HHD be made available to them, by no stretch of imagination it can be allowed, as also discussed supra. Had the legislation intended only the foreign currency collection as the mere motive and also the allowability of deduction on all receipts ancillary to original business of hotel running, then there should not have been any reasons to include Sub-section (2) which reads that such deduction be available on only sale of service provided to foreign tourists, and not on sale of any goods or merchandise in any shop owned or managed by the person who carries on the said business. Hence, I reiterate again that if the sole objective of the enactment of the Section 80HHD was to merely earn foreign exchange by whatever means, then the deduction shall have been allowed on all the receipts and such provision of Sub-section (2) should not have been enacted at all.
Therefore, in the light of the detailed discussions held supra, I hold that the following heads of income are not part of turnover for working out deduction under Section 80HHD and therefore, claim of assessee under Section 80HHD to this extent is disallowed.
The working of eligible Section 80HHD deduction is as under:
Calculation of deduction under Section 80HHD Profits of the business computed under the head 'Profits and gains of business or profession' X Net foreign exchange receipt from services provided to foreign tourists/Total receipts of the business
(a) Profit of the business computed under the head 'Profits Rs. 1,49,05,885 and gains of business or profession'
b) Net foreign exchange receipt from services provided to Rs. 3,73,78,523 foreign tourists as claimed by the assessee Less:
Receipts against various items sold (as discussed in para B) Bar Rs. 40,34,893 (as per P&L a/c) Catering Rs. 1,33,64,161 (as per P&L a/c) Sale of liquor Rs. 98,889 (as per P&L a/c) Rs. 1,74,97,943 93.56% of Rs. 1,74,97,943 Rs. 1,63,71,075.47 (as discussed below in note 1) Less:
(On account, of bar and catering Rs. 3,48,950.00
bills paid in cash)
Rs. 1,67,20.025.47
----------------------
Rs. 2,06,58,497.53
----------------------
Note 1
[As assessee himself admitted that approximately 93.56 per cent of the occupancy of the hotel is of the foreign tourists, then by applying the same proportion the receipts by way of selling of bar, catering, and foreign liquor comes out to Rs. 1,63,71,075.47 (93.56 per cent of Rs. 1,74,97,943). As it has already been discussed in para 2 that these do not constitute receipts by way of sale of service to the foreign tourist within the meaning of Section 80HHD hence should be reduced from the total realization in foreign currency of Rs. 3,73,78,523].
Note 2 [Also the assessee has claimed Rs. 3,48,950 as realization against bar and catering bill paid in cash by the foreign tourists (10 per cent of Rs. 34,89,496 as per Note 2 of Annexure to the report under Section 80HHD of the Act) which shall also be disallowed as discussed above].
Therefore the total disallowance on this account is = Rs. 1,63,71,075.47 + 3,48,950 = Rs. 1,67,20,025.47 [Therefore realization in foreign currency within the meaning of foreign currency is = Rs. 3,73.78,523 - Rs. 1,67,20,025.47 = Rs. 2,06,58,497.53
(c) Total receipts of the business = Rs. 4,50,82,626.6 Applying the figures to the formula Rs. 1,49,05,885 x Rs. 2,06,58,497.53/Rs. 4,50,82,626.6 - Rs. 68,30,418 Therefore, deduction under Section 80HHD to which the assessee is entitled = Rs. 68,30-,418.
2. The learned. CIT(A) after considering the facts and circumstances of the case and arguments of learned Counsel for the assessee has observed vide para 9 of his order as under :
That the action of the AO to treat the receipts against sale of services of bar and catering so provided to the foreign tourists with that of sale in a shop is totally incorrect because the Expln. (c) of Section 80HHD(7) is related with the exclusion of receipts of sales in those shops which are usually available in the hotels for sale of handicrafts, travelling tickets, gift items, etc. of which reference is made in the case of CIT v. Lake Palace Hotels & Motels (p) Ltd. decided by Hon'ble Rajasthan High Court by adopting the definition of hotel as per Websters International Dictionary and in no way is related with the essential services of catering and bar provided by a hotel. The contention of learned Authorised Representative that such services are also subject to charge under the Expenditure-tax Act as chargeable expenditure incurred in a hotel clearly explains that the same are in the nature of services provided by a hotel. The meaning of sale in a shop as applied by the AO if assigned to these services then in that case the same will not fall as chargeable expenditure under Expenditure-tax Act because this Act does not bring in its net sales effected in a shop. Further, by insertion of Clause (va) to Section 28 the meaning of services is made absolutely clear by incorporating therein the words lodging and boarding. Reference to the notification issued by Director General (Tourism), Government of India, a competent authority for approval of the hotel under the category of heritage hotel to which the hotel of the assessee belongs and the ratios of the decisions of the apex Court and the Rajasthan High Court also make it clear that such receipts are against the services provided in a hotel and in no manner can be considered or be construed as a sale in a shop.
On consideration of the material and the evidence produced by the learned Counsel and the ratios of decisions relied upon read together with the statutory provisions of Section 80HHD and Clause (va) of Section 28, I am of the view that the receipts of Rs. 1,67,20,025 of realization against the services provided to foreign tourists by the assessee for catering and bar are eligible for deduction under Section 80HHD and the AO has wrongly treated the same as sale in a shop. The AO is directed to act accordingly.
3. We have heard the parties and perused the material on record. The only issue in this ground is the meaning of "service" in relation to Section 80HHD of the Act especially when as per Expln. (c) to Section 80HHD(7) "service provided to foreign tourists shall not include services by way of sale in any shop owned or managed by the person who carries on the business of a hotel or a tour operator or of a travel agent". Whether the receipts on account of bar, catering, sales of foreign liquor constitute "sale in any shop owned or managed by the assessee". As per arguments of learned Departmental Representative who relied upon the order of AO that these items are physical commodities which are sold by the assessee to the consumer who purchases them and then consumes the same. These items are liable for sales-tax. These are not the services which are utilized for the fulfillment of needs of the customers viz., accommodation, phone service, health-club service, swimming pool, beauty parlour services, etc. and these services are not subject to sales-tax but are liable for levy of service-tax. Therefore, the receipts from these items constitute sale in any shop owned or managed by the assessee. Hence, the assesses is not eligible, for deduction under Section 80HHD of the Act on the receipts of sales of these items.
4. On the other hand, the learned Authorised Representative relying upon the order of learned CIT(A) has argued that provision of bar/foreign liquor, catering facilities are the services provided to foreign tourists as per Section 80HHD(2) of the Act and these are not the sales in a shop which are available in hotel like handicrafts, gift items, etc. Reliance has been placed on a decision of the jurisdictional High Court in the case of CIT v. Lake Palace Hotels & Motels (P) Ltd. , relevant pp. 577 and 578 which read as under :
It is basically the hospitality which is provided in a hotel, may be by human service or by equipment, surroundings, atmosphere, etc. which is provided by decorated rooms beautiful furnishing. The recompense of the hotelier is for the care, pain, facility which is provided by him by way of service rendered and not by providing the room alone it could be considered as a tool of the trade. The hotel industry is a service oriented industry and the better the service the higher the charges. The element, of service is the dominant object and not providing the room alone. The room in a city like Jaipur differs from hotel to hotel. The ordinary rooms may be available at Rs. 100 per day whereas the suite in a five star hotel may be as costly as Rs. 10,000 per day. If the building of a five star hotel is a plant there is no reason why the building of an ordinary hotel should be treated differently only on account of the charges for extra facilities. The difference of charges is because of extra service facilities, etc.
5. The learned. Authorised Representative has also relied upon the judgments of the apex Court in the case of State of Punjab v. Associated Hotels of India Ltd. where facts of the case are that the respondent-company carried on business as hoteliers. As part of its business as hoteliers, the company received guests to whom, besides furnishing, lodging it also served several other amenities, such as public and private rooms, bath with hot and cold running water, linen, meals during stated hours, etc. The bill tendered to the guest was an all inclusive one. It was held by the Hon'ble apex Court that the transaction between a hotelier and a visitor to his hotel is thus one essentially of service in the performance of which and as part of the amenities incidental to the service, the hotelier serves meals at stated hours. The Revenue, therefore, was not entitled to split-up the transaction into two parts, one of service and the other of sale of foodstuffs and to split-up also the bill charged by the hotelier, as consisting of charges for lodging and charges for foodstuffs served to him with a view to bring the latter under the Punjab Sales-tax Act, 1948.
6. In the case of Adayar Gate Hotels Ltd. v. CIT the Hon'ble Madras High Court has held at p. 282 following the decision of the Karnataka High Court in the case of CIT v. Hotel Ayodhya :
that the preparation of food articles in a hotel is incidental of rendering of services at the hotel whether it is a restaurant or a lodging house.
The provisions of food in the restaurant run by the assessee within the hotel premises as also the supply thereof to the rooms wherein the customers are lodged is incidental to the primary business of running a residential hotel, the main facility being the rooms provided to the customers and all other facilities being ancillary thereto.
Further on p. 284 it has been held that "The facilities provided by a residential hotel are meant for use in the premises of the hotel. The rooms are meant for use during the period of stay of the customers, the facilities provided are for use by the resident guests and other users during their stay in the hotel premises and the charges paid for by them are for the facilities provided by the hotel. The food prepared in the hotel is meant primarily for consumption in the premises of the hotel. No article or thing which has any degree of durability is produced in the hotel. The food that is prepared is meant for the immediate consumption and is not meant to be stored. for a period of time and used later by the customers who purchased the same.
7. The learned Authorised Representative has invited our attention to the Expln, (ii) of Sub-clause (va) inserted to Section 28 of IT Act w.e.f. 1st April, 2003 as "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.
8. The services provided by a hotel are chargeable to Expenditure-tax Act which is also a Central Act and the authority for collection of such tax is with the same AO who holds jurisdiction for income-tax case over the assessee. The definition of chargeable expenditure incurred in a hotel as per the said Act as given in Section 5 includes besides the charges for accommodation, the charges for food and/or drink by the hotel. Provisions of food and/or drink has been treated as a services provided by a hotel and is, therefore, chargeable for expenditure-tax. Had food or drink been a sale (as construed by the AO) then in that case the expenditure incurred on the same will not be chargeable under the Expenditure-tax Act because the Expenditure-tax Act does not enlarge its jurisdiction in respect of the sales effected in a shop even though the same is located in a hotel. This view has been confirmed by the Hon'ble Delhi High Court in the case of R.L. Jain and Ors. v. Union of India and Ors. .
9. The learned Authorised Representative further contended that neither the quantum of receipts nor its realization in convertible foreign exchange has been disputed by the AO and deduction worked out and certified by the auditor's is therefore allowable to the assessee and the working given by the AO by applying own process based upon presumptions and notions is incorrect and deserves to be quashed.
10. We have given careful consideration to the facts of the case and arguments of the parties, First of all, we have to draw the distinction between the contract for sale on the one hand and contract of work and labour/service on the other hand, which is often a fine one. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. A contract of work and labour is where the principle object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel. The test: is whether or not, the work and labour bestowed and in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance, one for work and labour or one for the sale of a chattel.
11. To construe a transaction as sale there should be an agreement relating to goods to be supplied by passing title on those goods, and that it was of the essence of such a concept that both the agreement and the sale should relate to one and the same subject-matter. There would be no sale if there was no agreement to sell the materials as such, The mere fact that in a contract of work or, service which belonged to the party performing service or executing the work stands transferred, to the other party is not enough. To constitute a sale, the Revenue has to establish that there was a sale distinct from contract, of work or service, of the property so passing to the other party. For example the thread stitched into coat which is under repair becomes part of the coat, but in a contract for repairing the coat the parties surely did not enter into an agreement of sale of that thread. Also as held in the case of Andhra Pradesh v. Guntur Tobaccos Limited (1965) 2 SCR 167, the transaction was for re-drying tobacco entrusted to the respondent company by its customers, The process involved the keeping of the moisture content of tobacco leaf at particular level and for that purpose the leaf had to be packed in bales, in waterproof packing material, as it emerged from the re-conditioning plant. The tobacco was then returned to the customer packed in costly packing material. In the company's charges for re-drying there was no separate charge for the value of such packing material. It was held that the re-drying process could not be completed without the use of the packing material, that packing formed an integral part of the process, and that although the re-dried tobacco was returned together with the packing materials there was no sale of those materials as there was no intention on the part of the parties to enter into any transaction of sale as regards those materials,
12. Even in a contract purely of work or service, it is possible that article may have to be used by the person executing the work and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials.
13. Therefore in considering whether transaction falls within the purview of sale or work or service, it becomes necessary at the threshold to determine the nature of contract involved in such a transaction which will depend in each case upon its facts and circumstances and mere passing of article or commodity during the course of performance of the transaction in question does not render it a transaction of sale.
14. In every case the Court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. It may in some cases be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service. But, then in such cases the transaction would not be one and indivisible, but would fall into the two separate agreements, one of work or service and the other of sale.
15. What precisely then is the nature of the transaction and the intention of the parties when a hotelier receives a guest in his hotel ? Is there in that transaction an intention to sell him food including liquor contained in the meals served to him during his stay in the hotel ? It stands to reason that during such stay a well-equipped hotel would have to furnish a number of amenities to render the customer's stay comfortable. In the supply of such amenities, do the hotelier and his customer enter into several contracts every time an amenity is furnished ? When a traveller, by plane or by steam-ship, purchases his passage-ticket, the transaction is one for his passage from one place to another. If, in the course of carrying out that transaction, the traveller is supplied with drinks or meals or cigarettes, no one would think that the transaction involves separate sales each time any of those things is supplied. The transaction is essentially one of carrying the passenger to his destination and if in performance of the contract of carriage, something is supplied to him, such supply is only incidental to that service, not changing either the pattern or the nature of the contract. Similarly, when clothes are given for washing to a laundry, there is a transaction which essentially involves work or service and if the laundry man stitches a button to a garment which has fallen off, there is no sale of the button or the thread. A number of such cases involving incidental uses of materials can be cited, none of which can be said to involve a sale as part of the main transaction.
16. As decided in the case of State of Punjab v. Associated Hotels of India (supra) where the transaction in question was essentially one and indivisible, namely one of receiving a customer in the hotel to stay. Even if the transaction is to be disintegrated, there is no question of the supply of meals during such stay constituting a separate contract of sale, since no intention on the part of the parties to sell and purchase foodstuff supplied during meal times can be realistically spelt out. No doubt, the customer, during his stay, consumes a number of foodstuffs. It may be possible to say that the property in those foodstuffs passes from the hotelier to the customer at least to the extent of the foodstuffs consumed by him. Even if that be so, mere transfer of property, as aforesaid, is not conclusive and does not render the event of such supply and consumption a sale, since there is no intention to sell and purchase. The transaction essentially is one of service by the hotelier in the performance of which meals are served as part of and incidental to that service, such amenities being regarded as essential in all well conducted modern hotels.
17. In England, a hotel under the Hotel Proprietors Act, 1956, is an establishment held out by the proprietor as offering food, drink, and if so required, sleeping accommodation, without special contract, to any traveller presenting himself and who appears able and willing to pay a reasonable sum for the services and facilities provided. This definition, which is also the definition of an inn, still excludes, as formerly, boarding houses, lodging houses and public houses which are merely ale-houses and in none of which there is the obligation to receive and entertain guests. An inn-keeper, that is to say, in the present days a hotel proprietor, in his capacity as an inn-keeper is, on the other hand, bound by the common law or the custom of the realm to receive and lodge in his inn all comers who are travellers and to entertain them at reasonable prices without any special or previous contract unless he has some reasonable ground of refusal. The rights and obligations of hotel proprietors are governed by statute which has more or less incorporated the common law. The contract between such a hotel proprietor and a traveller presenting himself to him for lodging is one which is essentially a contract of service and facilities provided at reasonable price.
18. In the present case, the transaction between a hotelier and a visitor to his hotel is thus one essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals, liquor at stated hours. Therefore, we are in agreement with the decision of learned CIT(A) and ratios of decisions by various Courts as discussed above and statutory provisions referred to above and a view that Rs. 1,67,20,025 being the receipt on realization against the services provided to foreign tourists by the assessee for catering and bar are eligible for deduction under Section 80HHD and AO has wrongly treated them as sale in the shop. Thus, this ground of Revenue is dismissed.
19. In ground No. 2, the Revenue is aggrieved against the relief of Rs. 16,27,046 out of travelling expenses disallowed for Rs. 17,72,256.
20. The AO disallowed Rs. 17,72,256 out of total expenses claimed under tour and travelling amounting to Rs. 20,03,369.77 for the reason that the business of the assessee is dependent upon the travel agents and nexus between the travelling expenses and a business is very much remote, illusory and not direct. The journeys were primarily undertaken for the sake of pleasure and entertainment and assessee has failed to produce the details of expenses incurred and benefit derived to the business of out of said expenses. The learned CIT(A) has deleted the addition of Rs. 16,27,046 thus sustaining the additions on this account amounting to Rs. 1,45,210 as per reasons mentioned in his order.
21. We have heard the parties. The learned Departmental Representative relied upon the order of the AO and on the other hand, the learned Authorised Representative has argued that all the details of the travelling expenses in India and abroad were submitted to the AO along with copies of passport of the partners and the purpose of journey was promotion of business, to have meetings with travel agents and to study the facilities provided by different hotels to their guests. The AO has disallowed Rs. 3,20,145 being expenses incurred by the staff and others and accordingly travelling tickets, payment to hotels within the country and outside the country incurred by the partners were only for Rs. 14,52,111 and the AO while disallowing Rs. 17,72,256 has not bothered to look into details available on records which had resulted into disallowance of those expenses which were not even incurred by the partners. Therefore, the AO has not looked into the details of the expenses on this account properly, which were wholly incurred for the purpose of business of the assessee. The learned Authorised Representative further argued that the business of the assessee and profit derived therefrom are available to the extent of more than 90 per cent as deduction under Section 80HHD.
22. After giving careful consideration to the arguments of both the parties and facts of the case, we are of the view that the AO while making the disallowance of the expenditure on this account has not properly looked into the details of the expenses submitted by the assessee since the expenses amounting to Rs. 3,20,145 were the expenses incurred by the staff and others which were also disallowed by the AO considering the same as expenses incurred by the partners alongwith the expenses incurred by the partners on travelling and tours within and outside India amounting to Rs. 14,52,111. The nature of business of the assessee is such that it is beyond doubt that lot of meetings have to be made within the country and outside India to contact the outside agents and to see the working in other hotels outside the country which are preferred by the persons resident in those countries, so that such facilities are also provided in the assessee's hotel for those persons when they come as visitors as foreign tourists to the assessee's hotel. We are convinced with the arguments of learned Authorised Representative in the absence of any material against the assessee but personal element in such expenditure cannot be ruled out. Therefore, the learned CIT(A) has rightly disallowed 10 per cent out of expenditure incurred by the partners amounting to Rs. 14,52,111 which comes at Rs. 1,45,210 and the rest of expenses has rightly been deleted by the learned CIT(A) including the expenses of travelling by staff amounting to Rs. 3,20,145. Therefore, we do not find any infirmity in the order of learned CIT(A) in deleting the additions of Rs. 16,27,046 out of total disallowance of Rs. 17,72,256 made by the AO, thus sustaining Rs. 1,45,210 on this account. Thus, this ground of the Revenue is also dismissed.
23. In ground No. 3, the Revenue is aggrieved with the deletion of addition of Rs. 36,59,103 made by AO on account of pre-emptive utilization of reserve as chargeable to tax under Section 80HHD(5) of IT Act.
The AO at p. 2 of his order has held as under:
The assessee is claiming deduction under Section 80HHD for running a hotel. Under the provisions of Section 80HHD the assessee had created an export promotion reserve account in which he credited the amount as per the requirement of Section 80HHD and utilized it as per provisions of Section 80HHD(5). On perusal of the records, it was noted that opening balance of the said reserves for the asst. yr. 2000-01 was Rs. 71,23,244 and transfer during the said year was Rs. 42,03,295 and utilization during the year was Rs. 1,07,82,347. The assessee should have utilized an amount from the reserve to the extent of Rs. 71,23,244 and not Rs. 1,07,82,347 because the amount available during the financial year 1999-2000 was only of Rs. 71,23,244 and extra amount to the extent of Rs. 36,59,103 which was utilized during the year (Rs. 1,07,82,347 - Rs. 71,23,244 = Rs. 36,59,103) was from that reserve in which the said amount was non-existent, in the reserve account, at the time of utilization of the said reserve because it was created only on 31st March, 2000. As per accounting principles, a reserve can be created only after determination of profits i.e., below the line in P&L a/c and determination of final profits is done on the date of balance sheet and then reserves are created by application of surplus profits. In this case not only reserve was created before balance sheet date i.e., 31st March, 2000 but also utilized simultaneously. This method is wholly incorrect as far as accounting policies, read with provisions of Section 80HHD are concerned. Therefore, how could the assessee utilize the said amount when the reserve was not in existence, so the utilization was not in the manner as specified in Clause (b) of Sub-section (5) of 80HHD. Accordingly a show-cause notice was issued under Section 142(1) of the IT Act, In compliance the assessee submitted reply on 8th Feb., 2003 wherein it was stated that The plain reading of Sub-section (4) of Section 80HHD if looked and analyzed in the context of intention of the legislature then there is restriction for claiming the deduction for utilizing the said amount for creation of capital assets so that the promotional activities of tourism industries take place. It is true that the capital expenditure is to be done before within a period of five years from the end of the year in which the amount was credited. However it does not put any restrictions of not utilizing the amount in the various activities as indicated therein during the year in which the said amount was credited. The assessee has taken plea that the exemption provisions should be liberally construed, for which the assessee has placed reliance on various case laws :
1. CIT v. J.H. Gotla ;
2. Saroj Agrawal v. CIT ;
3. CIT v. Kulu Valley Transport Co. (P) Ltd. .
The assessee has also given clarification regarding the charging section. Sub-clause (b) of Sub-Section (5) of Section 80HHD which states that if the amount is not being utilized in the manner for the purpose as referred in Sub-section (4) then the amount not so utilized shall be subject to tax immediately after completion of five years from the year in which the reserve was created.
The contention of the assessee has been examined thoroughly. The assessee has reiterated off and on about the liberal interpretation of the section and that, it does not fit in the ambit of chargeability section, i.e., Clause (b) of Sub-section (5) of 80HHD. Here, I would like to discuss the provisions of Section 80HHD at length. Section 80HHD of the IT Act, 1961, reads :
Where an assessee, being an Indian company or a person (other than a company) resident in India is engaged in the business of a hotel or of tour operator, approved by the prescribed authority in this behalf or of a travel agent, there shall in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of sum equal to the aggregate of--
(a) 50 per cent, of the profits derived by him from the services provided to foreign tourists, and
(b) so much of the amount of the remaining profits referred to in Clause (a) as is debited to the P&L a/c of the previous years in respect of which the deduction is to be allowed and credited to a reserve account to be utilized for the purposes of the business of the assessee in the manner laid down in Sub-section (4).
Sub-Section (4) of Section 80HHD says that the amount credited to the reserve account under Clause (b) of Sub-section (1) shall be utilized by the assessee before the expiry of a period of five years next following the previous year in which the amount was credited for the purposes of construction of new hotels, purchase of new cars, purchase of sports equipments' construction of conference or convention centers, etc. No doubt the emphasis is on utilization of the said reserve account within a period of five years but it is also mentioned that it should be from the period next following the previous year in which such amount was credited which implies that it should be a subsequent utilization once the amount is credited and not an ongoing process where the assessee has the liberty to utilize the said amount within the same year in which the account was credited. Moreover, it occurs very absurd and illogical that the amount was utilized from an entity which was not in existence. There are 2 points of elaboration here.
(a) When such amount was credited in the said reserves ? i.e. it should have been credited on 31st March, 2000.
Because the reserve is created only when the P&L a/c is drawn and P&L a/c is drawn at the end of the year. To substantiate this point, it is necessary to ascertain as to when an income accrues from firm to its partners, i.e. the right of a partner to receive the share of the profit of the firm for an accounting year arises on the settlement of accounts of the firm on the last date of the accounting year. It clearly means that settlement of the account of the firm takes place on the last date of the accounting year and reserve is created only when the profits from such P&L a/c is transferred to the reserve. In support of above view reliance on ratio of various case laws is placed viz., CIT v. Ashok Bhai Chimanbhai , CIT v. Goverdhan Lal , Grave Pharine Distributors v. CIT (AP). From the above facts it is clear that It was pre-emptive utilization of the reserve and amount was utilized from the reserve when the reserve in its literal and statutory sense did not exist at all. It was only presumption of the assessee that in due course of the business, profit would result and certain amount would be credited to the reserve so why not utilize it during the same year. The assessee cannot interpret the said law to apply beneficially to his case, on the basis of presumptions, surmises and conjectures which suits its case. Hence the assessee should not go beyond what is written in the IT Act.
(2) This point is also clear from the plain reading of Sub-section (4) of 80HHD that it shall be utilized before the expiry of period of 5 years of next following the previous year i.e. it means that once the reserve account is credited in previous year 1999-2000 the said amount should have been utilized in previous year 2000-01 onwards up to previous year 2004-05 and not during the same year when the so-called reserve was claimed to be created. This is very much clarified in the plain reading of Sub-section (4) and Clause (b) of Sub-section (5) of Section 80HHD. So there is no question of a strict interpretation of the statute but it is a simple interpretation. Here the words of a statute are plain, precise and unambiguous and should be taken as to what they actually want to convey. It is not fair on the part of the assessee to twist the facts of the case and interpret the statutes so as to suit its purposes. Also I would like to quote from the Commentary of Chaturvedi & Pithisaria that :
100 per cent of the profit derived by such hotels, tour operators and tour operations and travel agents from services rendered to foreign tourists can be allowed as a deduction. However, only 50 per cent of such profits is allowed as a deduction straightway. While profit up to the balance 50 per cent is allowed only to the extent it is credited to a reserve account and subsequently utilized for making certain specified investment for the business of the assessee.' Also as regards the chargeability section which says that if it is not utilized in the manner as specified in Sub-section (4) then such amount shall be charged to tax in the year immediately following the period of five years specified in Sub-section (4). The applicability of this charging section is only in the case where the amount from the said reserve was riot utilized fully within five years and extends beyond that period then it shall be charged to tax in the sixth years, but insofar if there is a pre-emptive utilization of the reserves this chargeability section automatically implies that it should be charged to tax in the corresponding previous year previous in which the said reserve was pre-emptively utilized.
Hence, in the light of above discussion I disallow Rs. 36,59,103 made by the assessee for deduction under Section 80HHD as it was not in accordance with Clause (b) of Sub-section (5) of Section 80HHD which reads that it is not utilized in manner as specified in Sub-section (4) of Section 80HHD of the IT Act, 1961, and be charged to tax accordingly. Therefore an amount of Rs. 36,59,103 is added back in the income declared and charged to tax during the previous year in question.
24. The learned CIT(A) after considering the facts of the case and taking into consideration the arguments of counsel of the assessee and remand report of AO have held as per paras 7 and 7.1 of his order as under :
I have perused the assessment records, papers and the submissions made before me and have also referred the remand report and have found that the contention raised by the learned Counsel is having force that out of the reserve created under Section 80HHD if, any amount is to be put to tax then the same is governed by the provisions of Section 80HHD(5) and that section does not provide charging of the amount which was utilized even during the same year in which the amount was credited to the reserve account. The accounting entries of creation and utilization are only the transfer entries passed in the books of account on 31st March of which the first entry was of transfer of amount out of the profits to the reserve account and the subsequent entry was of transfer by debiting the reserve account to the extent utilized for the purposes as per Section 80HHD(4).
Considering the submission made by learned Authorised Representative, I have found that the AO had made wrong interpretation of the provisions of Section 80HHD(4) and (5) which is further against the intention and the objects of that section when it has been admitted that the assessee had utilized the money for the purposes as referred in Sub-section (4) of Section 80HHD, The only dispute is as to the amount utilized during the same year as against within the period of 5 years. The contention raised by the learned Counsel that the word 'before' used in Sub-section (4) is to be construed 'upto' and 'next' as 'from' is logically and legally appears to be correct. These words have also been given the same meaning in the notes on clauses referred to by the learned Counsel. It is also noticed on the plain reading of Sub-section (4) that it put emphasis on utilization of amount for the purposes as referred therein within the time-limit of 5 years. The chargeability of the reserve amount to tax is as per provisions of Sub-section (5) of Section 80HHD and none of the conditions as specified in Clause (a) and (b) of that Section 80HHD(5) were found to be present in the case of the appellant and accordingly, the amount of Rs. 36,59,103 treated as chargeable to tax as income for the assessment year under appeal is totally unjust and unreasonable and far away from the legal pronouncements of the Hon'ble apex Court relied upon by the counsel as to interpretation and construction of the legal provisions and, therefore, is directed to be deleted.
25. We have heard the parties. Before we take any view on the issue in the present appeal, we have to look into the provisions of Section 80HHD(1) of the Act which provides that in computing the total income of the assessee a deduction of a sum equal to aggregate of--
(a) fifty per cent of the profits derived by him from services provided to foreign tourists; and
(b) so much of the amount out of the remaining profits referred to in Clause la) as is debited to the P&L a/c of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized for the purposes of the business of the assessee in the manner laid down in Sub-section (4)
26. And Sub-section (4) of Section 80HHD reads as under :
The amount credited to the reserve account under Clause (b) of Sub-section (1), shall be utilized by the assessee before the expiry of a period of five years next following the previous year in which the amount was credited for the following purposes, namely (refer Clause '(a)' to '(f)' in the Act).
27. Now at this juncture, we have to see the meaning of "reserve". Reserves as per Black's Law Dictionary means, "Funds set aside to cover future expenses, losses, claims or liabilities". In the present case, reserves are to be created out of profits of the business of the assessee. The profits do not accrue from day to day or even from month to month. The concept of accrual of profits of a business involves their determination by the method of accounting at the end of accounting year or any shorter period determined by law. In the gross receipts of a business day after day or from transaction to transaction lies embedded the dormant profit or loss. On such dormant profit or loss, undoubtedly taxable profits, if any, of the business will be computed, but dormant profit cannot be equated to profits charged to tax. Therefore the profit/income becomes taxable on the footing of accrual only after the right of the taxpayer to the income accrues or arises i.e. the words "accrue" and "arise" are used to contradistinguish the word "receive". Income is said to be received when it reaches the assessee, when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. These views find support from the judgment of apex Court in the case of CIT v. Ashok Bhai Chiman Bhai (supra) where the facts of the case are as under :
A, the manager of an HUF, held, on behalf of the family, a share of five annas in the Rupee in the profit and loss of a firm. Under the partnership deed, the accounts of the firm had to be adjusted every calendar year. On 12th Nov., 1955, there was a partition in the family in which A was allotted the five annas share in the firm and he became full owner thereof. In proceedings for the assessment to income-tax of the income of the family for the accounting period 27th Oct., 1954, to 14th Nov., 1955, the question arose whether the whole or any part of the five annas share of the profits of the firm for the calendar year 1955 accrued to the family :
Held, that the right to receive the share of the profits of the firm for the calendar year 1955 arose on the settlement of the accounts of the firm on 31st Dec., 1955. On that date A alone was the owner of the share of the profits and the family had no right therein. No part of the share of the profits of the firm for the calendar year 1955 was liable to be included in the income of the family, and the taxing authorities could not claim that the profits should be apportioned between the family and A and tax should be levied on the apportioned income.
28. Therefore, we are of the view that reserve can be created only out of the profits determined as at the end of the previous year which in the present case is 31st March, 2000. The reserve so credited under Clause (b) to Section 80HHD(1), shall be utilized by the assessee before the expiry of a period of five years next following the previous year in which the amount was credited for the purposes mentioned in Sub-section (4) to Section 80HHD of the Act. The assessee in the present case had utilized the reserve which was not there in the account, The assessee had an opening balance of reserve amounting to Rs. 71,23,244 as at 1st April, 1999 and whereas the assessee had utilized Rs. 1,07,82,347 before the expiry of the previous year ending on 31st March, 2000. Thus, the assessee had utilized the reserves amounting to Rs. 36,59,103 which were not there in the reserve account. Therefore, the assessee cannot be given benefit of utilization of the reserves which as per Sub-section (4) to Section 80HHD r/w Clause (b) to Section 80HHD(1), have to be utilized before the expiry of a period of 5 years next following the previous year in which the amount was credited. The reserves created by an amount of Rs. 42,03,295 by the assessee as on 31st March, 2000 have to be utilized within 5 years next following the previous year ending 31st March, 2000, i.e., between 31st March, 2001 to 31st March, 2005. The utilization by the assessee does not fall between the said period of 31st March, 2001 to 31st March, 2005 to the extent of Rs. 36,59,103. Therefore, the assessee will get the benefit under Section 80HHD(1)(b) r/w Sub-section (4) to Section 80HHD for an amount of reserve which is lying in the reserves account for the said purpose as at 31st March, 1999/lst April, 1999 amounting to Rs. 71,23,244 and not Rs. 1,07,82,347 as claimed by the assessee.
29. The counsel for the assessee has invited our attention to Sub-section (5) to Section 80HHD which reads as under:
(5). Where any amount credited to the reserve account under Clause (b) of Sub-section (1).-
(a) has been utilized for any purpose other than those referred to in Sub-section (4), the amount so utilized; or
(b) has not been utilized in the manner specified in Sub-section (4), the amount not so utilized, shall be deemed to be the profits,--
(i) in a case referred to in Clause (a), in the year in which the amount was so utilized; or
(ii) in a case referred to in Clause (b), in the year immediately following the period of five years specified in Sub-section (4), and shall be charged to tax accordingly.
30. The above provisions apply only when the reserve has been utilized for any other purpose and if it is so it shall be deemed to be profits and shall be charged to tax accordingly. In the present case there were no reserves with the assessee as on the date of utilization of Rs. 36,59,103 over and above Rs. 71,23,244 and therefore the provisions of the statute are very clear arid do not give any other meaning. Therefore, the argument of learned Departmental Representative that liberal interpretation of the statute should, be made does not hold good. In the taxing statute when one can look fairly at language used then there is no room for intendment and there is no equity or presumption to tax and the language of the statute cannot be strained. If provisions of statute are unambiguous and legislative intent is clear then Court need not call into aid the other rule of construction of statutes and they call only when legislative intent is not clear [Refer Innamun Gopalam v. State of AP , CIT v. G.V. Venugopal , State of Punjab v. Jalandhar Vegetable ].
31. Therefore, in the present case the assessee is allowed to utilize the reserve to the extent; of Rs. 71,23,244 and not to the extent of Rs. 1,07,82,347 under Section 80HHD(1)(b) r/w Sub-section (4) of Section 80HHD of the Act. Therefore, we reverse the decision taken by the learned CIT(A) and sustain the order of the AO who has rightly allowed the deduction under Section 80HHD(1)(b) of the Act r/w Sub-section (4) to Section 80HHD of the Act to the extent of Rs. 71,23,244. Thus, this ground of the Revenue is allowed.
32. In the result, appeal of the Revenue is partly allowed.