Income Tax Appellate Tribunal - Delhi
Hotel Diplomat vs Addl. Cit on 9 December, 2005
ORDER
N.S. Saini, A.M.
1. In this appeal, the assessee has taken the following grounds of appeal:
1. That the learned CIT has erred in his order under Section 263 of the Income Tax Act in directing re-computation of the deduction available to the appellant under Section 80HHD by excluding lease rentals and interest income for calculating the said deduction under Section 80HHD(3).
2. That the learned CIT has erred in fact and law in ordering re-computation of the appellant's deduction under Section 80HHD in a manner which is contrary to the provisions of Section 80HHD as well as to clear analogous case-law in favour of the appellant as well as board circulars under Section 80HHC of the Act, which have not been distinguished or commented upon.
3. That the learned CIT has erred on facts and in law in setting aside the order of the assessing officer to the extent of claim on account of repairs and replacement (Rs. 53.82 lakhs) and building maintenance (Rs. 31.91 lakhs) which has been restored to the file of the assessing officer to make further inquiries so as to find out which part of the expenditure is capital meriting disallowance.
4. That the learned CIT has erred on facts, in law, per record and in view of the detailed written submissions and material placed before the learned CIT which forms part of the assessment record, in holding that the order of the assessing officerwas erroneous and prejudicial to the interest of revenue to the extent of the directions given to the assessing officer in the order under appeal.
5. That the learned CIT has erred in invoking provisions of Section 263, inter alia, as the same do not permit roving inquiries or substitution of the CIT's opinion for the opinion of the assessing officer, particularly when the view of the learned CIT are contrary to the record, to precedents and case-law in appellant's favour and contrary to the provisions of the Act.
6. That the learned CIT has erred in stating that vouchers, bills and books were not examined, All relevant records, copies of accounts and details were duly filed or produced before the assessing officer and as such too, the learned CIT has erred in invoking the provisions of Section 263 for restoring the matter regarding repairs, replacement and building maintenance to the assessing officer.
7. That the grounds of appeal as herein, are without prejudice to each other.
8. That the order of the learned CIT is against law and facts of the case involved and beyond his jurisdiction under Section 263 of the Act.
9. That the appellant craves leave to add, alter, forego and/or modify and ground(s) of appeal or before the time of hearing."
2. Since the grounds of appeal are inter-connected, they are being disposed of together for the sake of convenience.
3. The sole issue in this appeal relates to the order passed under Section 263 by the CIT directing the assessing officer to re-compute the deduction under Section 80HHD by excluding lease rental and interest income and setting aside the order to the assessing officer to the extent expenses claimed on account of repairs and replacement Rs. 53.82 lakhs and building maintenance Rs. 31.91 lakhs, which were restored back to the file of the assessing officer to make further enquiries to find out which part of the expenditure is capital meriting disallowance. The brief facts of the case are that the assessee is carrying on business as a partnership firm of running a hotel. For the previous year ended relevant to the assessment year 1996-97, the assessce filed a return of income declaring total income of Rs. 50,87,500, while computing the income, the assessce claimed deduction under Section 80HHD of Rs. 30,87,178 based on a certificate of the Auditor. The assessment was completed on 29-1-1999 by passing an order under Section 143(3) of the Act on total income of Rs. 51,01,640 by making the addition on account of disallowance of conveyance expenses of Rs. 14,140.
4. The learned Commissioner (Appeals) on perusal of the assessment records found that the assessee had claimed deduction under Section 80HHD on lease rent and interest income. He also found that the repairs and replacement expenses amounting to Rs. 53,82,290 were allowed by the assessing officer without examination. Similarly, Rs. 35,91,991 was allowed as building maintenance without making any enquiry in this regard. He, therefore, issued notice under Section 263 of the Act on 7-3-2001 proposing to pass an order enhancing, modifying or cancelling the assessment order dated 29-1-1999 and directing a fresh assessment.
5. In response to the notice, Shri Anil Kumar Chopra, F.C.A. appeared on behalf of the assessee and filed written submissions opposing recourse to Section 263. It was submitted that the deduction under Section 80HH was allowed on business income of the assessee and not the business income of the hotel only and further deduction under this section was to be calculated in the manner laid down by the C.B.D.T. in Circular issued for the purpose of calculating deduction under Section 80HHC. It was further submitted that the business of hotel and other activities were inter-linked having common management, ownership and funds. Regarding the repairs and replacement and building maintenance, it was submitted that complete information of facts and judicial decisions were placed before the assessing officer. The assessing officer having satisfied himself that those constituted revenue expenditure, allowed deduction.
6. The learned Commissioner (Appeals) after considering the submission of the learned authorised representative of the assessee concluded that the deduction under Section 80HHD was to be restricted to the income derived from services provided to foreign tourists. He relied on the decisions of the Hon'ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC), CIT v. Sterling Foods (1999) 237 ITR 579 (SC) and the decision in the case of Hindustan Lever Ltd. v. CIT (1999) 239 ITR 297 (SC) and held that the lease rent was earned on account of exploitation of business assets leased out to others. The immediate source of income was leasing and no profit was derived from services provided to foreign tourists. He also noted that the immediate source of interest income was the deposit in the bank and no services rendered to the foreign tourists. He, therefore, directed the assessing officer to exclude lease rental and interest income while calculating deduction under Section 80HHD(3).
7. With regard to allowance of deduction on account of repairs, and replacement of Rs. 53.82 lakhs and building maintenance of Rs. 35.91 lakhs, he observed that no enquiry was made by the assessing officer as to whether the expenses pertained to current repairs or were in the nature of replacement or addition to the fixed assets. The books of account and the vouchers pertaining to the expenses were not examined by him. He, therefore, held that the failure on the part of the assessing officer to make proper enquiries with regard to the expenditure incurred by the assessee under the head 'Building maintenance, repair and replacement'rendered the order passed by him erroneous and prejudicial to the interest of the revenue. For this, he placed reliance on the decision of the Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT(1975) 99 ITR 375 (Del). Hence, he passed order under Section 263 directing the assessing officer to exclude lease rental and interest income, while allowing deduction under Section 80HHD and set aside the order of the assessing officer to the extent of claim on account of repairs and replacement Rs. 53.82 lakhs and building maintenance Rs. 35.91 lakhs and restored it to the file of the assessing officer to make further enquiries to find out which part of the expenditure is capital meriting disallowance.
8. The learned authorised representative for the assessee argued and submitted that the deduction under Section 80HHD was correctly allowed by the assessing officer based on appropriate audit certificate and as the income involved is correctly assessed as business income in the facts, law and Board's circulars involved. It was also his submission that as the amount was irrefutably correctly allowed and no adverse revision order was merited by the learned CIT. He submitted that the income was assessed as per information, details and materials on record, after due consideration of the same, the said details /information etc. included in the balance sheet, profit & loss account, 80HHD computation, 80HHD prescribed certificate of auditor pertaining to the nature of business that includes leasing etc. He also contended that the income involved constitutes profits & gains of business and is to be assessed as such and that deduction under Section 80HHD was correctly made including as per Board's Circular.
9. He also submitted that the assessee's hotel, leasing and finance income is a consolidated business, which is inter linked with community of management, ownership, control and funds. The common factors include same office, staff, books of account and records, one balance sheet and profit & loss account, same members, same bank account, same partners and Managers and the inter-linking of funds, which flow from one to the other either way in the normal course of business.
10. He further submitted that in the view of scale of business activities and the facts involved, where substantial funds, efforts, skill, acumen orders, follow-ups, research etc. are involved apart from the community of management, ownership, control and funds, the same is undisputably part of the assessee's business of leasing finance, interest income involved is correctly assessed as business income. Deduction under Section 80HHD is to be allowed on the business income of the assessee and not the business income of the hotel on Dy. In fact, there is no formula in the Act or possibility of computing in precise manner excluding business income of the hotel it is only the Hotel's Foreign Exchange income, which must necessarily relate to the hotel activity for the purpose of computing such deduction and the same is to be allowed on the over all business turnover and over all business income of the assessee involved. This is as per clear provisions of the Act as seen in the Board's Circular is to be computed in purely arithmatical mechanical manner. The Board's Circulars relate to analogous provisions of Section 80HHC, where a similar arithmatical mechanical formula is provided. In short, the deduction is correctly allowed and no adverse inference under Section 263 is warranted or merited in this matter.
11. The learned Counsel for the assessee further submitted that the repairs and replacement as well as building maintenance expenses were correctly allowed as revenue expense. The matter has been completely and thoroughly examined by the learned assessing officer with complete information of facts, case-law and the material on record including copies of ledger accounts produced before him. After due consideration of the same, the learned assessing officer correctly allowed expenses and the facts and circumstances and nature of the case as a revenue expense. The decision of the learned assessing officer is based upon the governing decisions of the Hon'ble Supreme Court, governing the High Court at Delhi and other High Court and Tribunal decisions. It was also submitted that it was pertinent to note that it is nobody's case that any new asset. has been created.
12. It was further submitted that it will be seen from the copy of the tax audit report that the said amount has been duly considered as revenue expenses. The expense involved is charged to profit & loss account. It was further submitted that the assessee's expenses of substantial income from hotel business alike claim is pursuant to high quality, boutique, hotel operations. The total income of the year was Rs. 3,28,62,051.50 pursuant to repairs and maintenance and decor the same as enhanced to Rs. 4,61,88,594.50 in the next year. This is an indication of the commercial activity and the bona fides of the assessee.
13. It was also submitted that from the decisions placed on record in clear and irrefutable support of the assessee's case, it will be seen that it support the assessee's view that the amount has been correctly allowed by the assessing officer as revenue expenses. Hence, it was submitted that with the reliance on the case law, no revision order under Section 263 changing the assessment order as made or disallowing these expenses correctly allowed as revenue expenses is capable of being made or required to be made in the case.
14. On the other hand, the learned Departmental Representative argued and submitted that under Section 263, the CIT exercised administrative and judicial functions. He after examining the assessment records passed an order. There is no flaw in this. He submitted that under Section 143(3), the assessing officer has not properly examined and applied his mind to the matter of allowing deduction under Section 80HHD on lease rent and interest income and also in allowing deduction as revenue expenditure and repairs, replacement and building maintenance. He also submitted that the principle of res judicata are not applicable to the income-tax proceedings. He further submitted that it is duty of the CIT under Section 263 to see that due to error of the assessing officer, no loss is caused to the revenue. He submitted that it is not in dispute that the assessing officer has sent the details of repairs, replacement and maintenance but he has not carried out subsequent enquiries to determine whether the same are allowable as revenue expenditure.
15. He further submitted that the lease rent received by the assessee is on account of beverage bottles on which the assessee had claimed 100% depreciation. It was his submission that the deduction under Section 80HHD was allowable to the assessee only as receipts on account of services provided to foreign tourists, which are received in or brought into India by the assessee in convertible foreign exchange. He submitted that the deduction is not available with respect to every receipts by the assessee. He placed reliance on the decision of the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT(2003) 262 ITR 278 (SC) and submitted that the Hon'ble Supreme Court has held that the interest derived by the Industrial Undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profit or gains derived by the undertaking for the purpose of special deduction under Section 80HH. Hence he submitted that in view of the Hon'ble Supreme Court judgment and interpretation of the word 'Derived from' and also keeping in view the fact that no effort is required on the part of the assessee to earn interest income the same cannot be treated as income eligible for deduction under Section 80HHD of the Act. He also placed reliance on the decision of Ahmedabad 'A' Bench of the Tribunal in Dy. CIT v. Mira Industries (2003) 87 ITD 475 (Ahd-A-Trib) and submitted that it was held by the Tribunal that interest in general terms is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to an other Helsbury's Laws. It is a payment for commercial compensation for non-payment of the debt on time. When a sale is effected the money consideration thereof becomes due and payable and interest starts running as per the terms stipulated. Such interest is not a consideration of sale of goods of the industrial undertaking, even though it has its origin in sale-for sale of goods manufactured if not made, there would not be debt and consequently no interest, but the immediate source is the debt owed, which takes it a degree away from industrial undertaking. Thus, interest on late payment of sale proceeds would not be eligible for deduction under Section 80HH and 80-1/80-IA/ 80/IA as immediate source is the debt owed and not the industrial undertaking.
16. He further submitted that to claim deduction under Section 80HHD there has to be live wire connection between the income and provision of services to foreign tourists. He submitted that as per the scheme of the Section 50% of the profits derived by the assessee from services provided to foreign tourists and credited to a reserve account to be utilised for the purpose of the business of the assessee in the manner laid down under Sub-section (4) is to be allowed deduction to the assessee. Hence, he submitted that the profits allowed as deduction has to be utilised in the hotel industry. He also submitted that the Hon'ble Madras High Court in Pandian Chemicals Ltd., v. CIT (2004) 270 ITR 448 (Mad) has reiterated the decision in Pandian Chemicals Ltd. v. CIT(2003) 262 ITR 278 (SC) wherein it was held that the Tribunal was right in law in holding that the income from the sale of scrap for the assessment year 1979-80 was not relatable to the industrial activities of the assessee for the purpose of Section 80HH of the income-tax Act, 1961.
17. He further placed reliance on the decision of Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT(2000) 243 ITR 83 (SC), wherein it was held that incorrect assumption of facts or incorrect application of law will satisfy requirement of the order being erroneous in the same category false orders passed without application of mind by the assessing officer.
18. He also placed reliance on the decision of the Hon'ble Supreme Court in Ram Pyari Devi Saraogi v. CIT (1968) 67 ITR 84 (SC), wherein it was held that there was ample material to show that the assessing officer made the assessment undue in a hurry without making any enquiries to satisfy himself before passing the assessment order. Therefore, the order was held to be erroneous and prejudicial to the interest of the revenue.
19. He placed reliance on the decision of the Hon'ble Punjab & Haryana High Court in CIT v. Export House(2002) 256 ITR 603 (P&H), wherein it was held that the CIT on examining the record had noticed that the details of various expenses, which were furnished by the assessee only showed the dates on which the expenses were incurred and/or the persons to whom the payment for these expenses were made. No material or evidence was furnished to show that these expenses had been incurred on any of the activities mentioned in various sub-clauses of Section 35B(1)(b). The order of assessment was erroneous to that extent causing prejudice to the interest of the revenue.
20. He also placed reliance on the decision of the Hon'ble Madras High Court in CIT v. South India Shipping Corpn. Ltd. (1998) 233 ITR 546 (Mad), wherein it was held that when the CIT after perusal of the records of assessment arrived at a finding that the claim of the assessee was allowed in a perfunctory manner or in a mechanical manner without examining the allowability of the claim for weighted deduction, under which subclause of Section 35B(1)(b) of the Act the claim would fall. The CIT was justified in passing an order under Section 263 of the Act.
21. He further relied on the decision of the Hon'ble Delhi High Court in Gee Vee Enterprises v. AddL CIT (1975) 99 ITR 375 (Del), wherein it was held that it is incumbent on the Income Tax Officer to further investigate the facts stated in the return when the circumstances would make such an enquiry prudent that the word "erroneous" in Section 263 includes failure to make such enquiry. Hence he fully justified the order passed by the CIT under Section 263 of the Act.
22. We have heard the rival submissions and perused the order of both the lower authorities and the materials available on record. We find that while passing order under Section 143(3), the assessing officer has allowed deduction under Section 80HHD to the assessee including the lease rent and interest income earned from the Bank. The assessing officer has also allowed deduction on account of repairs and replacement expenses of Rs. 53.82 lakhs and building maintenance Rs. 35.91 lakhs to the assessee while making the assessment. The learned CIT was of the view that deduction under Section 80HHD was not allowable on lease rent income and interest income earned from the bank by the assessee. He was also of the view that although the assessing officer has gone through the details submitted during the course of the assessment for claim of deduction on account of repairs and replacement of Rs. 55.82 lakhs and building maintenance Rs. 31.91 lakhs. The assessing officer before accepting such details had not made further enquiries to ascertain whether the amount of expenditure claimed by the assessee was capital in nature. Hence by issuing notice to the assessee, he passed order under Section 263 of the Act and directed the assessing officer to allow deduction under Section 80HHD by excluding lease rent and interest income and set aside the order of the assessing officer to the extent it allows the claims on account of repairs and replacement Rs. 53.82 lakhs and buildiner maintenance Rs. 35.91 lakhs and restored it to the file of the assessing officer to make further enquiries so as to find out which part of the expenditure is capital meriting disallowance.
23. We find that the learned authorised representative for the assessee has submitted that deduction under Section 80HHD was allowable to the assessce on the business income of the assessee and not the business income of the hotel only. The contention of the learned authorised representative of the assessee is that there is no formula in the Act or possibility of computing in precise manner exclusive business income of the hotel. It is only the Hoten's foreign exchange income, which must necessarily relate to the hotel activity for the purpose of computing the deduction and the same is to be allowed on the over all business turnover and the overall business income of the assessce involved. It is the contention of the assessee that this is as per clear provisions of the Act and as per Board's Circular that deduction is to be computed in purely arithmatical and mechanical manner. The Board's Circular relate to analogous provisions of Section 80HHC where arithmatical mechanical formula is provided.
24. Section 80HHD reads as under:
80H141)(1). Wherc 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 a 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 a sum equal to the 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 (a) as is debited to the profit andloss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee in the manner laid down in Sub-section (4):"
From a bare reading of the above section, it will be seen that deduction is allowed under this section in respect of the hotel business of the assessee, which consists of services provided to foreign tourists. Thus, for computing the deduction allowable under this section, we will first have to compute the income from the hotel business of the assessee. In the instant case, we find that besides the hotel business, the assessee has income from leasing business and also has earned interest income on fixed deposits kept with the Bank. The assessee is maintaining a combined books of account and a combined profit and loss account and balance sheet has been drawn by the assessee for the income computed by the assessee under the head 'Profits and gains'. The assessing officer will have to determine the income from leasing business of the assessee and also the income from the interest received by the assessee and the same will have to be deducted from the said income from business profits and gains to arrive at the income from hotel business of the assessee. Since the assessee has receipts in the hotel business locally as well as receipts from the services provided to foreign tourists, by applying the formula provided in Sub-section (3) of Section 80HHD, i.e., Profits from the hotel business X Receipts from services provided to foreign tourists Total Receipts of the hotel business of the assessee.
Deduction allowable under Section 80HHD has to be computed.
25. The resultant amount shall be the deduction allowable to the assessee under Section 80HHD of the Act. It is seen that the assessing officer has allowed the deduction as claimed by the assessee on the basis of the certificate issued by the Chartered Accountant before 30-10-1998. On perusal of the certificate of the Chartered Accountant, which is filed at pages 20 and 21 of the paper book, it is seen that while calculating the deduction, the income from leasing business and interest has been included in the business profits and gains for the purpose of arriving at the deduction allowable under Section 80HHD. In our considered opinion, the same is not according to the provisions of Section 80HHD of the Act. We find that the learned CIT, while passing order under Section 263 has directed the assessing officer to exclude the lease rent and interest income for allowing deduction under Section 80HHD. We would like to clarify that the total lease rent received and the interest income is not to be excluded from the business income while arriving at the deduction under Section 80HHD. It is only the income clement included in the receipts from lease rent and interest, which has to be excluded from the business income for the purpose of allowing deduction under Section 80HHD. In other words, the expenditure attributable to the earning of the lease rent and interest has to be deducted from the gross receipts on account of lease rent and the net receipts has to be deducted from the business income for the purpose of determining the deduction allowable under Section 80HHD of the Act. Thus, the proportionate expenses relatable to lease rent and interest earning will be deducted from the hotel business income of the assessee and which should meet the main grievance of the assessee in this appeal. We modify the order of the CIT to this extent. Further, with regard to the setting aside of the issue on account of repairs and replacement Rs. 5,3.82 lakhs and building maintenance Rs. 35.91 lakhs to the file of the assessing officer for making further enquiries in order to determine the expenditure, which is of capital nature for making the disallowance we find that it is not in dispute that the full details of the expenditure in question were filed before the assessing officer and the CIT. The CIT has alleged that the assessing officer has not examined these details. We further observe that after examining these details, the CIT could not bring on record even a single instance of expenditure of capital nature which was included in these expenses. In the circumstances there is no material before us to come to the conclusion that the assessing officer accepted these details without examination. Hence no error could be pointed out by the CIT in respect of these expenses in the order of the assessing officer. The setting aside of the same to allow the assessing officer to have second innings is not permissible. Therefore, the order of the CIT is modified as stated above. The grounds of appeal are partly allowed.
26. In the result, the appeal of the assessee is partly allowed.