Income Tax Appellate Tribunal - Chennai
Ceebros Hotels P Ltd., Chennai vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, CHENNAI
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
ITA No.2185/Mds/2012
Asst. Years : 2009-10
M/s. Ceebros Hotels P. Ltd., The Asst. Commissioner of
No.19/1, 3rd Cross Street, Income Tax, Company
R.A. Puram, CHENNAI-600 028. v. Circle-I(3), CHENNAI.
pan : AAACC3051E.
(Appellant) (Respondent)
ITA No.2276/Mds/2012
Asst. Years : 2009-10
The Asst. Commissioner of M/s. Ceebros Hotels P. Ltd.,
Income Tax, Company No.19/1, 3rd Cross Street,
Circle-I(3), CHENNAI. v. R.A. Puram, CHENNAI-600 028.
PAN : AAACC3051E.
(Appellant) (Respondent)
Assessee by : Mr. S. Sridhar, Advocate
Department by Mr. Moharana, CIT
Date of hearing : 27 Feb 2013
Date of Pronouncement : 08 Mar 2013
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ITA 2185/Mds/12
O R D E R
PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER :
These appeals are filed by the assessee and the Department against the order of Commissioner of Income Tax (Appeals)III, Chennai dated 12.9.2012 for the Asst. Year 2009-10. The first issue in the grounds of appeal of the assessee is that the Commissioner of Income Tax (Appeals) erred in partly sustaining the disallowance under sec.14A read with Rule 8D of I.T. Rules.
2. The Assessing Officer, while completing the assessment, disallowed 4,37,363/- towards expenses incurred for earning exempt income applying the provisions of sec.14A of the Act read with Rule 8D of the I.T. Rules. On appeal, the Commissioner of Income Tax (Appeals) restricted the disallowance to .3,58,035/- as against .4,37,363/- disallowed.
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ITA 2185/Mds/12
3. The Counsel for the Assessee relying on the grounds of appeal submitted that the Commissioner of Income Tax (Appeals) should have deleted the entire disallowance made under sec.14A of the Act.
4. The Departmental Representative supports the order of Commissioner of Income Tax (Appeals).
5. We have heard both sides. Perused the materials on record and the orders of authorities below. The Commissioner of Income Tax (Appeals) while restricting the disallowance to .3,58,035/- observed as under :-
"4.3 As regards the quantum of such disallowance, the A.O. has applied rule 8D and determined .4,37,363/- as amount disallowable to earn tax-free income of .93,22,845/-. The amounts determined under clauses
(i), (ii) and (iii) of rule 8D(2) were .Nil, .79,328/- and .3,58,035/- respectively. There is no dispute regarding clause (i) because it was "Nil. The appellant, in its submission, has argued that all the investments during the year were made from its own fund and no borrowed fund was utilized for investments. I have 4 ITA 2185/Mds/12 considered the above contention and perused the details submitted by the appellant. The appellant had sufficient own funds and internal accruals to meet its investments. The share capital was .2,55,04,750/-
and the set apart as prepaid costs and could not be allowed as expenditure for the year. He arrived the value of such prepaid cost at .4,93,170/- and disallowance the same as it was not incurred wholly and exclusively in respect of the business carried on during the year. He also stated that the addition was agreed to by the authorized representative of the assessee."
On going through the order of Commissioner of Income Tax (Appeals), we find no infirmity or good reason to interfere with his order and hence we confirm the order of the Commissioner of Income Tax (Appeals) on this issue.
6. The next issue in the grounds of appeal of the assessee is that the Commissioner of Income Tax (Appeals) erred in sustaining the disallowance of .41,71,198/- being the expenses incurred under the head "repairs and replacements".
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ITA 2185/Mds/12
7. The Assessing Officer, while completing the assessment, treated expenditure of .41,71,198/- incurred by the assessee on replacement of kitchen utensils, furniture, repairs to buildings, general repairs and maintenance, repairs to plant and machinery etc., as capital expenditure and allowed depreciation thereon as against the claim of the assessee that the said expenditure is allowable as deduction under sec.37(1) of the I.T. Act. The same was confirmed by the Commissioner of Income Tax (Appeals).
8. The assessee submitted that the said expenditure was incurred on replacements and repairs for the day to day running of the business and there is no enduring benefit out of such repairs and replacements. The Counsel for the Assessee submitted that in the course of business of the assessee, ie., hospitality business, the assessee has to incur these expenses to maintain the ambience of hotel. Further, constant replacements and repairs are necessary and, therefore, the assessee took up modernization of its hotel to attract the customers. Therefore, such expenditure which was incurred towards repairs and replacements of old utensils etc., has no 6 ITA 2185/Mds/12 enduring benefit and, therefore, should be treated as revenue expenditure. The Counsel for the Assessee in support of his contention relied on the decision of Hon'ble Madras High Court in the case of CIT v. Ooty Dasaprakash (237 ITR 902).
9. The Departmental Representative relied on the orders of lower authorities in treating the said expenditure as capital expenditure.
10. We have heard both sides. Perused the materials on record and the orders of authorities below. The assessee incurred various expenses on repairs and replacements in the course of its business of running a hotel and such expenditure was incurred in replacing the Kitchen utensils, paintings, sculptures, repairs to buildings, furniture etc., and claimed such expenditure allowable as revenue expenditure either under sec.31(1) of the I.T. Act or under sec.37 of the Act. We find that in almost similar circumstances the Madras High Court in the case of CIT v. Ooty Dasaprakash (supra) held that the expenditure incurred for repairs and modernization of hotel, replacing the existing components of the building, furniture 7 ITA 2185/Mds/12 etc., is revenue expenditure. The assessee in this case contended that no part of the expenditure is capital in nature because it was spent only for repairing and replacing and modernizing the hotel and replacing the existing components of the buildings, furniture etc. The Revenue contended that the modernization programme involved large amounts spread over three years and, therefore, it should have definitely given the assessee enduring benefit and, therefore, such expenditure is capital in nature. In the circumstances, the Hon'ble High Court held as under :-
"The issue falling for consideration in the question under reference is as to whether the expenditure incurred by the assessee for the relevant assessment years is one falling under "capital expenditure" and consequently not allowable as a deduction or falling under "revenue expenditure" and therefore to be allowed as a deduction under section 31(1) or section 37 of the Income Tax Act.
Our attention had been drawn to the assessee's own case in CIT v. Dasaprahash (1978) 114 ITR 210 (Mad), wherein the assessee claimed a deduction of an expenditure of Rs. 37,390 incurred in providing decorated mirrors, plaster-moulded roof plywood panels, etc., in respect of the hotel premises during the previous year and the same was negatived by the Income Tax Officer in the view that the expenditure could not be said 8 ITA 2185/Mds/12 to be in the nature of current repairs to the building, as it had brought into existence an asset of an enduring nature and hence it was of a capital nature.
The disallowance was confirmed by the Appellate Assistant Commissioner.
The Tribunal, however, held that the expenditure was incurred wholly for the purpose of the business and was allowable as a deduction under section 37.
On a reference, at the instance of the department, this court held that some of the items in question were in the nature of petty replacement of items which already existed and cannot be taken as capital, expenditure at all. Other items of expenditure were incurred with a view to beautify the premises and obviously with a view to keep the place fit for the purpose for which persons assembled in the place, namely, for taking food and other edibles, as, without the proper atmosphere, it would not be possible to attract the necessary customers for running the hotel business carried on by the assessee. The expenses cannot be said to be of an enduring nature as the items for which they were used would be of no use with reference to any other place and they cannot also be removed and used. They are just fixed in the walls so that they would present an inviting appearance to the customers assembled there. Accordingly, the Tribunal was right in its conclusion that the expenses were allowable as a deduction under section 37 of the Income Tax Act.9
ITA 2185/Mds/12 In the instant cases, the expenditure was incurred solely for repairs and modernising the hotel and replacing the existing components of the building, furniture and fittings, with a view to create a conducive and beautiful atmosphere for the purpose of running of a business of a hotel. Taking into consideration the rationale or reasonings, as had been provided for by a Division Bench decision of this court cited supra, in the assessee's own case in CIT v. Dasaprahash (1978) 14 ITR 210, it goes without saying that the expenditure incurred by the assessee for the relevant assessment years in repairing and modernising the hotel and replacing the existing components of a portion of the building, furniture and fittings cannot at all be stated to be of enduring in nature, in the nature of being a "capital expenditure" ; but, definitely such an expenditure would fall under the category of "revenue expenditure" in nature to be allowed, as a deduction under section 37 of the Income Tax Act."
11. As could be seen from the above, the High Court in an almost identical facts held that repairing and replacing the existing components of portion of the buildings, furniture and buildings cannot at all be stated to be of enduring nature but such expenditure would fall in the category of revenue expenditure allowable as deduction under sec.37 of the I.T. Act. Following the above decision, 10 ITA 2185/Mds/12 we hold that the expenditure incurred by the assessee for repairs and replacements as revenue in nature. The grounds raised by the assessee on this issue are allowed.
12. The next issue in the grounds of appeal of the assessee is that the Commissioner of Income Tax (Appeals) erred in sustaining the disallowance of annual maintenance charges amounting to .4,93,170/-.
13. The Assessing Officer, while completing the assessment, disallowed .4,93,170/- stating that the said expenditure had not been incurred wholly and exclusively in respect of business of the assessee for the year. He also observed that the Authorised Representative agreed for these additions. The Commissioner of Income Tax (Appeals) confirmed the said additions made by the Assessing Officer.
14. The Counsel for the Assessee relied on the grounds of appeal.
15. The Departmental Representative supports the orders of lower authorities.
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ITA 2185/Mds/12
16. We have heard both sides. Perused the materials on record and the orders of authorities below. The Commissioner of Income Tax (Appeals) confirmed the said addition observing as under:-
"5.2 I have carefully considered the facts of the case and the submissions of the A.R. The A.O has bifurcated the expenses towards AMC for the period upto 31.3.2009 and for the subsequent period. He has disallowed the expenses which pertained to the subsequent period. The rule of taxation rests on the matching principle in which cost incurred to earn revenue is recognized as expense in the period when related revenue is recognized as earned. The A.O. has rightly applied the matching principle and the portion of AMC expenses which does not relate to the maintenance costs for the year was rightly disallowed. The A.R. of the assessee had also agreed for such disallowance during the assessment proceedings. In view of the above facts, no interference is called for. The ground is, accordingly, dismissed."12
ITA 2185/Mds/12 On going through the observations of Commissioner of Income Tax (Appeals), we find no reason to interfere with the above findings, especially when the Authorised Representative of the assessee has agreed for such disallowance in the course of assessment proceedings. We are also in agreement with the view of the Commissioner of Income Tax (Appeals) that the assessee could not prove that these expenses were incurred for the purpose of business of the assessee. Thus the grounds raised by the assessee are rejected on this issue.
17. The next issue in the grounds of appeal of the assessee is that the Commissioner of Income Tax (Appeals) erred in sustaining the disallowance of .43,500/-, applying the provisions of Explanation to sec.37(1) of the I.T. Act.
18. At the time of hearing, the Counsel for the Assessee submitted that this ground is not pressed and may be disposed off as not pressed. Accordingly, this ground of appeal is dismissed as not pressed. Similarly, the Counsel for the Assessee submitted that the ground taken by the assessee in this appeal with regard to proper 13 ITA 2185/Mds/12 opportunity not given by the Commissioner of Income Tax (Appeals) is also not pressed and may be dismissed as not pressed. Accordingly, this ground is also dismissed as not pressed.
19. The last issue in the grounds of appeal of the assessee is on deduction under sec.80IA of the I.T. Act with reference to the wind energy generator installed at Udumalpet to the extent of .72,88,585/-. The assessee raised the following grounds of appeal:-
"17. The CIT(A) erred in not granting deduction u/s.80IA of the Act with reference to the wind energy generator installed at Udumalpet to the extent of .72,88,585/- in the computation of taxable total income without assigning proper reasons and justification.
18. The CIT (Appeals) failed to appreciate that having accepted the eligibility to make such deduction in the computation of taxable total income, the directions issued for verification of the accepted facts before granting such deduction were erroneous and invalid."14
ITA 2185/Mds/12
20. The Assessing Officer while completing the assessment denied deduction under sec.80IA of the Act on the Wind Energy Generator, Udumalpet. On appeal, the Commissioner of Income Tax (Appeals), following the decision of the Hon'ble Jurisdictional High Court in the case of Velayudaswamy Spinning Mills Pvt. Ltd. v. ACIT (340 ITR 477) directed the Assessing Officer to allow deduction under sec.80IA of the Act with certain directions to the Assessing Officer regarding unabsorbed depreciation and loss. Against this order of the Commissioner of Income Tax (Appeals) the Revenue is in appeal on allowance of deduction under sec.80IA of the Act and the assessee is in appeal on the directions given by the Commissioner of Income Tax (Appeals) to the Assessing Officer.
21. At the time of hearing, the Departmental Representative fairly conceded that this issue is squarely covered by the decision of Hon'ble Jurisdictional High Court in favour of the assessee in the case of Velayudaswamy Spinning Mills Pvt. Ltd. v. ACIT (supra). The Counsel for the Assessee submits that though the Commissioner of Income Tax (Appeals) allowed the claim of the assessee under 15 ITA 2185/Mds/12 sec.80IA of the Act, he has given certain directions which were not necessary as the Assessing Officer examined these issues.
22. We have heard both sides. Perused the materials on record and the orders of authorities below. The Commissioner of Income Tax (Appeals), in principle, allowed the claim of the assessee under sec.80IA of the Act following the decision of Velayudhasamy Spinning Mills Pvt. Ltd. v. ACIT (supra). However, Commissioner of Income Tax (Appeals) has given certain directions to the Assessing Officer observing as under :-
"8.2 I have carefully considered the facts of the case and the submissions of the Id.AR. I have also gone through the decisions relied on by the Id.AR and the AO. The appellant has relied on the decision of the Hon'ble Madras High Court in the case of Velayudhasamy Spinning Mills P. Ltd v. ACIT (340 ITR 477). In the said case, the AO had disallowed deduction of Rs.1,70,76,945/- claimed u/s 8O-IA on the ground that the eligible income was a negative figure. The CIT(A) allowed the appeal on the ground that the unabsorbed depreciation of the 'earlier years, which had already been absorbed, could not be notionally carried, forward and taken into consideration for computing deduction u/s 8O-IA. The Tribunal set aside the order of ClT(A) and restored the order of AO. On further appeal, the Hon'ble High Court allowed the appeal of the assessee., It held that there was no dispute that losses incurred by the assessee were already set ,off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee exercised option u/s 80-IA(2). During this period, there was no unabsorbed depreciation or loss of the eligible undertaking and these 16 ITA 2185/Mds/12 were already" set off in the earlier years. There was positive income during the year. The '. loss in the year earlier to Initial assessment year already absorbed against the profit other business could not be notionally brought forward .and set off against the profit eligible business as no such mandate was provided in section 80- IA(5). Accordingly the order of the ITAT Was set aside and the question was answered in favour of assessee. The Hon'ble Court also relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Mewar Oil and General Mills Ltd, 271 ITR 311 (Raj.). ratio of the above decision Is applicable to the facts of the present case. The Assessing Officer is, therefore, directed to verify whether the unabsorbed depreciation and loss of windmill were already absorbed in the earlier year and no unabsorbed depreciation available for set off in the current ,year. If the answer is in the affirmative i.e., there existed unabsorbed depreciation at the beginning of the year, then he should set 'off same against the profits of the eligible unit and allow deduction on the balance amount. It may also be stated that unabsorbed depreciation or loss of the windmill could be set off against profit of the hotel business if there was income of the eligible (windmill). If, however. the unabsorbed depreciation arid toss were already exhausts the earlier year, the appellant would be .entitled to deduction on the entire profit of eligible unit'. The around' is partly allowed for statistical purpose. "
On going through the Order of Commissioner of Income Tax (Appeals), we find that there is no infirmity or any good reason to interfere with the directions given by the Commissioner of Income Tax (Appeals) in allowing deduction under sec.80IA of the Act to the assessee as per the decision of the Hon'ble Jurisdictional High Court 17 ITA 2185/Mds/12 (supra). Therefore, we reject the grounds raised by the assessee as well as the Department on this issue.
23. In the result, the appeal of the assessee is partly allowed and the appeal of the Department is dismissed.
24. Order pronounced on Friday, the 8th day of March 2013, at Chennai.
Sd/- sd/-
( N.S. SAINI ) (CHALLA NAGENDRA PRASAD)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Chennai,
Dated : 08th March 2013.
Jls.
Copy to:- C.I.T.,
(1) Appellant
(2) Respondent
(3) CIT-(A), (4) CIT
(5) D.R. (6) Guard file