2006 (12) TMI 531 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of Section 80HHD of the Income Tax Act, 1961.
2. Whether payments made to hotels should be reduced from the amount received by the assessee for services rendered to foreign tourists and from the total receipts of the business while computing deduction u/s 80HHD.
3. Correct interpretation of Section 80HHD(3) regarding the reduction of payments made to hotels from total business receipts.

Summary:

Issue 1: Interpretation of Section 80HHD of the Income Tax Act, 1961
The appeals concern the interpretation of Section 80HHD, introduced to encourage tourism and augment foreign exchange reserves. The provision allows a deduction of 50% of profits derived from services provided to foreign tourists by approved hotels or travel agents, with the remaining 50% also eligible for exemption if credited to a reserve fund and utilized for business purposes.

Issue 2: Reduction of Payments Made to Hotels
The assessee, a travel agent and tour operator, included foreign exchange (FE) receipts pertaining to other hotels in its total FE receipts and issued Disclaimer Certificates (DCs) to such hotels. The Assessing Officer (AO) did not agree with the assessee's computation and included the business profits of both the tour operator and hotel businesses, disallowing the deduction of the hotel receipts from the total receipts. The CIT (A) partially accepted the assessee's contention, allowing the deduction of FE receipts covered by DCs from the total receipts but not the hotel receipts. The ITAT upheld the CIT (A)'s decision, stating that payments to hotels should be excluded from both the numerator and denominator of the multiplier used to compute profits derived from services to foreign tourists.

Issue 3: Correct Interpretation of Section 80HHD(3)
The court held that the words "total receipts" in sub-section (3) of Section 80HHD should be read along with "of the business carried on by the assessee," meaning only receipts exclusively from the assessee's business. Therefore, FE receipts on behalf of other hotels, covered by DCs, should be excluded from both the numerator and denominator of the multiplier. This interpretation aligns with the purpose of Section 80HHD to encourage tourism and augment foreign exchange reserves.

Conclusion:
The court affirmed the CIT (A) and ITAT's decisions, holding that the FE receipts on behalf of other hotels should be excluded from the total receipts while computing the deduction u/s 80HHD. Consequently, the appeals were dismissed with no orders as to costs.