2014 (3) TMI 470 - HC - Income Tax

Allowability of Expenditure u/s 37 of the Act - Nature of Expenses Payment made for right to use - Capital OR Revenue - Whether the Tribunal was correct in holding that the payment made for the right to use central court yard along with the marble installed to carry on its hotel business is a revenue expenditure allowable u/s 37 of the Act Held that - The decision in EMPIRE JUTE CO. LTD. -vs- COMMISSIONER OF INCOME TAX 1980 (5) TMI 1 - SUPREME Court followed - There is no all-embracing formula which can provide a ready solution to the problem - no touchstone has been devised - Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred - But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future - the amount paid to the Trust was for the use of the court yard under the MOU for an indefinite future thus, it would be on revenue account - merely because the advantage may endure for an indefinite future would not mean that the expenditure would be on capital account and not revenue - The advance consists merely in facilitating the assessee s business operations, enabling the management to conduct their Hotel business more efficiently and profitably Decided against Revenue. Computation of deduction u/s 80IA of the Act Interest on deposits Held that - The decision in LIBERTY INDIA Vs COMMISSIONER OF INCOME-TAX 2009 (8) TMI 63 - SUPREME COURT followed interest cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking - Decided in favour of Revenue. Allowability of deduction u/s 80HHD of the Act Held that - The decision in Commissioner of Income Tax & anr. Vs M/s.ITC Hotels Ltd. 2009 (9) TMI 675 - Karnataka High Court followed u/s 80HHD of the Act the reference is to the business of the assessee which is the business as a whole and as one unit and not by sub- dividing the total income of the business into unit-wise total income and then arriving at the unit-wise overall profit proportionate profit and then adding up the same for arriving at the benefit under section 80HHD of the Act the decision followed has been admitted in the SC as SLP thus, the assessee is entitled for the deduction by the time final judgement does not came Decided against Revenue.

Summary

Issues:
1. Interpretation of revenue expenditure vs. capital expenditure for payment made for the right to use central courtyard.
2. Computation of deduction under Section 80IA for specific types of income.
3. Allowance of deduction under Section 80HHD for the entire business or each eligible unit.

Issue 1: Interpretation of revenue expenditure vs. capital expenditure for payment made for the right to use central courtyard:
The case involved an appeal against the Tribunal's order regarding the payment of a license fee for the use of a central courtyard in a palace for hotel business. The key question was whether the expenditure of Rs.10 lakh resulted in an addition to fixed capital or facilitated trading operations. The court referred to the Empire Jute Co. Ltd. case and emphasized that if the expenditure facilitated trading operations without affecting fixed capital, it would be considered a revenue expenditure. The court found that the payment for the right to use the courtyard was for facilitating business operations and not for creating an enduring asset, thus ruling in favor of the assessee.

Issue 2: Computation of deduction under Section 80IA for specific types of income:
The second substantial question revolved around the treatment of income from interest on deposits for the computation of deduction under Section 80IA. Both parties agreed that this issue was covered by previous Supreme Court judgments. The court, in line with the parties' submissions, ruled in favor of the Revenue based on the precedent set by the Supreme Court cases of LIBERTY INDIA and PANDIAN CHEMICALS LTD.

Issue 3: Allowance of deduction under Section 80HHD for the entire business or each eligible unit:
Regarding the third question on the allowance of deduction under Section 80HHD, the court noted a similar question addressed in a previous case. The respondent's counsel mentioned that the matter was taken to the Supreme Court through a Special Leave Petition, which was pending. The court decided to answer the third question in favor of the Revenue but directed the Assessing Officer to wait for the outcome of the pending Supreme Court case before passing any consequential order, allowing time for the respondent to communicate the Supreme Court's decision to the AO.

This detailed analysis of the judgment from the Karnataka High Court provides insights into the interpretation of revenue and capital expenditures, computation of deductions under specific sections of the Income Tax Act, and the procedural aspects of pending cases affecting the assessment of tax liabilities.