2015 (10) TMI 2022 - AT - Income Tax

Disallowance of Deduction u/s 80HHD Exclusion of payments received in Indian Rupees from Foreign Airlines and Embassies - Held that - Once the RBI accepts a particular receipt to have been received in convertible foreign exchange, the deduction u/s 80HHC and 80HHD should be granted to the assessee. In the instant case, admittedly, the assessee had received monies in accordance with the scheme approved by RBI and hence the assessee is entitled for deduction u/s 80HHD of the Act in respect of amounts received in Indian Rupees from Foreign Airlines and Foreign Embassies. It is pertinent to note that the Learned Assessing Officer had granted deduction u/s 80HHD of the Act in the set aside assessment proceedings for the Asst Year 1999-2000 on the same issue to the same assessee. Hence in view of the aforesaid facts and circumstances and provisions of the Act, we direct the Learned Assessing Officer to grant deduction u/s 80HHD of the Act to the assessee - Decided in favour of assessee. Disallowance of deduction u/s 80HHC for sale proceeds of Flight Kitchen Services - Held that - As relying on assessee s own case reported in 2011 (8) TMI 411 - CALCUTTA HIGH COURT the assessee is entitled for deduction u/s 80HHC of the Act in respect of export of food and beverages to out bound flight s of International Airlines and for the proceeds received thereon in convertible foreign exchange and hold that the assessee had complied with the provisions of section 80HHC of the Act in this regard.- Decided in favour of assessee. Disallowance of running and maintenance expenditure of aircrafts - Held that - Reliance on Sayaji Iron And Engg. Co. case 2001 (7) TMI 70 - GUJARAT High Court is well placed and supports the case of the assessee. We also find lot of force in the arguments of the Learned AR that if at all there is any personal element involved in the aforesaid expenditure, the same have to be taxed as perquisite in the hands of the directors and it is only for the TDS officer to look into the violations, if any, on the same and hence on that ground also, no disallowance of expenditure could be appreciated. We find that the Learned Assessing Officer had made the enti re addition based on surmises and conjectures and made on ad hoc basis. It is well founded proposition that what is apparent is real and the allegation to prove the cont rary is on the person making such allegation. In view of the aforesaid fact s and ci rcumstances and respectfully following the judicial precedent s thereon, we have no hesitation in deleting the addition made in the sum of ₹ 42,80,883/- on an estimated basis - Decided in favour of assessee. Addition towards notional gain on foreign currency loan - Held that - In view of the case of CIT vs Woodward Governor India P. Ltd 2009 (4) TMI 4 - SUPREME COURT we hold that the sum of ₹ 4,15,36,381/- being the exchange gain would be taxable in the hands of the assessee for the Asst Year 2002-03 and correspondingly the Learned AO is also directed to grant deduction for the exchange loss due to restatement for the Asst Year 2003-04. - Decided against assessee. Disallowance of Interest on borrowed funds used for non-business purposes - Held that - Advances were made by the assessee to various parties during the course of its business and are strategic investment s. We also hold that the borrowed funds were not diverted for non-business purposes as sufficient own funds were available with the assessee to make interest free advances to its group concerns. We also hold that when borrowed funds and own funds were inextricably mixed in the same bank account and if the own funds are more than the amounts advanced interest free to sister concerns, then the presumption could be drawn in favour of the assessee that those advances were made only out of own funds of the assessee. We further hold that from the aforesaid fact s available on record, the assessee had advanced monies to various concerns during the course of its business to further strengthen its business interests with the said parties and as a measure of commercial expediency. Accordingly we hold that the action of the Learned Assessing Officer in disallowing a sum is not warranted - Decided in favour of assessee. Disallowance of legal expenses - Held that - The legal expenses incurred by the assessee were in respect of payments made to various renowned counsels for pursuing the various legal disputes of the assessee arising out of its business. We do not appreciate the view of the Learned CITA that additional evidences filed by the assessee in the form of details and bills for legal expenses were not admitted by him after calling for a remand report from the Learned Assessing Officer. In fact the remand report it self was called for from the Learned Assessing Officer only after admission of additional evidences by the Learned CIT(Appeals). Moreover, the assessee had duly filed objections to the remand report that had the original bills for legal expenses been called for by the Learned Assessing Officer, it could have been filed by the assessee. It is also observed that no adverse comments were given by the Learned AO regarding the incurrence of legal expenses except stating that original bills were not filed. In view of this, we have no hesitation in deleting the addition made towards disallowance of legal expenses- Decided in favour of assessee. Disallowance of proportionate management expenses u/s 14A - Held that - The relevant assessment year under appeal is 2002-03 at which point of time, the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej & Boyce Manufacturing (2010 (8) TMI 77 - BOMBAY HIGH COURT). However, it is not in dispute that the assessee had derived taxable income as well as tax free income and incurred expenditure for deriving both the incomes and hence disallowance is definitely warranted in terms of section 14A which is brought in the statute book with retrospective effect from 1.4.1962. The disallowance had to be made only on an estimated basis with regard to the expenditure incurred for the purpose of earning tax free income. Respectfully following the judicial precedent, we direct the Learned AO to disallow 1% of dividend income under this issue - Decided against assessee. Addition of indirect taxes such as sales tax, expenditure tax, etc as part of turnover for the purpose of deduction u/s 80HHD - CIT(A) deleted the addition - Held that - This issue is now squarely covered by the decision of the apex court in the case of CIT vs Lakshmi Machine Works Ltd (2007 (4) TMI 202 - SUPREME Court ) wherein it was held that Section 80HHC(3) is a benef icial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business, the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under the Excess Profits Tax Act and it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of turnover, excise duty and sales tax also cannot form part of the turnover . The excise duty and sales tax are indirect taxes and are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula u/s 80HHC would become unworkable - Decided against revenue. Apportionment of common expenses to Bangalore unit for claiming deduction u/s. 80IA - Held that - We restore this issue to the file of the Learned Assessing Officer to decide the issue afresh on the basis of detail s filed by the assessee following the decision of the Tribunal in assessee s own case for A.Y. 2000-01 - Decided in favour of assessee for statistical purposes. Disallowance of Pre-opening expenses as capital in nature relating to Vanyavilas and Udayvilas - Held that - We hold that the expenditure were incurred for expansion of the same business and not for setting up of the new business. Instead these expenditures were incurred by the assessee after the business is set up. It is ultimately only a new unit of the assessee by way of two fresh hotels (Vanyavilas and Udayvilas) which is nothing but an expansion of the existing hotel business of the assessee with complete interconnection and interlacing of funds with common administ ration, common management, common fund and common place of business. Thus we hold that the entire expenditure relating to Hotel Vanyavilas and relating to Hotel Udayvilas to be treated as revenue expenditure. - Decided against revenue. Addition on account of provision for repairs and replacement of bad and doubtful debts - Held that - From the perusal of the agreement between the assessee and Hotel Raj Bilash, it is apparent that the disallowance was made by the AO out of misconception about contractual obligation in earning management fees and arbitrarily added back an amount on account of management fees from Hotel Raj Bilash. It is a contractual obligations as well as entitlement of assessee-company and which was in no way comparable with the computation of taxable income under the Income Tax Act. Therefore, in our considered opinion, the ld. CIT(A) was justified in deleting the addition made by the AO - Decided against revenue. Addition on account of excess provision of technical fees - Held that - The income on account of technical services in respect of managed hotels are initially booked on provisional basis by the assessee for want of finalization of accounts of those managed hotels, and later based on Chartered Accountant s certificate the correct income is booked and provision al ready made is adjusted accordingly. It may either be increased or reduced. Hence we have no hesitation to delete this addition - Decided against revenue. Addition on account of advances written off - Held that - It is seen that the assessee has debited the sum in its profit and loss account under the head Advances written off pursuant to the directions of the Delhi High Court order received during the Asst Year 2002-03 (i.e. the year under appeal). This court order is very much in the public domain and cannot be construed as an additional evidence filed by the assessee before the Learned CIT(Appeals). Even otherwise, we find that the revenue s case is not going to get strengthened by setting aside this issue to the file of the Learned AO as the conclusion could not be anything different in this issue.We hold that the Learned CIT(Appeals) had adjudicated this issue and granted relief to the assessee with proper reasoning. Hence we are not inclined to interfere with the Learned CIT(Appeals) s - Decided against revenue. Disallowance on account of staff welfare expenses - Held that - It is seen that the addition has been made only on an ad hoc basis by the Learned Assessing Officer. It is seen that the learned counsel for the revenue had sought to withdraw this ground before the Hon ble High Court while pursuing the appeal in the earlier year based on the inst ructions from the Income Tax Department which is clearly stated in para 2 of the order of the High Court. This only leads to a situation that probably the revenue in its wisdom thought it fit not to pursue this issue before the High Court as the addition made thereon may not get sustained in the High Court. We find that this issue is covered in favour of the assessee by the decision of this Tribunal in assessee s own case for the Asst Year 2001-02 - Decided against revenue. Disallowance of repairs, renewals, replacement and advertisement - Held that - We find that the addition has been made only on an ad hoc basis which is not in accordance with law - Respectfully following the decision of the coordinate bench of the Tribunal on this impugned issue in assessee s own case for the Asst Year 1996-97 addition deleted - Decided against revenue. Disallowance of interest u/s 14A on the ground that loan has been utilized for investment in shares for earning dividend which is exempt - Held that - he assessee is having sufficient interest free funds to make investment in shares of domestic companies to the tune of ₹ 144.08 crores, wherein the dividend earned would be tax free and in view of the fact that the AO had not brought the nexus between the borrowed funds and the amount invested in the shares of domestic companies, and in view of the fact that the investments in subsidiaries were made out of strategic investment s, we are not inclined to interfere with the decision of the Learned CIT(Appeals) on this issue deleting the addition - We also hold that dividend, if any, derived from investment in shares of foreign companies made by the assessee would become taxable and hence disallowance u/s 14A would not operate in this regard - Decided against revenue. Disallowance of depreciation on additions of assets - CIT(A) allowed the claim - Held that - It is not in dispute that the bills for additions to fixed assets were filed by the assessee before the Learned CIT(Appeals) for the first time and accordingly a remand report was called for from the Learned Assessing Officer who had not given any adverse findings with regard to this issue. Hence there cannot be any grievance on the part of the revenue to agitate this ground before us. Accordingly, we are not inclined to interfere with the decision of the Learned CIT(Appeals) on this issue - Decided against revenue. Computation of deduction u/s 80IA - Held that - For the purpose of computing deduction u/s 80IA, the deduction u/s 80HHD need not be reduced as both the deductions are independent and accordingly the grounds of appeal raised by the assessee in this regard are allowed. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of Deduction u/s 80HHD for payments received in Indian Rupees from Foreign Airlines and Embassies.
2. Disallowance of deduction u/s 80HHC for sale proceeds of Flight Kitchen Services.
3. Disallowance of running and maintenance expenditure of aircrafts.
4. Addition towards notional gain on foreign currency loan.
5. Disallowance of interest on borrowed funds used for non-business purposes.
6. Disallowance of legal expenses.
7. Disallowance of proportionate management expenses u/s 14A.
8. Addition of indirect taxes as part of turnover for the purpose of deduction u/s 80HHD.
9. Apportionment of common expenses to Bangalore unit for claiming deduction u/s 80IA.
10. Disallowance of pre-opening expenses as capital in nature.
11. Addition on account of provision for repairs and replacement of bad and doubtful debts.
12. Addition on account of excess provision of technical fees.
13. Addition on account of advances written off.
14. Disallowance of interest on borrowed funds as diverted for non-business purposes.
15. Disallowance on account of staff welfare expenses.
16. Disallowance of repairs, renewals, replacement, and advertisement.
17. Disallowance of interest u/s 14A on the ground that loan has been utilized for investment in shares for earning dividend which is exempt.
18. Disallowance of proportionate management expenses u/s 14A.
19. Disallowance of depreciation on additions of assets.
20. Reduction in eligible profit of Bangalore unit while computing deduction u/s 80IA.

Detailed Analysis:

1. Disallowance of Deduction u/s 80HHD for payments received in Indian Rupees from Foreign Airlines and Embassies:
The tribunal held that "once the RBI accepts a particular receipt to have been received in convertible foreign exchange, the deduction u/s 80HHC and 80HHD should be granted to the assessee." The assessee received monies in accordance with a scheme approved by RBI, thus entitled to deduction u/s 80HHD.

2. Disallowance of deduction u/s 80HHC for sale proceeds of Flight Kitchen Services:
The tribunal noted that the issue is covered by the decision of the Jurisdictional High Court. The supply of food and beverages to international airlines constitutes export of goods out of India, and the sale proceeds received in Indian Rupees were treated as payment in convertible foreign exchange.

3. Disallowance of running and maintenance expenditure of aircrafts:
The tribunal found that the net expenditure towards running and maintenance of aircrafts was only Rs. 95,64,995/-. The assessee provided complete details of the expenditure, and the disallowance was based on surmises and conjectures. The tribunal allowed the expenditure as business expenditure.

4. Addition towards notional gain on foreign currency loan:
The tribunal held that the sum of Rs. 4,15,36,381/- being the exchange gain would be taxable. Correspondingly, the AO was directed to grant deduction for the exchange loss due to restatement for the subsequent year.

5. Disallowance of interest on borrowed funds used for non-business purposes:
The tribunal found that the assessee had sufficient own funds and the advances were made for business purposes. The disallowance of interest was not warranted as the borrowed funds were not diverted for non-business purposes.

6. Disallowance of legal expenses:
The tribunal deleted the addition as the expenses were incurred for pursuing legal disputes of the assessee arising out of its business. The CIT(A) had erred in not admitting additional evidences filed by the assessee.

7. Disallowance of proportionate management expenses u/s 14A:
The tribunal directed the AO to disallow 1% of dividend income under this issue, following the decision of the Jurisdictional High Court.

8. Addition of indirect taxes as part of turnover for the purpose of deduction u/s 80HHD:
The tribunal held that indirect taxes like sales tax, expenditure tax, etc., are not included in the total turnover for computation of deduction u/s 80HHD, following the decision of the Supreme Court in CIT vs Lakshmi Machine Works Ltd.

9. Apportionment of common expenses to Bangalore unit for claiming deduction u/s 80IA:
The tribunal restored this issue to the AO to decide afresh, following the directions given by the tribunal for earlier assessment years.

10. Disallowance of pre-opening expenses as capital in nature:
The tribunal held that the expenditure incurred after the business is set up but before the commencement of business is revenue expenditure. The entire expenditure of Rs. 1,61,98,830/- relating to Hotel Vanyavilas and Rs. 1,42,67,177/- relating to Hotel Udayvilas was treated as revenue expenditure.

11. Addition on account of provision for repairs and replacement of bad and doubtful debts:
The tribunal upheld the decision of the CIT(A) that the provision for repairs and replacement of bad and doubtful debts is allowable as deduction.

12. Addition on account of excess provision of technical fees:
The tribunal deleted the addition, accepting the assessee's explanation that the excess provision was adjusted in the subsequent year.

13. Addition on account of advances written off:
The tribunal upheld the deletion of the addition as the advances were written off pursuant to the directions of the Delhi High Court.

14. Disallowance of interest on borrowed funds as diverted for non-business purposes:
The tribunal dismissed the revenue's appeal, reiterating that the advances were made for business purposes and the assessee had sufficient own funds.

15. Disallowance on account of staff welfare expenses:
The tribunal upheld the deletion of the ad hoc disallowance of Rs. 50,00,000/-, noting that providing meals to employees on duty is a standard practice in the hotel business.

16. Disallowance of repairs, renewals, replacement, and advertisement:
The tribunal upheld the deletion of the ad hoc disallowance of Rs. 1,07,42,335/-, noting that the addition was made on an ad hoc basis without proper justification.

17. Disallowance of interest u/s 14A on the ground that loan has been utilized for investment in shares for earning dividend which is exempt:
The tribunal upheld the deletion of the disallowance, noting that the assessee had sufficient own funds and the investments were made for strategic purposes.

18. Disallowance of proportionate management expenses u/s 14A:
The tribunal directed the AO to disallow 1% of dividend income under this issue, following the decision of the Jurisdictional High Court.

19. Disallowance of depreciation on additions of assets:
The tribunal upheld the deletion of the disallowance, noting that the bills for additions to fixed assets were produced before the CIT(A) and no adverse findings were given by the AO during remand proceedings.

20. Reduction in eligible profit of Bangalore unit while computing deduction u/s 80IA:
The tribunal held that for the purpose of computing deduction u/s 80IA, the deduction u/s 80HHD need not be reduced as both the deductions are independent. The issue was allowed in favor of the assessee, following the decision of the Supreme Court in JCIT vs Mandideep Engineering & Packaging India P Ltd.

Conclusion:
The appeals were partly allowed in favor of both the assessee and the revenue, with specific directions provided for each issue. The tribunal's decisions were based on a detailed analysis of the facts, applicable laws, and relevant judicial precedents.