2017 (6) TMI 1272 - AT - Income Tax

Disallowance of the claim of deduction u/s 35AD(5)(aa) - eligible for claiming investment allowance - Held that - Once the Department has accepted the income of the assessee from hotel business which was newly established and become fully operational in the year 2010 then the assessee is very much eligible for claiming investment allowance. If we accept to the contention of AO that the assessee was granted star category classification only on 10.05.2011 he should not have accepted the income of the assessee offered to tax which was earned in lieu of star category of the hotel. Once the application for star category classification dated 17.04.2010 was not rejected by the India Tourism and even after inspection on 22.04.2011 the HRACC has not found any discrepancy and very well recommended for classification under 3 star category we find no fault on the assessee since the assessee has vide its letter dated 02.08.2010 informed about the fully operational of the Hotel to the India Tourism and it was the delay on the part of HRACC to inspect the Hotel before end of the financial year for which the assessee cannot be penalized. Under these facts and circumstances the disallowance made under section 35AD(5)(aa) stands deleted - decided in favour of assessee. Higher depreciation on building and plant and machinery - Held that - Referring to rate of depreciation allowable under Income Tax Rules we are of the considered opinion that the Assessing Officer has rightly allowed the 10% depreciation on building which was confirmed by the ld. CIT(A). Thus we find no reason to interfere with the order passed by the ld. CIT(A) on this issue and accordingly the ground raised by the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of the claim of deduction under section 35AD(5)(aa) of the Income Tax Act, 1961.
2. Restriction of higher depreciation on plant & machinery as well as building.

Issue-wise Detailed Analysis:

1. Disallowance of the Claim of Deduction under Section 35AD(5)(aa):

The assessee, engaged in civil construction and hospitality, filed a return of income for the assessment year 2011-12, claiming a loss and book profit. The return was processed, and a demand was determined. During scrutiny, it was found that the assessee had capitalized expenses for a hotel (The Rain Tree) and claimed a deduction under section 35AD(5)(aa) of the Income Tax Act, 1961. The assessee's claim was based on the hotel being classified as a 'Three' star category from 10.05.2011. However, the classification was not granted for the financial year 2010-11, which was a prerequisite for the deduction. Consequently, the Assessing Officer disallowed the investment allowance claimed.

The assessee argued that the star classification obtained in the next assessment year should relate back to the date of application and commencement of operations. They contended that the delay in obtaining the classification was procedural and not attributable to them. The assessee maintained that the legislative intent of section 35AD was to provide investment-linked incentives, and since the hotel was operational and income was offered to tax, the deduction should be allowed.

The Tribunal observed that the Department had accepted the income from the hotel business, which was operational in the financial year 2010-11. The delay in obtaining the star classification was procedural, and the assessee should not be penalized for it. The Tribunal concluded that the disallowance made under section 35AD(5)(aa) was not justified and directed the Assessing Officer to allow the investment allowance as claimed by the assessee.

2. Restriction of Higher Depreciation on Plant & Machinery and Building:

The assessee did not claim depreciation on the assets capitalized for the new hotel, as they had claimed investment allowance under section 35AD. Since the investment allowance was disallowed, the Assessing Officer allowed depreciation at 15% on the building and 10% on plant and machinery. The assessee appealed for higher depreciation, but the CIT(A) dismissed the appeal, stating there was no material to suggest eligibility for higher depreciation.

The Tribunal upheld the CIT(A)'s decision, noting that the eligible rate of depreciation for buildings used for hotels, as per the Income Tax Rules, is 10%. The Tribunal found no reason to interfere with the order passed by the CIT(A) on this issue and dismissed the ground raised by the assessee.

Conclusion:

The appeal filed by the assessee was partly allowed. The Tribunal deleted the disallowance made under section 35AD(5)(aa) and directed the Assessing Officer to allow the investment allowance. However, the Tribunal upheld the restriction of higher depreciation on plant and machinery and building, confirming the CIT(A)'s order.