2019 (2) TMI 1712 - AT - Income Tax

Disallowance u/s 35AD(5)(aa) - Whether assessee had completed necessary formalities in terms of obtaining licenses from different authorities were obtained by the assessee? - CIT-A allowed the claim - HELD THAT - As per provisions of section any capital expenditure incurred by the assessee prior to commencement of operation of the new unit shall be allowed as deduction in the previous year in which the assessee commences the operation of hotel business. Sec. 35AD(5)(aa) is regarding deduction in respect of expenditure on specified business - on or after 1s t day of April 2010 where the specified business is in the nature of building and operating a new hotel of Two Star or above category as classified by the Central Government. In respect of its contention assessee submi ted copy of permission granted by the Ministry of Tourism letter dated 30/08/2010 wherein approval of three star hotel has been granted by the Ministry and assessee has filed Building House Permission issued by the municipal authority dated 18/10/2011 for granting the permission of hotel and assessee submitted details with the AO for following documents along with copies of assessee submitted letter dated 09/02/2015. CIT(A) in our view has rightly come to the conclusion in favour of the assessee. Thus we dismiss the appeal of the Revenue.

Summary

Issues:
1. Disallowance under section 35AD(5)(aa) of the Income Tax Act.
2. Entitlement for deduction under section 35AD(5)(aa) of the Act.

Issue 1: Disallowance under section 35AD(5)(aa) of the Income Tax Act:

The appeal by the Revenue challenged the order of the Ld. CIT(A) deleting the disallowance of a substantial amount under section 35AD(5)(aa) of the Act. The Revenue contended that the assessee failed to apply separately for deduction under the Act despite conditions set by the Indian Tourism, Ministry of Tourism, Govt. of India. The Indian Tourism had specified requirements for availing fiscal concessions under the Income Tax Act, including separate approval after the hotel starts functioning. The assessee had not fulfilled all conditions and failed to obtain necessary licenses for hotel operation, leading to the disallowance of the amount.

Issue 2: Entitlement for deduction under section 35AD(5)(aa) of the Act:

The assessee, in response to the disallowance, argued before the Ld. CIT(A) that no specific permission was mandated in section 35AD or relevant income tax rules for the deduction. The CIT(A) allowed the appeal, stating that the AO's denial of deduction was unjustified as the necessary formalities, including obtaining licenses, were completed by the assessee. The Revenue, aggrieved by the CIT(A)'s decision, approached the ITAT. The ITAT analyzed the conditions for availing deduction under section 35AD(5)(aa), emphasizing that capital expenditure incurred before the commencement of hotel operations should be capitalized in the books of accounts. The section allows deduction for specified businesses like building and operating a new hotel of Two Star or above category. The assessee provided documents supporting the approval of a three-star hotel and various licenses obtained for hotel operation. The ITAT upheld the CIT(A)'s decision, concluding that the assessee was entitled to the deduction under section 35AD(5)(aa) of the Act.

In conclusion, the ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s decision in favor of the assessee regarding the entitlement for deduction under section 35AD(5)(aa) of the Income Tax Act. The judgment highlighted the importance of fulfilling specified conditions and obtaining necessary approvals and licenses for claiming deductions under the Act.