2017 (4) TMI 1013 - HC - Income Tax

Addition under Section 7(4) and the interest charged thereon under Section 14 Expenditure Tax Act 1987 on bills not yet raised, although the expenditure had been incurred - Held that Chargeable expenditure would be incurred only upon raising of a composite bill upon conclusion of hotel stay and not earlier. The substantial question of law is answered in favour of the Assessee and against the Revenue.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer under Section 7(4) and interest charged under Section 14 of the Expenditure Tax Act, 1987 on bills not yet raised.
2. Interpretation of the term "chargeable expenditure" under Section 5 of the Expenditure Tax Act, 1987.
3. Timing of incurrence of chargeable expenditure for the purpose of tax liability.

Issue-wise Detailed Analysis:

1. Deletion of Addition and Interest Charged:
The core issue was whether the Tribunal was correct in deleting the addition made by the Assessing Officer under Section 7(4) and the interest charged under Section 14 of the Expenditure Tax Act, 1987 on bills that had not yet been raised, despite the expenditure being incurred. The Assessee argued that the outstanding amount represented expenditure yet to be incurred by guests and would be paid over to the Government upon collection. The Assessing Officer, however, contended that under the mercantile system of accounting, all accrued expenditure should be taxed, irrespective of whether it had been collected from customers.

2. Interpretation of "Chargeable Expenditure":
The Assessee interpreted Section 5 of the Act to mean that chargeable expenditure includes only amounts that had been paid by guests and received by the hotel. The Tribunal agreed with the Assessee, stating that incurrence of expenditure for chargeability arises when the amount due by guests is quantified and an invoice is raised. The Tribunal concluded that for guests still in occupation at the end of the year, the expenditure could not be quantified mid-stay and thus, the hotel could not be liable for payment of expenditure tax until the bill was raised and settled by the guest.

3. Timing of Incurrence of Chargeable Expenditure:
The Court examined the timing of when chargeable expenditure is incurred under Section 5 of the Act. It was debated whether expenditure is incurred on a day-to-day basis during the guest's stay (Revenue's view) or upon conclusion of the stay at check-out (Assessee's view). The Court acknowledged that the normal practice in hotels is to quantify composite charges (accommodation, food, drink, other services) only at the end of the guest's stay. Thus, the Court found no support for the Revenue's submission that chargeable expenditure is incurred daily. Instead, it held that chargeable expenditure is incurred when the composite bill is raised at check-out, crystallizing the tax liability.

Additional Legal Precedents and Interpretations:
The Court referenced a Division Bench judgment from the Himachal Pradesh High Court in Himachal Pradesh Tourism Development Corporation vs. Union of India, which supported the view that chargeable expenditure includes only expenses incurred by guests during their stay. The Court also cited the Supreme Court's interpretation of "expenditure" in Indian Molasses Company Private Limited vs Commissioner of Income Tax, emphasizing that expenditure is something "paid out or away" and irretrievable.

Conclusion:
The Court held that chargeable expenditure is incurred only upon raising a composite bill at the end of the guest's stay, not on a day-to-day basis. The substantial question of law was answered in favor of the Assessee, and the Department's appeal was dismissed with no order as to costs.