2022 (2) TMI 588 - AT - Income Tax

Deduction u/s.35 AD(5)(aa) - whole of capital expenditure incurred for purpose of development of hotel claimed - Claim denied on delay in getting approval from authority - HELD THAT - As explanation of the assessee before the Assessing Officer as well as learned CIT(A) that although, the competent authority has accorded approval from subsequent financial year, but the assessee has obtained in principle approval from the competent authority on 30.11.2007 and same was valid for a period of five years and further, the assessee has filed application for approval on 12th May, 2011. The assessee further contended that there was a delay at the Department of Tourism, for processing application filed by the assessee and the assessee had to submit fresh applications for several times and process took considerable time at the Department of Tourism. Therefore, in the process, they have visited our facility only on 19.03.2014 and has granted approval w.e.f 21.03.2014 for the period from 21.03.2014 to 20.03.2019 Therefore, when the assessee has filed application much before date of commencement of business and has also incurred expenditure for specified business, merely for reason for delay in getting approval from authority, expenditure incurred for specified business cannot be disallowed. We are of the considered view that for ascertaining correct facts with regard to claim of the assessee that it was mistake of competent authority in granting approval for relevant assessment year, even though the assessee has filed application in time needs to be examined by the Assessing Officer in light of evidences filed by the assessee. Hence, we set aside order of the learned CIT(A) and restore the issue to file of the Assessing Officer and direct the A.O. to examine claim of the assessee in light of arguments of the assessee that there was no fault from their side in getting approval from competent authority. In case, the Assessing Officer finds that there is a delay from competent authority side in granting approval, then the Assessing Officer is directed to allow claim of deduction u/s. 35AD of the Act, in respect of expenditure incurred for specified business. Appeal filed by the assessee is treated as allowed for statistical purposes

Summary

Issues Involved:
1. Sustaining the disallowance of ?5,30,65,42,205/- claimed as a deduction under section 35AD(5)(aa) of the Income Tax Act.
2. Compliance with conditions prescribed in section 35AD(5)(aa) of the Act.
3. Delay in issuing star classification by the Ministry of Tourism.
4. Acceptance of income generated from the running of the eligible hotel.
5. Violation of principles of natural justice due to lack of proper opportunity before passing the impugned order.

Detailed Analysis:

1. Sustaining the disallowance of ?5,30,65,42,205/- claimed as a deduction under section 35AD(5)(aa) of the Income Tax Act:
The assessee claimed a deduction for the entire capital expenditure incurred for the development of a hotel under section 35AD(5)(aa). The Assessing Officer (AO) disallowed the deduction on the grounds that the hotel did not receive the required star classification from the competent authority during the relevant assessment year (2013-14). The CIT(A) upheld this disallowance, stating that the assessee did not meet the conditions laid out in section 35AD, specifically the requirement for star classification within the relevant assessment year.

2. Compliance with conditions prescribed in section 35AD(5)(aa) of the Act:
The CIT(A) noted that to claim the deduction under section 35AD, the specified business must be carried out during the relevant previous year and must be approved by the competent authority. The assessee argued that the star classification was obtained in the financial year 2013-14, although the application was submitted earlier. The CIT(A) rejected this argument, emphasizing that strict compliance with the provisions is necessary, and the star classification must be obtained within the relevant assessment year.

3. Delay in issuing star classification by the Ministry of Tourism:
The assessee contended that the delay in obtaining the star classification was due to the Ministry of Tourism's delay in processing the application. The CIT(A) dismissed this argument, stating that the law requires the star classification to be obtained within the relevant assessment year. The Tribunal, however, acknowledged the possibility of a delay from the competent authority and directed the AO to verify the facts. If the delay was indeed on the part of the competent authority, the deduction should not be denied.

4. Acceptance of income generated from the running of the eligible hotel:
The assessee argued that since the income generated from the hotel was accepted, the disallowance of the deduction based on technical grounds was unjust. The CIT(A) did not address this argument directly but focused on the requirement for star classification within the relevant assessment year. The Tribunal recognized that the hotel was operational and generating income, but the key issue was the timing of the star classification approval.

5. Violation of principles of natural justice due to lack of proper opportunity before passing the impugned order:
The assessee claimed that the impugned order was passed without providing a proper opportunity to present their case, violating the principles of natural justice. The Tribunal did not explicitly address this issue but focused on the substantive issue of the timing of the star classification approval and the compliance with section 35AD.

Conclusion:
The Tribunal concluded that the assessee's claim for deduction under section 35AD should be examined in light of the delay in obtaining the star classification. The AO was directed to verify whether the delay was due to the competent authority and, if so, to allow the deduction. The Tribunal set aside the CIT(A)'s order and restored the issue to the AO for further examination, emphasizing that the assessee should not be penalized for the delay caused by the competent authority. The appeal was treated as allowed for statistical purposes.