1988 (4) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of hotel receipt tax as income.
2. Deductibility of hotel receipt tax.
3. Disallowance of legal expenses.

Detailed Analysis:

1. Inclusion of Hotel Receipt Tax as Income:
The primary issue was whether the hotel receipt tax collected by the assessee should be included as income. The Hotel Receipt Tax Act, 1980, mandated a tax on gross receipts from room rent, which was 15% or 10% if received in foreign exchange. The Supreme Court had stayed the operation of this Act pending a final decision. The assessee argued that the tax was not a trading receipt and thus not includible in its total income. The assessee also contended that if the tax was considered a trading receipt, an equal amount should be allowed as a deduction on an accrual basis, given the mercantile system of accounting.

The Tribunal referred to the Supreme Court judgment in Chowringhee Sales Bureau Pvt. Ltd. vs. CIT, which held that such receipts are trading receipts. The Tribunal agreed with this precedent, stating, "Hotel tax receipts are trading receipts in the ratio of judgment of the Supreme Court in the case of Chowringhee Sales Bureau Pvt. Ltd." Thus, the hotel receipt tax was includible in the total income of the assessee.

2. Deductibility of Hotel Receipt Tax:
The assessee also sought to deduct the hotel receipt tax from its income, citing the Supreme Court's decision in Kedar Nath Jute Mfg. Co. Ltd. vs. CIT, which allowed the deduction of sales tax liabilities under the mercantile system of accounting. However, the Tribunal noted that the Supreme Court had stayed the operation of the Hotel Receipt Tax Act, meaning no tax was payable during the stay period. Therefore, the Tribunal held, "Even on mercantile system of accounting, assessee is not entitled to any deduction as the liability has not become due." The Tribunal concluded that the CIT(A) was correct in not allowing the deduction of the hotel receipts tax while computing the income of the assessee.

3. Disallowance of Legal Expenses:
For the assessment year 1982-83, the assessee claimed legal expenses incurred for defending its employees and the company against criminal charges related to the sale of liquor and food adulteration. The Assessing Officer disallowed these expenses, considering them as related to the infringement of law. The CIT(A) upheld this disallowance, referencing several judgments, including CIT vs. Chaman Lal & Bros., which held that legal expenses for defending prosecution against owners are not deductible.

The Tribunal agreed with the CIT(A), stating, "Company being juridical person cannot be jailed. It can only be fined in the ratio of judgment of the Delhi High Court in the case of CIT vs. Chamanlal & Bros. (1970) 77 ITR 383 (Del)." The Tribunal emphasized that the legal expenses incurred for defending the company, a juridical person, were not deductible, and the fact that the Department had accepted a similar deduction in an earlier year did not warrant a different decision for the current year.

Conclusion:
Both appeals by the assessee were dismissed. The Tribunal held that the hotel receipt tax was includible as income and not deductible, and the legal expenses incurred for defending the company and its employees were not allowable as deductions.