2021 (12) TMI 1175 - AT - Income Tax

Claim of deduction u/s. 35AD by stating that the appellant did not build the hotel building - HELD THAT - Provisions of section 35AD of the Act does not specify that the assessee has to construct the entire building by itself or own the building and land. The provisions only specify that the specified business should be in the nature of building and operating a new hotel of 2 star or above category as classified by the Central Government - there is no doubt that the entire investment made by the assessee was for constructing a portion of the building and for operating a new hotel of the category specified under the Act - from the provisions of section 35AD it is obvious that these provisions are brought into the Act in order to promote certain specified business in the country. These provisions grant deduction to the assessee in respect of the entire capital expenditure incurred wholly and exclusively for the purpose of the specified business which has commenced during the previous year. Even otherwise, by virtue of section 32 of the Act, the assessee is entitled for deduction towards such expenditures u/s.32 of the Act by way of depreciation over a period of time. There is no loss to the revenue when the whole issue is viewed in its entirety, because when the assessee derives the benefit of Section 35AD of the Act it saves payment of tax in the initial years but in the subsequent years ends up paying higher tax as it is deprived of the benefit of depreciation u/s. 32 of the Act. Provisions of section 35AD of the Act, only helps the assessee to maintain higher cash liquidity during the initial years of its business. Once deduction u/s.35AD of the Act is claimed then by virtue of section 35AD(4) of the Act, no other deduction in respect of these expenditure shall be allowed as deduction - the beneficial provisions of the Act and our observations mentioned herein above in the instant case before us the assessee is entitled for the benefit of deduction u/s. 35AD towards the expenditure incurred by it for establishing its hotel business of specified category as provided under the Act - we hereby direct the Ld. AO to grant deduction to the assessee under the provisions of section 35AD - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Denial of deduction under Section 35AD of the Income Tax Act.
2. Interpretation of "building" under Section 35AD.
3. Eligibility of expenditure incurred for deduction under Section 35AD.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 35AD of the Income Tax Act:
The primary issue in the appeal is whether the assessee is entitled to a deduction under Section 35AD of the Income Tax Act for expenditures incurred in constructing and operating a new Five Star Hotel. The Assessing Officer (AO) disallowed the claim, stating that the assessee did not build the hotel building but merely operated it on a leased property. The AO's decision was based on the premise that Section 35AD aims to promote fresh investments in specified businesses, and the assessee had not made any investment in the land and building.

2. Interpretation of "Building" under Section 35AD:
The term "building" is not explicitly defined in the Income Tax Act, leading to differing interpretations. The AO and CIT (A) interpreted "building" narrowly, implying that the assessee must construct the entire structure to qualify for the deduction. The Tribunal, however, referred to dictionary definitions and judicial precedents, concluding that "building" encompasses not only civil construction but also the establishment, fabrication, erection, and assembly of structures. The Tribunal emphasized a liberal interpretation of beneficial provisions to promote economic growth and development.

3. Eligibility of Expenditure Incurred for Deduction under Section 35AD:
The Tribunal examined the lease deed and found that the assessee had undertaken significant construction activities, including interior civil works, plumbing, electrical works, and installation of various equipment. These activities were deemed substantial enough to qualify as "building" the hotel. The Tribunal noted that Section 35AD does not require the assessee to construct the entire building or own the land and building. The provision only mandates that the specified business should involve building and operating a new hotel of a specified category. The Tribunal concluded that the assessee's expenditures met these criteria and directed the AO to grant the deduction.

Conclusion:
The Tribunal allowed the appeal, holding that the assessee is entitled to a deduction under Section 35AD for the expenditure incurred in establishing and operating a new Five Star Hotel. The decision emphasized a liberal interpretation of beneficial provisions to advance the legislative intent of promoting specified businesses. The Tribunal directed the AO to grant the deduction of ?101,98,52,291 under Section 35AD of the Act.