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TMI Blog2005 (12) TMI 232X X X X Extracts X X X X X X X X Extracts X X X X ..... 59,103 made by the AO on account of preemptive utilization of reserve as chargeable to tax under s. 80HHD(5) of the IT Act, 1961." In ground No.1 the grievance of Revenue is treatment by learned CIT(A) regarding bar and catering sales, eligible for deduction under s. 80HHD of the Act. The AO in this regard, vide para B of his order has observed as under: "In P L a/c the assessee has shown receipts on account of bar Rs. 40,34,893, catering Rs. 1,33,64,161 and towards sales of foreign liquor Rs. 98,389. Also in the Annex-A to the report under s. 80HHD, sales consideration for bar and catering are on estimation basis Rs. 3,48,950 (10 per cent of Rs. 34,89,496 which is the total realization against foreign currency exchanged with the tourists of foreign exchange). Since bar and catering items are physical commodities and are consumed by the person who purchases them, i.e. these items are sold and then consumed by the purchaser insofar there is an income of these items whereas service does not have a physical form and moreover it is not consumed. Actually the term service refers to operation of such an activity whereby certain facilities are provided to the customers for sake of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term service provided to foreign tourists and will be entitled to deduction under this section. However, if such health club, beauty parlour, etc, also sells any goods or merchandise to the foreign tourist, such sale cannot be included in the term services provided to the foreign tourist and therefore, shall not be entitled to the benefit of deduction under the section.' As it is evident from the section itself deduction is to be made available to person engaged in business of a hotel or of a tour operator or of a travel agent. It clearly implies that the intention of the legislature is that deduction should be available only by virtue of such activity or service by which the foreign tourists are brought here. Specially in the case of tour operators and travel agents they are merely the channels through whom the foreign tourists are brought to India and does not anywhere include the deduction to be claimed in respect of food and liquor consumed by the tourists. This shall be clarified by citing a illustration. For example, if a foreign tourist comes to India and stays at any five star hotel but dines and takes lunch at some other restaurant, then that restaurant cannot claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to foreign tourists/Total receipts of the business ------------------------------------------------ (a) Profit of the business Rs. 1,49,05,885 computed under the head 'Profits and gains of business or profession' (b) Net foreign exchange Rs. 3,73,78,523 receipt from services provided to foreign tourists as claimed by the assessee Less: Receipts against various items sold (as discussed in para B) Bar Rs. 40,34,893 (as per P L a/c) catering Rs. 1,33,64,161 (as per P L a/c) Sale of liquor Rs. 98,889 (as per P L a/c) Rs. 1,74,97,943 93.56% of Rs. 1,63,71,075.47 Rs. 1,74,97,943 (as discussed below in note 1) Less: (On account of Rs. 3,48,950.00 bar and Catering bills paid in cash) Rs. 1,67,20,025.47 ------------------ Rs. 2,06,58,497.53 ------------------------------------------------------ Note 1 [As assessee himself admitted that approximately 93.56 per cent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same are in the nature of services provided by a hotel. The meaning of sale in a shop as applied by the AO if assigned to these services then in that case the same will not fall as chargeable expenditure under Expenditure-tax Act because this Act does not bring in its net sales effected in a shop. Further, by insertion of cl. (va) to s. 28 the meaning of services is made absolutely clear by incorporating therein the words lodging and boarding. Reference to the notification issued by Director General (Tourism), Government of India, a competent authority for approval of the hotel under the category of heritage hotel to which the hotel of the assessee belongs and the ratios of the decisions of the apex Court and the Rajasthan High Court also make it clear that such receipts are against the services provided in a hotel and in no manner can be considered or be construed as a sale in a shop. On consideration of the material and the evidence produced by the learned counsel and the ratios of decisions relied upon read together with the statutory provisions of s. 80HHD and cl. (va) of s. 28, I am of the view that the receipts of Rs. 1,67,20,025 of realization against the services provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered and not by providing the room alone it could be considered as a tool of the trade. The hotel industry is a service oriented industry and the better the service the higher the charges. The element of service is the dominant object and not providing the room alone. The room in a city like Jaipur differs from hotel to hotel. The ordinary rooms may be available at Rs. 100 per day whereas the suite in a five star hotel may be as costly as Rs. 10,000 per day. If the building of a five star hotel is a plant there is no reason why the building of an ordinary hotel should be treated differently only on account of the charges for extra facilities. The difference of charges is because of extra service facilities, etc." 5. The learned Authorised Representative has also relied upon the judgments of the apex Court in the case of State of Punjab vs. Associated Hotels of India Ltd. 1972 CTR (SC) 1 : (1972) 1 SCC 472 where facts of the case are that the respondent-company carried on business as hoteliers. As part of its business as hoteliers, the company received guests to whom, besides furnishing, lodging it also served several other amenities, such as public and private rooms, bath with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Act w.e.f. 1st April, 2003 as "'service' means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging." 8. The services provided by a hotel are chargeable to Expenditure-tax Act which is also a Central Act and the authority for collection of such tax is with the same AO who holds jurisdiction for income-tax case over the assessee. The definition of chargeable expenditure incurred in a hotel as per the said Act as given in s. 5 includes besides the charges for accommodation, the charges for food and/or drink by the hotel. Provisions of food and/or drink has been treated as a services provided by a hotel and is, therefore, chargeable for expenditure-tax. Had food or drink been a sale (as construed by the AO) then in that case the expenditure incurred on the same will not be chargeable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitute a sale, the Revenue has to establish that there was a sale distinct from contract, of work or service, of the property so passing to the other party. For example the thread stitched into coat which is under repair becomes part of the coat, but in a contract for repairing the coat the parties surely did not enter into an agreement of sale of that thread. Also as held in the case of Andhra Pradesh vs. Guntur Tobaccos Limited (1965) 2 SCR 167, the transaction was for re-drying tobacco entrusted to the respondent-company by its customers. The process involved the keeping of the moisture content of tobacco leaf at particular level and for that purpose the leaf had to be packed in bales, in waterproof packing material, as it emerged from the re-conditioning plant. The tobacco was then returned to the customer packed in costly packing material. In the company's charges for re-drying there was no separate charge for the value of such packing material. It was held that the re-drying process could not be completed without the use of the packing material, that packing formed an integral part of the process, and that although the re-dried tobacco was returned together with the packin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied. The transaction is essentially one of carrying the passenger to his destination and if in performance of the contract of carriage, something is supplied to him, such supply is only incidental to that service, not changing either the pattern or the nature of the contract. Similarly, when clothes are given for washing to a laundry, there is a transaction which essentially involves work or service and if the laundry man stitches a button to a garment which has fallen off, there is no sale of the button or the thread. A number of such cases involving incidental uses of materials can be cited, none of which can be said to involve a sale as part of the main transaction. 16. As decided in the case of State of Punjab vs. Associated Hotels of India where the transaction in question was essentially one and indivisible, namely one of receiving a customer in the hotel to stay. Even if the transaction is to be disintegrated, there is no question of the supply of meals during such stay constituting a separate contract of sale, since no intention on the part of the parties to sell and purchase foodstuff supplied during meal times can be realistically spelt out. No doubt, the customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n realization against the services provided to foreign tourists by the assessee for catering and bar are eligible for deduction under s. 80HHD and AO has wrongly treated them as sale in the shop. Thus, this ground of Revenue is dismissed. 19. In ground No.2, the Revenue is aggrieved against the relief of Rs. 16,27,046 out of travelling expenses disallowed for Rs. 17,72,256. 20. The AO disallowed Rs. 17,72,256 out of total expenses claimed under tour and traveling amounting to Rs. 20,03,369.77 for the reason that the business of the assessee is dependent upon the travel agents and nexus between the traveling expenses and a business is very much remote, illusory and not direct The journeys were primarily undertaken for the sake of pleasure and entertainment and assessee has failed to produce the details of expenses incurred and benefit derived to the business of out of said expenses. The learned CIT(A) has deleted the addition of Rs. 16,27,046 thus sustaining the additions on this account amounting to Rs. 1,45,210 as per reasons mentioned in his order. 21. We have heard the parties. The learned Departmental Representative relied upon the order of the AO and on the other hand, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) has rightly disallowed 10 per cent out of expenditure incurred by the partners amounting to Rs. 14,52,111 which comes at Rs. 1,45,210 and the rest of expenses has rightly been deleted by the learned CIT(A) including the expenses of travelling by staff amounting to Rs. 3,20,145. Therefore, we do not find any infirmity in the order of learned CIT(A) in deleting the additions of Rs. 16,27,046 out of total disallowance of Rs. 17,72,256 made by the AO, thus sustaining Rs. 1,45,210 on this account. Thus, this ground of the Revenue is also dismissed. 23. In ground No.3, the Revenue is aggrieved with the deletion of addition of Rs. 36,59,103 made by AO on account of pre-emptive utilization of reserve as chargeable to tax under s. 80HHD(5) of IT Act. The AO at p. 2 of his order has held as under: "The assessee is claiming deduction under s. 80HHD for running a hotel. Under the provisions of s. 80HHD the assessee had created an export promotion reserve account in which he credited the amount as per the requirement of s. 80HHD and utilized it as per provisions of s. 80HHD(5). On perusal of the records, it was noted that opening balance of the said reserves for the asst. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 83 : (1985) 156 ITR 497 (SC); 3. CIT vs. Kulu Valley Transport Co. (P) Ltd. (1970) 77 ITR 518 (SC). The assessee has also given clarification regarding the charging section. Sub-cl. (b) of sub-s. (5) of s. 80HHD which states that if the amount is not being utilized in the manner for the purpose as referred in sub-s. (4) then the amount not so utilized shall be subject to tax immediately after completion of five years from the year in which the reserve was created. The contention of the assessee has been examined thoroughly. The assessee has reiterated off and on about the liberal interpretation of the section and that, it does not fit in the ambit of chargeability section, i.e., cl. (b) of sub-s. (5) of 80HHD. Here, I would like to discuss the provisions of s. 80HHD at length. Sec. 80HHD of the IT Act, 1961, reads: 'Where an assessee, being an Indian company or a person (other than a company) resident in India is engaged in the business of a hotel or of tour operator, approved by the prescribed authority in this behalf or of a travel agent, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Distributors vs. CIT (AP). From the above facts it is clear that it was pre-emptive utilization of the reserve and amount was utilized from the reserve when the reserve in its literal and statutory sense did not exist at all. It was only presumption of the assessee that in due course of the business, profit would result and certain amount would be credited to the reserve so why not utilize it during the same year. The assessee cannot interpret the said law to apply beneficially to his case, on the basis of presumptions, surmises and conjectures which suits its case. Hence the assessee should not go beyond what is written in the IT Act. (2) This point is also clear from the plain reading of sub-s. (4) of 80HHD that it shall be utilized before the expiry of period of 5 years of next following the previous year i.e. it means that once the reserve account is credited in previous year 1999-2000 the said amount should have been utilized in previous year 2000-01 onwards up to previous year 2004-05 and not during the same year when the so-called reserve was claimed to be created. This is very much clarified in the plain reading of sub-s. (4) and cl. (b) of sub-s. (5) of s. 80HHD. So th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the remand report and have found that the contention raised by the learned counsel is having force that out of the reserve created under s. 80HHD if, any amount is to be put to tax then the same is governed by the provisions of s. 80HHD(5) and that section does not provide charging of the amount which was utilized even during the same year in which the amount was credited to the reserve account. The accounting entries of creation and utilization are only the transfer entries passed in the books of account on 31st March of which the first entry was of transfer of amount out of the profits to the reserve account and the subsequent entry was of transfer by debiting the reserve account to the extent utilized for the purposes as per s. 80HHD(4). Considering the submission made by learned Authorised Representative, I have found that the AO had made wrong interpretation of the provisions of s. 80HHD(4) and (5) which is further against the intention and the objects of that section when it has been admitted that the assessee had utilized the money for the purposes as referred in sub-s. (4) of s. 80HHD. The only dispute is as to the amount utilized during the same year as against within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrue from day to day or even from month to month. The concept of accrual of profits of a business involves their determination by the method of accounting at the end of accounting year or any shorter period determined by law. In the gross receipts of a business day after day or from transaction to transaction lies embedded the dormant profit or loss. On such dormant profit or loss, undoubtedly taxable profits, if any, of the business will be computed, but dormant profit cannot be equated to profits charged to tax. Therefore the profit/income becomes taxable on the footing of accrual only after the right of the taxpayer to the income accrues or arises i.e. the words "accrue" and "arise" are used to contradistinguish the word "receive". Income is said to be received when it reaches the assessee, when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. These views find support from the judgment of apex Court in the case of CIT vs. Ashok Bhai Chiman Bhai where the facts of the case are as under: "A, the manager of an HUF, held, on behalf of the family, a share of five annas in the Rupee in the profit and loss of a firm. Under the partnershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , between 31st March, 2001 to 31st March, 2005. The utilization by the assessee does not fall between the said period of 31st March, 2001 to 31st March, 2005 to the extent of Rs. 36,59,103. Therefore, the assessee will get the benefit under s. 80HHD(1)(b) r/w sub-s. (4) to s. 80HHD for an amount of reserve which is lying in the reserves account for the said purpose as at 31st March, 1999/1st April, 1999 amounting to Rs. 71,23,244 and not Rs. 1,07,82,347 as claimed by the assessee. 29. The counsel for the assessee has invited our attention to sub-s. (5) to s. 80HHD which reads as under: "(5). Where any amount credited to the reserve account under cl. (b) of sub-s. (1),- (a) has been utilized for any purpose other than those referred to in sub-s.(4), the amount so utilized; or (b) has not been utilized in the manner specified in sub-s. (4), the amount not so utilized, shall be deemed to be the profits,- (i) in a case referred to in cl. (a), in the year in which the amount was so utilized; or (ii) in a case referred to in cl. (b), in the year immediately following the period of five years specified in sub-s. (4), and shall be charged to tax accordingly." 30. The above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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