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TMI Blog2011 (10) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... ional Tribunal in similar cases noted above. Under these circumstances, respectfully following the decisions of the coordinate Benches of the Tribunal in similar maters, we hold that no addition is called for towards unexplained investment in the construction of the building for the assessment years 2000-01, 2002-03, 2003-04, 2004-05 and 2005- 06. Disallowance of interest - Held that:- Perusing the factual matrix of the matter, we are of the pinion that the CIT(A) has rightly allowed as Revenue expenditure, the amount of interest, which related to the period after commencement of business from the Mall during the previous year. Hence, grounds of the Revenue on this issue are rejected. Entitled to relief under S.80IB - Held that:- Income from PAS system can be said to have been derived from the hotel business of the assessee for the purpose of allowing deduction under S.80IB. Hence, order of the CIT(A) is confirmed on this aspect - scrap sales relating to sale of empty liquor bottles, empty cartons, we appreciate that large value of such scrap has to be disposed of, periodically by the hotel and hence these receipts are also directly linked with the business of the assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, and therefore, it is not open to the assessee to adopt hybrid method of accounting, i.e. to account for receipts from lodge alone on cash basis. We accordingly uphold the order of the CIT(A) and reject the grounds of the assessee on this aspect. Interest attributable to advances made to sister concerns without interest - Held that:- We set aside this issue to the file of the assessing officer insofar as it related to investment in share application money of ₹ 4 crores, we delete the disallowance relatable to balance amount of interest free advances of ₹ 4.37 crores. - ITA No.778/Hyd/2009, ITA No.1147/Hyd/2009, ITA No.1221/Hyd/2007, ITA No.698/Hyd/2008, ITA No.1705/Hyd/2008, ITA No.600/Hyd/2009, ITA No.1190/Hyd/2007, ITA No.1607/Hyd/2008 - - - Dated:- 31-10-2011 - SMT. ASHA VIJAYARAGHAVAN AND SHRI AKBER BASHA, JJ. For the Appellant : Shri T.Diwakar Prasasd For the Respondent : Shr C. P. Ramaswamy ORDER Per Bench These eight appeals are directed against the orders of the CIT(A) Hyderabad. Assessment years involved are 2000-01 and from 2002-03 to 2005-06. As these appeals involve common issues, they are being disposed of by this cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lid, and accordingly rejected the ground raised by the assessee on that count. With respect to the addition made by the assessing officer, towards unexplained investment, the assessee submitted before the CIT(A) that the assessing officer should have accepted the order of the CIT(A) for the assessment year 2003-04, wherein a categorical finding has been recorded based on total appreciation of the facts of the case that the cost of construction shown by the assessee in its books of account, is correct and no addition is called for. 5. The learned authorized representative submitted that during the course of assessment proceedings for assessment year 2003-04, the assessing officer had referred the case of the assessee to the Departmental Valuer to determine the cost of construction of the said property, namely, MPM Mall. The DVO determined the cost of construction at ₹ 9,76,28,313, including the cost of furniture, fixtures and other items. Investment was spread over from the assessment year 1996-97 to 2004-05 and the assessing officer worked out the cost pertaining to the year under consideration based on the said report of the at ₹ 61,99,398. For the financial year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the said property, MPM Mall for the assessment year 2000-01 as well. 8. Aggrieved, Department is in appeal before us. 9. Department has raised the following grounds in this appeal-. 1. The learned CIT(A) erred in deleting the addition of Rs.,939,992/- made towards unexplained investment u/s. 69A in respect of construction of M.P.M.Mall. 2. The learned CIT(A) ought to have recognized the factual position in computing the correct profits arrived at by the assessing officer in the assessment order, instead of only relying on the assessee s contention that the method of accounting followed by the assessee was accepted by the department for earlier years. 10. The learned Departmental Representative pointed out the difference in rates applied for constructions at Delhi and other metropolitan cities. Secondly, he submitted that there is a clear difference in the cost of construction as per the books of the assessee and as per the affidavit filed by the Managing Director of the assessee company before the Debt Recovery Tribunal. It was also submitted that in the valuation of the registered valuer, which arrived at the cost of construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully following the decisions of the coordinate Benches of the Tribunal in similar maters, we hold that no addition is called for towards unexplained investment in the construction of the building for the assessment years 2000-01, 2002-03, 2003-04, 2004-05 and 2005- 06. 13. In the light of the above discussion, the order of the CIT(A) in deleting the addition of ₹ 9,39,992 made by the assessing officer on account of unexplained investment in construction is confirmed and the grounds of the Revenue in this appeal are rejected. Assessee s Appeal: ITA No.600/Hyd/2009 : Assessment year 2000-01 14. The only grievance of the assessee in the grounds of this appeal is against the action of the CIT(A) in sustaining the reopening of the assessment under S.147 of the Act. In view of our decision on the Revenue s appeal, being ITA No.7789/Hyd/2009, hereinabove, whereby, we have upheld the order of the cita in deleting the addition made by the assessing officer on account of unexplained investment, we are not inclined to go into the issue relating to the legality and validity of the reopening of the assessment under S.147 of the Act, which has become redundant. Being redu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khs for its project at Abids. The assessing officer held that the amount of interest of ₹ 2,25,002 has been paid on loan taken for new project, i.e. development of commercial complex, which cannot be treated as expansion of existing hotel business. Therefore, the assessing officer held that this is a capital expenditure and not allowable as deduction under S.36(1)(iii). The assessing officer placed reliance on the decision of the Calcutta Bench of the Tribunal in the case of JCT Limited (65 ITD 169). 21 Aggrieved, assessee filed appeal before the CIT(A). It was submitted before the CIT(A) that the loan was taken from APSFC for construction of the mall and the interest payable on this loan was ₹ 4,73,250. It was stated that construction of mall is an integral part of the activity of assessee s business and the expenditure incurred in such construction was laid out for the expansion of the assessee s existing business. Therefore, the interest on borrowings in so far as the same pertained to the period after commencement of business activity pertained to revenue field. It was also submitted that the assessee started generating income during the year, as evident from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of interest of ₹ 2,25,002 claimed by the assessee pertained to the period after commencement of business of the Mall during the previous year, and the ratio of the decision of JCT Ltd. (supra) is in fact, in favour of the assessee and hence, the claim of the assessee is allowable as revenue expenditure. 23. The learned Departmental Representative relied on the order of the assessing officer. The learned counsel for the assessee, on the other hand, placed strong reliance on the order of the CIT(A). 24. We heard both the parties. On perusal of the account copies of the assessee, which have been filed before us, we find that the interest paid to APSFC during the financial year 2002-03 is ₹ 4,73,250 out of which ₹ 1,47,543 has been capitalized in the accounts and the balance is treated as revenue expenditure. With respect to interest on LIC Housing loan for the financial year 2002-03 at ₹ 4,34,809, it was pointed out by the learned counsel that the loan was taken to complete the Big Bazar project and other facilities in MAM Mall, which started generating rental income and had been offered for taxation during the year under consideration. Hence, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from letting out of a portion of the bu8ildign cannot be considered as having been derived from the hospitality business carried on by the appellant. Therefore, these receipts cannot be considered as part of the profits of the business of the appellant and hence, the same is not eligible for deduction u/s. 80IB. Similarly, I find that the receipts from sponsorship and foreign currency commission have no direct nexus with the business carried on by the appellant. Therefore, the income from these sources cannot be considered for deduction u/s. 80IB. Lastly, the interest income and subsidy, which have been received by the appellant form the Banks and TFCI respectively, i.e. from external sources, cannot be considered as part of the profit derived by the appellant from the undertaking. Therefore, income from these two sources are not to be considered for deduction u/s. 80IB. The Assessing Officer is directed to compute the deduction u/s 80IB of the Act accordingly. 28. Aggrieved, both the parties have filed appeals before us on this issue. 29. The learned departmental Representative, relying on the order of the assessing officer submitted that the CIT(A) was not correct in tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be provided Without this facility, hotel business cannot be successfully conducted. Similarly with respect to miscellaneous from sale of various items like shaving kits, toilet kits, provision of secretarial assistance, these are all amenities having a direct nexus with the running of the hotel intertwined with the business of hospitality and making the guests comfortable and taken care of and therefore, have direct nexus with the which is derived from such undertaking and as such, such miscellaneous income is eligible for relief under S.80IB. Hence, order of the CIT(A) is confirmed on this aspect. 35. Last grievance of the Revenue in its appeal is with regard to addition of ₹ 65,14,277 made by the assessing officer towards unexplained investment in the cost of construction, which has been deleted by the CIT(A). We have considered this very issue in the context of the corresponding grounds of the Revenue for the assessment year 2000-2001, while dealing with its appeal for that year, being ITA No.778/Hyd/2009. For the detailed reasons given in that context in para 12 hereinabove, we uphold the action of the CIT(A) in deleting the addition of ₹ 65,14,277 made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Fosters. While purchasing liquor directly from APBCL, since products of such companies are promoted by various agencies like, Shri Venkateswara Agencies, sponsorship receipts are received from these parties. Though there seems to be some business connection, we do not see any direct nexus between the business of the assessee and the sponsorship receipts received by the assessee, in view of the ratio laid down by the Apex Court in the case of Liberty India V/s. CIT, noted above. 40. Similar is the claim of the assessee for relief under S.80IB with respect to foreign currency commission. It was explained that the guests settle their bills by tendering foreign currency, which is exchanged with recognized money changers and in the process, the assessee gets small amount of commission from these money changers. Hence the foreign exchange management of the guests is part of the activity of the assessee. We do not find merit in the contentions of the assessee on this aspect in view of the ratio laid down by the Apex Court in the case of Liberty India V/s. CIT, noted above. We accordingly confirm the order of the CIT(A) in upholding the claim of the assessee with regard to relief unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the undertaking- an expenditure which is not connected with the operations of the undertaking in the first degree, cannot be deducted from the profits of the undertaking while computing the relief u/s 80IA/ 80IB. Section 80IA/80IB does not talk of exclusion of income or expenditure. It requires computation of `profits derived from the undertaking . In doing so only receipts and expenditures which are connected in the first degree with the undertaking has to be taken into account. The AO will examine the claim of the Assessee regarding various expenditures, which they want to `net against the receipts excluded and determine whether such expenditure falls within the ambit of `first degree association with the undertaking and its profits. If the expenditure is inextricably connected and necessary for earning the income for the undertaking then the same should be deducted in computing the profits of the eligible undertaking. For this purpose the same yardstick as laid down by the Apex court regarding includibility of the income of the undertaking should also be applied for includibility of expenditure. This issue is set aside to the files of the assessing officer for de novo c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal for assessment year 2004- 05 is partly allowed for statistical purposes. CROSS-APPEALS FOR ASSESSMENT YEAR 2005-06 Revenue s Appeal: ITA No.1705/Hyd/2008 49. The first effective grievance of the Revenue in this appeal relates to the addition of ₹ 23,59,820 made under S.69A of the Act, on account of unexplained investment in the cost of construction. We have considered this very issue in the context of the corresponding grounds of the Revenue for the assessment year 2000-2001, while dealing with its appeal for that year, being ITA No.778/Hyd/2009. For the detailed reasons given in that context in para 12 hereinabove, we uphold the action of the CIT(A) in deleting the addition of ₹ 23,59,820 made by the assessing officer on account of unexplained investment of the assessee in the cost of construction, for the assessment year 2005-06 as well. 50. The next effective grievance of the Revenue in this appeal relates to addition made of ₹ 65,56,500 on account of profits attributable to the advances received by the assessee. The assessing officer assessed profits earned advances amounting to Rs. observing as follows T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition to know the revenue with reasonable certainty on the happening of either of the incidents as stated above. This method was consistently followed for the past several years and accepted by the revenue. The revenue which was recognized and taken to the Profit and Loss Account was as under- Assessment Year Amount in Rs. 2002-03 1,69,64,748 2003-04 2,25,47,000 2004-05 1,44,17,750* 2005-06 13,50,000* *Relates to revenue recognised for MPM Mall, Abids It was submitted that the Assessing Officer did not accept the method of accounting followed by the assessee. He was of the view that the assessee should work out the profit either on the basis of work-in-progress method or project completion method. He was further of the view that by adopting the method of recognizing revenue on the basis of registration or receipt of full advance, the assessee was postponing the profits to subsequent years. Accordingly, the assessing officer discarded the method adopted by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts shown in the past, in the current year and in the assessment year 2006-07. It was further submitted that it is a well accepted principle that when an assessee follows a method of accounting consistently maintained by him, it is not open for the assessing officer to disturb the same and more so, when the same has been accepted by the department. Reliance in this regard was placed on the decision of Delhi High Court in CIT V/s. Consulting Engineering Services (India) Ltd. (250 ITR 849). Further in this context, the learned Authorised Representative referred to the decision of the Andhra Pradesh High Court in CIT V/s. Margadarshi Chit Fund Pvt. Ltd. (155 ITR 442), wherein it was laid down as follows- It must be said at the outset that the choice to account for income on an acceptable basis is that of the assessee, and not of the Department. .The ITO s power to substitute a system of accounting for the one followed by the assessee, flows form the provisions of s.145 of the I.T.Act. It is, therefore, imperative that before rejecting the system of accounting followed by the assessee, the ITO must refer to the inherent defect in the system and record a clear finding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve further submitted that it has been mentioned that the assessee follow completion of contract method for recognizing revenue. At the same time, it has been stated that revenue is recognized on handing over possession on completion or registration of the property on completion whichever is earlier. The report of the auditor is not clear in regard to recognition of revenue. It was further stated that this point was raised by the assessing officer in the course of hearing. In fact, a show cause notice was issued by the assessing officer during the course of hearing containing inter-alia the issue of recognition of revenue. It was stated that this point was clarified in para 3 of the letter submitted to the assessing officer, in the following manner- The company is recognizing its income either on receipt of full consideration received from the purchaser or on registration of the property whichever is earlier. As on date the above projects are not yet completed. However we are admitting the income generating form these projects as mentioned supra. In our returns and this being accepted method of accounting, the company is following the method. Furnishing a copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court in the case of United Commercial Bank V/s. CIT(249 ITR 355), wherein the following principles have been laid down. (1) A method of accounting adopted by the tax payer consistently land regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. (2) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognized limits. (3) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. 59. Having considered the facts of the case, we find no infirmity in the order sf the CIT(A) in holding that the addition of ₹ 66,56,500 made by the assessing officer towards accrued profit on advances, after rejecting the method consistently followed by the assessee is not sustainable in law. We also find that the amounts received by the assessee as advances cannot be cancelled and the advances will then have to be returned. There is no debt created in favour of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, the CIT(A) at para 11 of his order, observing that the learned AR has not seriously objected to the above addition and since the assessee is following mercantile system of accounting in respect of hotel business, considered this amount towards accrued lodge rent for the previous year under consideration and has to be considered for current accounting year. Accordingly, he confirmed the addition made by the assessing officer. 63. We heard the parties. We find no infirmity in the order of the CIT(A). We also find that under S.145(1) from assessment year 1997-98 onwards, income chargeable under the head profits and gains of business or profession has to be considered either in accordance with cash or mercantile system of accounting regularly employed by the assessee, and therefore, it is not open to the assessee to adopt hybrid method of accounting, i.e. to account for receipts from lodge alone on cash basis. We accordingly uphold the order of the CIT(A) and reject the grounds of the assessee on this aspect. 64. The next issue is with respect to addition of ₹ 59,51,375, made on account of interest attributable to advances made to sister concerns without interest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Ho ble Punjab and Haryana High Court in CIT V/s. Abhishek Industries Ltd. (286 ITR 1). Further following the ratio of the Tribunal Special Bench (Delhi) decision in the case of Aquarius Travels P. Ltd V/s. ITO (301 ITR (AT) 111) and of Mumbai Bench of the Tribunal in Kankhal Investments and Trading Co. V/s. ACIT(301 ITR (AT) 359), the CIT(A) held that since indirectly borrowed funds have been utilized for investing in shares, in view of the provisions of S.14A of the Act, interest attributable to such investments/deposits has to be disallowed. 67. Aggrieved, assessee is in appeal before us. 68. Learned counsel for the assessee Shri C.P.Ramaswamy contended as follows- (a) It can be seen from the details of interest paid that the purpose for which interest was paid by the assessee during the previous year on various accounts was for the purposes of business and therefore, the same should have been allowed under section 36(1)(iii) of the Act. The liabilities were incurred in the past years by the assessee for the purposes of business. (b) The assessing officer has failed to prove the nexus between the borrowed funds and the interest free advances (c) Total sales a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies. The very fact that the assessee was interested in investing money in the new venture show that there was an element of business prudence and commercial expediency as both the companies were group companies and the new company was in the process of setting up a new five star hotel and the assessee had interest in being part of a hotel chain for its future business. There was an understanding that the assessee would provide technical know and details in working of the new hotel. 71. The learned counsel for the assessee further submitted that the assessing officer has observed that any interest paid on share application money is disallowable under S.14A as dividends are exempt from tax. The learned counsel for the assessee, in the context of this observation, submitted that the assessee has not earned any dividend, nor claimed any deduction of interest from the exempted income and hence, the assessing officer has disallowed interest on a wrong and hypothetical basis. The learned counsel also stated that the assessing officer s observation about the amount of interest being capitalized in the hands of the assessee , as it follows project completion method is not relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment in the shares and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section1 4A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not permissible. The same view has been taken by the Tribunal in the case of ACIT V/s. Sun Investment (8 ITR (Trib) 33). Relying on the ratio laid down in the above cases, this issue is set aside to the file of the assessing officer, to verify whether any exempted income has been earned by the assessee during the previous year relevant to assessment year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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