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TMI Blog2015 (7) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... us agreements in between the assessee and the other parties that the payments on the basis of sharing of revenue would not come under the purview of section 194 I of the Act. However, in respect of SRK Travels & Tours Pvt. Ltd., the ld. CIT(A) categorically stated that as per the agreement dated 23.06.2005, it was evident that there was no involvement of the said party in the management and day to day running of the business affairs of the hotel in that property. Therefore, the payment made by the assessee was in the nature of rent and the assessee was liable to deduct TDS u/s 194 I. The ld. CIT(A) held that as the assessee short deducted the TDS, the disallowance u/s 40(a)(ia) of the Act amounting to ₹ 21,60,000/- was justified. In the present case, the maximum amount payable to M/s SRK Travels & Tours Pvt. Ltd. was ₹ 18,00,000/-, therefore, the disallowance could have been made to that extent only. It is also noticed from the details of the licence fees paid as mentioned by the AO that the assessee paid a sum of ₹ 18,00,000/- to M/s SRK Travels & Tours Pvt. Ltd. during the financial year relevant to the assessment year under consideration. We, therefore, conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R Per N. K. Saini, AM: These cross appeals by the Department and the assessee are directed against the order dated 28.02.2013 of ld. CIT(A)XVI, Delhi. 2. In the Departmental appeal in ITA No. 3134/Del/2013 following grounds have been raised: 1. The Ld. CIT(A) has erred in law and on facts in reducing the disallowance from ₹ 1,24,49,495/- to ₹ 21,60,000/- made by the assessing officer u/s 40(a)(ia) of the Act; 1.1 The Ld. CIT(A) has erred in law and on facts in giving the relief to the assessee on the above issue without considering the detailed reasons given by the assessing officer in the assessment order; 1.2 The Ld. CIT(A) has erred in law and facts in ignoring the contents of CBDT s Circular No.715 dated 08.08.1995 wherein it has been laid that provisions of section 194I of the Act do not depend upon any specific nomenclature; 2. The Ld. CIT(A) has erred in law and on facts in reducing the Short Term Capital Gain to ₹ 44,64,266/- from ₹ 63,83,256/- without appreciating the fact that the assessee failed to furnish authenticated proof regarding apportionment of land and building; 2.1 The Ld. CIT(A) has erred in law and on fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B and 234C and 234D of the Act. The AO has failed to appreciate that the assessee could have never foreseen these additions being made against the assessee. 4. From the above grounds it would be clear that the grievance of the department vide Ground Nos. 1 to 1.2 and the assessee vide Ground Nos. 1 to 5 relates to the deletion/sustenance of the addition made by the AO u/s 40(a)(ia) of the Income Tax Act, 1961 (hereinafter referred to as the Act). 5. Facts of the case related to this issue in brief are that the assessee filed e-return on 24.09.2008 declaring an income of ₹ 4,28,30,390/-. Later on, the case was selected for scrutiny. The AO during the course of assessment proceedings noticed that the assessee had paid licence fees amounting to ₹ 2,87,49,591/- to various parties as per following details: AMOUNT TDS-DEPOSIT 1 Delhi Warehousing Pvt. Ltd. 13,701,000.00 3,104,648.00 2 Other 500.00 - 3 Ashok Jain 41, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehousing Pvt. Ltd. Neemrana Fort Place 1 3,701,000.00 3,104,648.00 22.66% 2 HOTEL PURPO SE Ashok Jain Ramgrah 41,660.00 858.00 0.00% 3 HOTEL PURPO SE Sudhir Mulji Bunglaow on the Beach 637,305.00 13,128.00 2.06% Sharing of Revenue Ag. 4 HOTEL PURPO SE Francis Wacziarg Hotel DL Orient 4,357,502.00 98,742.00 2.27% Sharing of Revenue Ag. 5 HOTEL PURPO SE Sheela Nath Ramgrah 81,830.00 1,686.00 0.00% 6 6 HOTEL PURPO SE Metheson Bosanquet Ent Ltd Wallwood Garden 303,676.00 6,881.00 2.27% Sharing of Revenue Ag. 7 HOTEL PURPO SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are not reproduced herein. The AO observed that the details and clauses of agreements entered into by the assessee with the aforesaid parties revealed that in all cases the assessee had acquired the right to use property vide all the agreements entered into with each party, and that the model, manner and clauses of each and every agreement on record are the same. He also observed that the Revenue Sharing clause was same in the license agreement entered into with the above said parties. The AO also noted that in some cases viz. Delhi Warehousing Pvt. Ltd., the assessee deducted TDS u/s 194 I of the Act and in some other cases viz. Ms. Meera Kulkarni, M/s SRK Tours Travels Pvt. Ltd. and Mr. Francis Wacziarg, TDS was deducted u/s 194C of the Act. The AO asked the assessee to explain the reason for differentiation between the TDS rates as the applicable rates should have been u/s 194 I of the Act, whereas the assessee had deducted TDS u/s 194C of the Act. The assessee vide letter dated 09.12.2010 explained that TDS had been made u/s 194C where agreements entered were revenue sharing agreement being purely contractual in nature as in the case of Ms. Meera Kulkarni, M/s SRK Tours T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted as under: The appellant is carrying on business of running of hotels at various locations in India. It entered into business/commercial arrangements with various parties to market, supervise and manage the operations of the hotel in their hotel premises owned by them. In terms of agreement, the appellant has paid ₹ 2,87,49,591/- to various parties and also deducted tax at source on these payments, but at different rates. Disallowance has been made by the Ld. Assessing Officer u/s 40(a)(ia) of the Income Tax Act, 1961 (the Act) on the plea that the TDS should be made on the payment so made by the appellant as per provisions of section 194 I (Rent) and not as per section 194C (Payment to Contractors). Detail of various payments made as licence fees and tax deducted thereon is given hereunder: Name of the parties to whom payment made Licence fees paid (Rs.) TDS deducted (Rs.) Rate of TDS (in %) Delhi Warehousing Pvt. Ltd. 1,37,01,0001/- 31,04,6481/- 22.66 Francis Wacziarg 43,57,502/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t provides deduction to the DWPL @ 50% u/s 80IB (7)(a) (earlier under 80IA(5)(ii)) of the Act. DWPL is getting deductions regularly u/s 80IB of the Act since it got approval. As DWPL was facing difficulties in managing the affairs of its Palace as hotel on its own without the team of marketing personnel etc, the appellant, on DWPL's behalf, with its full team and having a lot of experience in managing hotels, has started carrying out all marketing functions and managing the affairs of the said Palace as hotel. The appellant has started managing the affairs of marketing/supervision etc. of the said Palace as hotel since 2002 only. It entered into agreement with DWPL wherein DWPL has permitted the appellant to market, mange and supervise etc. the operations of the said Palace as hotel. The appellant is not the tenant of DWPL and is also not using the Palace for their own use and also has not taken the property on lease from DWPL. Neither DWPL has given the Palace on lease to the appellant. The appellant is sharing the revenue from the Hotel operations like a profit sharing agreement which is purely a business arrangement. Further DWPL is also not the contractor of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Neemrana Hotels Pvt. Ltd., the appellant. (c) Mrs. Meera Kulkarni (in short MK) - Owner of Waterside Retreat, Zila Tehri Garhwal being used as hotel in the name style of Glass House of Ganges. She has entered into business agreement for sharing of revenue with the appellant as per agreement and allowed the appellant to market and manage the affairs of the hotel from the said property. All facts are similar to the facts given in above cases (a) and (b) above with regard to running the rooms of the property as hotel and also sharing of revenue. MK is also not the contractor of the appellant. As stated herein above in other cases the appellant is carrying out business operations of running the property as hotel which is owned by MK. (d) SRK Travel Tours Pvt. Ltd., New Delhi (In short SRK): Having authority to use the portion of property of Ibrahim Mahal and Nafeas Manzil, situated at Pataudi district Gurgaon, entered into business agreement with the appellant and allowed the appellant to operate and manage the operations of the hotel in the said property. Here also all facts are similar to the facts given in above cases with regard to running of rooms of the property as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share in profits from the business. This shall be calculated for every quarter and be payable by The Party of the Second Part on a quarterly basis. The Part of the Second Part shall retain the balance profits. 2.3 Gross Operating Profits: Gross Operating Profits shall mean the amount by which the 'Gross Turnover' of the said hotel for each year exceeds the Deductible Expenses of the hotel for the said quarter: 2.4 Gross Income Gross Income shall mean all revenues accrued and earned from the operations of the hotel and its facilities including: (a) Room receipts from realization of the room occupancy charges; (b) Sale of food, beverages, liquor and smokes from the restaurant bars; (c) Income in respect of all the telephones, laundry and providing other services and facilities. 2.5 Deductible Expenses: Deductible Expenses shall mean and include all costs pertaining to: i) Commissions and/or discount given or allowed or payable to travel agents, tour operators and tour leaders or any other agencies for booking of rooms or facilities in the said hotel or given by the The Party of the Second Part in the course of business. ii) Taxes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperties. The intention of the parties is to share the revenue and not to make payment of a fixed sum of rent as covered u/s 194 I of the Act. The appellant is not using the land or any building or furniture/fixtures etc. for its own use. The rooms of the properties are being using for sale as a hotel, wherein beverages and meals etc. are also served to multiple clients/customers. Thus when the provisions covered under chapter XVII is not applicable to the appellant for these payments, provisions contained u/s 40(i)(ia) is also not applicable to the appellant. 9. The assessee also drew the attention of the ld. CIT(A) towards various provision contained in section 194C 194 I of the Act which are reproduced in paras 13 to 16 of the impugned order, for the cost of repetition, the same are not reproduced herein. The assessee further submitted to the ld. CIT(A) as under: It can be seen that the appellant has not entered into any lease or rental agreement with any of the parties wherein it is liable for deducting tax at source u/s 194 I of the Act. Similarly payment is not covered under u/s 194C as the owners of the properties are not contractors. When both provisions of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AO has made disallowance u/s 40(a)(ia) on certain selected payments and allowed other similar payments for the reasons best known to her, details given hereunder: Paid to Mr. Ashok Jain ₹ 41,660/- TDS Deducted@ 2.06% of ₹ 858/- Paid to Mrs. Sheela Nath ₹ 81,330/- TDS Deducted@ 2.06% of ₹ 1,686/- Paid to A T Changapa ₹ 14,105/- TDS Deducted@ 2.06% of ₹ 2911- Paid to Sagari Dalia Changapa ₹ 14,105/- TDS Deducted@ 2.06% of ₹ 291/- Paid to Poonama Romana Aooanna ₹ 14,105/- TDS Deducted @ 2.06% of ₹ 291/- Ld. AO has also wrongly stated that the appellant has deducted tax u/s 194 I on the payments of licence fees made to DWPL for usage of space, while payment to the others viz. Meera Kulkarni /SRK Tours Travels Pvt. Ltd. / Francis Wacziarg have been made u/s 194C. As already stated above the agreements entered into with various parties are revenue sharing agreements and not rental agreements. Hon'ble Supreme Court of India in the case of Kedar Nath Jute Mfg. Co. Ltd. v. CIT (Central), Calcutta [1971] 82 ITR 363 has observed that: Whether the assessee is entitled to a particular deduction or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y shall mutually decide upon the appointment/engagement of experts in the field of hotel management/operations to run, conduct, operate, manage, market, direct, control and supervise the operations of the said hotel. From the above it is evident that all the agreements with the above parties are for different revenue sharing depending on location, potential etc. and payments were also made by the appellant to the parties on the basis of revenue sharing method. From the above clause in the agreement it is also seen that the parties are involved in all the aspects of management and day to day running of the business affairs of the property as a hotel including appointments/engagement of experts in the operation of the hotel. The license fee paid to the parties is not fixed amount as in the case of income from house property but it is based on revenue sharing agreement. The license fee paid is based on business of running the hotel. The income from house property is usually a fixed amount irrespective of the income from business carried on in a house property. However in the instant case the payments made to the parties are not fixed amounts but income from business of running h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived by Francis Wacziarg from Neemrana Hotels Pvt. Ltd. as revenue sharing from running of the property are taxable under the head income from business or profession and not under the head income from house property. The terms of agreement between the appellant and the parties are almost identical as in the case of Francis Wacziarg and actual payments to the parties are also as per terms of agreement on revenue sharing basis. In view of the above, factual and legal position, the disallowance made by the A.O. in respect of the above parties vs. Sudhir Muljee, Francis Wacziarg, Matheson Bosanquet Ent. Ltd., Meera Kulkarni, and Mountainvalley Spring India P. Ltd. under sec 40(a)(ia) read with sec 194 I are not sustainable. 6.5 Regarding the license fee paid to SRK Travels Tours Pvt. Ltd, from the agreement dt. 23/06/2005 between the appellant and the party it is evident that there is no involvement of the party in the management and day to day running of the business affairs of the hotel in that property. The license fee payable to the party during the relevant period is minimum of ₹ 12,00,000/- or 15% of gross operating profit whichever is higher subject to maximum of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments to contractors etc. Sec 40(a)(ia) provides that payments of the nature specified therein shall not be allowed as deduction if TDS as provided in chapter XVIIB is liable to be made and such TDS has not been made or paid before the due date. Therefore, if disallowance u/s 40(a)(ia) cannot cover short deduction of TDS or TDS under wrong head as claimed by the appellant, the provisions in chapter XVIIB providing different rates of TDS would be meaningless. If provisions of Sec 40(a)(ia) cannot cover short deduction of TDS, the assessees would be at liberty to make TDS at lower rates and therefore, the provisions of Sec 40(a)(ia) would also be meaningless altogether. In view of the above, I am of the opinion that provisions of Sec 40(a)(ia) covers both non-deduction as well as short-deduction of TDS. Further, the decisions relied upon by the A.O. in this regard are distinguishable from the issues involved in this appeal. In view of the above, the disallowance made by the A.O. IS reduced from ₹ 1,24,49,495/- to ₹ 21,60,000/-. 11. Now both the parties are in appeal. The department is in appeal against the relief granted to the assessee and the assessee is in appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pported the order of the AO and further submitted that as the assessee short deducted the TDS, therefore, the disallowance was rightly made by the AO by invoking the provisions of section 40(a)(ia) of the Act since there was violation of section 194 I of the Act by the assessee. 13. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the assessee entered into agreement with the various parties who were having various properties and were involved in all aspects of management and day to day running of business affairs of the property as a hotel. The assessee entered into agreement with those parties for different Revenue Sharing dependent on location potential etc. and the payments were made by the assessee on the basis of revenue sharing method. The assessee also agreed for minimum guaranteed amount. The ld. CIT(A) also accepted after making a detailed verification from the various agreements in between the assessee and the other parties that the payments on the basis of sharing of revenue would not come under the purview of section 194 I of the Act. However, in respect of SRK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27000000 616744 26383256 4435536 16. From the above details and the copies of sales deed and purchase agreements, the AO noticed that the assessee had sold the Land and Building for ₹ 2.70 crores which was acquired by it during the financial year 2006-07 for ₹ 2 crore. He also noticed that there was no apportionment of cost between Land and Building either in the purchase agreement or in the Sale Deed, however, the assessee had bifurcated the purchase price and sale proceeds between the Land and Building on its own. The AO reproduced the relevant portion of purchase agreement and sale deed at page no. 10 of the assessment order dated 28.12.2010, for the cost of repetition, the same is not reproduced herein. The assessee furnished before the AO a certificate from an architect certifying the value of the Land and Building to be ₹ 1,97,50,000/- and ₹ 21,97,720/- respectively. However, the AO considered the said certificate as self-serving document because no details of valuation done and description of the property had been provided therein. The AO also pointed out that the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis/document for bifurcation of total cost into land and into building. Since the property was having very old construction, the appellant considered the land cost for ground and first floor at ₹ 1, 97,50,000/- (viz. ₹ 98,75,000/- each floor) and balance is kept in building account. No objections have ever been raised for this apportionment of total cost into land and into building by RSM Co., Chartered Accountants, the statutory auditor/tax auditor of the appellant who have been the statutory audit report and tax audit report. As concept of block of asset u/s 32 of the Act is mandatory, and since the appellant is eligible for depreciation on building, the appellant recorded cost of building into 'building' block of asset in depreciation schedule and charged depreciation at the rates applicable. As per block concept, the appellant charged depreciation on building portion while there is no depreciation on land. Further, as the property is sold within 3 years period, there is a short term capital gain on sale of land portion. The appellant bifurcated the sale consideration and cost on transfer, proportionately into land value and into building value as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n value of building block of asset, which she has not touched. (b) Allow full cost of purchase including stamp duty, brokerage etc, as stated hereinabove in the cost acquisition of the property sold. The Ld. AO has taken the cost of land building at ₹ 200 Lakhs, purchased during financial year 2006-07 as compared to actual total cost incurred by the appellant of ₹ 219.47 Lakhs as per details stated herein above. She cannot disregard the audited books of account for the financial year 2006-07 without invoking the provisions of section 147/148 of the Act by reassessing the income of the appellant for financial year 2006-07 relevant to assessment year 2007-08, which she has not done. Thus Ld. AO has illegally reduced the cost of property to ₹ 200 Lakhs from ₹ 219.47 Lakhs, which the appellant is hereby praying to kindly restore the same. Further while charging short term capital gain on building, she has illegally disregarded the depreciation schedule for financial 2006-07 (Assessment Year 2007-08) and for financial year 2007-08 (Assessment Year 2008-09), in which she should have make necessary corrections. There will be no change in tax liability if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee recorded cost of building into building block of asset in depreciation schedule and charged depreciation at the rates applicable. He further observed that as the property was sold within 3 years period, therefore, Short Term Capital Gain arising on sale of land portion was shown by the assessee. According to the ld. CIT(A) the AO was not justified in taking purchase cost of property at ₹ 2 crores only by ignoring other cost of ₹ 19,47,720/- including stamp duty of ₹ 10 lakhs and corporation tax of ₹ 6 lakhs which was appearing on the face of the sale deed, brokerage expenses, legal expenses etc. which the assessee had incurred in the course of purchase of the aforesaid property and the detail of which were submitted to the AO during the course of assessment proceedings and was also shown in the balance sheet filed alongwith Income Tax Return for the assessment year 2007-08. The ld. CIT(A) also pointed out that the Clause 16 of the agreement says that all the expenses of the corporation tax, stamp duty, registration fee, etc. had been borne and paid by the vendee. He, therefore, held that the AO was not justified in working out the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 23,92,871/-. The ld. CIT(A) also directed the AO to give consequential effects on the depreciation claimed in view of the sale value of the building adopted at circle rate of cost of construction at ₹ 22,19,690/-. 21. Now the department is in appeal against the relief allowed by the ld. CIT(A) while the assessee is aggrieved for the addition sustained by the ld. CIT(A). The ld. DR strongly supported the order of the AO and reiterated the observations made in the assessment order and also submitted that the assessee bifurcated the cost in land and building without any basis and the ld. CIT(A) also deleted the addition made by the AO without appreciating the facts in the right prospective. It was further stated that the ld. CIT(A) was not justified while accepting the bifurcation of the cost into land and building as shown by the assessee. 22. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the ld. CIT(A) was not justified in sustaining the addition of ₹ 4,73,881/-. 23. We have considered the submissions of both the parties and carefully gone through the material ..... X X X X Extracts X X X X X X X X Extracts X X X X
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