9911796707
TMI Blog2015 (10) TMI 2022X X X X Extracts X X X X X X X X Extracts X X X X ..... tchen Services - Held that:- As relying on assessee’s own case reported in [2011 (8) TMI 411 - CALCUTTA HIGH COURT] the assessee is entitled for deduction u/s 80HHC of the Act in respect of export of food and beverages to out bound flight s of International Airlines and for the proceeds received thereon in convertible foreign exchange and hold that the assessee had complied with the provisions of section 80HHC of the Act in this regard.- Decided in favour of assessee. Disallowance of running and maintenance expenditure of aircrafts - Held that:- Reliance on Sayaji Iron And Engg. Co. case [2001 (7) TMI 70 - GUJARAT High Court] is well placed and supports the case of the assessee. We also find lot of force in the arguments of the Learned AR that if at all there is any personal element involved in the aforesaid expenditure, the same have to be taxed as perquisite in the hands of the directors and it is only for the TDS officer to look into the violations, if any, on the same and hence on that ground also, no disallowance of expenditure could be appreciated. We find that the Learned Assessing Officer had made the enti re addition based on surmises and conjectures and made on ad hoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not admitted by him after calling for a remand report from the Learned Assessing Officer. In fact the remand report it self was called for from the Learned Assessing Officer only after admission of additional evidences by the Learned CIT(Appeals). Moreover, the assessee had duly filed objections to the remand report that had the original bills for legal expenses been called for by the Learned Assessing Officer, it could have been filed by the assessee. It is also observed that no adverse comments were given by the Learned AO regarding the incurrence of legal expenses except stating that original bills were not filed. In view of this, we have no hesitation in deleting the addition made towards disallowance of legal expenses- Decided in favour of assessee. Disallowance of proportionate management expenses u/s 14A - Held that:- The relevant assessment year under appeal is 2002-03 at which point of time, the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej & Boyce Manufacturing (2010 (8) TMI 77 - BOMBAY HIGH COURT). However, it is not in dispute that the assessee had derived taxable income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the expenditure were incurred for expansion of the same business and not for setting up of the new business. Instead these expenditures were incurred by the assessee after the business is set up. It is ultimately only a new unit of the assessee by way of two fresh hotels (Vanyavilas and Udayvilas) which is nothing but an expansion of the existing hotel business of the assessee with complete interconnection and interlacing of funds with common administ ration, common management, common fund and common place of business. Thus we hold that the entire expenditure relating to Hotel Vanyavilas and relating to Hotel Udayvilas to be treated as revenue expenditure. - Decided against revenue. Addition on account of provision for repairs and replacement of bad and doubtful debts - Held that:- From the perusal of the agreement between the assessee and Hotel Raj Bilash, it is apparent that the disallowance was made by the AO out of misconception about contractual obligation in earning management fees and arbitrarily added back an amount on account of management fees from Hotel Raj Bilash. It is a contractual obligations as well as entitlement of assessee-company and which was in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Asst Year 2001-02 - Decided against revenue. Disallowance of repairs, renewals, replacement and advertisement - Held that:- We find that the addition has been made only on an ad hoc basis which is not in accordance with law - Respectfully following the decision of the coordinate bench of the Tribunal on this impugned issue in assessee’s own case for the Asst Year 1996-97 addition deleted - Decided against revenue. Disallowance of interest u/s 14A on the ground that loan has been utilized for investment in shares for earning dividend which is exempt - Held that:- he assessee is having sufficient interest free funds to make investment in shares of domestic companies to the tune of ₹ 144.08 crores, wherein the dividend earned would be tax free and in view of the fact that the AO had not brought the nexus between the borrowed funds and the amount invested in the shares of domestic companies, and in view of the fact that the investments in subsidiaries were made out of strategic investment s, we are not inclined to interfere with the decision of the Learned CIT(Appeals) on this issue deleting the addition - We also hold that dividend, if any, derived from investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed deduction u/s 80HHD of the Act in respect of profit derived from the services provided to the foreign tourist s in ac cordance with the provisions of sect ion 80HHD of the Act. The assessee company claimed total foreign exchange receipts of ₹ 182,77,99,427/- for the purpose of computing deduction u/s 80HHD of the Act. Out of this, the Learned Assessing Officer observed that a sum of ₹ 2,20,87,392/- made by the Foreign Embassies received in Indian Rupees and accordingly held that the same should not be considered for deduction u/s 80HHD of the Act as the same was not received in foreign currency. Aggrieved, the assessee preferred an appeal before the Learned CIT(Appeals) who upheld the disallowance of the Learned Assessing Officer. Aggrieved, the assessee preferred further appeal before this Tribunal on the following ground:- 1. That on law as well as on the facts and in the circumstances of the case the Learned Commissioner of Income Tax (A)-VIII, Kolkata erred in confirming the disallowance of ₹ 22,087,392 paid in Indian Rupee by Foreign Airlines out of thei r repatriable amount and ₹ 171 ,829.661 paid by the Diplomats of foreign countries who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Learned AR stated that in the said set aside assessment, the Learned Assessing Officer had granted deduction u/s 80HHD of the Act in respect of the amount received in Indian Rupees by agreeing to the RBI Ci rcular. 2.4. In response to this, the Learned DR argued that the RBI Ci rcular is issued in the context of EPCG scheme and not applicable for income tax purposes and pleaded that the payment s received in Indian currency from foreign airlines and embassies does not fall in the category of convertible foreign exchange as defined in FERA and the Income Tax Act does not permit to go beyond this provision to look for the definition of foreign exchange eligible for deduction u/s 80HHD. He further argued that foreign exchange eligible for a particular scheme of the Ministry of Commerce may not be regarded as foreign exchange for the purpose of Income tax, more so, when the Ci rcular of the Commerce Minist ry seeks for a larger definition of foreign exchange for the purpose of EPCG scheme including the definition of foreign exchange u/s 80HHD as one of the parameters provided for the same. He further argued that similar issue for the Asst Year 2000-01 in ITA No. 490/Kol/2005 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee is allowed. 3. Disallowance of deduction u/s 80HHC for sale proceeds of Flight Kitchen Services Rs.1,96,89,591/- 3.1. The brief fact s of this issue are that the assessee derived sale proceeds on account of flight kitchen services (sale of food and beverages) to out bound flights of Foreign Airlines and claimed deduction u/s 80HHC of the Act and proceeds received thereon in Indian Rupees. As the proceeds were not received in convertible foreign exchange, the Learned Assessing Officer denied deduction u/s 80HHC on the said turnover which was also in line with the decision taken by him in the earlier years which was later upheld upto ITAT. However, the assessee had preferred an appeal against ITAT order before the Hon ble Calcutta High Court and it was pending at that time. The addition made by the Learned Assessing Officer was also upheld by the Learned CIT(Appeal s) on the similar grounds mentioned hereinabove. Aggrieved, the assessee is in appeal before us on the following grounds:- 2. That on law as well as on the facts and in the circumstances of the case the Learned CIT (A) erred in confirming disallowance of the deduction claimed U/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction claimed under section 80HHC of the Act? The relevant operative portion of the said judgement is reproduced below:- 13. After hearing the learned Counsel for the parties and after going through the aforesaid provisions of law, we find that in order to get the benefit of deduction under Section 80HHC of the Act, the assessee must comply with the terms of the said section. In the case before us, the only grounds of refusal of the benefit are that first, that the sale of such food and beverages to the foreign airlines did not amount to export out of India and secondly, that the payment received from the said foreign airlines in India in the form of Indian rupees could not be treated as payment in convertible foreign exchange within the meaning of the provisions of Section 80HHC of the Act. The word export has not been defined in the Act and thus, the said word is to be interpreted in the light of the language of Section 80HHC of the Act including the explanation added thereto and if the formalities required in Section 80HHC are fully complied with, in our opinion, it is not necessary that all the other formalities prescribed in the Customs Act for export of the art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the appellant has complied with the conditions mentioned in both the Explanations (a) and (aa). 23. The Certificate issued by the office of the Commissioner of Customs dated April 13, 2004 certifies that all bonded goods and catering food supplies are carried in a sealed Hl-Lift of M/s. Oberoi Flight Services, the appellant before us, which is escorted by the Customs Preventive Officer on duty, to the Air Crafts of International Airlines catered by them at the tarmac at Chhatrapati Shivaji International Airport, Mumbai, as required under the regulations of the Customs Act, 1963. In our opinion, the aforesaid certificate indicates that the appellant in the process of selling the food and beverage in the said airport has complied with the condition mentioned in Explanation (aa) of the Section 80HHC. 24. Similarly in reply to the letter written by the assessee to the General Manager of the Reserve Bank of India to issue a certificate showing that the payments made in Indian rupees to the hotels by Foreign Airlines and diplomats are being treated by Reserve Bank as Convertible Foreign Exchange for the purpose of Foreign Exchange Regulation Act, 1973 and the Rules made there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the earlier years sought to disallow 20% of the same amounting to ₹ 42,80,883/-on account of personal element of usage of ai rcrafts by the Directors and their relatives for personal purposes. This was also upheld by the Learned CIT(Appeals). Aggrieved, the assessee had preferred an appeal before us on the following ground:- 4. That on law as well as on the facts and in the circumstances of the case the Learned CIT(A) erred in confirming the estimated disallowance of ₹ 4,280,883/-, being 20% of ₹ 21,404,416 as against the actual maintenance and running expenditure of aircrafts amounting to ₹ 9.465,892 even though the aircrafts were exclusively used for the purpose of business . 4.2. The Learned AR argued that there cannot be any personal element of expenditure in the hands of the company as the company being a non-natural person. He relied on the decision of the Gujarat High Court in the case of Sayaji Iron and Engineering Co. vs.- CIT reported in 253 ITR 749 in support of this contention. He further argued that even assuming without conceding that if at all, the same is prevalent, then the same could have to be taxed as perquisite in the han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20252452-9564995). The Learned AR further argued that full details of expenses and the log book of flights undertaken by the aircraft has been provided from where it could be seen that the expenditure was incurred only for business purposes. He further argued that in Asst Years 1999-2000 and in Asst Year 2001-2002, on the same set of fac ts, this tribunal had restored the issue to the file of the Learned Assessing Officer for veri fication of details to find out whether the same has been incurred for business purposes only. He also stated that during the assessment year under appeal, the assessee had furnished all the detail s of the said expenditure before the Learned Assessing Officer and without giving any categorical finding on the same, the Learned Assessing Officer resorted to make the disallowance on estimated basis on the basis of surmise and conjectures. 4.3. In response to this, the Learned DR heavily relied on the written submissions filed by him on this ground. 4.4. We have heard the rival submissions and perused the materials available on record. It is seen that the net expenditure towards running and maintenance of aircraft s debited in profit and loss account i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 (Mad); In view of the aforesaid fact s and ci rcumstances and respectfully following the judicial precedent s thereon, we have no hesitation in deleting the addition made in the sum of ₹ 42,80,883/- on an estimated basis. Accordingly, the Ground No. 4 raised by the assessee is allowed. 5. Addition towards notional gain on foreign currency loan - ₹ 4,15,36,381/- 5.1. The brief facts of this issue is that the assessee company availed 2603.99 Million in Japanese Yen on 13th August 2001 (equivalent to ₹ 100 crores) under Foreign Currency Non Resident Bank Scheme (in short FCNR(B)) Loan for the purpose of its working capital business. Hence this goes to prove that the loan has been obtained for revenue account. This loan was outstanding as on 31.3.2002 and the same was restated at the exchange rate prevai ling at the end of the year in consonance with the Accounting Standard 11 (AS-11) issued by the Institute of Chartered Accountants of India (ICAI) by the assessee company. The assessee derived a notional gain on such restatement in view of dec rease in liability payable on the loan account amounting to ₹ 4,15,36,381/-. This is worked out as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower authorities. 5.4. We have heard the rival submissions and perused the materials available on record. Admittedly, the assessee on 13.8.2001 had availed foreign currency loan of JPY 2603.99 Million (equivalent to ₹ 100 crores) for the purpose of its working capital business. Hence it can be safely concluded that the loan was borrowed on revenue account. Based on this, it could logically be concluded that any exchange fluctuation arising out of restatement of the said loan at the end of the year, be it gain or loss, would also fall on revenue account and hence automatically comes under the ambit of taxation if it is a gain and allowable as an expenditure if it is a loss. This issue is squarely covered by the decision of the Supreme Court in the case of CIT vs Woodward Governor India P. Ltd reported in 312 ITR 254 (SC) wherein the questions raised before thei r Lordships were as under:- (i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for rev enue purposes could be allowed as deduction under section 37(1) in the y ear of fluctuation in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head profits and gains of business . In Sections 30 to 36, the expressions expenses incurred as well as allowances and depreciation has also been used. For example, depreciation and allowances are dealt with in Section 32. Therefore, Parliament has used the expression any expenditure in Section 37 to cover both. Therefore, the expression expenditure as used in Section 37 may, in the circumstances of a particular case, cover an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee. 14. In the case of M.P. Financial Corporation v. CIT reported in 165 ITR 765 the Madhya Pradesh High Court has held that the expression expenditure as used in Section 37 may, in the circumstances of a particular case, cover an amount which is a loss even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in 225 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where Section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Rs.9,50,00,000/- (i) Amounts paid to Lake Palace Hotels Motels Ltd...Rs.2,50,00,000/- This was paid as security deposit for taking land of the Hotel s at Udaipur, Rajasthan and interest @ 9% has been charged for such deposit. The said party had also duly deducted tax at source on the interest payment made to the assessee . (ii) Amounts paid to Jyoti Pvt Ltd - ₹ 58,28,690/- The amount represents the balance recoverable from the company which was pending for certain disputes. The assessee has duly charged interest @ 18% on the loan amount both for FY 2001-02 2002-03 and the amount was received in full in the FY 2002-03. (iii) Amounts paid to Nandi Hills Resorts Ltd ₹ 9,01,50,000/- This represent s advance given for the Joint Venture project with Janson Group of Bangalore to construct and operate Golf course in Bangalore. The amount paid is towards advance for acquisition of land for the project. (iv) Amounts paid to Balamurie Island Resort Pvt Ltd ₹ 69,60,000/- This was paid towards advance for purchase of shares. (v) Amounts paid to Balaji Hotels Enterprises Ltd. Rs.15,12,00,000/- The amount was advanced for cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hotels Motel s Ltd; Jyoti Pvt Ltd and Mumtaz Hotel Ltd from whom the assessee had charged interest. Aggrieved, the assessee has preferred further appeal before us on the following ground:- 6. That the Learned CIT(A) was not justified in restricting the addition on account of interest to ₹ 51,401,920/-being 12% of interest free advances given to Associate Enterprises having business connections in operating the hotels owned by such Enterprises . 6.3. The Learned AR argued that the ent ire details as to for what purpose the monies were paid by the assessee company to the aforesaid part ies were given before the Learned Assessing Officer. He argued that the assessee had sufficient own funds at its disposal and hence the borrowed funds were not utilized for advancing monies to aforesaid part ies and hence there should not be any disallowance of interest on borrowed funds. He further argued that all the advances were made in the nature of advances pursuant to ei ther joint venture agreement s or advance for shares and is not paid as loans and hence there is no question of charging any interest on the advances. The Learned AR further argued that all the advances wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 544 (SC). Further reliance is also placed on the decision of the Hon ble Apex Court in the case of CIT vs Walchand and Co. (1967) 65 ITR 381 (SC), wherein it was held that in applying the test of commercial expediency whether the expendi ture was excessively laid down for the purpose of business, reasonableness of the expenditure is to be judged from the point of view of a businessman and not that of the revenue. It is well decided that what is to be seen for the purpose of allowability of interest u/s 36(1)(ii i) of the Act is as to whether the borrowed funds were utilized for the purpose of business. In the instant case, the assesee had in fact made borrowings and utilised the same for the purpose of its business. The borrowed funds and the own funds in the form of share capital, reserves surplus, cash profits derived during the year, etc were inext ricably mixed in the same bank account and hence presumption could be drawn that interest free advances were made out of own funds provided the own funds are more than the amounts advanced interest free to parties. It is relevant to get into the few decisions on this subject:- CIT vs Gopalakrishna Muralidhar reported in (1963) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of the business, the presumption was that the tax was paid out of the profits and not out of the ov erdraft amount and since the amount of the profits for the relevant year far exceeded the liability for advance tax and the entire amount of profits of ₹ 27 lakhs was deposited in the ov erdraft account out of which the bank remitted the advanc e tax, the tax was paid out of the earning of the profits and not out of the overdraft amount taken Jar other business purposes. The revenue contended that the contention, viz. , where there was a mixed account and the profits were sufficient to meet the tax liability from the said account then the presumption should not be drawn that the tax liability was met out of the overdraft account and not out of the profits, was not raised before the Tribunal and, therefore, that contention should not be allowed to be agitated for the first time before the High Court: Held, (i) that though a contention which was not urged before the Tribunal could not be agitated for the first time before the High Court in a re ference, yet it was apparent from the Tribunal s order that the contention that the profits were sufficient to meet the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had advanced moneys to the hotel out of funds borrowed for business purpose the presumption would arise, where there is a common fund that the money advanced came only out of its own funds. The decision of the Andhra Pradesh High Court in the case of Gopikrishna Muralidar [1963] 47 ITR 469, would support the ease of the Revenue (?) to that extent. In that case, the assessee-a Hindu undivided family-had a large capital of ₹ 20 lakhs and also made large borrowings during the relevant year and had paid interest amounting to ₹ 93,611. During the relevant previous year a sum of ₹ 1,77,984 was withdrawn from time to time for household expenses and the question that arose before the Andhra Pradesh High Court was whethera part of interest paid on the borrowed capital could be disallowed. The Andhra Pradesh High Court held that it was not a case that where any particular sum purported to be borrowed on behalf of the business was spent for household expenses and this was a case where the loans were taken for carrying on the business of the assessee-firm, but the family used to withdraw some amounts from the business and which were within the limit of capital supplied by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under : Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that there was sufficient credit balance and, therefore, the amount advanced to Savera Hotels (P.) Ltd., were not out of the borrowed amount was not based on valid and relevant materials? We answer the questions referred to us in the affirmative and against the Revenue. However, in the circumstances, there will be no order as to costs . CIT vs Britannia Industries Ltd reported in 280 ITR 525 (CAL) The assessee had a packing credit sanctioned by Syndicate Bank, to the extent of ₹ 25lakhs. This was enhanced to ₹ 175 lakhs. One the very dateof enhancement of the packing credit, a sum of ₹ 165 lakhs was advanced to M through a cheque drawn on Syndicate Bank. The Assessing Officer found that the firm to which interest free loan was advanced was constituted by the relatives of the directors of the assessee. The Assessing Officer pointed out that the advance was made to M without any security and without any stipulation for payment of interest, whereas the assessee had paid 12 per cent, interest on the packing credit to Syndicate B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d includes such expenditure as a prudent businessman incur s for the purpose of business. The expenditure may not hav e been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to section 37 will also be applicable to section 36(1) (iii) because in section 37 also the e xpression used is for the purpose of business . For the purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. ATHERTON (H. M. INSPECTOR OF TAXES) V. BRITISH INSULATED AND HELSBY CABLES LTD. [1925] 10 TC 155 (HL), EASTERN INVESTMENTS LTD. v. CIT [1951] 20 ITR 1 (SC) ; [1951] 21 Camp Cas 194 AND CIT -VS.- CHANDULAL KESHAVLAL AND CO. [1960] 38 ITR 601 (SC) followed. The expression for the purpose of busines s is wider in scope than the expression for the purpose of earning profits . CIT v. MALAYALAM PLANTATIONS LTD. [1964] 53 ITR 140 (SC) and CIT v. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [1971] 82 ITR 166 (SC) followed. To consider whether one should allow deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to claim deduction under 36(1)(iii). In other words, the Tribunal held that loans were given for business purposes. Similarly, for AY 1993-94, the Tribunal had taken the view that the said loans given to the firm s sister concerns were for business purposes. Accordingly, the Tribunal had deleted the disallowances during the AYs 1992-93 and 1993-94. It is equally true that for the AY 1994-95 the Tribunal took a contrary view in view of change in law brought about by Finance Act 1992. Prior to 1.4.93 payment of interest to the partner had to be added back to the assessable income of the firm whereas after Finance Act 1992 such payment became an item of deduction for computing the assessable income of the firm and it became part of the business income of the partner. In view of this change of law, the Tribunal disallowed payment of the interest in the present case for AYs 1994-95, 1995-96, 1996-97 and 1997-98. However, the point which has been left out from consideration is that the loans which were given in August/September 1991 to the sister concerns got wiped out only in AY 1997-98. As stated above, for AY 1992-93 and AY 1993-94, the Tribunal held that the loans given to the sist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible . In view of the aforesaid facts and ci rcumstances and the judicial precedents on the impugned issue, we hold that the advances were made by the assessee to various parties during the course of its business and are st rategic investment s. We also hold that the borrowed funds were not diverted for non-business purposes as sufficient own funds were available with the assessee to make interest free advances to its group concerns. We also hold that when borrowed funds and own funds were inextricably mixed in the same bank account and i f the own funds are more than the amounts advanced interest free to sister concerns, then the presumption could be drawn in favour of the assessee that those advances were made only out of own funds of the assessee. We further hold that from the aforesaid fact s available on record, the assessee had advanced monies to various concerns during the course of its business to further strengthen its business interests with the said parties and as a measure of commercial expediency. Accordingly we hold that the action of the Learned Assessing Officer in disallowing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported the orders of the lower authorities. 7.3. We have heard the rival submissions and it is seen from the details filed in the form of Paper Book by the assessee, the legal expenses incurred by the assessee were in respect of payments made to various renowned counsels for pursuing the various legal disputes of the assessee arising out of its business. We do not appreciate the view of the Learned CITA that additional evidences filed by the assessee in the form of detail s and bills for legal expenses were not admitted by him after calling for a remand report from the Learned Assessing Officer. In fact the remand report it self was called for from the Learned Assessing Officer only after admission of additional evidences by the Learned CIT(Appeals). Moreover, the assessee had duly filed objections to the remand report that had the original bills for legal expenses been called for by the Learned Assessing Officer, it could have been filed by the assessee. It is also observed that no adverse comments were given by the Learned AO regarding the incurrence of legal expenses except stating that original bills were not filed. In view of this, we have no hesitation in deleting the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to disallow the expenditure under section 14A. Hence the onus is on the revenue to prove that interest paid by assessee on borrowed funds related to acquisition of shares yielding tax free income . The Learned AR further argued that the assesee had sufficient funds in the form of share capital, reserves and surplus and cash profit for the year which worked out to ₹ 646.65 crores ( being the net owned funds at the beginning of the year to the tune of ₹ 574.46 crores plus cash profit for the year amounting to ₹ 72.19 crores) and the total investment s made by the assessee is only ₹ 280.01 crores and hence it could be easily inferred that the investments were made only out of own funds. In response to this, the Learned DR supported the orders of the lower authorities. 8.3. We have heard the rival submissions and perused the materials available on record. The relevant assessment year under appeal is 2002-03 at which point of time, the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej Boyce Manufacturing. However, it is not in dispute that the assessee had derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtainment tax (Rs.10,500/-) and work contract tax (Rs.12,08,997/-) was added to the total turnover for the purpose of ascertaining the percentage of receipt in foreign currency for granting deduction u/s 80HHD of the Act. The Learned CIT(Appeals) deleted the addition made on this count. Aggrieved, the revenue is in appeal before us on the following ground:- 1. On the facts and in the ci rcumstances of the case Ld. CIT[A] has erred in deleting the Assessing Officer s additions of ₹ 73,61,14,470/- on account of collections of sales tax, expenditure tax, luxury tax, service tax, entertainment tax and work contract tax forms part of total turnover in computing deduction u/s.80HHD of I.T. Act in reliance with provisions of section 145A of I.T. Act and verdict of Hon ble Supreme Court in the case of Chowringhee Sales Bureau -vs- CIT [87 ITR 542.] . 9.2. The Learned DR vehemently supported the orders of the Learned AO and relied on the decision of the apex court in Chowringhee Sales Bureau vs CIT (87 ITR 542). In response to this , the Learned AR argued that it is now well settled law that computation of deduction under Chapter VIA is an independent code by itself for compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the total turnover and from that the closing sundry debtor should be deducted in order to arrive at the correct figure and that has been followed by the Auditor who has certified the entitl ement of 61.07% of the business profit. Our aforesaid view finds support from the decision of the Supreme Court in the case of CIT vs Lakshmi Machine Works reported in (2007) 290 ITR 667 while interpreting the similar provision of section 80HHC(3) of the Act. It further appears that copy of Accountant s certificate in Form 10CCAD has also been produced. Therefore, the Assessing Officer wrongly considered the total turnover of ₹ 395,62,34,559/-instead of gross receipt in business amounting to ₹ 390,93,27,318/- certified by the Auditor and accordingly, the relief allowed u/s 80HHD should be enhanced to ₹ 77,62,17,303/- instead of ₹ 77,53,58,471/- allowed by the Assessing Officer. In view of the aforesaid decisions, we are not inclined to interfere with the decision of the Learned CIT(Appeals) on this issue. Accordingly, the Ground No. 1 raised by the revenue is dismissed. 10. Apportionment of common expenses to Bangalore unit for claiming deduction u/s. 80IA of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in his assessment order . 10.3. The Learned DR argued that for the Asst Years 2000-2001 2001-02 in ITA No. 833/Kol/2005 and ITA No. 1090/Kol/2005 respectively vide order dated 8.9.2006, this Tribunal had set aside this issue to the file of the Learned AO and prayed for similar di rection for this asst year also. In response to this, the Learned AR pleaded that no order has been passed by the Learned AO for the Asst Years 2000-01 2001-02 pursuant to old tribunal orders. However, he also agreed for set aside of this issue to the file of the Learned AO to consider this issue in line wi th the directions given by this Tribunal for the Asst Years 2000-01 2001-02. 10.4. We have heard the rival submissions and perused the materials available on record. We find that this tribunal on a similar issue for the Asst Years 2000-01 2001-02 had set aside to the file of the Learned Assessing Officer in ITA No. 833/Kol/2005 and ITA No. 1090/Kol/2005 respectively vide order dated 8.9.2006 with the following di rections :- Considering the totality of the facts of the case and following the decision of the Tribunal in assessee s own case for A.Y. 2000-01, we restore the matter bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer s assessment order . 11.2. The Learned DR argued that the assessee had set up a new unit and all the expenses incurred upto the date of commencement of commercial production are to be capitalized and argued that the pre-opening expenses are at par with pre-operative expenses and are only capital in nature. In response to this, the Learned AR argued that the assessee had set up two seven star hotel s and all the expenses for const ruction of the said hotels were duly capitalized by the assessee. The subject mentioned pre-opening expenses are nothing but expenses incurred on salaries, recruitment, training and development etc of General Managers, Service Engineers etc who are di rectly related to the operation of the Hotel after opening so that no obstruction arises while providing services to the guest s when the hotel commences its business. Hence these are only expendi ture incurred from the time of set up of business to the time of commencement of business. He further argued that these expenses are necessarily to be incurred for smooth functioning of the post commencement of business of the hotel and no way it is connected with the const ruction of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim deduction of expenditure and the expenditure cannot be disallowed on the ground that the same had been incurred prior to the commencement of the actual business of commercial production. (2nd para at page 525) : Held, that the Tribunal had found that the assesese had set up its business in the assessment year 1966-67. The finding of the Tribunal had not been challenged as perverse. Therefore, the assessee was entitled to depreciation and deduction of expenditure for the assessment year 1966-67 and depreciation for the assessment year 1969-70 . CIT vs Ramaraju Surgical Cotton Mills Ltd (1967) 63 ITR 478 (SC) Held that where a business had been set up by the assessee, the expenses incurred in such setting up could not be disallowed on the ground that the assessee had not commenced commercial production in such business . CIT vs.- Hughes Escorts Communications Limited [2009] 311 ITR 253 (Delhi) A plain reading of section 2(34) of the Income-tax Act, 1961, shows that for a new business the previous year is the period beginning with the date of setting up of the business. There is a distinction between setting up and commencement of a business. When a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the assessee could not be said to be an e xtension of the e xisting business, (ii) the expenditure incurred in connection with the purchase and installation of plant and machinery was capital in nature and thus disallowable, and (iii) the pre-operative expenses could not be written off at one go but had to be capitalised and admissible depreciation allowed thereon: Held, dismissing the appeal, that the new unit was a part of the existing business and there was no dispute that there was unity of control and interlacing of the units. Thus the expenses incurred by the assessee for the setting up of the new unit which was a part of the existing business were therefore to be allowed as a revenue expenditure . The special leave petition filed by the revenue against this order is dismissed by the Supreme Court in CC 12361/2007 dated 3.1.2008. Delhi ITAT 15 SOT 348 (Del) Hotel Hans P Ltd vs ACIT It is well-settl ed proposition of law that setting up of business and commencement of business are two separate activities. Once a business is set up, all the exp enses of revenue nature are to be allowed, notwithstanding the fact that commercial operation starte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the entire expenditure of ₹ 1,61,98,830/-relating to Hotel Vanyavilas and ₹ 1,42,67,177/- relating to Hotel Udayvilas to be treated as revenue expenditure. Accordingly, the ground no. 3 raised by the revenue is dismissed. 12. Addition on account of provision for repairs and replacement of bad and doubtful debts ₹ 28,91,127/- 12.1. The Learned AO added back an amount of ₹ 28,91,127/- while computing income from technical fees receivable from hotels under the agreement for technical assistance on the ground that such amounts represent provision for repai rs and replacement of bad and doubtful debts which are not allowable under the Act. This addition was deleted by the Learned CIT(Appeals) by relying on the order of his predecessor on the same issue for the earlier year. Aggrieved, the revenue is in appeal before us on the following ground:- 4. On the facts and in the circumstances of the case Ld. CIT[A] has erred in deleting the addition of ₹ 28,91,127/-on account of provision for repairs and replacement of bad and doubtful debts in relying on the decision of Ld. CIT[A) s order in appeal No.11/CIT[A]-VIII/Cir-8/04-05 dated 07.02. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. 25.2. We also find that the Tribunal vide ITA No. 607/K/2005 dated 30.06.2000 in assessee s own case for AY 2000-01 had dismissed the ground raised by the revenue on this issue. 26. Considering the totality of the facts of the case and following the decision of the Tribunal in assessee s own case in the immediately preceding two assessment years, we do not find any infirmity in the order of the ld. CIT(A) and accordingly uphold the same. Grounds of appeal No. 2 by the revenue is therefore dismissed . In view of the fact that there is no change in the facts and circumstances of this issue, respect fully following the decision of the coordinate bench of the Tribunal, we are not inclined to interfere with the decision of the Learned CITA on this issue. Accordingly, the ground no. 4 raised by the revenue is dismissed. 13. Addition on account of excess provision of technical fees Rs.4,62,806/- 13.1. The Learned Assessing Officer added back an amount of ₹ 4,62,806/- on account of excess provision of technical fees for earlier years written back ignoring the clarification given at the time of assessment proceedings that the said amount was provided in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready made is adjusted accordingly. It may either be increased or reduced. Hence we have no hesitation to delete this addition made in the sum of ₹ 4,62,806/-. Accordingly, the ground no. 5 raised by the revenue is dismissed. 14. Addition on account of advances written off ₹ 86,21,700/- 14.1. The brief fact s of this issue is that the assessee had paid certain advances as per the di rections of the Delhi High Court in the earlier years towards a possible claim that might arise in the form of compensation due to the death of a guest in the swimming pool of the hotel in the year 1997-98 and this issue was under litigation before the Hon ble Delhi High Court. During the Asst Year 2002-03, the assessee received the final order from the Delhi High Court wherein, it was held that the advances already paid shall be t reated as compensation paid by the assessee. Accordingly, this advance was written off in the books of the assessee during Asst Year 2002-03 and deduction claimed ac cordingly as expendi ture incurred wholly and exclusively for the purpose of business. The Learned Assessing Officer records this fact but proceeded to disallow the same as the copy of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had advanced monies to two parties namely Lake Palace Hotels Motels Ltd (Rs.2,50,00,000/-) ; Mumtaz Hotel Ltd (Rs.9,50,00,000/-) wherein assessee had duly charged interest and offered the same to tax. Accordingly, it was pleaded by Learned AR that no disallowance of interest should be made. The Learned CIT(Appeals) deleted the addition made towards disallowance of interest on borrowed funds in respect of funds advanced to aforesaid two parties as the same are interest bearing and confirmed the addition towards interest disallowance in respect of other parties. Against this relief granted to assessee, the revenue is in appeal before us on the following ground:- 7. On the facts and in the circumstances of the case Ld. CIT[ A] has erred in restri cting the addition to the extent of ₹ 5,14,01,920/- as against Assessing Officer s addition of ₹ 6,27,16,642/- on account of interest paid on loan free advances made to sister concern on accepting fresh explanation made by assessee without appreciating the fact and circumstances of the loan transactions recorded by Assessing Officer in his assessment order . 15.2. We have heard the rival submissions. This issue has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gitated this issue before the Hon ble Calcutta High Court in the earlier year by raising substantial question of law in ITA No. 3 of 2001 dated 28.3.2001 at the time of admission of appeal before the High Court, the learned counsel for the revenue sought to withdraw the same on instructions from the income tax department at the time of final disposal of appeal by the Hon ble High Court. 16.3. We have heard the rival submissions. It is seen that the addition has been made only on an ad hoc basis by the Learned Assessing Officer. It is seen that the learned counsel for the revenue had sought to withdraw this ground before the Hon ble High Court while pursuing the appeal in the earlier year based on the inst ructions from the Income Tax Department which is clearly stated in para 2 of the order of the High Court. This only leads to a situation that probably the revenue in its wisdom thought it fit not to pursue this issue before the High Court as the addition made thereon may not get sustained in the High Court. We find that this issue is covered in favour of the assessee by the decision of this Tribunal in assessee s own case for the Asst Year 2001-02 in ITA No. 833/Kol/2005 dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the revenue is dismissed. 17. Disallowance of repairs, renewals, replacement and advertisement Rs.1,07,42,335/- 17.1. The brief facts of this issue are that the assessee was asked by the Learned Assessing Officer to furnish the details as requisitioned in the questionnai re u/s 142(1) of the Act. In response, the assessee submitted that the information is not readily available in their systems and offered to give the details in elect ronic media which was al so not given by assessee later during assessment proceedings. But the assessee submitted the unit wise detail s of expenses incurred on this account. The Learned Assessing Officer felt that the detail s furnished by assessee are of no use as the details simply indicate the amount incurred by an individual unit but the detail s of expenses are not available and hence genuini ty of the same could not be veri fied. Accordingly he disallowed a sum of ₹ 1,07,42,335/- being 2% of total expenditure on that ac count on an estimated basis. On first appeal, the Learned CIT(Appeals) deleted this addition on the ground that the reasons given by the Learned Assessing Officer for making the disal lowance is vague a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has debited total interest amounting to ₹ 18.60 crores and hence interest relatable to 31% of investment in shares is ₹ 3,47,34,798/- was disallowed u/s 14A of the Act. On first appeal, the Learned CIT(Appeals) deleted the addition made u/s 14A on this account on the ground that no evidence has been brought on record by the Learned AO to prove that the borrowed funds were utilized for investment in shares for earning tax free dividend income. Aggrieved, the revenue is in appeal before us on the following ground:- 10. On the facts and in the circumstances of the case Ld. CIT[A] has erred in deleting the disallowance u/s.14A of the I.T. Act the proportionate interest on loan fund utilized in shares for earning exempted dividend income on the basis of facts and ci rcumstances pleaded before him which was unverifiable during asstt. proceedings for the year due to failure on the part of assessee to produce before the Assessing Officer . 18.2. The Learned DR relied on the order of the Learned Assessing Officer. In response to this, the Learned AR argued that most of the investment s in shares were made in earlier years and are practically old investment s. He also ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom is purely incidental. Therefore, the inv estment made by the assessee in its subsidiary is not to be reckoned for disallowance u/s 14A read with Rule 8D . Interglobe Enterprises Ltd vs DCIT Delhi Tribunal decis ion:- Assessee had utilized interest free funds for making fresh investments and that too into its subsidiaries which were not for the purpose of earning exempt income but for strategic purposes only. No disallowance of interest is required to be made under Rule 8D (i) or (ii) as no direct or indirect interest expenditure has incurred for making investments. Strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii) . However, when it is found that the assessee has got sufficient own funds in the form of share capital, reserves and surplus to the tune of ₹ 646.65 crores and cash profit for the year amounting to ₹ 72.19 crores and the total investments (including foreign company investment s) is only ₹ 280.01 crores, and more so when these investment s were made years ago by the assessee, it could easily be concluded that no disallowance u/s 14A of the Act could operate in the facts and ci rc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance was made. The disallowance was sought to be made under section 14A. Hence, it was for the revenue to discharge the onus which the revenue has miserably failed to discharge. Accordingly, the order of CIT(A) is set aside on this issue and consequently, the addition of ₹ 4,59,08,287 sustained by her is hereby deleted . Respectfully following the decision of the coordinate bench of Chennai and Delhi Tribunal as cited above, we hold that the assessee is having sufficient interest free funds to make investment in shares of domestic companies to the tune of ₹ 144.08 crores, wherein the dividend earned would be tax free and in view of the fact that the Learned Assessing Officer had not brought the nexus between the borrowed funds and the amount invested in the shares of domestic companies, and in view of the fact that the investments in subsidiaries were made out of strategic investment s, we are not inclined to interfere with the decision of the Learned CIT(Appeals) on this issue. We al so hold that dividend, if any, derived from investment in shares of foreign companies made by the assessee would become taxable and hence disallowance u/s 14A would not operate i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny adverse remarks on this issue but simply stated that only Xerox copies of the bills were produced by the assessee, the Learned CIT(Appeal s) sought to delete the addition made in the sum of ₹ 11,33,20,825/- towards disallowance of depreciation. Aggrieved, the revenue is in appeal before us on the following ground:- 12. On the facts and in the circumstances of the case Ld. CIT[A] has erred in deleting the disallowance of ₹ 11,33,20,825/- on account of depreciation on the amount of additions in assets on accepting assessee s explanation without appreciating the facts and circumstances recorded by Assessing Officer in his assessment order as well as remand report dated 06.12.2005 . 20.2. The Learned DR relied on the order of the Learned Assessing Officer. In response to this, the Learned AR argued that since no adverse findings were given by the Learned Assessing Officer during remand proceedings towards this issue, he prayed for deletion of this disallowance. 20.3. We have heard the rival submissions and perused the materials available on record. It is not in dispute that the bills for additions to fixed assets were filed by the assessee before the Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) erred in holding that if deduction is claimed u/s.80HHD of the Income Tax Act, 1961 (herein after referred to as Act) on profits of a unit deduction under any other section of Chapter VIA cannot be allowed on the profits of the same unit. 2. That on the facts and in the circumstances of the case, the Learned CIT(Appeals) was not justified in confirming the action of the AO in reducing the eligible profit of Bangalore unit by 36.21 % while computing deduction u/s. 80IA on the ground that the same had already been allowed as deduction u/s. 80HHD. 3. That on the facts and in the circumstances of the case, the Learned CIT(Appeals) failed to appreciate the fact that deduction claimed u/s. 80HHD and that under section 80IA in the aggregate did not exceed the profits of the unit eligible for deduction under these sections and hence there was no double deduction. 4. That without prejudice to the grounds taken herein above, the Learned CIT(Appeals) erred in confirming the action of the AO in reducing 36.21% of the eligible profit of the Bangalore unit while computing deduction u/s. 80IA ignoring the fact that the actual relief granted u/s. 80HHD was restri cted to only 30% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Undertaking or Enterprise, as the case may be . 21.6. The question that repeatedly arises for the consideration of the Court is about that quantum of deduction in case where an assessee is eligible to claim deduction under more than one Section of Part C of Chapter VI-A based on different criteria, for instance, under section 80HHC for export profit s and section 80IA for new Industrial Undertaking, and the manner of computation of deductions under both these sections. Hon ble Bombay High Court in the case of Associated Capsules Pvt. Ltd. vs.- DCIT reported in 237 CTR (Bom.) 408 considered the decision of the Hon ble Delhi High Court in the case of Great Eastern Export vs.- CIT reported in 237 CTR 264 noted that the Hon ble Delhi High Court had failed to consider one of the arguments of the ld. counsel for the revenue in that case. Ld. counsel had argued that in the matter of grant of deduction, the first stage was computation of deduction and second stage was the allowance of deduction, and that computation of deduction had to be made as provided in their respective sections and it was only at the stage in allowing deduction under section 80IA(1) and also under other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilling certain requirements specified under the relevant sections. The total deductions under Chapter VIA of the Income Tax Act were restricted to the gross total income in respect of assessee as a whole . However, in certain cases, it was noticed that certain assessee s claim more than 100% deduction on such profit s and gains of the same Undertaking, when they were entitled to deduction under more than one sect ion of Chapter VIA. With a view to providing suitable statutory safeguard in the Income Tax Act to prevent tax payers from taking undue advantage of existing provisions of the Act by claiming repeated deductions in respect of the same amount of eligible income, even in cases where it exceeds such eligible profit of an Undertaking or Hotel, it is proposed to provide inbuilt rest rictions in section 80HHD and 80IA, so that such unintended benefits are not passed on to the assessee. This amendment is sought to be int roduced ret rospectively w.e.f. 1.4.1990 (emphasis supplied) . 23. It is also pertinent to get into the provisions of section 80P(3) of the Act at this juncture. Section 80P(3) reads as under:- In a case where the assessee is entitled also to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deduction shall be given only after allowing or giving effect to all other deduc tions. In the absence of such priori tisation and keeping in view the fact that the computation mechanism under the sections have nothing in common, as also the fact that the objectives sought to be achieved or different, there should be no occasion to take one deduction into the other. 23.4. The rule of harmonious interpretation is a well accepted rule of interpretation. A section or part of sect ion should be interpreted so that it is in harmony with other provisions of the Act. Further no part of the statute should be regarded as a surplus age. Allowing deduction under only one section will make the later part of sub-section (9) of section 80IA redundant. Such an interpretation should be avoided. 23.5. The Hon ble MP High court decision in JP tobacco Products Pvt. Ltd. case reported in [1998] 229 ITR 123 held as under: Section 80HH(9) as it stood prior to inser tion of section 80-1 by the Finance (No. 2) Act, 1980, with effect from 1-4-1981 originally included only section 80J. Section 80) providing for deduction in respect of the profits and gains from newly established industrial u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n raised before the Hon ble Supreme Court and the decision taken thereon is reproduced herewith for the sake of convenience and clari ty:- The point involved in the present case is: whether Sections 80-HH and 80-I of the Income Tax Act, 1961 are independent of each other and therefore a new industrial unit can claim deductions under both the sections on the gross total income independently or that deduction under Section 80-I can be taken on the reduced balance after taking into account the benefit taken under Section 80-HH. The Madhya Pradesh High Court in J.P. Tobacco Products Pvt. Ltd. vs CIT, Jabalpur reported in 229 ITR 123 took the view that both the sections are independent and, therefore, the deductions could be claimed both under Sections 80-HH and 80-I on the gross total. Against this judgment a Special Leave Petition was filed in this Court which was dismissed on the ground of delay on 21.07.2000 [see 245 ITR 71 (St.)]. The decision in J.P. Tobacco Products Pvt. Ltd. (supra) was followed by the same High Court in the case of CIT vs. Alpine Solvex (P) Ltd. in ITA No. 92 of 1999 decided on May 2, 2000. Special Leave Petition against this decision was dismissed by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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