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TMI Blog2006 (1) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act? (b) Whether, the Income-tax Appellate Tribunal has correctly interpreted the provisions of section 80HHD(3) of the Act when this sub-clause specifically provides for reducing payment made to the hotels out of receipts specified in sub-section (2) but does not provide for reducing the same out of total receipts of the business?" 3. We have heard learned counsel for the parties in great detail. These appeals involve the interpretation of section 80HHD of the Act, the background to the introduction of which requires to be noticed. Section 80HHD was first introduced in the Act by the Direct Tax Laws (Amendment) Act, 1989. In his Budget Speech on February 22, 1989, the Union Finance Minister explained the rationale for the introduction of the said provision in the following words: "In order to provide encouragement to tourism for augmenting foreign exchange reserves, it is proposed to provide deduction of 50 per cent. of exchange earnings derived from services rendered to foreign tourists by approved hotels or travel agents. The remaining 50 per cent. will also receive similar exemption if it is credited to the reserve fund and utilised for the purpose of business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts of the business carried on by the assessee." 5. The scheme of the above provision, at the time of its introduction, as explained further in Circular No. 559, dated May 4, 1990, issued by the Central Board of Direct Taxes (CBDT) was as under: (i) The assessee had to be an Indian company or an Indian resident engaged in the business of a hotel, or of a tour operator approved by the prescribed authority in this behalf, or of a travel agent; (ii) In computing the total income of such assessee a deduction would be allowed which deduction was a sum equal to: (a) 50 per cent. of the total profits 'derived by him from services provided to foreign tourist' plus; (b) so much of the remaining profit as is debited to the profit and loss account in the previous year and credited to a reserve account to be utilised by the assessee for the purposes of his business in the manner stipulated in sub-section (4); (iii) Among the conditions attached to the availing of such deduction were that the moneys were to be received by the assessee only in convertible foreign exchange and the reserve so created had to be utilised only for certain specific purposes; (iv) Where only a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Direct Taxes Circular No. 621, dated December 19, 1991, as under: "33.4 In many cases, the foreign tourists visit India on a package tour and make payment in foreign exchange, in one lump sum, to a tour operator in India. The Indian tour operator, thereafter, makes payments to the hotels where the tourist groups are lodged. Since the foreign exchange is received only by the tour operator, it is only he who can claim the tax concession under section 80HHD. The hotel owner is denied the benefit of section 80HHD, even though the payment for service to the foreign tourists rendered by the hotel may constitute the major part of the expenditure by the foreign tourist in India. 33.5 With a view to securing that the benefits under section 80HHD for all the three segments of the tourism industry, section 80HHD has been amended to provide that, in cases where payments for services to the foreign tourist provided by hotel, tour operator or a travel agent are received in Indian currency from another hotel, tour operator, travel agent or airline, the person providing the service to the foreign tourists will be eligible for deduction under section 80HHD in relation to profits derived theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the denominator of the multiplier. And that is where the present controversy arises. But first, the facts of the case in brief. 8. The respondent-assessee is a travel agent and tour operator. It also has a hotel business under the name of Nikko Hotel. For the assessment year 1996-97, the assessee declared a total taxable income of Rs. 18,00,350. In the computation of income, the assessee declared its "profits and gains from business and profession" ("business profits") as Rs. 28,85,448. The foreign exchange (FE) received by the assessee from foreign tourists (i.e. Rs. 6,72,89,350) included the FE receipts pertaining to other hotels (i.e., Rs. 2,51,64,240) in respect of which the assessee issued disclaimer certificates (DCs) to such hotels in Form No. 10CCAE. The assessee's total receipts for the assessment year 1996-97 were Rs. 7,35,98,820 and its rental income was Rs. 6,73,029. It showed an amount of Rs. 32,19,926 as the receipts of Nikko Hotel. The assessee submitted a separate computation of the business profits of Nikko Hotel as Rs. 23,39,122. The assessee also made a separate calculation for section 80HHD(1) deduction for the Nikko Hotel. In order to avail of the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier pattern in the assessment year 1996-97, permitted the assessee's formulation of the numerator (i.e., total FE minus FE covered by DCs issued to other hotels) but disallowed the deduction of the Nikko Hotel receipts and the FE receipts in respect of which DCs had been issued to other hotels from the total receipts (constituting the denominator of the multiplier). Again, the assessee appealed to the Commissioner of Income-tax (Appeals). 12. The Commissioner of Income-tax (Appeals) by an order dated February 11, 2002, first disposed of the appeal pertaining to the assessment year 1998-99. Accepting the assessee's contention in part, the Commissioner of Income-tax (Appeals) reworked the profits derived from services to foreign tourists by permitting deduction of the FE receipts in respect of which DCs had been issued to other hotels from the total receipts (constituting the denominator of the multiplier). However, the Commissioner of Income-tax (Appeals) did not permit the deduction of the Nikko Hotel receipts from the total receipts. After accounting for the tax incentive reserve created by the assessee, the Commissioner of Income-tax (Appeals) determined the amount av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found out on a uniform basis. There is a detailed discussion in this respect in the decision of the Income-tax Appellate Tribunal Calcutta in Chloride India Ltd. v. Deputy CIT [1995] 53 ITD 180. In our opinion, the legal position is more clear in the case of a tour operator because the exclusion of payments to hotels, etc., is provided for in the statute itself by sub-section (2A) of section 80HHD. We, therefore, do not find much room for a view other than that adopted by the learned Commissioner of Income-tax (Appeal). We uphold the same and dismiss these appeals filed by the Revenue." 14. Ms. Prem Lata Bansal, learned counsel appearing for the appellant submits that the express wording of sub-section (3) of section 80HHD of the Act admits only of a strict and literal construction. According to her, the expression in sub-section (3) does not envisage the deduction of the payments made by the assessee of FE to other hotels (covered by the certificate under sub-section (2A from the total receipts of the business. If that were the intention of the Legislature, the section would have expressly provided for such deduction. On the other hand, Mr. Ajay Vohra, learned counsel for the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te to the business of the assessee and not that of other hotels for whom the assessee may have collected from foreign tourists FE receipts and in respect of which the assessee has not only made over such FE receipts to the other hotels but has also issued the necessary certificate under sub-section (2A), i.e., in Form No. 10 CCAE. This interpretation, in our view, comports with the purpose for which the provision was introduced in the first place. 17. Although no direct decision on a similar issue concerning section 80HHD has been brought to our notice, there are decisions in regard to a similar issue arising in the context of section 80HHC, which support this line of interpretation. In CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 (Bom), while explaining the expression "total turnover" in Explanation (ba) to section 80HHC, S. H. Kapadia J. (as his Lordship then was), speaking for the Bombay High Court explained that if sales tax and excise duty cannot form part of the export turnover (which constituted the numerator of the multiplier for the purposes of sub-section (3) of section 80HHC), they could also not form the part of the total turnover (which constituted th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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