2006 (1) TMI 119 - HC - Income Tax

Foreign Exchange Receipts for Other Hotels Excluded from Assessee's Business Receipts Under Income-tax Act, Section 80HHD.

The court upheld the CIT (Appeals) and ITAT's decisions, affirming that foreign exchange receipts on behalf of other hotels should be excluded from the ... Interpretation Of Statutes - Deduction u/s 80HHD - Payment made to hotels - The payment made to the hotels are to be reduced from the amount received by the assessee for services rendered to foreign tourists as well as from the total receipts of the business while computing deduction u/s 80HHD of the Act? - HELD THAT:- The scheme governing section 80HHD has already been adverted to earlier in this judgment in some detail. The primary purpose that spurred the introduction of this provision into the Act with effect from April 1, 1989, is the 'encouragement to tourism for augmenting foreign exchange reserves'. This purpose continued to inform the continuance of the provision thereafter, at least till the time of the assessment years with which we are concerned. This therefore constitutes one useful aid to interpret the provisions of section 80HHD generally and sub-section (3) thereof in particular. We now turn to the concerned provision itself. It is true that sub-section (3) while setting out the multiplier that is to be applied while determining the profits derived from services rendered to foreign tourists (where this is not the sole business of the assessee) expressly permits the deduction of the FE receipts in respect of which DCs have been issued to other hotels from the total FE receipts (constituting the numerator of the multiplier) but does not provide for such deduction from the total receipts that constitute the denominator of such multiplier. However, a closer reading of sub-section (3) reveals that the profits derived from services provided to foreign tourists 'shall be the amount which bears to the profits of the business (as computed under the head 'Profits and gains of business or profession') the same proportion as the receipts specified in sub-section (2) as reduced by any payment referred to in sub-section (2A), made by the assessee bear to the total receipts of the business carried on by the assessee'. Therefore the words 'total receipts' are obviously qualified by the immediately succeeding words, viz., 'of the business carried on by the assessee'. In other words the total receipts are only those receipts that can be said to relate 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. 10CCAE. This interpretation, in our view, comports with the purpose for which the provision was introduced in the first place. Respectfully adapting the exposition of section 80HHC by the Bombay High Court in CIT v. Sudarshan Chemicals Industries Ltd.[2000 (8) TMI 73 - BOMBAY HIGH COURT], we are of the view that the words 'total receipts' in sub-section (3) of section 80HHD have to be read along with the words 'of the business carried on by the assessee' and can mean only such receipts that are exclusively from the business of the assessee. Therefore, the words 'total receipts of the business of the assessee' appearing in sub-section (3) to section 80HHD, constituting the denominator of the multiplier, have to admit of the same construction as the 'FE receipts' of the assessee in the numerator. We accordingly hold that, in so far as the FE receipts of the assessee (for the purpose of the numerator of the multiplier) excludes the FE received on behalf of other hotels and in respect of which the assessee has issued DCs under Form No. 10CCAE, the 'total receipts' in the denominator of the multiplier must also exclude the FE received on behalf of other hotels. CIT(A) has rightly computed the profits derived from services rendered by the assessee to foreign tourists by not permitting the deduction of the Nikko Hotel receipts from the total receipts while at the same time permitting the FE receipts on behalf of other hotels (covered by certificates in Form No. 10CCAE) to be so deducted. The concurrent views of both the CIT(A) and Tribunal in this regard require to be upheld. Consequently questions Nos. (a) and (b) are answered in the affirmative and against the Revenue. These appeals are accordingly dismissed with no orders as to costs. Issues Involved:1. Interpretation of Section 80HHD of the Income-tax Act, 1961.2. Correctness of the ITAT's decision regarding the deduction of payments made to hotels from the total receipts while computing deduction under Section 80HHD.3. Whether the ITAT correctly interpreted Section 80HHD(3) concerning the reduction of payments made to hotels from the total receipts of the business.Issue-wise Detailed Analysis:1. Interpretation of Section 80HHD of the Income-tax Act, 1961:The appeals concern the interpretation of Section 80HHD, which was introduced to encourage tourism and augment foreign exchange reserves by providing deductions on profits derived from services rendered to foreign tourists. The section underwent multiple amendments to clarify the conditions under which deductions could be claimed. Specifically, the provision allows for a deduction of 50% of the profits derived from services provided to foreign tourists, with the remaining profits being credited to a reserve account for business purposes.2. Correctness of the ITAT's decision regarding the deduction of payments made to hotels from the total receipts while computing deduction under Section 80HHD:The controversy revolves around whether the payments made to hotels, which are covered by certificates under sub-section (2A) of Section 80HHD, should be deducted from the total receipts of the business when computing the deduction. The ITAT upheld the CIT (Appeals) decision, which allowed the deduction of foreign exchange (FE) receipts on behalf of other hotels from the total receipts. The ITAT reasoned that these receipts do not belong to the tour operator but to the hotels, thus should not be included in the total business receipts of the assessee.3. Whether the ITAT correctly interpreted Section 80HHD(3) concerning the reduction of payments made to hotels from the total receipts of the business:The court examined the language of Section 80HHD(3), which specifies that profits derived from services to foreign tourists should be proportionate to the receipts specified in sub-section (2) as reduced by payments referred to in sub-section (2A). The court held that the 'total receipts of the business carried on by the assessee' should exclude the FE receipts made on behalf of other hotels. This interpretation aligns with the purpose of Section 80HHD, which is to encourage tourism and ensure that only the actual business receipts of the assessee are considered for the deduction.Conclusion:The court upheld the decisions of the CIT (Appeals) and the ITAT, affirming that the FE receipts on behalf of other hotels should be excluded from the total receipts of the assessee's business. Consequently, both questions were answered in the affirmative and against the Revenue, leading to the dismissal of the appeals with no orders as to costs.