Statutory reserve use, notional interest, and hotel terrace rental income were each tested on commercial and tax principles.

Reserve utilisation under section 80HHD(4) was upheld where the investment was made by subscription to equity shares of a hotel company formed for a new hotel project, with no material showing diversion beyond the statutory objects; the disallowance was therefore unjustified. Notional interest on an outstanding balance due from a subsidiary was rejected because there was no legal or contractual basis requiring interest to be charged, and taxable income could not be imputed on that footing. Rental income from letting out a hotel terrace was treated as business income, since the terrace formed part of the commercial hotel asset and was exploited in the course of the hotel business.

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Issues: (i) Whether the amount of Rs. 44,68,966 claimed out of the reserve under section 80HHD(4) was validly utilised on subscription to equity shares of the hotel company, (ii) whether the notional interest addition on the outstanding balance due from the subsidiary was sustainable, and (iii) whether rental income from letting out the hotel terrace was assessable as business income or income from house property.

Issue (i): Whether the amount of Rs. 44,68,966 claimed out of the reserve under section 80HHD(4) was validly utilised on subscription to equity shares of the hotel company.

Analysis: The reserve under section 80HHD(4) could be applied only in the modes permitted by the statute, including subscription to equity shares forming part of an eligible issue of capital. The company in which the assessee invested had set up a new hotel with prescribed approval, and the record did not show that the issue proceeds were used for any purpose outside the statutory objects. The facts disclosed that the funds were connected with setting up and running a new hotel and with the growth of tourism.

Conclusion: The addition of Rs. 44,68,966 was unjustified and the issue was decided in favour of the assessee.

Issue (ii): Whether the notional interest addition on the outstanding balance due from the subsidiary was sustainable.

Analysis: The outstanding sum arose in the course of a sale transaction involving immovable property. In the absence of material showing that the assessee was bound to charge interest or that the subsidiary was obliged to pay it, the taxing authorities could not presume a notional interest income. The principle that a businessman cannot be compelled to maximise profit applied, and there was no basis to treat the non-charging of interest as taxable income in the manner adopted by the authorities.

Conclusion: The notional interest addition was unsustainable and the issue was decided in favour of the assessee.

Issue (iii): Whether rental income from letting out the hotel terrace was assessable as business income or income from house property.

Analysis: The terrace formed part of the hotel's commercial asset and was exploited in the course of the assessee's hotel business. The letting out of such space was treated as an incidence of business exploitation rather than passive ownership of property, and the Tribunal's view was consistent with that commercial character.

Conclusion: The rental income was correctly assessed as business income, and this issue was decided in favour of the revenue.

Final Conclusion: The assessee succeeded on the first two questions and failed on the third, so the appeal was allowed only to that extent.

Ratio Decidendi: Where statutory reserve utilisation is traceable to a permitted mode and the record does not show diversion to a non-qualifying purpose, the benefit cannot be denied; similarly, a notional income addition cannot be sustained without a legal or contractual basis for charging such income, while exploitation of a commercial hotel asset may yield business income rather than income from house property.

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