2016 (11) TMI 965 - HC - Income Tax

High Court rules for assessee on section 80HHD, rejects addition of notional interest, upholds revenue on rental income classification

The High Court partially allowed the appeal, ruling in favor of the assessee on the interpretation of sub-section (4) of section 80HHD and the addition of ... Deduction u/s 80HHD - whether the reserve amounting to a sum of ₹ 44,68,966/- was properly utilized - Held that:- It is not in dispute that HRL has set up a new hotel which commenced business on April 1, 2002, i.e. to say in the same financial year in which the money was invested. It is also not in dispute that the prescribed authority has granted approval to HRL. The proceeds of the issue could be used for running of the new hotels under sub-clause (a) and could also have been used for the purpose of providing new facility for the growth of tourism in India. Tribunal did not record any finding that the money invested by the assessee or any part thereof to the share capital of HRL was utilised for any object which does not fall either within subclause (i) or sub-clause (ii). Unless such a finding is recorded, the benefit could not have been denied.The minutes of the meeting of the Board of Directors of HRL, held on March 28, 2003, shows that the funds were required by HRL for further diversification and expansion of the existing business. Expansion and diversification, according to us, are both activities pertaining to running of a hotel or any business for that matter. It could not, therefore, have been said that the reserve of a sum of ₹ 44,68,966/- was utilised by the assessee for a purpose not authorised by the statute.In that view of the matter, the addition was unwarranted altogether and the finding in that regard is arbitrary and perverse - Decided against revenue Addition of notional interest in respect of appellant’s balances with its subsidiaries - Held that:- Nothing is found from any of the judgments of the Assessing Officer, the CIT(A) or the learned Tribunal to show that the subsidiary (HRL) did not use its funds for the running of the hotel or for the purpose of providing for facilities for the growth of tourism in India nor is there any evidence to show that any part of the money due and owing by HRL to the assessee was spent for any personal business of any of the directors. Thus the addition made by the Assessing Officer and upheld by the CIT(A) and the learned Tribunal are not sustainable - Decided against revenue Rental income received - assessable as business income and not under the head ‘house property’ - Held that:- Hotel is obviously a business of the assessee. Terrace of that hotel was utilised for the purpose of installing a tower and the income arose out of the rental of the terrace. The business of the assessee is, in a sense, to let out the rooms to the guests for consideration, though strictly speaking in law it is not a case of letting out. It may be a case of licensing. Then can it be said that letting out of the terrace is not the business of the assessee? If the rental arising out of letting out of the terrace is to be treated as an income arising out of house property, the income arising out of letting out rooms of the hotel should also be similarly treated. The assessee is not prepared to have his income from hotel assessed as income arising out of house property. Therefore, the view taken by the learned Tribunal is a correct view. - Decided against assessee Issues Involved:1. Interpretation of sub-section (4) of section 80HHD of the Income Tax Act, 1961 regarding the addition of Rs. 44,68,966.2. Addition of notional interest of Rs. 40,89,045 made by the Assessing Officer.3. Classification of rental income from Spice Cell Ltd. as business income or income from house property.Issue-wise Detailed Analysis:1. Interpretation of sub-section (4) of section 80HHD of the Income Tax Act, 1961:The Tribunal upheld the addition of Rs. 44,68,966 on the grounds that the foreign exchange reserve was used by the assessee for routine additions to fixed assets and investment in equity shares of Hospitality Resorts Ltd. (HRL), which were not exclusively for the expansion of business. The Tribunal noted that the reserve created under sub-section (4) of section 80HHD must be utilized in specific ways, such as the construction of new hotels or subscription to eligible capital issues. The Tribunal did not find that the funds were used for purposes outside the permissible uses under sub-section (4). The High Court found that HRL had set up a new hotel and the prescribed authority had approved it. Therefore, the reserve was utilized as per the statute, and the addition was deemed unwarranted, making the Tribunal's finding arbitrary and perverse.2. Addition of notional interest of Rs. 40,89,045:The Assessing Officer added Rs. 40,89,045 as notional interest on the outstanding balance with HRL, assuming the assessee should have charged interest on the dues. The High Court noted that the liability to pay interest is subject to a contract between the buyer and seller, as per section 55 of the Transfer of Property Act. The Assessing Officer did not consider any contract stipulating the payment of interest. The High Court emphasized that tax authorities cannot compel a businessman to maximize profits, citing the S.A. Builders Ltd. case, which stated that commercial expediency should be considered. The High Court concluded that the addition was unsustainable as there was no evidence that HRL misused the funds or that the assessee suffered any loss, answering the question in favor of the assessee.3. Classification of rental income from Spice Cell Ltd.:The Tribunal classified the rental income from Spice Cell Ltd. as business income, despite previous orders treating it as income from house property. The High Court agreed with the Tribunal, noting that the terrace of the hotel was a commercial asset used for installing a transmission tower, generating business income. The High Court reasoned that if the rental income from the terrace were treated as house property income, then the income from letting out hotel rooms should also be similarly treated, which the assessee did not prefer. Thus, the Tribunal's view was upheld, answering the question in favor of the revenue.Conclusion:The appeal was partly allowed, with the High Court ruling in favor of the assessee on the first two issues and in favor of the revenue on the third issue.