1989 (6) TMI 80 - AT - Income Tax

Tribunal grants deductions and adjustments, remands for Supreme Court review.

INDIAN HOTELS COMPANY LTD. Versus INSPECTING ASSISTANT COMMISSIONER.

The Tribunal ruled in favor of the assessee on various issues, directing the Income-tax Appellate Tribunal to modify the assessment in line with the ... - Issues Involved:1. Applicability of provisions of s. 40(c) or s. 40A(5) of the Act.2. Consideration of service charges for computing disallowance under s. 40A(5) of the Act.3. Deduction of fees paid to M/s D.M. Harish & Co. under s. 80VV of the Act.4. Disallowance under s. 37(3A) of the Act for expenditure on photographs.5. Deduction of Rs. 34,70,845 spent on decoration as revenue expenditure.6. Entitlement to Investment Allowance for plant and machinery installed in the hotel.7. Entitlement to initial depreciation under s. 32(1)(v) for expenditure on hotel building construction.8. Deduction of Rs. 31,24,688 spent on hotel building as revenue expenditure.9. Deduction of Rs. 18,28,953 incurred during hotel construction.10. Deduction of Rs. 28,75,000 paid to settle a dispute.11. Claim for extra shift depreciation allowance (ESA) on air conditioning plant.12. Set-off of deficiency under s. 80J against profits of other units.13. Interest charged under s. 215 of the Act.14. Depreciation on hotel buildings treated as plant.15. Addition of Rs. 35,60,326 for income from operating and technical service contracts.16. Classification of decorative items as plant.17. Eligibility of flight kitchen for investment allowance, ESA, and relief under s. 80-J.Issue-wise Detailed Analysis:1. Applicability of Provisions of s. 40(c) or s. 40A(5) of the Act:The assessee contended that s. 40(c) applies to employee-directors, while the Revenue argued for s. 40A(5). The Tribunal accepted the assessee's stance based on precedents from Geoffrey Manners & Co. Ltd., CIT vs. D.B.R. Mills, and CIT vs. Indian Molasses Co. (P) Ltd., directing the IAC to modify the assessment accordingly.2. Consideration of Service Charges for Computing Disallowance under s. 40A(5) of the Act:The assessee argued that service charges received by employees should not be considered under s. 40A(5), supported by the Tribunal's decision in Piem Hotels Ltd. and Supreme Court rulings. The Tribunal found merit in the assessee's argument and directed the IAC to modify the assessment.3. Deduction of Fees Paid to M/s D.M. Harish & Co. under s. 80VV of the Act:The IAC allowed Rs. 20,000 but disallowed Rs. 17,000, invoking s. 80VV. The CIT(A) directed verification and deduction under s. 80VV. The Tribunal upheld CIT(A)'s order, finding it unambiguous.4. Disallowance under s. 37(3A) of the Act for Expenditure on Photographs:The assessee argued against invoking s. 37(3A) for Rs. 1,75,000 spent on photographs. The Tribunal upheld the IT authorities' action, noting the use of photographs for publicity in in-house magazines and displays, supporting the disallowance.5. Deduction of Rs. 34,70,845 Spent on Decoration as Revenue Expenditure:The assessee argued this expenditure should be revenue in nature, citing CIT vs. Dasaprakash. The Tribunal agreed, noting the hotel industry's need for regular expenditure on decorations and the lease agreement allowing removal of movable items. The IAC was directed to allow the deduction.6. Entitlement to Investment Allowance for Plant and Machinery Installed in the Hotel:The Tribunal noted a similar issue pending before the Supreme Court for the asst. yr. 1978-79. The matter was remanded to the IAC for adjustment based on the Supreme Court's decision.7. Entitlement to Initial Depreciation under s. 32(1)(v) for Expenditure on Hotel Building Construction:The assessee sought to substitute the ground for initial depreciation with outright deduction of Rs. 31,24,688 as revenue expenditure. The Tribunal allowed this substitution and directed the IAC to allow the deduction, noting the expenditure was necessary for obtaining the hotel management contract.8. Deduction of Rs. 31,24,688 Spent on Hotel Building as Revenue Expenditure:The Tribunal accepted the assessee's claim for outright deduction, noting the expenditure was necessary for managing and running the hotel, and directed the IAC to allow the deduction.9. Deduction of Rs. 18,28,953 Incurred During Hotel Construction:The assessee argued this expenditure was for expanding its hotel activities, not pre-start-up expenses. The Tribunal accepted this argument, directing the IAC to allow the deduction, distinguishing it from the Challapalli Sugar case.10. Deduction of Rs. 28,75,000 Paid to Settle a Dispute:The Tribunal found the payment to settle the dispute with Shri Sheonath Singh and others was incidental to the business and allowed the deduction, directing the IAC to modify the assessment.11. Claim for Extra Shift Depreciation Allowance (ESA) on Air Conditioning Plant:The Tribunal endorsed the CIT(A)'s view that the assessee was entitled to extra depreciation allowance for approved hotels under Item (iii) of the IT Rules, not ESA under Item (iv), and upheld the CIT(A)'s directions.12. Set-off of Deficiency under s. 80J Against Profits of Other Units:The Tribunal directed the IAC to accept the assessee's claim for set-off, following the Tribunal's decision in Indo French Time Industries Pvt. Ltd., which applied Supreme Court precedents.13. Interest Charged under s. 215 of the Act:The assessee agreed to approach the CIT(A) under s. 154 for this issue, making the ground infructuous.14. Depreciation on Hotel Buildings Treated as Plant:The Tribunal allowed the additional ground and directed the IAC to treat hotel buildings as plant for depreciation purposes, following the Tribunal's decisions in similar cases.15. Addition of Rs. 35,60,326 for Income from Operating and Technical Service Contracts:The Tribunal upheld the CIT(A)'s deletion of the addition, noting the change in accounting method was bonafide and consistently followed, and did not adversely affect revenue.16. Classification of Decorative Items as Plant:In light of the Tribunal's decision to allow outright deduction of Rs. 34,70,845, the issue became infructuous and was rejected.17. Eligibility of Flight Kitchen for Investment Allowance, ESA, and Relief under s. 80-J:The Tribunal noted the issue was pending before the Supreme Court and remanded the matter to the IAC for adjustment based on the Supreme Court's decision.