TaxTMI 
TaxTMI 
TaxTMI 
2005 (12) TMI 232
X X X X Extracts X X X X
X X X X Extracts X X X X
....,103 made by the AO on account of preemptive utilization of reserve as chargeable to tax under s. 80HHD(5) of the IT Act, 1961." In ground No.1 the grievance of Revenue is treatment by learned CIT(A) regarding bar and catering sales, eligible for deduction under s. 80HHD of the Act. The AO in this regard, vide para B of his order has observed as under: "In P&L a/c the assessee has shown receipts on account of bar Rs. 40,34,893, catering Rs. 1,33,64,161 and towards sales of foreign liquor Rs. 98,389. Also in the Annex-A to the report under s. 80HHD, sales consideration for bar and catering are on estimation basis Rs. 3,48,950 (10 per cent of Rs. 34,89,496 which is the total realization against foreign currency exchanged with the tourists of foreign exchange). Since bar and catering items are physical commodities and are consumed by the person who purchases them, i.e. these items are sold and then consumed by the purchaser insofar there is an income of these items whereas service does not have a physical form and moreover it is not consumed. Actually the term service refers to operation of such an activity whereby certain facilities are provided to the customers for sake of conven....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervice provided to foreign tourists and will be entitled to deduction under this section. However, if such health club, beauty parlour, etc, also sells any goods or merchandise to the foreign tourist, such sale cannot be included in the term services provided to the foreign tourist and therefore, shall not be entitled to the benefit of deduction under the section.' As it is evident from the section itself deduction is to be made available to person engaged in business of a hotel or of a tour operator or of a travel agent. It clearly implies that the intention of the legislature is that deduction should be available only by virtue of such activity or service by which the foreign tourists are brought here. Specially in the case of tour operators and travel agents they are merely the channels through whom the foreign tourists are brought to India and does not anywhere include the deduction to be claimed in respect of food and liquor consumed by the tourists. This shall be clarified by citing a illustration. For example, if a foreign tourist comes to India and stays at any five star hotel but dines and takes lunch at some other restaurant, then that restaurant cannot claim deduction u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rists/Total receipts of the business ------------------------------------------------ (a) Profit of the business Rs. 1,49,05,885 computed under the head 'Profits and gains of business or profession' (b) Net foreign exchange Rs. 3,73,78,523 receipt from services provided to foreign tourists as claimed by the assessee Less: Receipts against various items sold (as discussed in para B) Bar Rs. 40,34,893 (as per P&L a/c) catering Rs. 1,33,64,161 (as per P&L a/c) Sale of liquor Rs. 98,889 (as per P&L a/c) Rs. 1,74,97,943 93.56% of Rs. 1,63,71,075.47 Rs. 1,74,97,943 (as discussed below in note 1) Less: (On account of Rs. 3,48,950.0....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntitled = Rs. 68,30,418." 2. The learned CIT(A) after considering the facts and circumstances of the case and arguments of learned counsel for the assessee has observed vide para 9 of his order as under: "That the action of the AO to treat the receipts against sale of services of bar and catering so provided to the foreign tourists with that of sale in a shop is totally incorrect because the Expln. (c) of s. 80HHD(7) is related with the exclusion of receipts of sales in those shops which are usually available in the hotels for sale of handicrafts, travelling tickets, gift items, etc. of which reference is made in the case of CIT vs. Lake Palace Hotels & Motels (p) Ltd. (1996) 130 CTR (Raj) 585 : (1997) 226 ITR 561 (Raj) decided by Hon'ble Rajasthan High Court by adopting the definition of hotel as per Websters International Dictionary and in no way is related with the essential services of catering and bar provided by a hotel. The contention of learned Authorised Representative that such services are also subject to charge under the Expenditure-tax Act as chargeable expenditure incurred in a hotel clearly explains that the same are in the nature of services provided by a hotel. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re liable for levy of service-tax. Therefore, the receipts from these items constitute sale in any shop owned or managed by the assessee. Hence, the assessee is not eligible for deduction under s. 80HHD of the Act on the receipts of sales of these items. 4. On the other hand, the learned Authorised Representative relying upon the order of learned CIT(A) has argued that provision of bar/foreign liquor, catering facilities are the services provided to foreign tourists as per s. 80HHD(2) of the Act and these are not the sales in a shop which are available in hotel like handicrafts, gift items, etc. Reliance has been placed on a decision of the jurisdictional High Court in the case of CIT vs. Lake Palace Hotels & Motels (P) Ltd. (1996) 130 CTR (Raj) 585 : (1997) 226 ITR 561 (Raj), relevant pp. 577 and 578 which read as under: "It is basically the hospitality which is provided in a hotel, may be by human service or by equipment, surroundings, atmosphere, etc. which is provided by decorated rooms beautiful furnishing. The recompense of the hotelier is for the care, pain, facility which is provided by him by way of service rendered and not by providing the room alone it could be conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as also the supply thereof to the rooms wherein the customers are lodged is incidental to the primary business of running a residential hotel, the main facility being the rooms provided to the customers and all other facilities being ancillary thereto." Further on p. 284 it has been held that "The facilities provided by a residential hotel are meant for use in the premises of the hotel. The rooms are meant for use during the period of stay of the customers, the facilities provided are for use by the resident guests and other users during their stay in the hotel premises and the charges paid for by them are for the facilities provided by the hotel. The food prepared in the hotel is meant primarily for consumption in the premises of the hotel. No article or thing which has any degree of durability is produced in the hotel. The food that is prepared is meant for the immediate consumption and is not meant to be stored for a period of time and used later by the customers who purchased the same." 7. The learned Authorised Representative has invited our attention to the Expln. (ii) of sub-cl. (va) inserted to s. 28 of IT Act w.e.f. 1st April, 2003 as "'service' means service of any desc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f work and labour is where the principle object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel. The test is whether or not the work and labour bestowed and in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance, one for work and labour or one for the sale of a chattel. 11. To construe a transaction as sale there should be an agreement relating to goods to be supplied by passing title on those goods, and that it was of the essence of such a concept that both the agreement and the sale should relate to one and the same subject-matter. There would be no sale if there was no agreement to sell the materials as such, The mere fact that in a contract of work or service which belonged to the party performing service or executing the work stands transferred to the other party is not enough. To constitute a sale, the Revenue has to establish that there was a sale dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uting the work or performing the service. But, then in such cases the transaction would not be one and indivisible, but would fall into the two separate agreements, one of work or service and the other of sale. 15. What precisely then is the nature of the transaction and the intention of the parties when a hotelier receives a guest in his hotel? Is there in that transaction an intention to sell him food including liquor contained in the meals served to him during his stay in the hotel? It stands to reason that during such stay a well-equipped hotel would have to furnish a number of amenities to render the customer's stay comfortable. In the supply of such amenities, do the hotelier and his customer enter into several contracts every time an amenity is furnished? When a traveller, by plane or by steam-ship, purchases his passage-ticket, the transaction is one for his passage from one place to another. If, in the course of carrying out that transaction, the traveler is supplied with drinks or meals or cigarettes, no one would think that the transaction involves separate sales each time any of those things is supplied. The transaction is essentially one of carrying the passenger to h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a hotel proprietor, in his capacity as an inn-keeper is, on the other hand, bound by the common law or the custom of the realm to receive and lodge in his inn all comers who are travellers and to entertain them at reasonable prices without any special or previous contract unless he has some reasonable ground of refusal. The rights and obligations of hotel proprietors are governed by statute which has more or less incorporated the common law. The contract between such a hotel proprietor and a traveller presenting himself to him for lodging is one which is essentially a contract of service and facilities provided at reasonable price. 18. In the present case, the transaction between a hotelier and a visitor to his hotel is thus one essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals, liquor at stated hours. Therefore, we are in agreement with the decision of learned CIT(A) and ratios of decisions by various Courts as discussed above and statutory provisions referred to above and a view that Rs. 1,67,20,025 being the receipt on realization against the services provided to foreign tourists by the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ile making the disallowance of the expenditure on this account has not properly looked into the details of the expenses submitted by the assessee since the expenses amounting to Rs. 3,20,145 were the expenses incurred by the staff and others which were also disallowed by the AO considering the same as expenses incurred by the partners alongwith the expenses incurred by the partners on travelling and tours within and outside India amounting to Rs. 14,52,111. The nature of business of the assessee is such that it is beyond doubt that lot of meetings have to be made within the country and outside India to contact the outside agents and to see the working in other hotels outside the country which are preferred by the persons resident in those countries, so that such facilities are also provided in the assessee's hotel for those persons when they come as visitors as foreign tourists to the assessee's hotel. We are convinced with the arguments of learned Authorised Representative in the absence of any material against the assessee but personal element in such expenditure cannot be ruled out. Therefore, the learned CIT(A) has rightly disallowed 10 per cent out of expenditure incurred by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... manner as specified in cl. (b) of sub-s. (5) of 80HHD. Accordingly a show-cause notice was issued under s. 142(1) of the IT Act. In compliance the assessee submitted reply on 8th Feb., 2003 wherein it was stated that: The plain reading of sub-s. (4) of s. 80HHD if looked and analyzed in the context of intention of the legislature then there is restriction for claiming the deduction for utilizing the said amount for creation of capital assets so that the promotional activities of tourism industries take place. It is true that the capital expenditure is to be done before within a period of five years from the end of the year in which the amount was credited. However it does not put any restrictions of not utilizing the amount in the various activities as indicated therein during the year in which the said amount was credited. The assessee has taken plea that the exemption provisions should be liberally construed, for which the assessee has placed reliance on various case laws: 1. CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1385) 156 ITR 323 (SC); 2. Saroj Agrawal vs. CIT (1985) 49 CTR (SC) 183 : (1985) 156 ITR 497 (SC); 3. CIT vs. Kulu Valley Transport Co. (P) Ltd. (1970) 77 IT....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the account was credited. Moreover, it occurs very absurd and illogical that the amount was utilized from an entity which was not in existence. There are 2 points of elaboration here. (a) When such amount was credited in the said reserves? i.e. it should have been credited on 31st March, 2000. Because the reserve is created only when the P&L a/c is drawn and P&L a/c is drawn at the end of the year. To substantiate this point, it is necessary to ascertain as to when an income accrues from firm to its partners, i.e. the right of a partner to receive the share of the profit of the firm for an accounting year arises on the settlement of accounts of the firm on the last date of the accounting year. It clearly means that settlement of the account of the firm takes place on the last date of the accounting year and reserve is created only when the profits from such P&L a/c is transferred to the reserve. In support of above view reliance on ratio of various case laws is placed viz., CIT vs. Ashok Bhai Chimanbhai (1965) 56 ITR 42 (SC), CIT vs. Goverdhan Lal (1968) 69 ITR 675 (SC), Grave Pharine Distributors vs. CIT (AP). From the above facts it is clear that it was pre-emptive utilization ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds beyond that period then it shall be charged to tax in the sixth years, but insofar if there is a pre-emptive utilization of the reserves this chargeability section automatically implies that it should be charged to tax in the corresponding previous year previous in which the said reserve was pre-emptively utilized. Hence, in the light of above discussion I disallow Rs. 36,59,103 made by the assessee for deduction under s. 80HHD as it was not in accordance with cl. (b) of sub-s. (5) of s. 80HHD which reads that it is not utilized in manner as specified in sub-s. (4) of s. 80HHD of the IT Act, 1961, and be charged to tax accordingly. Therefore an amount of Rs. 36,59,103 is added back in the income declared and charged to tax during the previous year in question." 24. The learned CIT(A) after considering the facts of the case and taking into consideration the arguments of counsel of the assessee and remand report of AO have held as per paras 7 and 7.1 of his order as under: "I have perused the assessment records, papers and the submissions made before me and have also referred the remand report and have found that the contention raised by the learned counsel is having force that....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a sum equal to aggregate of- (a) fifty per cent of the profits derived by him from services provided to foreign tourists; and (b) so much of the amount out of the remaining profits referred to in cl. (a) as is debited to the P&L a/c of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized for the purposes of the business of the assessee in the manner laid down in sub-s. (4). 26. And sub-s. (4) of s. 80HHD reads as under: "The amount credited to the reserve account under cl. (b) of sub-s. (1), shall be utilized by the assessee before the expiry of a period of five years next following the previous year in which the amount was credited for the following purposes, namely (refer cls. '(a)' to '(f)' in the Act). 27. Now at this juncture, we have to see the meaning of "reserve". Reserves as per Black's Law Dictionary means, "Funds set aside to cover future expenses, losses, claims or liabilities". In the present case, reserves are to be created out of profits of the business of the assessee. The profits do not accrue from day to day or even from month to month. The concept of accrual of profits of a business involves th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... utilized by the assessee before the expiry of a period of five years next following the previous year in which the amount was credited for the purposes mentioned in sub-s. (4) to s. 80HHD of the Act. The assessee in the present case had utilized the reserve which was not there in the account. The assessee had an opening balance of reserve amounting to Rs. 71,23,244 as at 1st April, 1999 and whereas the assessee had utilized Rs. 1,07,82,347 before the expiry of the previous year ending on 31st March, 2000. Thus, the assessee had utilized the reserves amounting to Rs. 36,59,103 which were not there in the reserve account. Therefore, the assessee cannot be given benefit of utilization of the reserves which as per sub-s. (4) to s. 80HHD r/w cl. (b) to s. 80HHD(1), have to be utilized before the expiry of a period of 5 years next following the previous year in which the amount was credited. The reserves created by an amount of Rs. 42,03,295 by the assessee as on 31st March, 2000 have to be utilized within 5 years next following the previous year ending 31st March, 2000, i.e., between 31st March, 2001 to 31st March, 2005. The utilization by the assessee does not fall between the said pe....