In this appeal, assessee has taken following grounds of appeal: "1. That learned CIT has erred in his order under s. 263 of IT Act in directing recomputation of deduction available to appellant under s. 80HHD by excluding lease rentals and interest income for calculating said deduction under s. 80HHD(3). That learned CIT has erred in fact and law in ordering recomputation of appellant s deduction under s. 80HHD in manner which is contrary to provisions of s. 80HHD as well as to clear analogous case-law in favour of appellant as well as Board circulars under s. 80HHC of Act, which have not been distinguished or commented upon. That learned CIT has erred on facts and in law in setting aside order of AO to extent of claim on account of repairs and replacement (Rs. 53.82 lakhs) and building maintenance (Rs. 31.91 lakhs) which has been restored to file of AO to make further inquiries so as to find out which part of expenditure is capital meriting disallowance. That learned CIT has erred on facts, and in law, per record and in view of detailed written submissions and material placed before learned CIT which forms part of assessment record, in holding that order of AO was erroneous and prejudicial to interest of revenue to extent of directions given to AO in order under appeal. That learned CIT has erred in invoking provisions of s. 263, inter alia, as same do not permit roving inquiries or substitution of CIT s opinion for opinion of AO, particularly when view of learned CIT are contrary to record, to precedents and case-law in appellant s favour and contrary to provisions of Act. That learned CIT has erred in stating that vouchers, bills and books were not examined. All relevant records, copies of accounts and details were duly filed or produced before AO and as such too, learned CIT has erred i n invoking provisions of s. 263 for restoring matter regarding repairs, replacement and building maintenance to AO. That grounds of appeal as herein, are without prejudice to each other. That order of learned CIT is against law and facts of case involved and beyond his jurisdiction under s. 263 of Act. That appellant craves leave to add, alter, forego and/or modify any ground(s) of appeal or before time of hearing." Since grounds of appeal are interconnected, they are being disposed of together for sake of convenience. sole issue in this appeal relates to order passed under s. 263 by t h e CIT directing AO to recompute deduction under s. 80HHD by excluding lease rental and interest income and setting aside order to AO to extent expenses claimed on account of repairs and replacement Rs. 53.82 lakhs and building maintenance Rs. 31.91 lakhs, which were restored back to file of AO to make further enquiries to find out which part of expenditure is capital meriting disallowance. brief facts of case are that assessee is carrying on business as partnership firm of running hotel. For previous year ended relevant to asst. yr. 1996-97, assessee filed return of income declaring total income of Rs. 50,87,500. While computing income, assessee claimed deduction under s. 80HHD of Rs. 30,87,178 based on certificate of auditor. assessment was completed on 29th Jan., 1999 by passing order under s. 143(3) of Act on total income of Rs. 51,01,640 by making addition on account of disallowance of conveyance expenses of Rs. 14,140. learned CIT on perusal of assessment records found that assessee had claimed deduction under s. 80HHD on lease rent and interest income. He also found that repairs and replacement expenses amounting to Rs. 53,82,290 were allowed by AO without examination. Similarly, Rs. 35,91,991 was allowed as building maintenance without making any enquiry in this regard. He, therefore, issued notice under s. 263 of Act on 7th March, 2001 proposing to pass order enhancing, modifying or cancelling assessment order dt. 29th Jan., 1999 and directing fresh assessment. In response to notice, Shri Anil Kumar Chopra, FCA appeared on behalf of assessee and filed written submissions opposing recourse to s. 263. It was submitted that deduction under s. 80HH was allowed on business income of assessee and not business income of hotel only and further deduction under this section was to be calculated in manner laid down by CBDT in Circular issued for purpose of calculating deduction under s. 80HHC. It was further submitted that business of hotel and other activities were interlinked having common management, ownership and funds. Regarding repairs and replacement and building maintenance, it was submitted that complete information of facts and judicial decisions were placed before AO. AO having satisfied himself that those constituted revenue expenditure, allowed deduction. learned CIT after considering submission of learned Authorised Representative of assessee concluded that deduction under s. 80HHD was to be restricted to income derived from services provided to foreign tourists. He relied on decisions of Hon ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 CTR (SC) 50: (1978) 113 ITR 84 (SC), CIT vs. Sterling Foods (1999) 153 CTR (SC) 439: (1999) 237 ITR 579 (SC) and decision in case of Hindustan Lever Ltd. vs. CIT (1999) 156 CTR (SC) 506: (1999) 239 ITR 297 (SC) and held that lease rent was earned on account of exploitation of business assets leased out to others. immediate source of income was leasing and no profit was derived from services provided to foreign tourists. He also noted that immediate source of interest income was deposit in bank and no services rendered to foreign tourists. He, therefore, directed AO to exclude lease rental and interest income while calculating deduction under s. 80HHD(3). With regard to allowance of deduction on account of repairs, and replacement of Rs. 53.82 lakhs and building maintenance of Rs. 35.91 lakhs, he observed that no enquiry was made by AO as to whether expenses pertained to current repairs or were in nature of replacement or addition to fixed assets. books of account and vouchers pertaining to expenses were not examined by him. He, therefore, held that failure on part of AO to make proper enquiries with regard to expenditure incurred part of AO to make proper enquiries with regard to expenditure incurred by assessee under head Building maintenance, repair and replacement rendered order passed by him erroneous and prejudicial to interest of Revenue. For this, he placed reliance on decision of Hon ble Delhi High Court in case of Gee Vee Enterprises vs. Addl. CIT 1975 CTR (Del) 61: (1975) 99 ITR 375 (Del). Hence, he passed order under s. 263 directing AO to exclude lease rental and interest income, while allowing deduction under s. 80HHD and set aside order of AO to extent of claim on account of repairs and replacement Rs. 53.82 lakhs and building maintenance Rs. 35.91 lakhs and restored it to file of AO to make further enquiries to find out which part of expenditure is capital meriting disallowance. learned Authorised Representative for assessee argued and submitted that deduction under s. 80HHD was correctly allowed by AO based on appropriate audit certificate and as income involved is correctly assessed as business income in facts, law and Board s circulars involved. It was also his submission that as amount was irrefutably correctly allowed and no adverse revision order was merited by learned CIT. He submitted that income was assessed as per information, details and materials on record and after due consideration of same, said details/information etc. included in balance sheet and P&L a/c for s. HRD computation. Sec. 80HHD computation, 80HHD prescribed certificate of auditor pertaining to nature of business that includes leasing, etc. He also contended that income involved constitutes profits and gains of business and is to be assessed as such and that deduction under s. 80HHD was correctly made including as per Board s Circular. He also submitted that assessee s hotel, leasing and finance income is consolidated business, which is interlinked with community of management, ownership, control and funds. common factors include same office, staff, books of account and records, one balance sheet and P&L a/c, same members, same bank account, same partners and managers and interlinking of funds, which flow from one to other either way in normal course of business. He further submitted that in view of scale of business activities and facts involved, where substantial funds, efforts, skill, acumen orders, follow ups, research, etc. are involved apart from community of management, ownership, control and funds, same is indisputably part of assessee s business of leasing finance, interest income involved is correctly assessed as business income. Deduction under s. 80HHD is to be allowed on business income of assessee and not business income of hotel only. In fact, there is no formula in Act or possibility of computing in precise manner excluding business income of hotel. It is only hotel s foreign exchange income, which must necessarily relate to hotel activity for purpose of computing such deduction and same is to be allowed on overall business turnover and overall business income of assessee involved. This is as per clear provisions of Act and as seen in Board s Circular is to be computed in purely arithmetical mechanical manner. Board s Circulars relate to analogous provisions of s. 80HHC, where similar arithmetical mechanical formula is provided. In short, deduction is correctly allowed and no adverse inference under s. 263 is warranted or merited in this matter. learned counsel for assessee further submitted that repairs n d replacement as well as building maintenance expenses were correctly allowed as revenue expense. matter has been completely and thoroughly examined by learned AO with complete information that it is nobody s case that any new asset has been created. It was further submitted that it will be seen from copy of tax audit report that said amount has been duly considered as revenue expenses. expense involved is charged to P&L a/c. It was further submitted that assessee s expenses of substantial income from hotel business alike claim is pursuant to high quality, boutique, hotel operations. total income of year was Rs. 3,28,62,051.50 pursuant to repairs and maintenance and decor same as enhanced to Rs. 4,61,88,594.50 in next year. This is indication of commercial activity and bona fides of assessee. It was also submitted that from decisions placed on record in clear and irrefutable supports of assessee s case, it will be seen that it support assessee s view that amount has been correctly allowed by AO as revenue expenses. Hence, it was submitted that with reliance on case law, no revision order under s. 263 changing assessment order as made or disallowing these expenses correctly allowed as revenue expenses is capable of being made or required to be made in case. On other hand, learned Departmental Representative argued and submitted that under s. 263, CIT exercised administrative and judicial functions. He, after examining assessment records, passed order. There i s no flaw in this. He submitted that under s. 143(3), AO has not properly examined and applied his mind to matter of allowing deduction under s. 80HHD on lease rent and interest income and also in allowing deduction as revenue expenditure and repairs, replacement and building maintenance. He also submitted that principle of res judicata are not applicable to income- tax proceedings. He further submitted that it is duty of CIT under s. 263 t o see that due to error of AO, no loss is caused to Revenue. He submitted that it is not in dispute that AO has sent details of repairs, replacement and maintenance but he has not carried out subsequent enquiries to determine whether same are allowable as revenue expenditure. He further submitted that lease rent received by assessee is on account of beverage bottles on which assessee had claimed 100 per cent depreciation. It was his submission that deduction under s. 80HHD was allowable to assessee only as receipts on account of services provided to foreign tourists, which are received in or brought into India by assessee in convertible foreign exchange. He submitted that deduction is not available with respect to every receipts by assessee. He placed reliance on decision of Hon ble Supreme Court in Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99: (2003) 262 ITR 278 (SC) and submitted that Hon ble Supreme Court has held that interest derived by industrial undertaking of assessee on deposits made with Electricity Board for supply of electricity for running industrial undertaking could not be said to flow directly from industrial undertaking itself and was not profit or gains derived by undertaking for purpose of special deduction under s. 80HH. Hence he submitted that in view of Hon ble Supreme Court judgment and interpretation of word derived from and also keeping in view fact that no effort is required on part of assessee to earn interest income same cannot be treated as income eligible for deduction under s. 80HHD of Act. He also treated as income eligible for deduction under s. 80HHD of Act. He also placed reliance on decision of Ahmedabad Bench of Tribunal in Dy. CIT vs. Mira Industries (2004) 86 TTJ (Ahd) 309: (2003) 87 ITD 475 (Ahd) and submitted that it was held by Tribunal that interest in general terms is return or compensation for use or retention by one person of sum of money belonging to or owed to another (Helsbury s Laws). It is payment for commercial compensation for non-payment of debt on time. When sale is effected money consideration thereof becomes due and payable and interest starts running as per terms stipulated. Such interest is not consideration of sale of goods of industrial undertaking, even though it has its origin in sale, for sale of goods manufactured if not made, there would not be debt and consequently no interest, but immediate source is debt owed, which takes it degree away from industrial undertaking. Thus, interest on late payment of sale proceeds would not be eligible for deduction under s. 80HH and 80-I/80-IA as immediate source is debt owed and not industrial undertaking. He further submitted that to claim deduction under s. 80HHD there has to be live wire connection between income and provision of services to foreign tourists. He submitted that as per scheme of section, 50 per cent of profits derived by assessee from services provided to foreign tourists and credited to reserve account to be utilised for purpose of business of assessee in manner laid down under sub-s. (4) is to be allowed deduction to assessee. Hence, he submitted that profits allowed as deduction has to be utilised in hotel industry. He also submitted that Hon ble Madras High Court in Pandian Chemicals Ltd. vs. CIT (2004) 270 ITR 448 (Mad) has reiterated decision in Pandian Chemicals Ltd. vs. CIT (supra) wherein it was held that Tribunal was right in law in holding that income from sale of scrap for asst. yr. 1979-80 was not relatable to industrial activities of assessee for purpose of s. 80HH of IT Act, 1961. He further placed reliance on decision of Hon ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1: (2000) 243 ITR 83 (SC), wherein it was held that incorrect assumption of facts or incorrect application of law will satisfy requirement of order being erroneous in same category of false orders passed without application of mind by AO. He also placed reliance on decision of Hon ble Supreme Court in Ram Pyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC), wherein it was held that there was ample material to show that AO made assessment in undue h u r r y without making any enquiries to satisfy himself before passing assessment order. Therefore, order was held to be erroneous and prejudicial to interest of Revenue. He placed reliance on decision of Hon ble Punjab & Haryana High Court in CIT vs. Export House (2002) 175 CTR (P&H) 137: (2002) 256 ITR 603 (P&H), wherein it was held that CIT on examining record had noticed that details of various expenses, which were furnished by assessee only showed dates on which expenses were incurred and/or persons to whom payment for these expenses were made. No material or evidence was furnished to show that these expenses had been incurred on any of activities mentioned in various sub-clauses of s. 35B(1)(b). order of assessment was erroneous to that extent causing prejudice to interest of Revenue. He also placed reliance on decision of Hon ble Madras High Court in CIT vs. South India Shipping Corpn. Ltd. (1998) 147 CTR (Mad) 433: (1998) 233 ITR 546 (Mad), wherein it was held that when CIT after perusal of records of assessment arrived at finding that claim of assessee was allowed in perfunctory manner or in mechanical manner without examining allowability of claim for weighted deduction, under which in sub-clause of s. 35B(1)(b) of Act claim would fall. CIT was justified in passing order under s. 263 of Act. He further relied on decision of Hon ble Delhi High Court in Gee Vee Enterprises vs. Addl. CIT (supra), wherein it was held that it is incumbent on ITO to further investigate facts stated in return when circumstances would make such enquiry prudent that word "erroneous" in s . 263 includes failure to make such enquiry. Hence he fully justified order passed by CIT under s. 263 of Act. We have heard rival submissions and perused order of both lower authorities and materials available on record. We find that while passing order under s. 143(3), AO has allowed deduction under s. 80HHD to assessee including lease rent and interest income earned from Bank. T h e AO has also allowed deduction on account of repairs and replacement expenses of Rs. 53.82 lakhs and building maintenance Rs. 35.91 lakhs to assessee while making assessment. learned CIT was of view that deduction under s. 80HHD was not allowable on lease rent income and interest income earned from Bank by assessee. He was also of view that although AO has gone through details submitted during course of assessment for claim of deduction on account of repairs and replacement of Rs. 55.82 lakhs and building maintenance Rs. 31.91 lakhs, AO before accepting such details had not made further enquiries to ascertain whether amount of expenditure claimed by assessee was capital in nature. Hence by issuing notice to assessee, he passed order under s. 263 of Act and directed AO to allow deduction under s. 80HHD by excluding lease rent and interest income and set aside order of AO to extent it allows claims on account of repairs and replacement Rs, 53.82 lakhs and building maintenance Rs. 35.91 lakhs and restored it to file of AO to make further enquiries so as to find out which part of expenditure is capital meriting disallowance. We find that learned Authorised Representative for assessee has submitted that deduction under s. 80HHD was allowable to assessee on business income of assessee and not business income of hotel only. contention of learned Authorised Representative of assessee is that there is no formula in Act or possibility of computing in precise manner excluding business income of hotel. It is only hotel s foreign exchange income, which must necessarily relate to hotel activity for purpose of computing deduction and same is to be allowed on overall business turnover and overall business income of assessee involved. It is contention of assessee that this is as per clear provisions of Act and as per Board s Circular that deduction is to be computed in purely arithmetical and mechanical manner. Board s Circular relate to analogous provisions of s. 80HHC where arithmetical mechanical formula is provided. Sec. 80HHD reads as under: Sec. 80HHD reads as under: "80HHD (1). Where assessee, being Indian company or person (other than company) resident in India, is engaged in business of hotel or of tour operator, approved by prescribed authority, in this behalf or of travel agent, there shall, in accordance with and subject to provisions of this section, be allowed, in computing total income of assessee, deduction of sum equal to aggregate of (a) fifty per cent of profits derived by him from services provided to foreign tourists; and (b) so much of amount out of remaining profits referred to in cl. (a) as is debited to P&L a/c of previous year in respect of which deduction is to be allowed and credited to reserve account to be utilised for purposes of business of assessee in manner laid down in sub-s. (4):" From bare reading of above section, it will be seen that deduction is allowed under this section in respect of hotel business of assessee, which consists of services provided to foreign tourists. Thus, for computing deduction allowable under this section, we will first have to compute income from hotel business of assessee. In instant case, we find that besides hotel business, assessee has income from leasing business and also has earned interest income on fixed deposits kept with bank. assessee is maintaining combined books of account and combined P&L a/c and balance sheet has been drawn by assessee for income computed by assessee under head Profits and gains . AO will have to determine income from leasing business of assessee and also income from interest received by assessee and same will have to be deducted from said income from business profits and gains to arrive at income from hotel business of assessee. Since assessee has receipts in hotel business locally as well as receipts from services provided to foreign tourists, deduction has to be computed by applying formula provided in sub-s. (3) of s. 80HHD, i.e., Profits from hotel business x Receipts from services provided to foreign tourists Total Receipts of hotel business of assessee. deduction allowable under s. 80HHD has to be computed. resultant amount shall be deduction allowable to assessee under s. 80HHD of Act. It is seen that AO has allowed deduction as claimed by assessee on basis of certificate issued by chartered accountant before 30th Oct., 1998. On perusal of certificate of chartered accountant, which is filed at pp. 20 and 21 of paper book, it is seen that while calculating deduction, income from leasing business and interest has been included in business profits and gains for purpose of arriving at deduction allowable under s. 80HHD. In our considered opinion, same is not according to provisions of s. 80HHD of Act. We find that learned CIT, while passing order under s. 263 has directed AO to exclude lease rent and interest income for allowing deduction under s. 80HHD. We would like to clarify that total lease rent received and interest income is not to be excluded from business income while arriving at deduction under s. 80HHD. It is only income element included in receipts from lease rent and interest, which has to be excluded from business income for purpose of allowing deduction under s. 80HHD. In other words, expenditure attributable to earning of lease rent and interest has to be deducted from gross receipts on account of lease rent and net receipts has to be deducted from business income for purpose of determining deduction allowable under s. 80HHD of Act. Thus, proportionate expenses relatable to lease rent and interest earning will be deducted from hotel business income of assessee and which should meet main grievance of assessee in this appeal. We modify order of CIT to this extent. Further, with regard to setting aside of issue on account of repairs and replacement Rs. 53.82 lakhs and building maintenance Rs. 35.91 lakhs to file of AO for making further enquiries in order to determine expenditure, which is of capital nature for making disallowance we find that it is not in dispute that full details of expenditure in question were filed before AO and CIT. CIT has alleged that AO has not examined these details. We further observe that after examining these details, CIT could not bring on record even single instance of expenditure of capital nature which was included in these expenses. In circumstances there is no material before us to come to conclusion that AO accepted these details without examination. Hence no error could be pointed out by CIT in respect of these expenses in order of AO. setting aside of same to allow AO to have second innings is not permissible. Therefore, order of CIT is modified as stated above. grounds of appeal are partly allowed. In result, appeal of assessee is partly allowed. *** HOTEL DIPLOMAT v. ADDITIONAL COMMISSIONER OF INCOME TAX