B.P. JAIN, M. : ORDER This appeal arises from order of learned CIT(A)-II, Jaipur, vide his order dt. 14th July, 2003 for asst. yr. 2000-01. Revenue has raised in all three grounds of appeal as under : "On facts and in circumstances of case and in law, learned CIT(A)-II, Jaipur, has erred in : 1. Holding that receipts of Rs. 1,6 7 ,20,025 being bar and catering sales are eligible for deduction under s. 80HHD ignoring definition of services provided to foreign tourists in Explanation to s. 80HHD( 7 ) and further in directing AO to allow deduction under s. 80HHD accordingly. 2. Reducing disallowance of Rs. 1 7 , 7 2,256 out of travelling expenses to Rs. 1,45,210 only, thereby allowing relief of Rs. 16,2 7 ,046 when assessee failed to prove that such expenditure was exclusively and wholly incurred for assessee s business. 3. Deleting addition of Rs. 36,59,103 made by AO on account of pre-emptive utilization of reserve as chargeable to tax under s. 80HHD(5) of IT Act, 1961." In ground No. 1 grievance of Revenue is treatment by learned CIT(A) regarding bar and catering sales, eligible for deduction under s. 80HHD of Act. AO in this regard, vide para B of his order has observed as under : "In P&L a/c 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 Annex-A to 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 total realization against foreign currency exchanged with tourists of foreign exchange). Since bar and catering items are physical commodities and are consumed by person who purchases them, i.e. these items are sold and then consumed by purchaser insofar there is income of these items whereas service does not have physical form and moreover it is not consumed. Actually term service refers to operation of such activity whereby certain facilities are provided to customers for sake of convenience, enjoyment, pleasure, etc. Not that these facilities are consumed (intake of item) but they are utilized for fulfillment of needs, viz. accommodation, phone service, health club service, etc. So accordingly, show-cause notice was issued to assessee as to why such sales should not be construed as sale of commodity and not providing of services to foreign tourists on which benefit of deduction under s. 80HHD is available. reply was submitted by assessee wherein it is stated that it is wrong interpretation of AO to exclude bar and catering out of purview of definition of services because they are very much linked with service provided by assessee and in absence of which hotel in its true form cannot function because boarding and lodging are two facilities which are provided. services of sale of accommodation is in nature of boarding whereas services in nature of catering and bar are covered under lodging. facility of bar and catering so provided where foodsstuff and beverages were consumed by resident guests cannot be construed as sale of commodity. Hence, it is misinterpretation of statute. Submission of assessee has been examined thoroughly. In order to appreciate implications of fact that bar and catering should not be considered as sale of service but as sale of commodity, I would like to analyze corresponding statute. Sec. 80HHD provides for deduction in respect of earnings in convertible foreign exchange to assessee being Indian company or person other than company resident in India, who is engaged in business of hotel or of tour operators for services provided to foreign tourists. expression service is explicitly defined in Explanation of s. 80HHD. Service provided to foreign tourists shall not include services by way of sale in any shop owned or managed by person who carries on business of hotel or of tour operator or of travel agent. This is also clarified byCommentary of Chaturvedi, & Pithisaria sthat intention is to exclude only sale of goods/mercantile in any such shop from benefit of exemption under section. Therefore services at health club, beauty parlour, barber shop, etc. owned or managed by person who are entitled to deduction under section will be included in term service 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 foreign tourist, such sale cannot be included in term services provided to foreign tourist and therefore, shall not be entitled to benefit of deduction under section. As it is evident from section itself deduction is to be made available to person engaged in business of hotel or of tour operator or of travel agent. It clearly implies that intention of legislature is that deduction should be available only by virtue of such activity or service by which foreign tourists are brought here. Specially in case of tour operators and travel agents they are merely channels through whom foreign tourists are brought to India and does not anywhere include deduction to be claimed in respect of food and liquor consumed by tourists. This shall be clarified by citing illustration. For example, if 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 under s. 80HHD by virtue of fact that they have rendered service to foreign tourist in form of lunch and dinner. Also insofar bar and catering items and sale of foreign liquor are concerned they are sold as items/commodities. Moreover another distinction is made on fact that these items sold for consumption are liable for sales-tax whereas service/ amenities of hotels used, i.e., health-club, phone service, accommodation, swimming pool, etc. are liable for levy of service-tax. Therefore, they are two entirely different things and should be construed separately. Had said items been through sale of service, then service-tax should have been levied on them. contention of assessee in this regard is wrong and cannot be accepted. In this regard, I would like to mention that, fact of receipts in view of bar/catering/sale of foreign liquor is not disputed at all. But insofar question of treating same as receipts in lieu of services rendered to foreign tourists and accordingly deduction under s. 80HHD be made available to them, by no stretch of imagination it can be allowed, as also discussed supra. Had legislation intended only foreign currency collection as mere motive and also allowability of deduction on all receipts ancillary to original business of hotel running, then there should not have been any reasons to include sub-s. (2) which reads that such deduction be available on only sale of service provided to foreign tourists, and not on sale of any goods or merchandise in any shop owned or managed by person who carries on said business. Hence, I reiterate again that if sole objective of enactment of s. 80HHD was to merely earn foreign exchange by whatever means, then deduction shall have been allowed on all receipts and such provision of sub-s. (2) should not have been enacted at all. Therefore, in light of detailed discussions held supra, I hold that following heads of income are not part of turnover for working out deduction under s. 80HHD and therefore, claim of assessee under s. 80HHD to this extent is disallowed. working of eligible s. 80HHD deduction is as under : Calculation of deduction under s. 80HHD Profits of business computed under head Profits and gains of business or profession X Net foreign exchange receipt from services provided to foreign tourists/Total receipts of business (a) Profit of business computed under head Rs. Profits and gains of business or profession 1,49,05,885 (b) Net foreign exchange receipt from services Rs. 3, provided to foreign tourists as claimed by assessee 7 3, 7 8,523 Less : Receipts against various items sold (as discussed in para B) Rs. 40,34,893 (as per Bar P&L a/c) Rs. 1,33,64,161 (as Catering per P&L a/c) Rs. 98,889 (as per Sale of liquor P&L a/c) Rs. 1, 7 4,9 7 ,943 93.56% of Rs. 1, 7 4,9 7 ,943 Rs. 1,63, 7 1,0 7 5.4 7 (as discussed below in note 1) Less: (On account of bar and catering Rs. 3,48,950.00 bills paid in cash) Rs. 1,6 7 ,20,025.4 7 Rs. 2,06,58,49 7 .53 Note 1 [As assessee himself admitted that approximately 93.56 per cent of occupancy of hotel is of foreign tourists, then by applying same proportion receipts by way of selling of bar, catering, and foreign liquor comes out to Rs. 1,63, 7 1,0 7 5.4 7 (93.56 per cent of Rs. 1, 7 4,9 7 ,943). As it has already been discussed in para 2 that these do not constitute receipts by way of sale of service to foreign tourist within meaning of s. 80HHD hence should be reduced from total realization in foreign currency of Rs. 3, 7 3, 7 8,523]. Note 2 [Also assessee has claimed Rs. 3,48,950 as realization against bar and catering bill paid in cash by foreign tourists (10 per cent of Rs. 34,89,496 as per Note 2 of Annexure to report under s. 80HHD of Act) which shall also be disallowed as discussed above]. Therefore total disallowance on this account is = Rs. 1,63, 7 1,0 7 5.4 7 + 3,48,950 = Rs. 1,6 7 ,20,025.4 7 [Therefore realization in foreign currency within meaning of foreign currency is = Rs. 3, 7 3, 7 8,523 - Rs. 1,6 7 ,20,025.4 7 = Rs. 2,06,58,49 7 .53 (c) Total receipts of business = Rs. 4,50,82,626.6 Applying figures to formula Rs. 1,49,05,885 x Rs. 2,06,58,49 7 .53/Rs. 4,50,82,626.6 = Rs. 68,30,418 Therefore, deduction under s. 80HHD to which assessee is entitled = Rs. 68,30,418." 2. learned CIT(A) after considering facts and circumstances of case and arguments of learned counsel for assessee has observed vide para 9 of his order as under : "That action of AO to treat receipts against sale of services of bar and catering so provided to foreign tourists with that of sale in shop is totally incorrect because Expln. (c) of s. 80HHD( 7 ) is related with exclusion of receipts of sales in those shops which are usually available in hotels for sale of handicrafts, travelling tickets, gift items, etc. of which reference is made in case ofCIT vs. Lake Palace Hotels & Motels (p) Ltd. (1996) 130 CTR (Raj) 585 : (199 7 ) 226 ITR 561 (Raj)decided by Hon ble Rajasthan High Court by adopting definition of hotel as perWebsters International Dictionaryand in no way is related with essential services of catering and bar provided by hotel. contention of learned Authorised Representative that such services are also subject to charge under Expenditure-tax Act as chargeable expenditure incurred in hotel clearly explains that same are in nature of services provided by hotel. meaning of sale in shop as applied by AO if assigned to these services then in that case same will not fall as chargeable expenditure under Expenditure-tax Act because this Act does not bring in its net sales effected in shop. Further, by insertion of cl. (va) to s. 28 meaning of services is made absolutely clear by incorporating therein words lodging and boarding. Reference to notification issued by Director General (Tourism), Government of India, competent authority for approval of hotel under category of heritage hotel to which hotel of assessee belongs and ratios of decisions of apex Court and Rajasthan High Court also make it clear that such receipts are against services provided in hotel and in no manner can be considered or be construed as sale in shop. On consideration of material and evidence produced by learned counsel and ratios of decisions relied upon read together with statutory provisions of s. 80HHD and cl. (va) of s. 28, I am of view that receipts of Rs. 1,6 7 ,20,025 of realization against services provided to foreign tourists by assessee for catering and bar are eligible for deduction under s. 80HHD and AO has wrongly treated same as sale in shop. AO is directed to act accordingly." 3. We have heard parties and perused material on record. only issue in this ground is meaning of "service" in relation to s. 80HHD of Act especially when as per Expln. (c) to s. 80HHD( 7 ) "service provided to foreign tourists shall not include services by way of sale in any shop owned or managed by person who carries on business of hotel or tour operator or of travel agent". Whether receipts on account of bar, catering, sales of foreign liquor constitute "sale in any shop owned or managed by assessee". As per arguments of learned Departmental Representative who relied upon order of AO that these items are physical commodities which are sold by assessee to consumer who purchases them and then consumes same. These items are liable for sales-tax. These are not services which are utilized for fulfillment of needs of customers viz., accommodation, phone service, health- club service, swimming pool, beauty parlour services, etc. and these services club service, swimming pool, beauty parlour services, etc. and these services are not subject to sales-tax but are liable for levy of service-tax. Therefore, receipts from these items constitute sale in any shop owned or managed by assessee. Hence, assessee is not eligible for deduction under s. 80HHD of Act on receipts of sales of these items. 4. On other hand, learned Authorised Representative relying upon order of learned CIT(A) has argued that provision of bar/foreign liquor, catering facilities are services provided to foreign tourists as per s. 80HHD(2) of Act and these are not sales in shop which are available in hotel like handicrafts, gift items, etc. Reliance has been placed on decision of jurisdictional High Court in case ofCIT vs. Lake Palace Hotels & Motels (P) Ltd. (1996) 130 CTR (Raj) 585 : (199 7 ) 226 ITR 561 (Raj),relevant pp. 5 77 and 5 7 8 which read as under : "It is basically hospitality which is provided in hotel, may be by human service or by equipment, surroundings, atmosphere, etc. which is provided by decorated rooms beautiful furnishing. recompense of hotelier is for care, pain, facility which is provided by him by way of service rendered and not by providing room alone it could be considered as tool of trade. hotel industry is service oriented industry and better service higher charges. element of service is dominant object and not providing room alone. room in city like Jaipur differs from hotel to hotel. ordinary rooms may be available at Rs. 100 per day whereas suite in five star hotel may be as costly as Rs. 10,000 per day. If building of five star hotel is plant there is no reason why building of ordinary hotel should be treated differently only on account of charges for extra facilities. difference of charges is because of extra service facilities, etc." 5 . learned. Authorised Representative has also relied upon judgments of apex Court in case ofState of Punjab vs. Associated Hotels of India Ltd. 19 7 2 CTR (SC) 1 : (19 7 2) 1 SCC 4 7 2where facts of case are that respondent-company carried on business as hoteliers. As part of its business as hoteliers, company received guests to whom, besides furnishing, lodging it also served several other amenities, such as public and private rooms, bath with hot and cold running water, linen, meals during stated hours, etc. bill tendered to guest was all inclusive one. It was held by Hon ble apex Court that transaction between hotelier and visitor to his hotel is thus one essentially of service in performance of which and as part of amenities incidental to service, hotelier serves meals at stated hours. Revenue, therefore, was not entitled to split-up transaction into two parts, one of service and other of sale of foodstuffs and to split-up also bill charged by hotelier, as consisting of charges for lodging and charges for foodstuffs served to him with view to bring latter under Punjab Sales-tax Act, 1948. 6 . In case ofAdayar Gate Hotels Ltd. vs. CIT (2000) 158 CTR (Mad) 482 : (2000) 241 ITR 2 7 9 (Mad)the Hon ble Madras High Court has held at p. 282 following decision of Karnataka High Court in case ofCIT vs. Hotel Ayodhya (1993) 109 CTR (Kar) 106 : (1993) 201 ITR 1002 (Kar): "that preparation of food articles in hotel is incidental of rendering of services at hotel whether it is restaurant or lodging house. provisions of food in restaurant run by assessee within hotel premises as also supply thereof to rooms wherein customers are lodged is incidental to primary business of running residential hotel, main facility being rooms provided to customers and all other facilities being ancillary thereto." Further on p. 284 it has been held that "The facilities provided by residential hotel are meant for use in premises of hotel. rooms are meant for use during period of stay of customers, facilities provided are for use by resident guests and other users during their stay in hotel premises and charges paid for by them are for facilities provided by hotel. food prepared in hotel is meant primarily for consumption in premises of hotel. No article or thing which has any degree of durability is produced in hotel. food that is prepared is meant for immediate consumption and is not meant to be stored for period of time and used later by customers who purchased same." 7 . learned Authorised Representative has invited our attention to 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 description which is made available to potential users and includes provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging." 8. services provided by hotel are chargeable to Expenditure-tax Act which is also Central Act and authority for collection of such tax is with same AO who holds jurisdiction for income-tax case over assessee. definition of chargeable expenditure incurred in hotel as per said Act as given in s. 5 includes besides charges for accommodation, charges for food and/or drink by hotel. Provisions of food and/or drink has been treated as services provided by hotel and is, therefore, chargeable for expenditure- tax. Had food or drink been sale (as construed by AO) then in that case expenditure incurred on same will not be chargeable under Expenditure- tax Act because Expenditure-tax Act does not enlarge its jurisdiction in respect of sales effected in shop even though same is located in hotel. This view has been confirmed by Hon ble Delhi High Court in case ofR.L. Jain & Ors. vs. Union of India & Ors. (1990) 81 CTR (Del) 36 :(1989) 180 ITR 643 (Del). 9 . learned Authorised Representative further contended that neither quantum of receipts nor its realization in convertible foreign exchange has been disputed by AO and deduction worked out and certified by auditor s is therefore allowable to assessee and working given by AO by applying own process based upon presumptions and notions is incorrect and deserves to be quashed. 1 0 . We have given careful consideration to facts of case and arguments of parties. First of all, we have to draw distinction between contract for sale on one hand and contract of work and labour/service on other hand, which is often fine one. Nevertheless, distinction between two rests on clear principle. contract of sale is one whose main object is transfer of property in, and delivery of possession of, chattel as chattel to buyer. contract of work and labour is where principle object of work undertaken by payee of price is not transfer of chattelquachattel. test is whether or not work and labour bestowed and in anything that can properly become subject of sale; neither ownership of materials, nor value of skill and labour as compared with value of materials, is conclusive, although such matters may be taken into consideration in determining, in circumstances of particular case, whether contract is in substance, one for work and labour or one for sale of chattel. 1 1 . To construe transaction as sale there should be agreement relating to goods to be supplied by passing title on those goods, and that it was of essence of such concept that both agreement and sale should relate to one and same subject-matter. There would be no sale if there was no agreement to sell materials as such, mere fact that in contract of work or service which belonged to party performing service or executing work stands transferred to other party is not enough. To constitute sale, Revenue has to establish that there was sale distinct from contract, of work or service, of property so passing to other party. For example thread stitched into coat which is under repair becomes part of coat, but in contract for repairing coat parties surely did not enter into agreement of sale of that thread. Also as held in case ofAndhra Pradesh vs. Guntur Tobaccos Limited (1965) 2 SCR 16 7 , transaction was for re-drying tobacco entrusted to respondent-company by its customers. process involved keeping of moisture content of tobacco leaf at particular level and for that purpose leaf had to be packed in bales, in waterproof packing material, as it emerged from re-conditioning plant. tobacco was then returned to customer packed in costly packing material. In company s charges for re- drying there was no separate charge for value of such packing material. It was held that re-drying process could not be completed without use of packing material, that packing formed integral part of process, and that although re-dried tobacco was returned together with packing materials there was no sale of those materials as there was no intention on part of parties to enter into any transaction of sale as regards those materials. 12. Even in contract purely of work or service, it is possible that article may have to be used by person executing work and property in such articles or materials may pass to other party. That would not necessarily convert contract into one of sale of those materials. 13. Therefore in considering whether transaction falls within purview of sale or work or service, it becomes necessary at threshold to determine nature of contract involved in such transaction which will depend in each case upon its facts and circumstances and mere passing of article or commodity during course of performance of transaction in question does not render it transaction of sale. 14. In every case Court would have to find out what was primary object of transaction and intention of parties while entering into it. It may in some cases be that even while entering into contract of work or even service, parties might enter into separate agreements, one of work and service and other of sale and purchase of materials to be used in course of executing work or performing service. But, then in such cases transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and other of sale. 15. What precisely then is nature of transaction and intention of parties when hotelier receives guest in his hotel ? Is there in that transaction intention to sell him food including liquor contained in meals served to him during his stay in hotel ? It stands to reason that during such stay well-equipped hotel would have to furnish number of amenities to render customer s stay comfortable. In supply of such amenities, do hotelier and his customer enter into several contracts every time amenity is furnished ? When traveller, by plane or by steam-ship, purchases his passage- ticket, transaction is one for his passage from one place to another. If, in course of carrying out that transaction, traveller is supplied with drinks or meals or cigarettes, no one would think that transaction involves separate sales each time any of those things is supplied. transaction is essentially one of carrying passenger to his destination and if in performance of contract of carriage, something is supplied to him, such supply is only incidental to that service, not changing either pattern or nature of contract. Similarly, when clothes are given for washing to laundry, there is transaction which essentially involves work or service and if laundry man stitches button to garment which has fallen off, there is no sale of button or thread. number of such cases involving incidental uses of materials can be cited, none of which can be said to involve sale as part of main transaction. 1 6 . As decided in case ofState of Punjab vs. Associated Hotels of India(supra) where transaction in question was essentially one and indivisible, namely one of receiving customer in hotel to stay. Even if transaction is to be disintegrated, there is no question of supply of meals during such stay constituting separate contract of sale, since no intention on part of parties to sell and purchase foodstuff supplied during meal times can be realistically spelt out. No doubt, customer, during his stay, consumes number of foodstuffs. It may be possible to say that property in those foodstuffs passes from hotelier to customer at least to extent of foodstuffs consumed by him. Even if that be so, mere transfer of property, as aforesaid, is not conclusive and does not render event of such supply and consumption sale, since there is no intention to sell and purchase. transaction essentially is one of service by hotelier in performance of which meals are served as part of and incidental to that service, such amenities being regarded as essential in all well conducted modern hotels. 1 7 . In England, hotel under Hotel Proprietors Act, 1956, is establishment held out by proprietor as offering food, drink, and if so required, sleeping accommodation, without special contract, to any traveller presenting himself and who appears able and willing to pay reasonable sum for services and facilities provided. This definition, which is also definition of inn, still excludes, as formerly, boarding houses, lodging houses and public houses which are merely ale-houses and in none of which there is obligation to receive and entertain guests. inn-keeper, that is to say, in present days hotel proprietor, in his capacity as inn-keeper is, on other hand, bound hotel proprietor, in his capacity as inn-keeper is, on other hand, bound by common law or custom of 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. rights and obligations of hotel proprietors are governed by statute which has more or less incorporated common law. contract between such hotel proprietor and traveller presenting himself to him for lodging is one which is essentially contract of service and facilities provided at reasonable price. 18. In present case, transaction between hotelier and visitor to his hotel is thus one essentially of service in performance of which and as part of amenities incidental to that service, hotelier serves meals, liquor at stated hours. Therefore, we are in agreement with decision of learned CIT(A) and ratios of decisions byvarious Courts as discussed above and statutory provisions referred to above and view that Rs. 1,6 7 ,20,025 being receipt on realization against services provided to foreign tourists by assessee for catering and bar are eligible for deduction under s. 80HHD and AO has wrongly treated them as sale in shop. Thus, this ground of Revenue is dismissed. 19. In ground No. 2, Revenue is aggrieved against relief of Rs. 16,2 7 ,046 out of travelling expenses disallowed for Rs. 1 7 , 7 2,256. 20. AO disallowed Rs. 1 7 , 7 2,256 out of total expenses claimed under tour and travelling amounting to Rs. 20,03,369. 77 for reason that business of assessee is dependent upon travel agents and nexus between travelling expenses and business is very much remote, illusory and not direct. journeys were primarily undertaken for sake of pleasure and entertainment and assessee has failed to produce details of expenses incurred and benefit derived to business of out of said expenses. learned CIT(A) has deleted addition of Rs. 16,2 7 ,046 thus sustaining additions on this account amounting to Rs. 1,45,210 as per reasons mentioned in his order. 21. We have heard parties. learned Departmental Representative relied upon order of AO and on other hand, learned Authorised Representative has argued that all details of travelling expenses in India and abroad were submitted to AO along with copies of passport of partners and purpose of journey was promotion of business, to have meetings with travel agents and to study facilities provided by different hotels to their guests. AO has disallowed Rs. 3,20,145 being expenses incurred by staff and others and accordingly travelling tickets, payment to hotels within country and outside country incurred by partners were only for Rs. 14,52,111 and AO while disallowing Rs. 1 7 , 7 2,256 has not bothered to look into details available on records which had resulted into disallowance of those expenses which were not even incurred by partners. Therefore, AO has not looked into details of expenses on this account properly, which were wholly incurred for purpose of business of assessee. learned Authorised Representative further argued that business of assessee and profit derived therefrom are available to extent of more than 90 per cent as deduction under s. 80HHD. 22. After giving careful consideration to arguments of both parties and facts of case, we are of view that AO while making disallowance of expenditure on this account has not properly looked into details of expenses submitted by assessee since expenses amounting to Rs. 3,20,145 were expenses incurred by staff and others which were also disallowed by AO considering same as expenses incurred by partners alongwith expenses incurred by partners on travelling and tours within and outside India amounting to Rs. 14,52,111. nature of business of assessee is such that it is beyond doubt that lot of meetings have to be made within country and outside India to contact outside agents and to see working in other hotels outside country which are preferred by persons resident in those countries, so that such facilities are also provided in assessee s hotel for those persons when they come as visitors as foreign tourists to assessee s hotel. We are convinced with arguments of learned Authorised Representative in absence of any material against assessee but personal element in such expenditure cannot be ruled out. Therefore, learned CIT(A) has rightly disallowed 10 per cent out of expenditure incurred by partners amounting to Rs. 14,52,111 which comes at Rs. 1,45,210 and rest of expenses has rightly been deleted by learned CIT(A) including expenses of travelling by staff amounting to Rs. 3,20,145. Therefore, we do not find any infirmity in order of learned CIT(A) in deleting additions of Rs. 16,2 7 ,046 out of total disallowance of Rs. 1 7 , 7 2,256 made by AO, thus sustaining Rs. 1,45,210 on this account. Thus, this ground of Revenue is also dismissed. 23. In ground No. 3, Revenue is aggrieved with deletion of addition of Rs. 36,59,103 made by AO on account of pre-emptive utilization of reserve as chargeable to tax under s. 80HHD(5) of IT Act. AO at p. 2 of his order has held as under : "The assessee is claiming deduction under s. 80HHD for running hotel. Under provisions of s. 80HHD assessee had created export promotion reserve account in which he credited amount as per requirement of s. 80HHD and utilized it as per provisions of s. 80HHD(5). On perusal of records, it was noted that opening balance of said reserves for asst. yr. 2000-01 was Rs. 7 1,23,244 and transfer during said year was Rs. 42,03,295 and utilization during year was Rs. 1,0 7 ,82,34 7 . assessee should have utilized amount from reserve to extent of Rs. 7 1,23,244 and not Rs. 1,0 7 ,82,34 7 because amount available during financial year 1999- 2000 was only of Rs. 7 1,23,244 and extra amount to extent of Rs. 36,59,103 which was utilized during year (Rs. 1,0 7 ,82,34 7 - Rs. 7 1,23,244 = Rs. 36,59,103) was from that reserve in which said amount was non-existent, in reserve account, at time of utilization of said reserve because it was created only on 31st March, 2000. As per accounting principles, reserve can be created only after determination of profits i.e., below line in P&L a/c and determination of final profits is done on date of balance sheet and then reserves are created by application of surplus profits. In this case not only reserve was created before balance sheet date i.e., 31st March, 2000 but also utilized simultaneously. This method is wholly incorrect as far as accounting policies, read with provisions of s. 80HHD are concerned. Therefore, how could assessee utilize said amount when reserve was not in existence, so utilization was not in manner as specified in cl. (b) of sub-s. (5) of 80HHD. Accordingly show-cause notice was issued under s. 142(1) of IT Act. In compliance assessee submitted reply on 8th Feb., 2003 wherein it was stated that : plain reading of sub-s. (4) of s. 80HHD if looked and analyzed in context of intention of legislature then there is restriction for claiming deduction for utilizing said amount for creation of capital assets so that promotional activities of tourism industries take place. It is true that capital expenditure is to be done before within period of five years from end of year in which amount was credited. However it does not put any restrictions of not utilizing amount in various activities as indicated therein during year in which said amount was credited. assessee has taken plea that exemption provisions should be liberally construed, for which 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 49 7 (SC); 3.CIT vs. Kulu Valley Transport Co. (P) Ltd. (19 7 ) 77 ITR 518 (SC). assessee has also given clarification regarding charging section. Sub-cl. (b) of sub-s. (5) of s. 80HHD which states that if amount is not being utilized in manner for purpose as referred in sub-s. (4) then amount not so utilized shall be subject to tax immediately after completion of five years from year in which reserve was created. contention of assessee has been examined thoroughly. assessee has reiterated off and on about liberal interpretation of section and that, it does not fit in ambit of chargeability section, i.e., cl. (b) of sub-s. (5) of 80HHD. Here, I would like to discuss provisions of s. 80HHD at length. Sec. 80HHD of IT Act, 1961, reads : 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, 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) 50 per cent of profits derived by him from services provided to foreign tourists, and (b) so much of amount of remaining profits referred to in cl. (a) as is debited to P&L a/c of previous years in respect of which deduction is to be allowed and credited to reserve account to be utilized for purposes of business of assessee in manner laid down in sub-s. (4) Sub-s. (4) of s. 80HHD says that amount credited to reserve account under cl. (b) of sub-s. (1) shall be utilized by assessee before expiry of period of five years next following previous year in which amount was credited for purposes of construction of new hotels, purchase of n e w cars, purchase of sports equipments construction of conference or convention centers, etc. No doubt emphasis is on utilization of said reserve account within period of five years but it is also mentioned that it should be from period next following previous year in which such amount was credited which implies that it should be subsequent utilization once amount is credited and not ongoing process where assessee has liberty to utilize said amount within same year in which account was credited. Moreover, it occurs very absurd and illogical that amount was utilized from entity which was not in existence. There are 2 points of elaboration here. (a) When such amount was credited in said reserves ? i.e. it should have been credited on 31st March, 2000. Because reserve is created only when P&L a/c is drawn and P&L a/c is drawn at end of year. To substantiate this point, it is necessary to ascertain as to when income accrues from firm to its partners, i.e. right of partner to receive share of profit of firm for accounting year arises on settlement of accounts of firm on last date of accounting year. It clearly means that settlement of account of firm takes place on last date of accounting year and reserve is created only when profits from such P&L a/c is transferred to 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 6 7 5 (SC),Grave Pharine Distributors vs. CIT (AP). From above facts it is clear that it was pre-emptive utilization of reserve and amount was utilized from reserve when reserve in its literal and statutory sense did not exist at all. It was only presumption of assessee that in due course of business, profit would result and certain amount would be credited to reserve so why not utilize it during same year. assessee cannot interpret said law to apply beneficially to his case, on basis of presumptions, surmises and conjectures which suits its case. Hence assessee should not go beyond what is written in IT Act. (2) This point is also clear from plain reading of sub-s. (4) of 80HHD that it shall be utilized before expiry of period of 5 years of next following previous year i.e. it means that once reserve account is credited in previous year 1999-2000 said amount should have been utilized in previous year 2000-01 onwards up to previous year 2004-05 and not during same year when so-called reserve was claimed to be created. This is very much clarified in plain reading of sub-s. (4) and cl. (b) of sub-s. (5) of s. 80HHD. So there is no question of strict interpretation of statute but it is simple interpretation. Here words of statute are plain, precise and unambiguous and should be taken as to what they actually want to convey. It is not fair on part of assessee to twist facts of case and interpret statutes so as to suit its purposes. Also I would like to quote from theCommentary of Chaturvedi & Pithisariathat : 100 per cent of profit derived by such hotels, tour operators and tour operations and travel agents from services rendered to foreign tourists can be allowed as deduction. However, only 50 per cent of such profits is allowed as deduction straightway. While profit up to balance 50 per cent is allowed only to extent it is credited to reserve account and subsequently utilized for making certain specified investment for business of assessee. making certain specified investment for business of assessee. Also as regards chargeability section which says that if it is not utilized in manner as specified in sub-s. (4) then such amount shall be charged to tax in year immediately following period of five years specified in sub-s. (4). applicability of this charging section is only in case where amount from said reserve was not utilized fully within five years and extends beyond that period then it shall be charged to tax in sixth years, but insofar if there is pre-emptive utilization of reserves this chargeability section automatically implies that it should be charged to tax in corresponding previous year previous in which said reserve was pre-emptively utilized. Hence, in light of above discussion I disallow Rs. 36,59,103 made by 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 IT Act, 1961, and be charged to tax accordingly. Therefore amount of Rs. 36,59,103 is added back in income declared and charged to tax during previous year in question." 24. learned CIT(A) after considering facts of case and taking into consideration arguments of counsel of assessee and remand report of AO have held as per paras 7 and 7 .1 of his order as under : "I have perused assessment records, papers and submissions made before me and have also referred remand report and have found that t h e contention raised by learned counsel is having force that out of reserve created under s. 80HHD if, any amount is to be put to tax then same is governed by provisions of s. 80HHD(5) and that section does not provide charging of amount which was utilized even during same year in which t h e amount was credited to reserve account. accounting entries of creation and utilization are only transfer entries passed in books of account on 31st March of which first entry was of transfer of amount out of profits to reserve account and subsequent entry was of transfer by debiting reserve account to extent utilized for purposes as per s. 80HHD(4). Considering submission made by learned Authorised Representative, I have found that AO had made wrong interpretation of provisions of s. 80HHD(4) and (5) which is further against intention and objects of that section when it has been admitted that assessee had utilized money for purposes as referred in sub-s. (4) of s. 80HHD. only dispute is as to amount utilized during same year as against within period of 5 years. contention raised by learned counsel that word before used in sub-s. (4) is to be construed upto and next as from is logically and legally appears to be correct. These words have also been given same meaning in notes on clauses referred to by learned counsel. It is also noticed on plain reading of sub-s. (4) that it put emphasis on utilization of amount for purposes as referred therein within time-limit of 5 years. chargeability of reserve amount to tax is as per provisions of sub-s. (5) of s. 80HHD and none of conditions as specified in cls. (a) and (b) of that s. 80HHD(5) were found to be present in case of appellant and accordingly, amount of Rs. 36,59,103 treated as chargeable to tax as income for assessment year under appeal is totally unjust and unreasonable and far away from legal pronouncements of Hon ble apex Court relied upon by counsel as to interpretation and construction of legal provisions and, therefore, is directed to be deleted." 25. We have heard parties. Before we take any view on issue in present appeal, we have to look into provisions of s. 80HHD(1) of Act which provides that 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 utilized for purposes of business of assessee in manner laid down in sub-s. (4). 26. And sub-s. (4) of s. 80HHD reads as under : "The amount credited to reserve account under cl. (b) of sub-s. (1), shall be utilized by assessee before expiry of period of five years next following previous year in which amount was credited for following purposes, namely (refer cls. (a) to (f) in Act). 2 7 . Now at this juncture, we have to see meaning of "reserve". Reserves as perBlack s Law Dictionarymeans, "Funds set aside to cover future expenses, losses, claims or liabilities". In present case, reserves are to be created out of profits of business of assessee. profits do not accrue from day to day or even from month to month. concept of accrual of profits of business involves their determination by method of accounting at end of accounting year or any shorter period determined by law. In gross receipts of business day after day or from transaction to transaction lies embedded dormant profit or loss. On such dormant profit or loss, undoubtedly taxable profits, if any, of business will be computed, but dormant profit cannot be equated to profits charged to tax. Therefore profit/income becomes taxable on footing of accrual only after right of taxpayer to income accrues or arises i.e. words "accrue" and "arise" are used to contradistinguish word "receive". Income is said to be received when it reaches assessee, when right to receive income becomes vested in assessee, it is said to accrue or arise. These views find support from judgment of apex Court in case ofCIT vs. Ashok Bhai Chiman Bhai(supra) where facts of case are as under : "A, manager of HUF, held, on behalf of family, share of five annas in Rupee in profit and loss of firm. Under partnership deed, accounts of firm had to be adjusted every calendar year. On 12th Nov., 1955, there was partition in family in which was allotted five annas share in firm and he became full owner thereof. In proceedings for assessment to income-tax of income of family for accounting period 2 7 th Oct., 1954, to 14th Nov., 1955, question arose whether whole or any part of five annas share of profits of firm for calendar year 1955 accrued to family : Held, that right to receive share of profits of firm for calendar year 1955 arose on settlement of accounts of firm on 31st Dec., 1955. On that date alone was owner of share of profits and family had no right therein. No part of share of profits of firm for calendar year 1955 was liable to be included in income of family, and taxing authorities could not claim that profits should be apportioned between family and and tax should be levied on apportioned income." 28. Therefore, we are of view that reserve can be created only out of profits determined as at end of previous year which in present case is 31st March, 2000. reserve so credited under cl. (b) to s. 80HHD(1), shall be utilized by assessee before expiry of period of five years next following previous year in which amount was credited for purposes mentioned in sub-s. (4) to s. 80HHD of Act. assessee in present case had utilized reserve which was not there in account. assessee had opening balance of reserve amounting to Rs. 7 1,23,244 as at 1st April, 1999 and whereas assessee had utilized Rs. 1,0 7 ,82,34 7 before expiry of previous year ending on 31st March, 2000. Thus, assessee had utilized reserves amounting to Rs. 36,59,103 which were not there in reserve account. Therefore, assessee cannot be given benefit of utilization of reserves which as per sub-s. (4) to s. 80HHD r/w cl. (b) to s. 80HHD(1), have to be utilized before expiry of period of 5 years next following previous year in which amount was credited. reserves created by amount of Rs. 42,03,295 by assessee as on 31st March, 2000 have to be utilized within 5 years next following previous year ending 31st March, 2000, i.e., between 31st March, 2001 to 31st March, 2005. utilization by assessee does not fall between said period of 31st March, 2001 to 31st March, 2005 to extent of Rs. 36,59,103. Therefore, assessee will get benefit under s. 80HHD(1)(b) r/w sub-s. (4) to s. 80HHD for amount of reserve which is lying in reserves account for said purpose as at 31st March, 1999/1st April, 1999 amounting to Rs. 7 1,23,244 and not Rs. 1,0 7 ,82,34 7 as claimed by assessee. 29. counsel for assessee has invited our attention to sub-s. (5) to s. 80HHD which reads as under : "(5). Where any amount credited to reserve account under cl. (b) of sub-s. (1), (a) has been utilized for any purpose other than those referred to in sub- s.(4), amount so utilized; or (b) has not been utilized in manner specified in sub-s. (4), amount not so utilized, shall be deemed to be profits, (i) in case referred to in cl. (a), in year in which amount was so utilized; or (ii) in case referred to in cl. (b), in year immediately following period of five years specified in sub-s. (4), and shall be charged to tax accordingly." 30. above provisions apply only when reserve has been utilized for any other purpose and if it is so it shall be deemed to be profits and shall be charged to tax accordingly. In present case there were no reserves with assessee as on date of utilization of Rs. 36,59,103 over and above Rs. 7 1,23,244 and therefore provisions of statute are very clear and do not give any other meaning. Therefore, argument of learned Departmental Representative that liberal interpretation of statute should be made does not hold good. In taxing statute when one can look fairly at language used then there is no room for intendment and there is no equity or presumption to tax and language of statute cannot be strained. If provisions of statute are unambiguous and legislative intent is clear then Court need not call into aid other rule of construction of statutes and they call only when legislative intent is not clear [ReferInnamun Gopalam vs. State of AP (1963) 14 STC 7 42 (SC),CIT vs. G.V. Venugopal (2005) 193 CTR (Mad) 661 : (2005) 2 7 3 ITR 30 7 (Mad),State of Punjab vs. Jalandhar Vegetable AIR 1966 SC 1295]. 31. Therefore, in present case assessee is allowed to utilize reserve to extent of Rs. 7 1,23,244 and not to extent of Rs. 1,0 7 ,82,34 7 under s. 80HHD(1)(b) r/w sub-s. (4) of s. 80HHD of Act. Therefore, we reverse decision taken by learned CIT(A) and sustain order of AO who has rightly allowed deduction under s. 80HHD(1)(b) of Act r/w sub-s. (4) to s. 80HHD of Act to extent of Rs. 7 1,23,244. Thus, this ground of Revenue is allowed. 32. In result, appeal of Revenue is partly allowed. *** DEPUTY COMMISSIONER OF INCOME TAX v. HOTEL SAMODE PALACE