Commissioner of Income-tax, Chennai v. Adyar Gate Hotel Ltd
[Citation -2017-LL-0421-202]

Citation 2017-LL-0421-202
Appellant Name Commissioner of Income-tax, Chennai
Respondent Name Adyar Gate Hotel Ltd.
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 21/04/2017
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags profits and gains of business or profession • convertible foreign currency • convertible foreign exchange • business of a hotel • expenditure tax • export turnover • business profit • reserve account • indian currency • question of law • approved hotel • indian company • total turnover • service tax • luxury tax • sales tax
Bot Summary: The assessee, in accordance with the provisions of Section 80HHD of the Act, claimed a deduction of the profits earned in convertible foreign exchange in respect of the hotel located at Chennai, approved by the prescribed authority in terms of Rule 18 BBA of the Income tax Rules, the Director General of Tourism, Government of India. The computation of relief under Section 80HHD is in terms of the formula set out in sub-section of Section 80HHD. The eligible profits shall bear the same proportion of profits of the business as computed under the head profits and gain of business or proportion as the receipts specified in sub-section, i.e. foreign receipts brought into India in convertible foreign currency bears to the total receipts of the business carried on by the assessee. Section 80AB of Chapter VIA of the Act opens with a non-obstante clause, mandating that the sum total of all deductions claimed under that chapter shall be restricted to the available profits alone thus ensuring that no assessee obtains a benefit in excess of the total profits earned. Is not subjected to the levy of minimum tax on companies, it is proposed to exclude such profits from tax liability under Section 115J. There is thus no quarrel with the position that section 80HHD provides a tax concession and has been specifically brought in to serve a beneficial purpose. Even in section 80HHD of the Act the reference is to the business of the assessee which is the business as a whole and as one unit and not by sub-dividing the total income of the business into unit- wise total income and then arriving at the unit-wise overall profit proportionate profit and then adding up the same for arriving at the benefit under section 80HHD of the Act. The three components set out in sub-section of the section 80HHD are profits of the business receipts specified in sub-section and iii) total receipts of the business, all of which have to be seen in the context of sub section in as much as sub-section commences with the phase for the purpose of sub-section. The Revenue would also seek to draw a parallel with the provisions of Section 80HHC of the Act dealing with deduction in the case of profits derived from exports.


1 IN HIGH COURT OF JUDICATURE AT MADRAS Reserved on: 02.11.2016 Pronounced on : 21.04.2017 Coram: Hon'ble Mr.Justice NOOTY. RAMAMOHANA RAO AND Hon'ble Dr. Justice ANITA SUMANTH TAX CASE (APPEAL) No.770 of 2007 Commissioner of Income Tax, Chennai .. Appellant Versus Adyar Gate Hotel Ltd., 132 TTK Raod, Chennai-18. ..Respondent Prayer: Tax Case Appeal filed under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal, Madras Bench dated 31st May 2006 in ITA.No.1522/Mds/02. For Appellant .. Ms. Hema Murali Krishnan Standing Counsel For Respondent .. Mr.C.Natarajan, Senior Advocate For Mr.K.Krishnamoorthy JUDGMENT (Judgment of this Court was delivered by ANITA SUMANTH, J.) assessment year involved is 1998-99. substantial question of law raised by Revenue challenging order of Income tax Appellate Tribunal (in short Tribunal ) dated 3.5.2006 and admitted for consideration is as follows: 2 Whether in facts and circumstances of case, Tribunal was right in holding that deduction under section 80HHD should be given in respect of Chennai unit without deducting losses incurred in another unit owned by assessee? 2. assessee/respondent is company engaged in business of managing hotels. assessee, at relevant point of time, had three properties, one each at Chennai, Ootacamund and Vishakapatnam. interpretation of Section 80HHD of Income Tax Act (in short Act ) is called into question this appeal. Section 80HHD, part of Chapter VIA of Act, provides for deduction in respect of earnings in convertible foreign exchange of Indian Company, resident in India and engaged in businessof hotel or tour operator approved by prescribed authority. provisions of Section 80HHD in so far as relevant for adjudication of this appeal are extracted below: Deduction in respect of earnings in convertible foreign exchange. 80HHD.(1) Where assesee, 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 3 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 clause (a) as is debited to profit and loss account 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-section (4); ..... (2) This section applies only to services provided to foreign tourists receipts in relation to which are received (in, or brought into, India by assessee in convertible foreign exchange within period of six months from end of previous year or, (within such further period as competent authority may allow in this behalf) (3) For purposes of sub-section (1), profits derived from services provided to foreign tourists shall be amount which bears to profits of business (as computed under head Profits and gains of business or profession) same proportion as receipts specified in sub-section (2) ((as reduced by any payment, referred to in sub-section (2A), made by assessee)) bear to total receipts of business carried on by assessee. 3. assessee, in accordance with provisions of Section 80HHD of Act, claimed deduction of profits earned in convertible foreign exchange in respect of hotel located at Chennai, approved by prescribed authority in terms of Rule 18 BBA (5) of Income tax Rules, Director General of Tourism, Government of India. There is no dispute with 4 position that property at Chennai was only eligible property from amongst three properties managed by assessee. 4. computation of relief under Section 80HHD is in terms of formula set out in sub-section (3) of Section 80HHD. eligible profits shall bear same proportion of profits of business as computed under head profits and gain of business or proportion as receipts specified in sub-section (2), i.e. foreign receipts brought into India in convertible foreign currency bears to total receipts of business carried on by assessee . 5. In terms of above, assessee filed return of income claiming relief under section 80 HHD in following terms: CALCULATION OF DEDUCTION U/S 80 HHD TOTAL SALES (INCLUSIVE OF TAXES) TOTAL SALES OF PARK SHERATON HOTEL & TOWERS AS PER PROFIT AND LOSS ACCOUNT 56,29,68,190 LESS: DIVIDEND AS PER PROFIT AND LOSS ACCOUNT 51,840 ----------------- 56,29,16,350 ADD: LUXURY TAX 9,26,87,053 SALES TAX 1,22,37,925 EXPENDITURE TAX 5,53,96,060 SERVICE TAX 10,59,714 ------------- Total 72,42,97,102 Eligible Deduction: BUSINESS PROFIT AS X FOREIGN EXCHANGE PER RETURN EARNINGS TOTAL SALES (INCLUSIVE OF TAXES) 5 18,03,73,848 X 36,72,22,408 ----------------------------------------------- = 9,14,50,482 72,42,97,102 6. assessee had adopted sum of Rs. 18,03,22,408/- being business profits as per return of income, sum of Rs.1,36,72,22,408/- being actual foreign exchange earnings and sum of Rs.72,42,97,102/-, being total sales, all three figures relating to eligible hotel at Chennai alone, for computation of relief u/s 80HHD of Act. 7. While completing assessment, assessing officer vide order dated 30.3.2001, re-computed deduction under section 80HHD of Act as follows; Eligible 80 HHD deduction: Business income x Receipts from services provided to foreign tourists Total receipts of business 1. Business income : Rs. 7,35,97,733 2. Receipts from services provided to foreign tourists : Shown by assessee: : Rs. 36,72,22,408 Add receipts at Vizag unit : Rs. 15,85,961 Total Rs. 36,88,08,369 3. Total receipts of business: Total receipts as per consolidated P&L a/c. : Rs. 57,89,07,406 Add: Taxes as shown by assessee : Rs. 16,13,80,752 _____________ Total Rs. 74,02,88,158 Less: Dividend Rs. 51,840 Interest(other sources) Rs.5,00,830 : Rs. 5,52,670 Total Rs. 73,97,35,488 Eligible deduction: 7,35,97,733 x 36,88,08,369 73,97,35,488 = Rs.3,66,93,467 6 8. difference in computation by department arises on two accounts viz., firstly, business profits adopted at figure of Rs.7,35,97,733/- as against Rs.18,03,73,848/- adopted by assessee, and secondly total business of assessee taken at figure of Rs.73,97,35,488/- as against figure of Rs.72,42,97,102/-. difference in business profits arises on account of assessing officer adopting net figure of profits after taking into account positive receipts from eligible hotel at Chennai and loss from ineligible hotels at Ooty and Vizag. Business profits of Rs.18,03,73,848/- as adopted by assessee thus stood reduced to Rs.7,35,97,733/-. Then again, total receipts of business stood increased from Rs.72,42,97,102/- to Rs.73,97,35,488/- on account of adding back of other incomes to denominator of formula over and above total sales relatable to Chennai hotel, adopted by assessee. deduction as against figure of Rs.9,14,50,482/- thus stood reduced to Rs.3,66,93,467/- as per working of assessing officer vide order of assessment dated 30.3.2001. 9. It is relevant to note that assessee, in compliance with provisions of section 80AB of Act had restricted its claim of deduction under section 80HHD to figure of Rs.7,58,38,597/- being available profits. Section 80AB of Chapter VIA of Act opens with non-obstante clause, mandating that sum total of all deductions claimed under that chapter shall be restricted to available profits alone thus ensuring that no assessee obtains benefit in excess of total profits earned. Thus, though assessee in this case was entitled to deduction of amount of 7 Rs.9,14,50,482/-, by virtue of overriding provisions of section 80AB of Act, deduction was restricted to figure of Rs.7,58,38,597/- only. 10. In first appeal against order of assessment, Commissioner of Income Tax (Appeals) vide order dated 10.6.2002, dismissed ground of appeal relating to computation of deduction u/s 80HHD. aforesaid order was reversed in second appeal by Income Tax Appellate Tribunal, vide order dated 31.5.2006 assailed in appeal before us. 11. We have heard submissions of Ms.Hema Murali, learned counsel appearing for Commissioner of Income Tax and Mr.C.Natarajan, Senior Advocate appearing for Mr.K.Krsihnamoorthy on behalf of Assessee/Respondent. 12. This appeal calls upon us to decide nature of business profits and total receipts for purpose of computation u/s 80HHD of Act and whether computation of deduction should take into account gains/losses of ineligible entities as well. 13. Section 80HHD of Act has been inserted with effect from 1.4.2009 to provide fillip to hotel industry and as measure to augment foreign exchange resources. In words of Union Finance Minister in his speech on 22.02.89, Section 80HHD was introduced for following purpose:- In order to provide encouragement to tourism for augmenting foreign exchange reserves, it is proposed to provide deduction of 50 per cent of exchange earnings derived from services rendered to foreign tourists by approved hotels or travel agents. remaining 50% will also receive similar exemption if it is credited to reserve fund and 8 utilized for purpose of business of assessed on fulfillment of certain conditions. Further, in order that 100 percent exemption of foreign exchange earnings provided to exporters, approved hotels, travel agents, etc. is not subjected to levy of minimum tax on companies, it is proposed to exclude such profits from tax liability under Section 115J. There is thus no quarrel with position that section 80HHD provides tax concession and has been specifically brought in to serve beneficial purpose. provision contains two prescriptions, firstly, as regards activity to be carried on and secondly as regards entity engaged in carrying on eligible activity. It is only upon satisfaction of aforesaid two prescriptions that assessee becomes entitled to relief set out thereunder. 14. self contained code, checks and balances are in-built to ensure proper computation of relief in accordance with object and purpose of its insertion. quick summary would reveal scheme thus: provisions of sub-section (1) set out relevant framework for establishing entitlement of assessee. It provides for apportionment of relief by way of absolute deduction of 50 percent of profits and balance of 50% to be deposited in reserve account to be specifically utilized for construction of newly approved hotel or expansion of facilities in existing hotels, provision of facilities for growth of Indian Tourism as may be notified or other specified purposes as set out in terms of sub-section (4) of Section 80HHD within period of 5 years, next following previous year in which amount was 9 credited. Sub-section (5) ensures that if amount credited in reserve account is utilized for any other activity other than that mentioned in sub-section (4) it shall be charged to tax accordingly and benefit of deduction under section 80HHD lost. 15. Sub-section (2) states that benefit is available only in respect of services provided to foreign tourists in consideration of which receipts are brought into India in convertible foreign exchange within stipulated period of six months from end of previous year or such extended time as may be granted by competent authority. Explanation 1 to sub-section (2) extends benefit of section 80HHD to payments received in Indian currency from tourist group obtained by way of conversion of foreign exchange upon production of certificate obtained in prescribed form confirming such transaction. Sub-section (3) opens with phrase for purposes of sub-section 1 and sets out formula for claim of deduction as follows: Business profits x Eligible receipts Total receipts 16. Sub-section (6) mandates that return is to be accompanied by certificate of chartered accountant in respect of claim under section 80HHD. Sub-section (7) casts further restriction to state that where deduction is claimed and allowed in terms of sub-section (1), such profit shall not qualify for any other deduction under part C of chapter VIA and in any 10 event, shall not exceed profits and gains of such hotel. This ensures that provisions of section 80AB are specifically reiterated in computation of deduction under section 80HHD. 17. issue occupying our attention has to be resolved in light of scheme of section and intention behind its insertion. We are of view that full benefit of provision should be extended to eligible assessee without there being attempt to whittle down same. It is important to note that sub-section (3) has to be read along with sub-section (1) by statutory prescription and in such event, all parameters of formula should relate solely to receipts/profits/income of eligible unit alone and none other. 18. Our attention is drawn by Ms.Hema Murali to decision of Karnataka High Court in case of Commissioner of Income Tax and another Vs. ITC Hotels Ltd., (344 ITR 680). We do not believe that this decision advances case of Revenue. As seen from discussion extracted below, unit wise computation in terms of section 80HHD should be effected with all eligible units taken as whole and not bifurcated: submission on behalf of assessee that profits unit-wise should be ascertained first in respect of all recognized or certified units and proportionate profits of foreign exchange receipts should be arrived at by keeping that as base and determine admissible benefit for sub-section (1) of section 80HHD of Act in respect of each unit and add up figure for arriving at overall benefit under section 80HHD of Act is not acceptable argument for reason that scheme of Act does not provide for assessment of income of individual units of assessee and even in terms of particulars furnished in prescribed Form 10CCAD assessee itself has furnished figures 11 treating all units as one for purpose of computation of total income, etc., which is proper method even as envisaged under scheme of Income-tax Act, particularly, for arriving at total income of assessee after arriving at income under respective heads and as we are in this case concerned only with income under head Profits and gains of business or profession , we do not think it is possible to accept contention that unit-wise profit should be ascertained first and proportionate profit of unit attributable to foreign exchange should be ascertained thereafter by applying formula and thereafter on basis of profits of all units, to arrive at total benefit of profit is prudent method of working out profits for purpose of computation under section 80HHD of Act. We are of clear view that overall profits, of assessee, computation of which is provided in sub-Chapter (D) of Chapter IV of Act is only one of computing total income of assessee under this head as whole and as one unit and not on any unit- wise, method, etc. Even in section 80HHD of Act reference is to business of assessee which is business as whole and as one unit and not by sub-dividing total income of business into unit- wise total income and then arriving at unit-wise overall profit proportionate profit and then adding up same for arriving at benefit under section 80HHD of Act. In our view, that is neither envisaged under statutory scheme or as is indicated in language of section. It is, therefore, question No.4 is also answered in negative against assessee and in favour of Revenue. 19. above conclusion would rather support stand of assessee that deduction should be granted qua eligible unit/units only and not aggregating profits/losses of eligible and ineligible units. In present case, admitted position is that it is only Chennai unit which has approval from Director General, Tourism and is thus eligible unit. 12 20. three components set out in sub-section (3) of section 80HHD are (i) profits of business (ii) receipts specified in sub-section (2) and iii) total receipts of business, all of which have to be seen in context of sub section (1) in as much as sub-section (3) commences with phase for purpose of sub-section (1) . Revenue would also seek to draw parallel with provisions of Section 80HHC of Act dealing with deduction in case of profits derived from exports. We do not believe that two provisions are analogous for simple reason that Explanation in provision defines individual components of formula. Thus, while both section 80HHC and 80HHD contain Explanations defining terms used in provision, Export Turnover , Total Turnover and profits of business have been specifically defined for purposes of interpretation of section 80HHC. absence of statutory definition for components of formula prescribed under section 80HHD would support conclusion that computation be confined to eligible unit alone without introduction of artificial restriction such that full play is given to benefit thereunder. In conclusion each provision in Chapter VI is intended to be self- contained code subject to provisions of Section 80A to 80B and where references are to be drawn from other provisions within chapter, Legislature has specifically provided for same. Section 80HHD, with which we are concerned, has thus to be interpreted solely on its language and bearing in mind spirit and intention with which it was inserted. 21.In light of discussion above, question of law is answered in favour of assessee and against Revenue. 13 departmental tax case appeal stands rejected with no order as to costs. [N.R.R.,J.] & [A.S.M.,J.] 21.04.2017 Index: Yes/No Internet:Yes/No Msr NOOTY. RAMAMOHANA RAO, J AND Dr.ANITA SUMANTH,J msr TAX CASE (APPEAL) No.770 of 2007 14 21.04.2017 http://www.judis.nic.in Commissioner of Income-tax, Chennai v. Adyar Gate Hotel Ltd
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