Full Judgment
S.V. Mehrotra, A.M.
1. These cross appeals are directed against the order of ld. CIT(A) dated 23/02/2012 for AY 2008-09.
2. The assessee company, in the relevant assessment year, was running a Five Star Deluxe Hotel in the name of "The Grand" located at Plot No. 2, Nelson Mandela Marg, Vasant Kunj, Phase II, New Delhi. It had filed its Return of Income declaring total income of Rs. 16,26,58,786/-. During the relevant previous year, the assessee company had shown income from rooms, food, beverage and other services to the tune of Rs. 1,12,44,91,891/- and other income of Rs. 4,54,96,716/-. Against this income, the assessee company had claimed expenditure of Rs. 47,60,16,347/-, interest and finance charges of Rs. 22,23,15,520/-, depreciation of Rs. 11,06,89,998/- and prior year adjustment of Rs. 1,63,761/-. Profit before tax had been computed at Rs. 37,01,16,728/-.
3. The Assessing Officer completed the assessment, inter-alia, making following additions/ disallowances: -
i) addition on account of provision for gratuity Rs. 3,62,096/-;
ii) addition on account of cash loss during a fire Rs. 6,86,253/-;
iii) addition u/s 41(1) Rs. 3,54,201/-;
iv) addition u/s 14A Rs. 16,13,623/-;
v) disallowance of bad debts Rs. 2,04,091/-;
vi) foreign travel expenses of Director's wife Rs. 2,90,020/- being 10% out of foreign traveling expenses of Managing Director and Export Marketing Managers.
4. The assessee preferred appeal before ld. CIT(A), who partly allowed the assessee's appeal.
5. Being aggrieved with the order of ld. CIT(A), both assessee and department have filed cross appeals before us.
6. First we take up the Department's appeal vide ITA No. 2113/D/12. The Department has taken following grounds of appeal: -
1. "On the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition of Rs. 3,62,096/- made on account of disallowance being provision of gratuity.
2. On the facts and circumstances of the case and in law the ld. CIT(A) erred in deleting an addition of Rs. 6,86,253/- on account of cash loss during a fire.
3. On the facts and circumstances of the case and in law the ld. CIT(A) erred in deleting an addition of Rs. 6,86,253/- on account of cash loss during a fire without appreciating the fact that even if a loss of cash had occurred, it was capital in nature and hence not allowable as such."
7. Brief facts apropos ground no. 1 are that assessee had debited provision for gratuity to the tune of Rs. 3,62,096/-. However, in the computation, the same was not disallowed. Accordingly, the AO added back the provision.
8. Before ld. CIT(A), the assessee had explained that the total payment during the year was Rs. 5,69,919/- out of which Rs. 3,62,096/- was towards the current years payment and the balance sum of Rs. 2,07,823/- was towards the earlier years provision. Accordingly, Rs. 3,62,096/- was debited to Profit and Loss Account and the balance sum of Rs. 2,07,823/- was claimed in the computation of income. Thus, it was submitted that the sum of Rs. 3,62,096/- did not represent the amount transferred to provision for gratuity but represented the actual amount paid during the year.
9. Ld. CIT(A), after considering the assessee's submissions, allowed the assessee's claim, inter-alia, observing that from the working itself it was abundantly clear that the amount was claimed on actual payment basis and it was not a provision.
10. We have considered the submissions of both the parties and have perused the record of the case.
11. Ld. Counsel reiterated the submissions made before ld. CIT(A) and submitted that the provision made in earlier year was added back while computing total income. However, the amount of Rs. 3,62,096/- debited as provision for gratuity was the actual payment made during the year towards current year's liability. These facts have not been controverted by the Department and, therefore, the findings of ld. CIT(A) that the claim regarding gratuity payment was advanced on actual payment basis does not call for any interference.
12. In the result, this ground is dismissed.
13. Brief facts apropos ground no. 2 and 3 are that in the previous year the assessee had claimed the cash loss of Rs. 6,86,253/- due to fire. The assessee explained that cash in hand as per cash book was immediately reduced after fire. The AO disallowed the assessee's claim, inter-alia, observing that no documentary evidence was filed in support of claim of loss of cash.
14. Before ld. CIT(A), it was, inter-alia, submitted that mostly the notes were completely burnt in fire except the few notes parts of which were recovered from fire. The assessee produced the half burnt notes before ld. CIT(A) along with the burnt cash box. It was also submitted that the AO did not raise any query in regard to cash loss. The assessee further submitted that the physical verification of cash was made after fire and the cash loss was computed after making adjustments of sales/expenses in the opening cash available on the said date. Ld. CIT(A) admitted the details/additional evidences under Rule 46A(4) because these evidences were produced in response to various queries made during the course of appellate proceedings. Ld. CIT(A) allowed the assessee's claim, inter-alia, observing that no adverse inference was brought on record by the AO to negate the contention of the assessee.
15. We have considered the submissions of both the parties and have perused the record of the case.
16. The Department has not brought any evidence on record to controvert the findings of ld. CIT(A). There is no dispute about fire. The assessee had claimed loss of cash on the basis of physical verification of cash carried out immediately after the fire. Ld. CIT(A) has examined the mutilated notes also along with the burnt cash box. Under such circumstances, we do not find any reason to interfere with the order of ld. CIT(A).
17. In the result, this ground is dismissed.
18. In the result, the Departmental appeal is dismissed.
19. Now we take up the Assessee's appeal, vide ITA No. 2259. The assessee has taken following grounds of appeal: -
1. "The CIT(A) erred in law and on facts in confirming an addition of Rs. 3,54,201/- u/s 41(1) for some credit balance outstanding as on 31/03/2008 ignoring the facts and evidences placed on record. Thus, the addition so made should be deleted.
2. The CIT(A) erred in law and on facts in confirming an addition of Rs. 16,13,623/- u/s 14A without pointing out any specific expense relatable to exempt income and ignoring the submissions of the appellant. Thus, the addition so made should be deleted.
3. The CIT(A) erred in law and on facts in confirming the disallowance of bad debts of Rs. 2,04,091/- ignoring the facts and evidences placed on record. Thus, the addition so made should be deleted.
4. The CIT(A) erred in law and on facts in confirming a disallowance of Rs. 2,90,020/- for the expenses incurred on foreign travel undertaken by Mrs. Piti Saraf ignoring the facts and evidences placed on record. Thus, the addition so made should be deleted.
5. The CIT(A) erred in law and on facts in confirming a disallowance of Rs. 85,269/- out of foreign travel expenses on estimated basis holding 10% of the same to be of personal nature merely on presumption ignoring the facts and evidences placed on record. Thus, the addition so made should be deleted."
20. Brief facts apropos ground no. 1 are that the assessee had shown sundry creditors to the tune of Rs. 57,29,11,676/- as on 31/03/2008 as against Rs. 48,83,14,180/- as on 31/03/2007.
21. The Assessing Officer required the assessee to furnish the balance position as on 31/03/2010 of those creditors whose balances remained the same as on 31/03/2007 and 31/03/2008. The assessee furnished the details of such creditors aggregating to Rs. 3,54,201/-. The AO made an addition of this amount u/s 41(1) treating this to be remission of trading liability. The AO relied on the following two decisions: - i) T.V. Sundram Aiyangar and Sons , 222 ITR 344; ii) ACIT vs. Pheonix Mills Ltd. (2002), 83 ITD 65 (Bom.).
22. Ld. CIT(A) confirmed the addition, inter-alia, observing that as per Explanation 1 of section 41 it has been found by AO that this was a case of remission or cessation of trading liability, which was claimed as expenditure in earlier years.
23. Ld. Counsel for the assessee referred to page 3 and 4 of the assessment order to demonstrate that the sum of Rs. 3,54,201.23 comprised of several accounts. He submitted that assessee had not returned back these amounts and there was no basis for treating these amounts as remission or cessation of trading liability of assessee. He submitted that AO has made this addition merely on presumption basis. With regard to the decision of Hon'ble Supreme Court in the case of T.V. Sundram Aiyangar and Sons, ld. Counsel pointed out that in the said case assessee itself had written back the amounts in the Profit and Loss Account but did not include the same in the total income. Under such circumstances, it was held that there was cessation of trading liability.
24. Ld. Counsel relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Sugauli Sugar Works P. Ltd., 236 ITR 518 and on Chief CIT vs. Kesaria Tea Company Ltd., 254 ITR 434. He submitted that in the case of Kesaria Tea Co. Ltd., the decision in the case of T.V. Sundram Aiyangar and Sons (supra) was considered and it was held that the provision made towards purchase tax liability in earlier years which was written back in accounts could not be taxed under section 41(1) because Sales Tax Department was pursuing claim. It was held that unilateral action of the assessee was not conclusive. Ld. Counsel for the assessee further submitted that assessee is very much under obligation to make the payment to these creditors.
25. Ld. DR relied on the order of ld. CIT(A).
26. We have considered the submissions of both the parties and have perused the record of the case.
27. The facts are not disputed. The assessee had not written back these amounts in the Profit and Loss Account and the impugned amounts represented only unclaimed balances.
28. In the case of T.V. Sundram Aiyangar and Sons (supra), the Income Tax Officer found that for the assessment years 1982-83 and 1983-84, the assessee had transferred an amount of Rs. 17,381/- to Profit and Loss Account of the Company during the accounting period ended on 31st March, 1982 (A.Y. 1982-83), and an amount of Rs. 38,975/- during the accounting period ended on 31st March, 1983 (A.Y.1983-84). But these amounts were not included in the total income of the assessee. Thus, assessee had taken a conscious decision regarding cessation of liability. However, in the present case, the assessee had not written back these amounts in the Profit and Loss Account. Thus, there was no positive act on the part of the assessee from which it could be concluded that there was remission or cessation of trading liability. Therefore, the decision in the case of T.V. Sundram Aiyangar and Sons (supra) was not applicable. In the case of Sugauli Sugar Works (P) Ltd., (supra), it was, inter-alia, held that expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt. It was further held that mere entry in the books of account of the debtor, made unilaterally, without any act on the part of the creditor, will not enable the debtor to say that the liability has come to an end. In the present case, since assessee had not written back these amounts, therefore, there was acknowledgment of debt by assessee as on the date of balance sheet. Under such circumstances, it could not be said that there was remission or cessation of liability. We, therefore, set aside the order of ld. CIT(A) on this issue.
29. In the result, this ground is allowed.
30. Brief facts apropos ground no. 2 are that during the relevant previous year the assessee company had shown dividend income of Rs. 1,37,18,624/-. The AO computed the disallowance u/s 14A as per Rule 8D at Rs. 16,13,623/- which was confirmed by ld. CIT(A). At the time of hearing, ld. Counsel for the assessee filed before us computation of expenditure inadmissible u/s 14A read with Rule 8D as per which the disallowance should have been Rs. 13,68,231/-. He submitted that the matter may be restored back to the file of AO for verification of quantification of disallowance.
31. Having hard both the parties, we restore this issue to the file of AO for verification of claim made by the assessee.
32. In the result, this ground is allowed for statistical purposes.
33. Brief facts apropos ground no. 3 are that assessee had written off bad debt to the tune of Rs. 4,62,662/-. The AO examined the details submitted by the assessee and noticed that name of the parties had not been submitted in respect of bad debts written off aggregating to Rs. 2,04,091/-. The assessee's reply was as under: - "As you are aware the fire occurred to the hotel on 26th January, 2008 and all the entertainment as well as house use/self consumption was inadvertently charge to the city ledger/respective employees/staff as recoverable. The same is hereby written off to comply with the term of uniform system of accounting. The details of Bad Debts written off is enclosed herewith for your ready reference."
34. After considering the assessee's submissions, the AO disallowed the assessee's claim to the tune of Rs. 2,04,091/-. Ld. CIT(A) confirmed the findings of AO.
35. Ld. Counsel for the assessee submitted that these amounts mainly pertained to restaurant in which people ran away at the time of fire and, therefore, their names could not be mentioned but only the restaurants name was available with the Accounts Department which was on the basis of slips signed by the customers. He relied on the submissions made before ld. CIT(A).
36. We have considered the submissions of both the parties and have perused the record of the case.
37. Before ld. CIT(A) the assessee had submitted as under: - "6. The Assessing Officer erred in law and on facts in not allowing bad debts to the extent of Rs. 2,04,091/- ignoring the facts and evidences placed on record. Thus the addition so made should be deleted.
6.1 The AO stated that details of bad debts show that the name of the parties have not submitted in respect of some items as mentioned on page 6 of the assessment order. In the absence of full details of the parties and customers with substantiating evidences, the claim for bad debts was not allowed.
6.2 In this regard, it is submitted that the sales, self consumption, house use etc. on the day of fire were recorded in the Debtors account or shown as receivable from staff or respective employees or under respective head of income. However, the same could not be recovered and therefore the said amounts were written off. The list mentions the names or the heads from which the amount was recoverable, e.g., Brix, Cascades and Caraway, Gourment Shop, Grand Café are the restaurants and coffee shop of the hotel from whom the amount was receivable on account of sales made by them. However, due to fire, the said amount cannot be recovered. Since the income had already been recorded in the accounts but the amount was not recoverable, the same was claimed as bad debts. Rooms, Minibar and Sales and Marketing represent the amount recoverable under these heads. Clearing account and Guest long stay Reco. Prog. Are also ledger heads in the books of account. The money outstanding under these heads was written off since not recoverable. Meals Mod Dhi is the name of restaurant.
6.3 In this case, it is an undisputed fact that the amount under these heads was booked as income and shown as receivable under various heads as the AO has not challenged this fact. The only reason for disallowing the bad debt written off was that name of the parties was not submitted. Only the nomenclature of an item should not be considered but the substance of the transaction has to be seen. The AO did not bring any evidence on record to show that income against these heads were not recorded in the books or that the amount was recoverable from them. Since the assessee has fulfilled the conditions laid down by law for claiming bad debts i.e. the said amount should have been declared as income at an earlier stage and the same should be written off in the books of account, the same should be allowed to the assessee."
38. The assessee's gross turnover was Rs. 112 crores. There is no dispute that fire did occur on the said date. It also cannot be disputed that at the time of fire services were being offered in the restaurants. The assessee's submission is whenever any order of a customer is executed, the same gets recorded with the Accounts Department. However, due to fire bills could not be raised. This aspect has not been considered by lower Revenue Authorities. Under such circumstances, we restore the matter to the file of AO to examine the claim in the light of submissions made by ld. Counsel for the assessee.
39. In the result, this ground is allowed for statistical purposes.
40. Brief facts apropos ground no. 4 are that assessee had claimed an expenditure of Rs. 2,90,020/- on foreign travel of Mrs. Priti Saraf wife of Mr. Umesh Saraf, Managing Director of the Company. The AO noticed that Mrs. Priti Saraf merely accompanied Mr. Umesh Saraf during his foreign visits to Kualalampur/Baily, London/Oriando, Miami and Bangkong/Hongkong. After considering the assessee's submissions he disallowed the assessee's claim on the ground that the foreign travel of Mrs. Priti Saraf was not connected with the business of the assessee company.
41. Ld. CIT(A) confirmed the AO's action. Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A) because neither before AO and CIT(A) nor before us assessee established any business connection with the foreign travel of Mrs. Priti Saraf.
42. In the result, this ground is dismissed.
43. Brief facts apropos ground no. 5 are that assessee company had claimed Rs. 14,42,452/- on account of foreign travel of its Managing Director and Export Marketing Managers. After considering the details submitted by the assessee, the AO observed that some personal element was part of the expenses claimed by the assessee. He noted that lodging and boarding expenses were unusually high. He, therefore, disallowed 10% of Rs. 8,52,696/- being the expenses in connection with lodging and boarding. He, accordingly, disallowed Rs. 85,269/-.
44. Ld. CIT(A) confirmed the disallowance.
45. We have considered the submissions of both the parties and have perused the record of the case. It is not disputed that the foreign visits were undertaken for business purposes. Therefore, all the expenditure incurred in course of this visit was to be treated for business purposes only. No disallowance could be made on ad-hoc basis out of lodging and boarding expenses because they were incidental to the foreign visits for business purposes. We, therefore, set aside the order of ld. CIT(A).
46. In the result, this ground is allowed.
47. In the result, the Assessee's appeal is partly allowed for statistical purposes and Department's appeal is dismissed.