1. As the above appeals are inter-related and involve common points, so we are disposing them off by this common order for the sake of convenience.
2. ITA No. 1338/B/94 and 2229/B/94 are cross appeals by assessee and revenue respectively for assessment year 1991-92 and are directed against the order of CIT (A), Mumbai dated 27.01.1994.
3. We have heard the arguments of both the sides and also perused the records including the written submissions of assessee furnished on record before me.
4. First, we take up ITA No. 1338/B/94. The assessee-appellant originally raised as many as five grounds of appeal constituting single issue disputing the learned CIT (A)'s impugned order in not allowing deduction claimed by assessee under Clause (iii) of explanation below Sub-section (1A) of Section 115-J. However, the learned AR of assessee has furnished concised ground of appeal raising a sole ground, which is as under:- "On the facts and circumstances of the case and in law, the learned CIT (A) erred in not directing the Assessing Officer to allow a deduction from book profits under Clause (iii) of explanation to Sub-section (1A) of Section 115-J of the Act, 1961 in respect of book profit attributable to the appellant's hotel business, the profits from which are eligible for deduction Under Section 80-HHD computed in the manner set out in Sub-section 3 of Section 80-HHD of the Act".
5. The facts, in brief, are that the assessee-appellant claimed deduction of Rs. 8,37,238/- Under Section 80HHD in the computation of book profit. The Assessing Officer disallowed the assessee's aforesaid claim for deduction Under Section 80HHD in the computation of book profit for the reason that in the regular computation of income, there was loss. The learned AR of assessee has contended that for allowing of deduction Under Section 80HHD in the computation of book profit Under Section 115-J, it is not a precondition that there should be a positive income. He has contended that the issue is covered in assessee's favour by Board's circular No. 680 dated 21.2.94, and by 248 ITR 372 (Kerala).
As against this, the learned DR of revenue has relied on the orders of authorities below on this count.
6. We have considered the rival contentions, relevant material on record, as also the cited decision. In the above referred circular No.680 of CBDT, the relevant position regarding the computation of book profits Under Section 115-J together with effect of Clause (iii) of explanation Under Section 115-J as under:- (iii) If the business exclusively consists of the types of business which are eligible for deduction Under Section 80HHC / 80HHD the whole of such amount arrived at as per (ii) above should be allowed as deduction; and (iv) If not, the proportion of the export turnover to the total turnover of the business carried on by the assessee as required Under Section 80HHC(3)(b) or the proportion of the turnover in respect of sales made to export house or trading house to the total turnover of the business carried on by the assessee as required Under Section 80HHC(3A)(b) or, as the case may be, the proportion of the receipts specified in section 80HHD(2) to the total receipts of the business carried on by the assessee should be determined and the said proportion should bee applied to the amount arrived at (ii) above to determine the quantum of deduction Under Section 115-J".
7. As such in the computation of book profit Under Section 115-J, the deduction Under Section 80HHD has been held allowable. Similarly, in 248 ITR 372 (Kerala) CIT v. G.T.N. Textiles, following portion of CBDT circular No. 559, dated 4.5.90 has been quoted :- "An explanation in section provides for the manner of computation of book profits for the purpose of section. The Amending Act, 1989, has carried out the following amendments in the said Explanation: a) A new Clause (iii) has been inserted in the Explanation to provide that for the purposes of computation of book profits, the net profit shall be reduced by the amount of net profits derived from the business of exports or from services provided to foreign tourists by approved hotels and tour operators or by travel agents, which are eligible for deduction Under Sections 80HHC and 80HHD. For this purpose, the net profit to be excluded shall be computed in the same manner as provided for in Sub-sections (3) and (3A) of Section 80HHC or Sub-section (3) of Section 80HHD, as the case may be" The Honourable Kerala High Court upheld the view taken by the Tribunal, wherein, the Tribunal held that Under Section 115-J, explanation, Clause (iii) of the Act, profit to be taken for consideration was profit as per the book of account and not as calculated under Act.
8. Accordingly, in view of our above discussion, respectfully following the aforesaid decision of Honourable Kerala High Court as also the Board's circular, we find the assessee's claim to be quite justified, and so we direct the Assessing Officer to compute the book profit accordingly that is allowing deduction Under Section 80HHD as per Clause (iii) of explanation to Section 115-J(1A) of the Act in respect of profit attributable to foreign exchange earnings in hotels.
9. In the result, the assessee's appeal No. 1338/B/94 is allowed as indicated.
11. Ground No. 1 disputes the learned CIT (A)'s impugned order in directing the Assessing Officer to allow assessee's claim for deduction of Rs. 1,98,201 in respect of sundry creditors' balances, which was charged to tax Under Section 41(1) of the Act. The learned DR of revenue has relied on the Assessing Officer's order and contended that the Tribunal may consider the issue appropriately in accordance with law. He has cited 222 ITR 344(SC) CIT v. TVS Iyengar & sons. He has also contended that the subsequent two judgments of Honourable Supreme Court are in favour of assessee, no doubt, but the same should not be preferred for the reason that in the case of TVS Iyengar, the judgment has been rendered by a bench of three judges, whereas in the subsequent two cases / decisions, the judgments have been rendered by two judges bench of the Honourable Supreme Court. As against the above, the learned AR of assessee has contended that in the latter judgments, the Honourable Supreme Court has taken the view in favour of the assessee.
He has cited following decisions in his support:- He has contended that in the case of Kesaria Tea Co. Ltd. 254 ITR 434, the Hon'ble Supreme Court has considered the case of T.V.S. Iyengar also, but has followed the case of Sugauli Sugar works P. Ltd. (236 ITR 518). He has relied on learned CIT (A)'s order.
12. We have considered the rival contentions, the relevant material on record, as also the cited decisions. In 222 ITR 344(SC)(supra), the assessee had received deposits from customers, which were not claimed by the customers and the said claim had become barred by limitation.
The assessee transferred the said unclaimed balances to profit & loss account. The Honourable Supreme Court held that the said amount should be treated as assessee's income and was assessable as assessee's income. The Honourable Court held that a trading receipt, though, may not be taxable in the year of receipt but that amount changes its character when the amount becomes assessee's own money because of limitation or by any other statutory or contractual right and then that amount should be treated as income of assessee.
13. In 236 ITR 518 (SC)(supra), the Honourable Supreme Court held that mere unilateral transfer entry in accounts will not enable the department to apply Section 41(1) and accordingly to include the said amount in total income of the assessee. The Honourable Supreme Court held that following words in Section 41(1) are important :- "the assessee had obtained, whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him" 14. The Honourable Supreme Court thus held that the obtaining of an amount either in cash or in any other manner or a benefit by way of remission or cessation of a trading liability was necessary for applying the provisions of Section 41(1). The Honourable Supreme Court also observed that the principle that on expiry of the period of limitation only the remedy available to creditor for enforcing debt was extinguished but the debt itself was not extinguished and that accordingly a mere entry in the books of account of debtor (assessee) made unilaterally without any act on the part of the creditor will not cause the liability of the debtor to come to an end.
15. In 254 ITR 434 (SC), the assessee had made provision towards purchase tax liability in earlier year. Thereafter the assessee wrote back the same in accounts; but the ST department was still pursuing the claim and litigation in respect thereof was pending. In the circumstances, the Honourable Supreme Court held that the amount written back cannot be taxed as profit in as much as the unilateral action of assessee is not conclusive to bring the cessation of liability under law.
16. In 257 ITR 343 (SC), the assessee had paid excise duty on certain goods in the year 1986. Pursuing to the decision of CEGAT, a sum of Rs. 9,64,000/- was refunded in September, 1988. The excise department continued to pursue the matter in litigation before the Hon'ble High Court and then before the Honourable Supreme Court. In the assessment year 1989-90, the Assessing Officer brought the amount of refund to tax Under Section 41(1) but the Tribunal held that there was no remission or cessation of trading liability so long as the department's SLP was pending in the Honourable Supreme Court. On a reference, Hon'ble High Court held that the amount was assessable to tax. The Honourable Supreme Court confirmed the decision of High court and held as under: - "that where a statutory levy is discharged by the assessee and subsequently the amount paid is refunded, it will be a case where the assessee "has obtained any amount in respect of such expenditure" within the meaning of Section 41(1) of the Act, 1961; it will not be a case of "benefit by way of remission or cessation" of a trading liability. Where expenditure is actually incurred by reason of payment of duty on goods and the deduction or allowance is given in the assessment of an earlier period, the assessee is liable to disgorge that benefit as and when he obtains refund of the amount so paid. Whether there is a possibility of the refund being set at naught on a future date is not a relevant consideration. Once the assessee gets back the amount which was claimed and allowed as business expenditure during an earlier year, the deeming provision in Section 41(1) comes into play and it is not necessary that the revenue should await the verdict of higher court or tribunal. If the higher court or tribunal upholds the levy at a later date the assessee is not without a remedy to get back the relief".
17. In 211 ITR 919 (Bom), the Honourable Bombay High Court has held that unclaimed balances written back to profit & loss account was assessable Under Section 28(iv) of the Act.
18. Thus, we may note that the judgment in 222 ITR 344 (SC) is in respect of trading receipt, being unclaimed credit balances, to be treated as "Profits and gains of Business or Profession" which, in turn, fall within the purview of section 28 of the Act. This judgment {222 ITR 344} does not deal with and does not cover a situation of "an allowance or deduction in respect of loss, expenditure or trading liability having already been made in any of the earlier assessments", which situation falls within Section 41(1) and not within Section 28.
Such a situation, as falls within Section 41(1), has been dealt with and is covered in the judgment reported in 236 ITR 518 (SC) wherein the requisite pre-condition for chargeability to tax covered by Section 41(1), has been explained; which pre-condition is that an assessee must have obtained a benefit, whether by way of cessation or remission of liability or by way of obtaining any benefit in cash or kind. In this judgment, it has been held that it is only on the fulfillment of the aforesaid pre-condition that the chargeability to tax as provided in Section 41(1), can be applied.
19. Obvious as it is, from our above discussion, there does not appear to be any direct clash between the judgment reported in 222 ITR 344 (SC) and that reported in 236 ITR 518 (SC) so as to impel us to proceed to make an exercise of opting between the two and in that context to consider the learned DR of revenue's contention of preferring a three judge bench judgment of the Honourable Supreme Court to that of two judge bench judgment of the Honourable Supreme Court.
20. In this very context, we may also note that the judgment reported in 254 ITR 434 deals with a slightly differring issue, which covers a situation where the debtor unilaterally writes back the amount but the creditor {ST department} is still continuing to press the demand by pursuing its claim which still pends litigation. It is thus in a fact-situation, wherein the debtor unilaterally writes back the debt liability without there being any corresponding supportive conduct on the part of creditor to remit or forego its claim or to treat the same as having come to an end, resulting, consequentially, in cessation of debtor's liability in respect of the said claim of the creditor. So the creditor, keeping his credit alive demonstratively, excludes, rather rules out, the possibility of the amount, so written back by debtor unilaterally, becoming debtor-assessee's income so as to call for a charging to tax Under Section 41(1) of the Act.
21. Similarly, 257 ITR 343 (SC), as noted above, is also on an issue, some what differing from that involved in 222 ITR 344 (SC), in as much as the judgment in 222 ITR 344 deals with customers' credit balances with the assessee, being assessee's trade liability, which, the customers having not claimed and the customer's said claim in respect of their deposits with assessee having become barred by limitation, the amount of the same was treated as assessee's profit of business and, in turn, assessee's taxable income. Distinguishably from the said judgment, 257 ITR 343 (SC) deals with a statutory liability, which, on being discharged by the assessee, forms assessee's business expenditure eligible for deduction. The ratio decidendi of this judgment is that when after an assessee has paid off his statutory liability, (being excise duty in the cited case) and claimed deduction in respect thereof, the sum is refunded to assessee {may be under judicial adjudication} the same is to be treated as assessee's deemed profit chargeable to tax Under Section 41 (1). The Honourable Supreme Court has propounded that such a situation (being of receipt of amount in respect of expenditure) is quite distinct from a situation of remission or cessation of a trading liability.
22. Considering the facts and circumstances of the case and the legal position, we are of the view that out of the aggregate amount of Rs. 1,98,201/-, an amount of Rs. 17,027/- represents sundry credit balance written back, the fact-situation in respect of which is identical with that of 222 ITR 344 (supra); and the amount involved is a trading receipt, and the decision of 222 ITR 344 is directly on trading receipts. Accordingly, the said amount of Rs. 17,027/- is to be taxed Under Section 28 in view of the judgment of Honourable Supreme Court in 222 ITR 344. However, the assessee will be at liberty to claim deduction as and when the assessee is required to pay and does pay any amount comprised in the said figure. As regards the balance amount of Rs. 1,81,174/-, comprised of unclaimed wages, bonus etc., we find the same to be not taxable in view of the judgment of Honourable Supreme Court in 236 ITR 518 (supra). As the fact situation in respect of this amount is identical with that involved in the just cited decision ( 236 ITR 518 ) so the ratio decidendi thereof will apply squarely in the instant case. We may also note here that 222 ITR 344 is not on the issue involved in Section 41(1) but is on trading receipt involved in Section 28, whereas 236 ITR 518 is directly on the issue of Section 41(1). We, therefore, modify the impugned order of learned CIT (A) on this count in the manner held by us above in this para and direct the Assessing Officer accordingly.
23. Ground No. 2 disputes the learned CIT (A)'s action in directing the Assessing Officer to restrict the disallowance at 50% of Rs. 3,66,508/- Under Section 37(2A) and at 50% of Rs. 69,433/- being the expenditure incurred on foreign trip. The learned DR of revenue has contended that in TAR, the whole amount of Rs. 3,66,508/- was worked out as disallowable Under Section 37(2A) as entertainment expenditure.
Similarly, he has contended that the amount of Rs. 69,433/- (US$ 3,500) was allowed by the order of Exchange Control Department by way of entertainment expenditure during foreign visit of Mr. S.V. Balaram and so both the amounts were rightly disallowed as entertainment expenditure in entirety by the Assessing Officer. He has contended that the Tribunal may consider it in accordance with Law. As against this, the learned AR of assessee has relied on the orders of learned CIT (A) contending the Tribunal may consider the issue appropriately.
24. We have considered the rival contentions, as also the relevant material on record. From the perusal of record we find that an amount of Rs. 3,66,508/- was worked out as entertainment expenditure Under Section 37(2A) in TAR of assessee. However, it has been the assessee's plea that the said expenditure has been incurred on employees of assessee accompanying the guests. In as much as the various benches of Tribunal (Bombay) have, at present, been consistently allowing 25% of entertainment expenditure as having been incurred on employees and disallowing 75% of such expenditure Under Section 37(2A). As regards the amount of Rs. 69,433/- being the expenditure incurred during foreign trip, the same was also permitted by Exchange Control Department as entertainment expenditure; and the assessee has not furnished any details of the incurrence of expenditure during foreign trip before us so as to ascertain, in specific, as to how and for what purpose the above expenditure was incurred during foreign trip.
Accordingly, we treat the aforesaid said sum of Rs. 69,433/- as having been spent by way of entertainment on Mr. S.V. Balaram and others. As such considering all the facts and circumstances of the case as also the legal position, we modify the impugned orders of authorities below in the manner that 75 % of the above aggregate expenditure of Rs. 4,35,941/- {Rs. 366508 + Rs. 69433} shall be disallowed Under Section 37(2A) and balance 25% thereof shall be allowed. We order accordingly.
25. Ground No. 3 disputes the learned CIT (A)'s impugned order in directing Assessing Officer to allow investment allowance Under Section 32A on new plant and machinery following the decision of the Tribunal.
The learned DR of revenue has contended that this issue is covered against assessee and in favour of revenue by the judgment of Honourable Supreme Court in the case of Indian Hotels Co. Ltd v. ITO 245 ITR 538.
The learned AR of assessee also frankly conceded that in view of the judgment of Honourable Supreme Court, this issue is to be decided against assessee.
26. We considered the rival contentions, relevant material on record as also the cited decision. In 245 ITR 538 (supra), the Honourable Supreme Court has held that in preparing food packages or selling the same or preparing food stuffs for serving in the hotel, there is no question of manufacture or production, the raw material is at the most processed so as to make it eatable. It has been held that in such a case, the assessee is not entitled to special deduction Under Section 80-J nor to investment allowance Under Section 32A. As such respectfully following the aforesaid judgment of Honourable Supreme Court, we reverse the order of learned CIT (A) on this count and uphold that of Assessing Officer in disallowing the assessee's claim for investment allowance of Rs. 1,61,800/- Under Section 32A on the new plant and machinery. We order accordingly.
27. Ground No. 4 disputes the learned CIT (A)'s action in directing the Assessing Officer to allow depreciation on the actual cost of fixed assets without deducting subsidy there from. The learned DR of revenue has frankly conceded that in view of the judgment of Honourable Supreme Court in the case of P.J. Chemicals reported in 210 ITR 830 (SC), this issue has to be decided in favour of assessee. Similar has been the contention of learned AR of assessee. Considering the rival contentions as also the legal position as held in the aforesaid judgment of the Honourable Supreme Court and respectfully following the said judicial pronouncement, we find no fault with the impugned order of learned CIT (A) in treating the actual cost without deduction of subsidy amount there from and so we uphold the same.
28. Ground No. 5 disputes the deletion of addition of Rs. 87,000 made by Assessing Officer on account of disallowance of legal fee treating the same as capital expenditure. The learned DR of revenue has referred to P40 of assessee's PB and contended that it pertained to the expansion of assessee's hotel premises by making further construction, within 200 metres of high tide limit which was objected to by an NGO, being Goa Foundation which filed writ petition against assessee seeking restrain of construction together with demolition of construction raised within 200 metres high tide limit by way of expansion of assessee's hotel known as Mazanda Beach Resort (MBR). He has contended that the said legal fee being in respect of expansion of the existing hotel business, the same was not allowable and was rightly disallowed by Assessing Officer. He has cited the following decision in his support:- 29. As against the above, the learned AR of assessee has contended that the assessee's hotel business was started in the year 1984. He has contended that the assessee's hotel was near seashore in Goa. He has contended that when new rooms were constructed in the year 1989, the NGO near MBR filed litigation against assessee and so the assessee had to defend because the assessee's business had come to stand still. He has accordingly contended that in the situation this expenditure cannot be a capital expenditure.
30. We have considered the rival contentions, relevant material on record as also the cited decisions. In 167 ITR 740 (Bom), the assessee had taken over the business of certain insurance companies, there was a dispute as to the quantum of compensation payable to the insurance companies; and the assessee incurred legal expenditure. The assessee claimed deduction in respect this expenditure, which was disallowed up to the Tribunal level. The Honourable Bombay High Court held that when the assessee acquired the business of insurance companies, the assessee was acquiring capital asset, and the compensation paid for such acquisition was capital expenditure. It was held that the expenditure incurred in litigation relating to such capital expenditure must also be treated as capital expenditure. In 218 ITR 590, the assessee had taken a plot of land on lease for establishing a factory, a portion of land was found to be in unauthorized occupation of villagers. The assessee made further payment of Rs. 8,00,000/- to the lessor to enable the eviction of the occupants from the plot. The Honourable Bombay High Court held the payment to be capital expenditure. In 235 ITR 264, the Honourable Gujarat High Court held that the legal expenses incurred for resisting the claim of higher compensation for the land acquired was capital expenditure and not allowable as deduction Under Section 37 of the Act.
31. From the perusal of record, we find that the Assessing Officer held the expenditure by way of legal fee to be of capital nature for the reason that the dispute was for protection of right in property. The learned CIT (A) considered the contentions of the learned AR of assessee to the effect that the expenditure was incurred to defend the company against writ petition and to save demolition of construction carried out during the expansion and it was necessary for the business man to protect his business interest. It was also pleaded before him that this expenditure did not result in improvement or alteration of capital asset. The learned CIT (A) considered the decision of 13 ITR 340 in the case of Mahabir Prasad v. CIT, wherein the Hon'ble High Court held that it was necessary for a business man to protect his business premises as his stock in trade; and the learned CIT (A) accordingly held that there was no distinction in principle between litigation expenditure incurred to defend the business premises and those incurred to defend stock in trade. He accordingly treated the expenditure to be allowable as revenue expenditure.
32. Considering the facts and circumstances of the case including the fact that the expenditure by way of legal fee, involved in the matter under consideration, was incurred on litigation pertaining to expansion of the hotel {capital asset}, as also the legal position, we find the said expenditure to be a capital expenditure. We therefore reverse the impugned order of learned CIT (A) on this count and restore that of Assessing Officer treating the said expenditure as of capital nature and disallowing deduction in respect thereof. We order accordingly.
33. Ground No. 6 disputes the deletion of addition of Rs. 85,705/- made by Assessing Officer under Rule 6B. It has been common submission of the rival representatives that this issue is covered in favour of assessee and against the department by the judgment of Honourable Bombay High Court in the case of CIT v. Allana Sons Pvt. Ltd. 216 ITR 690 (Bom). As such, considering the rival contentions as also the legal position, we uphold the impugned order of learned CIT (A) on this count. This ground of revenue thus fails.
34. Ground No. 7 disputes the learned CIT (A)'s impugned order in holding that the interest Under Section 234B and 234C is not leviable in assessee's case. The learned DR of revenue has contended that the learned CIT (A) has held the aforesaid interest to be not leviable in the case of present assessee following the decision of ITAT, Delhi in the case of Steel Authority of India Ltd., but the case is covered in favour of Revenue by a judgment of Honourable Bombay High Court in the case of CIT v. Kotak Mahindra Finances Ltd. As against this, the learned AR of assessee has tried to support the impugned order of learned CIT (A) and has cited 243 ITR 519 (Karnataka).
35. We have considered the rival contentions, relevant material on record as also the cited decisions. In the Honorable Jurisdictional High Court has held that the 'current income' Under Section 207 referred to computation of total income under the provisions of Income Tax Act including Section 115-J. It has been held therein that merely because the curtain raises in the cases of companies falling Under Section 115-J after 31^st March, is no ground for assessee company not to pay interest Under Section 234B & 234C. As such considering all the facts and circumstances of the case and respectfully following the aforesaid judgment of Honorable Jurisdictional High Court, we hold the interest Under Section 234B & 234C to be leviable in the instant case as well, on account of non-payment of advance tax as per the income computed Under Section 115-J. We, therefore, reverse the order of learned CIT (A) and restore that of Assessing Officer on this account.
We order accordingly.
36. In the result, the revenue's appeal No. ITA 2229/B/94 is partly allowed as indicated above.