M/s. Mahindira Holidays & Resorts India Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1616/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64424 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-10-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 04-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB IRS A DDL
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Permanent establishment; Unabsorbed depreciation; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NO.1616(MDS)/2011 ASSESSMENT YEAR : 2008-09 M/S.MAHINDRA HOLIDAYS & RESORTS INDIA LTD., MAHINDRA TOWERS II FLOOR, 17-18, PATULLOS ROAD, CHENNAI-600 002. PAN AAACM6469L VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, LARGE TAXPAYER UNIT, CHENNAI. (APPELLANT) (RESPONDENT) AN D ITA NO.1764(MDS)/2011 ASSESSMENT YEAR : 2008-09 THE DEPUTY COMMISSIONER M/S.MAHINDRA HOLIDAYS & OF INCOME-TAX, RESORTS INDIA LTD. LTU, CHENNAI. CH ENNAI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.VIJAYARAGHAVAN, ADVO CATE DEPARTMENT BY : SHRI SHAJI P JACOB, IRS, ADD L.CIT DATE OF HEARING : 10 TH OCTOBER, 2012 DATE OF PRONOUNCEMENT : 17 TH OCTOBER, 2012 O R D E R PER DR.O.K.NARAYANAN, VICE PRESIDENT THESE ARE TWO CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE, FOR THE ASSESSMENT YEAR 2008-09. THES E APPEALS - - ITA 1616 & 1764 OF 2011 2 ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME- TAX(APPEALS), LARGE TAXPAYER UNIT AT CHENNAI, DATED 25-8-2011. THE CROSS APPEALS ARISE OUT OF THE ASSESSMENT COMPL ETED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961. 2. FIRST WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE IN ITA NO.1616(MDS)/2011. 3. THE FIRST ISSUE RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE ADDITION OF ` 158,43,81,853/-. THIS ADDITION RELATED TO 40% OF THE MEMBERSHIP FEES DEFERRED BY THE ASSESSEE COMPAN Y AGAINST FUTURE YEARS. THIS ISSUE HAS BEEN CONSIDERED BY US IN THE APPEALS FILED BY THE ASSESSEE FOR THE EARLIER ASSES SMENT YEARS 2006-07 AND 2007-08. FOLLOWING THE SAID COMMON ORD ER OF EVEN DATE, WE FIND THAT THE ADDITION IS NOT JUSTIFIED. ACCORDINGLY THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND THE ADDITION OF ` 158,43,81,853/- IS DELETED. 4. THE SECOND ISSUE RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING - - ITA 1616 & 1764 OF 2011 3 THE DISALLOWANCE OF FOREIGN EXCHANGE LOSS OF ` 1,83,10,529/-, INASMUCH AS IT WAS NEITHER NOTIONAL NOR CONTINGENT NOR CAPITAL IN NATURE, AS HELD BY THE LOWER AUTHORITIES. 4.1. THE ASSESSEE HAD GIVEN A FOREIGN EXCHANGE LOA N OF ` 20,78,61,900/- TO M/S MHR (USA), A SUBSIDIARY COMP ANY OF THE ASSESSEE IN UNITED STATES OF AMERICA. THE INTEREST RECEIVABLE ON THIS LOAN WAS ` 1,03,78,518/-. THE TOTAL AMOUNT THUS RECEIVABLE FROM M/S MHR (USA) WAS ` 21,82,40,418/-. THE ENTIRE LOAN AND INTEREST AS STATED ABOVE WAS REVALU ED AND RESTATED BY THE ASSESSEE ON BALANCE SHEET DATE. TH IS REVALUATION RESULTED IN LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION. THE ASSESSEE CLAIMED IT AS A REVENUE L OSS. THE ASSESSING OFFICER DID NOT ALLOW THE LOSS, STATING T HAT IT WAS A NOTIONAL LOSS ON ACCOUNT OF DIMINUTION IN THE VALUE OF INVESTMENT. 4.2. THE COMMISSIONER OF INCOME-TAX(APPEALS), AFTE R EXAMINING THE ISSUE IN DETAIL, FOUND THAT THE TOTAL OF SUCH REVALUATION LOSS CLAIMED BY THE ASSESSEE WAS ` 1,96,82,771/-. A LOSS OF ` 3,15,406/- RELATED TO ITS DUBAI BRANCH. AS IT WAS AN OPERATING LOSS, THE SAME WAS ALLOWED BY THE ASSESSI NG OFFICER AS A DEDUCTION. LIKEWISE, THE ASSESSING OFFICER HA S ALLOWED - - ITA 1616 & 1764 OF 2011 4 DEDUCTION OF ` 7,32,032/- AS LOSS ON ACCOUNT OF RESORT OPERATIONS AT KUWAIT. THE COMMISSIONER OF INCOME-TAX(APPEALS) FOUND THAT WHEREVER THE LOSSES WERE PERTAINING TO THE BUSINESS OPERATIONS CARRIED ON BY THE ASSESSEE, THOSE LOSSES WERE ALLOW ED AS DEDUCTION BY THE ASSESSING OFFICER. IT IS ONLY IN THE CASE OF THE US CONCERN M/S. MHR(USA) THAT THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM MADE BY THE ASSESSEE. THE COM MISSIONER OF INCOME-TAX(APPEALS), AFTER EXAMINING THE RELEVAN T CASE LAWS, HELD THAT IF THE FOREIGN EXCHANGE LOSS WAS INCURRED ON A CAPITAL ASSET OR AGAINST A FIXED ASSET, THE LOSS WOULD BE C APITAL IN NATURE AND CANNOT BE ALLOWED AS A DEDUCTION. ACCORDINGLY, THE COMMISSIONER OF INCOME-TAX(APPEALS) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 4.3. ON GOING THROUGH THE FACTS OF THE CASE, WE AR E INCLINED TO AGREE WITH THE FINDING OF THE LOWER AUT HORITIES. THE RESTATEMENT OF LOAN AND INTEREST ON THE BALANCE SHE ET DATE IN THE PRESENT CASE IS TO ADHERE TO THE REPORTING NORMS FO LLOWED BY THE ASSESSEE COMPANY. THE AMOUNT DID NOT RELATE TO ANY OPERATING ACCOUNT OF ANY BUSINESS. THEREFORE, AS RIGHTLY POI NTED OUT BY THE ASSESSING OFFICER, AS FAR AS THE INCOME-TAX ACT IS CONCERNED, THE - - ITA 1616 & 1764 OF 2011 5 RESTATED FOREIGN EXCHANGE LOSS WAS NOTIONAL AS WELL AS CAPITAL IN NATURE. IF AT ALL SUCH DEDUCTION IS NECESSARY, THA T WOULD BE AVAILABLE ONLY AT THE TIME OF ACTUAL SETTLEMENT OF THE ACCOUNT. THEREFORE, THE DISALLOWANCE OF ` 1,83,10,529/- IS CONFIRMED. THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 5. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE DISALLOWANCE OF ` 96,75,008/- TOWARDS UNABSORBED DEPRECIATION OF AMALGAMATING COMPANY WITHOUT APPREC IATING THE FACT THAT ALL THE CONDITIONS OF SECTION 72A WERE DU LY COMPLIED WITH. 5.1. THE ASSESSEE IS NOT A HOTEL COMPANY TO CLAIM THE ABOVE DEDUCTION UNDER SECTION 72A OF THE ACT. THE ASSESSEE IS A DEALER IN TIME SHARING. THE PROPERTY OF THE ASSE SSEE IS NOT A HOTEL. HOTEL IS OPEN TO THE PUBLIC. THE ASSESSEE S RESORT IS OPEN ONLY TO ITS MEMBERS. IF IT IS A HOTEL BUSINES S, THE ASSESSEE WOULD HAVE NEVER MADE THE APPORTIONMENT OF 60% AND 40% OF ITS MEMBERSHIP FEES. THERE IS NO SUBSTANCE IN THE ARGUMENT OF - - ITA 1616 & 1764 OF 2011 6 THE ASSESSEE. IT IS REJECTED. THE ISSUE IS DECIDE D AGAINST THE ASSESSEE. 6. THE NEXT ISSUE RAISED BY THE ASSESSEE IS THAT T HE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THAT THE EXCESS OF ASSETS OVER THE LIABILITIES AMOU NTING TO ` 80,76,889/- WAS TAXABLE AS SHORT-TERM CAPITAL GAIN S. THIS AMOUNT OF ` 80,76,889/- IS ONLY A BALANCING FIGURE ARISING OUT OF THE ENTRIES PASSED AS A RESULT OF THE AMALGAMATION. THE EXCESS OF ASSETS OVER LIABILITIES IS NOTIONAL AND IS THE R ESULT OF REVALUATION OF ASSETS AND LIABILITIES ON AMALGAMATION. THEREFO RE, THE LOWER AUTHORITIES ARE NOT JUSTIFIED IN TREATING THE AMOUN T OF ` 80,76,889/- AS THE INCOME OF THE ASSESSEE COMPANY. THE SAID ADDITION IS DELETED. THIS ISSUE IS DECIDED IN FAVO UR OF THE ASSESSEE. 7. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THAT EXPENDITURE ON CIVIL, ELECTRICAL, PLUMBING ON EXTENSION OF THE IMPROVEMENTS TO THE LEASEHOLD BUILDING IS CAPITAL I N NATURE, REJECTING THE CONTENTION OF THE ASSESSEE THAT THOSE EXPENSES WERE REVENUE IN NATURE. THE COMMISSIONER OF INCOME - - - ITA 1616 & 1764 OF 2011 7 TAX(APPEALS) HAS CONSIDERED THIS ISSUE IN A DETAILE D MANNER IN PARAGRAPHS 9, 9.1, 9.2, 9.2.1 AND 9.2.2 IN HIS ORDE R. THE EXPENSES RELATING TO TRANSPORT, FREIGHT, GENERAL EX PENSES AND UPHOLSTERY HAVE BEEN ALLOWED BY THE COMMISSIONER OF INCOME- TAX(APPEALS) AS REVENUE EXPENDITURE. ONLY THOSE IT EMS WHICH ARE CAPITAL IN NATURE WERE DISALLOWED BY THE COMMIS SIONER OF INCOME-TAX(APPEALS). IN THAT CASE DEPRECIATION HAS BEEN ALLOWED. THEREFORE, WE FIND NO REASON TO INTERFERE IN THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) ON THIS POI NT. THIS GROUND IS DISMISSED. 8. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DI RECTING THE ASSESSING OFFICER TO VERIFY THE EXPENDITURE OF ` 2,07,14,756/- AND ALLOW IT IF THE SAME WAS INCURRED ON SALARIES, RENT , INTEREST, REPAIRS AND FURNITURE. THIS GROUND IS DISMISSED IN VIEW OF OUR DECISION TAKEN IN THE ASSESSEES APPEAL FOR THE ASS ESSMENT YEAR 2006-07 THROUGH OUR COMMON ORDER OF EVEN DATE. 9. THE LAST GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE DISALLOWANCE OF EXPENDITURE ON PURCHASE OF SOFT WARE UNDER - - ITA 1616 & 1764 OF 2011 8 SECTION 40(A)(IA) REJECTING THE CONTENTION OF THE A SSESSEE THAT THE PROVISIONS OF SECTION 194J ARE NOT ATTRACTED. THE ASSESSEE HAS ALREADY PAID THE AMOUNT. THEREFORE, IN VIEW OF THE SPECIAL BENCH DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, VIZH AKAPATNAM, IN THE CASE OF MERILYN SHIPPING AND TRANSPORTS VS. ACI T, 16 ITR (TRIB) 1(SB), THE PROVISIONS OF LAW STATED IN SECTI ON 40(A)(IA) WILL NOT APPLY. THE DISALLOWANCE IS, THEREFORE, DELETED . 10. THE APPEAL FILED BY THE ASSESSEE IS PARTLY SUCCESSFUL. 11. NEXT WE WILL CONSIDER THE APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2008-09 IN ITA NO.1764(MDS)/2011. 12. THE FIRST ISSUE RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DI RECTING THE DEDUCTION OF EXPENDITURE INCURRED FOR PURCHASING FU RNITURE. THIS ISSUE HAS BEEN CONSIDERED BY US IN ASSESSEES APPEA L FOR THE EARLIER ASSESSMENT YEAR 2006-07, DISPOSED OF THROUG H OUR COMMON ORDER OF EVEN DATE. IN VIEW OF THE SAID DEC ISION, THIS GROUND RAISED BY THE REVENUE IS ALLOWED AND THE ASS ESSING - - ITA 1616 & 1764 OF 2011 9 OFFICER IS DIRECTED TO EXCLUDE THE COST OF FURNITUR E FROM THE SCOPE OF DEDUCTION. 13. THE NEXT GROUND RAISED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DE LETING THE DISALLOWANCE OF COMPENSATION PAID ON ESOP. THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS FOLLOWED TH E ORDER OF THE INCOME-TAX APPELLATE TRIBUNAL, CHENNAI BENCH, R ENDERED IN THE CASE OF SSI LTD. VS. DCIT, 85 TTJ 1049, TO ALLO W THE CLAIM MADE BY THE ASSESSEE. IN FACT, THE SAID DECISION O F THE JURISDICTIONAL TRIBUNAL IS BINDING ON THE COMMISSIO NER OF INCOME- TAX(APPEALS). HE HAS RIGHTLY FOLLOWED THE SAID ORD ER OF THE TRIBUNAL. THE GROUND RAISED BY THE REVENUE FAILS. 14. THE NEXT GROUND RAISED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DE LETING THE DISALLOWANCE UNDER SECTION 40(A)(I) IN RESPECT OF C ONSULTANCY CHARGES PAID TO VARIOUS PERSONS OUTSIDE INDIA. THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS RIGHTLY OBS ERVED THAT THE DISALLOWANCE UNDER SECTION 40(A)(I) CAN BE MADE ONLY IF TAXES ARE NOT WITHHELD ON INCOME CHARGEABLE TO TAX IN IND IA. IN THE PRESENT CASE THERE IS NO ACQUISITION OF TECHNICAL K NOWLEDGE - - ITA 1616 & 1764 OF 2011 10 WHICH COULD BE INDEPENDENTLY APPLIED BY THE ASSESSE E. THEREFORE, THE PAYMENT COULD NOT BE CONSTRUED AS IF FOR TECHNICAL SERVICES. THE ENTIRE SERVICES WERE RENDERED OUTSID E INDIA. THERE IS NO PERMANENT ESTABLISHMENT FOR THE NON RES IDENT IN INDIA. IN THESE CIRCUMSTANCES THE COMMISSIONER OF INCOME- TAX(APPEALS) HAS RIGHTLY DELETED THE DISALLOWANCE O F ` 18,99,269/-. THIS GROUND OF THE REVENUE IS DISMISS ED. 15. THE REVENUE IS PARTLY SUCCESSFUL IN ITS APPEAL . 16. IN RESULT, THE APPEAL FILED BY THE ASSESSEE AS WELL AS THE APPEAL FILED BY THE REVENUE ARE PARTLY ALLOWED. ORDERS PRONOUNCED ON WEDNESDAY, THE 17 TH OF OCTOBER, 2012 AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED, THE 17 TH OCTOBER, 2012. V.A.P. COPY TO: 1. ASSESS EE 2. DEPARTMENT 3. CIT 4. CIT(A) 5. DR 6. GF.