Appeal details
Counselvise Citation
69822514 RSA 2008
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 6 month(s) 13 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
31-10-2011
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
09-06-2011
Assessment Year
2004-2005
Appeal Filed On
17-04-2008
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBE R AND SHRI AKBER BASHA, ACCOUNTANT MEMBER ITA NO.778/HYD/2009 : ASSESSMENT YEAR 2000-01 ITA NO.1147/HYD/2009 : ASSESSMENT YEAR 20 02-03 ITA NO.1221/HYD/2007 : ASSESSMENT YEAR 20 03-04 ITA NO.698/HYD/2008 : ASSESSMENT YEAR 200 4-05 ITA NO.1705/HYD/2008 : ASSESSMENT YEAR 20 05-06 DY./ASST. COMMISSION ER OF INCOME-TAX CIRCLE 16(2), HYDERABAD V/S M/S. MAHESWARI PLAZA RESORTS LTD., HYDERABAD (PAN - AABCM 6346 D) (APPELLANT) (RESPONDENT) AND ITA NO.600/HYD/2009 : ASSESSMENT YEAR 2000-01 ITA NO.1190/HYD/2009 : ASSESSMENT YEAR 2003-04 ITA NO.1607/HYD/2008 : ASSESSMENT YEAR 2005-06 M/S. MAHESWARI PLAZA RESORTS LTD., HYDERABAD (PAN - AABCM 6346 D) V/S DY./ASST. COMMISSIONER OF INCOME - TAX CIRCLE 16(2), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI T.DIWAKAR PRASASD RESPONDENT BY : SHR C.P.RAMASWAMY DATE OF HEARING 27 .9.2011 DATE OF PRONOUNCEMENT 31.10.2011 O R D E R PER BENCH THESE EIGHT APPEALS ARE DIRECTED AGAINST THE OR DERS OF THE CIT(A) HYDERABAD. ASSESSMENT YEARS INVOLVED ARE 200 0-01 AND FROM 2002-03 TO 2005-06. AS THESE APPEALS INVOLVE COMMO N ISSUES, THEY ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 2 ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FO R THE SAKE OF CONVENIENCE. CROSS APPEALS FOR ASSESSMENT YEAR 2000-01 REVENUES APPEAL: ITA NO.778/HYD/2009 : ASSESSMENT YEAR 2000-01 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL RELATES TO ADDITION UNDER S.69A OF THE ACT, MADE ON ACCOUNT OF UNEXPLA INED INVESTMENT MADE IN THE CONSTRUCTION, WHICH HAS BEEN DELETED BY THE CIT(A). 3. ASSESSEE IS A COMPANY ENGAGED IN HOTEL AND CONS TRUCTION BUSINESS. ORIGINAL ASSESSMENT FOR ASSESSMENT YEAR 2000-01 WAS COMPLETED ON 25.3.2003. REGULAR ASSESSMENT WAS LAT ER COMPLETED AFTER SCRUTINY UNDER S.143(3) OF THE ACT, DETERMINI NG THE TOTAL INCOME AT RS.5,73,911. SUBSEQUENTLY, DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2003-04, THE ASSESS ING OFFICER MADE A REFERENCE TO THE VALUATION CELL OF THE DEPARTMENT FOR DETERMINING THE COST OF CONSTRUCTION OF THE PROPERTY NAMELY, MPM MA LL AT ABIDS HYDERABAD CONSTRUCTED BY THE ASSESSEE. ON SUCH REF ERENCE MADE BY THE ASSESSING OFFICER, THE SUPERINTENDING ENGINEER, VALUATION CELL, VIDE HIS REPORT DATED 22.9.2006 DETERMINED THE COST OF C ONSTRUCTION OF THE SAID PROPERTY CONSTRUCTED DURING THE FINANCIAL YEA RS 1996-97 TO 2004- 05 AT RS.9,76,28,313 AS AGAINST RS.9,34,20,051 SHOW N BY THE ASSESSEE. ON THE BASIS OF THE SAID REPORT OF THE V ALUATION REPORT, THE ASSESSING OFFICER NOTICED THAT DURING THE FINANCIAL YEAR 1999-2000, RELEVANT FOR ASSESSMENT YEAR 2000-01, THE ASSESSEE HAS MADE INVESTMENT ON CONSTRUCTION AT RS.61,99,398 AS AGAIN ST RS.52,59,406 SHOWN BY THE ASSESSEE. UNDER THESE CIRCUMSTANCES, T HE ASSESSING OFFICER REOPENED THE ASSESSMENT UNDER S.147 ON THE GROUND THAT THERE WAS EXCESS INVESTMENT OF RS.9,39,992 MADE BY THE AS SESSEE IN ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 3 CONSTRUCTION OF THE SAID PROPERTY DURING THE PREVIO US YEAR RELEVANT TO ASSESSMENT YEAR 2000-01. THE ASSESSING OFFICER ISS UED NOTICE UNDER S.148 OF THE ACT ON 30.3.2001 AND ULTIMATELY COMPLE TED THE ASSESSMENT BRINGING TO TAX THE SAID EXCESS INVESTME NT OF RS.9,39,992 WHICH ACCORDING TO HIM WAS UNEXPLAINED. 4. AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE CI T(A). THE ASSESSEE OBJECTED TO THE REOPENING OF THE ASSESSMEN T UNDER S.147 OF THE ACT ON THE BASIS OF THE VALUATION REPORT OF THE DEPARTMENTAL VALUATION OFFICER (DVO) IN THIS CASE. THE CIT(A) AT PARA 6.3 OF HIS ORDER HELD THAT THE REOPENING OF THE ASSESSMENT MAD E UNDER S.147 BY THE ASSESSING OFFICER WAS LEGAL AND VALID, AND ACCO RDINGLY REJECTED THE GROUND RAISED BY THE ASSESSEE ON THAT COUNT. WITH R ESPECT TO THE ADDITION MADE BY THE ASSESSING OFFICER, TOWARDS UNE XPLAINED INVESTMENT, THE ASSESSEE SUBMITTED BEFORE THE CIT(A ) THAT THE ASSESSING OFFICER SHOULD HAVE ACCEPTED THE ORDER O F THE CIT(A) FOR THE ASSESSMENT YEAR 2003-04, WHEREIN A CATEGORICAL FIND ING HAS BEEN RECORDED BASED ON TOTAL APPRECIATION OF THE FACTS O F THE CASE THAT THE COST OF CONSTRUCTION SHOWN BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT, IS CORRECT AND NO ADDITION IS CALLED FOR. 5. THE LEARNED AUTHORIZED REPRESENTATIVE SUBMITTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR ASS ESSMENT YEAR 2003-04, THE ASSESSING OFFICER HAD REFERRED THE CAS E OF THE ASSESSEE TO THE DEPARTMENTAL VALUER TO DETERMINE THE COST OF CO NSTRUCTION OF THE SAID PROPERTY, NAMELY, MPM MALL. THE DVO DETERMINED THE COST OF CONSTRUCTION AT RS.9,76,28,313, INCLUDING THE COST OF FURNITURE, FIXTURES AND OTHER ITEMS. INVESTMENT WAS SPREAD OV ER FROM THE ASSESSMENT YEAR 1996-97 TO 2004-05 AND THE ASSESSIN G OFFICER WORKED OUT THE COST PERTAINING TO THE YEAR UNDER CO NSIDERATION BASED ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 4 ON THE SAID REPORT OF THE AT RS.61,99,398. FOR TH E FINANCIAL YEAR 1999-2000, RELEVANT TO ASSESSMENT YEAR 2000-01, THE TOTAL INVESTMENT IN THE CIVIL WORKS WAS SHOWN BY THE ASSESSEE AT RS. 52,59,406. HOWEVER, THE ASSESSING OFFICER WORKED OUT THE TOTA L INVESTMENT AT RS.61,91,398 FOR THE YEAR ADOPTING RS.9,76,28,313 AS TOTAL INVESTMENT, WHICH INCLUDES THE COST OF FURNITURE A ND FIXTURES. THIS WAS WORKED OUT IN THE SAME RATIO AS THE SPREAD OVER WAS WORKED BY THE DVO. THE DIFFERENCE OF RS.9,39,992 (RS.61,99,398 RS.52,59,406) WAS ADDED AS UNEXPLAINED INVESTMENT MADE BY THE ASS ESSEE DURING THE PREVIOUS YEAR 1999-2000 RELEVANT TO ASSESSMENT YEAR 2000-01. 6. THE LEARNED AUTHORISED REPRESENTATIVE OF THE A SSESSEE FURTHER SUBMITTED BEFORE THE CIT(A) THAT THE INVEST MENT IN THE SAID PROPERTY WAS DISPUTED BY THE ASSESSEE IN APPEALS F ILED BY IT FOR ASSESSMENT YEAR 2003-04, 2004-05 AND 2005-06. THE L EARNED AUTHORISED REPRESENTATIVE FILED A DETAILED WORKING TAKING INTO ACCOUNT THE DECISIONS OF THE JURISDICTIONAL TRIBUNAL IN VA RIOUS CASES OF SIMILAR NATURE AND CONSISTENTLY FOLLOWED BY THE DEPARTMENT IN THE SUBSEQUENT CASES. ON THE BASIS OF THE SAME, THE COST OF CONST RUCTION DETERMINED BY THE DVO WAS MODIFIED. THEREFORE, THE AR SUBMIT TED THAT SINCE THE INVESTMENT AS PER THE ASSESSEES BOOKS WAS MORE THA N THE COST OF CONSTRUCTION WORKED OUT BY THE DVO AS MODIFIED ON T HE BASIS OF THE ORDERS OF THE JURISDICTIONAL TRIBUNAL, REQUEST WAS MADE FOR DELETING THE ADDITIONS MADE FOR ASSESSMENT YEARS 2003-04 2004-05 AND 2005-06. 7. THE CIT(A) AFTER ELABORATE DISCUSSION ACCEPTE D THE SUBMISSIONS OF THE ASSESSEE AND DELETED THE ADDITIO NS MADE FOR THE ASSESSMENT YEAR 2004-05. THE CIT(A) CONSIDERING TH E SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE FOLLOWING TH E DECISIONS OF THE JURISDICTIONAL TRIBUNAL IN THE CASE OF SALMA A. MEH DI, VISAKAHAPATNAM ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 5 IN ITA NO.697 AND 698/HYD/93 AND G.PULLA REDDY V/S. JCIT VIDE ORDER DATED 29.10.2004 AND ACIT V/S. VINOD KUMAR AGARWAL (82 ITD 1) DELETED THE ADDITION FOR THE ASSESSMENT YEAR 2003-0 4 AND GAVE A FINDING THAT THE ASSESSEE HAS SHOWN THE COST OF CON STRUCTION IN ITS BOOKS AT A HIGHER FIGURE THAN THE COST OF CONSTRUC TION ESTIMATED BY THE DVO, AFTER HAVING BEEN MODIFIED AS PER THE RULINGS OF THE JURISDICTIONAL TRIBUNAL. THE CIT(A) FOLLOWING THE ORDERS FOR THE A SSESSMENT YEARS 2003-04 TO 2005-06, DELETED THE IMPUGNED ADDITION O F RS.9,39992 TOWARDS UNEXPLAINED INVESTMENT IN CONSTRUCTION OF THE SAID PROPERTY, MPM MALL FOR THE ASSESSMENT YEAR 2000-01 AS WELL. 8. AGGRIEVED, DEPARTMENT IS IN APPEAL BEFORE US. 9. DEPARTMENT HAS RAISED THE FOLLOWING GROUNDS IN THIS APPEAL-. 1. THE LEARNED CIT(A) ERRED IN DELETING THE ADDITI ON OF RS.,939,992/- MADE TOWARDS UNEXPLAINED INVESTMENT U/S. 69A IN RESPECT OF CONSTRUCTION OF M.P.M.MALL. 2. THE LEARNED CIT(A) OUGHT TO HAVE RECOGNIZED THE FACTUAL POSITION IN COMPUTING THE CORRECT PROFITS ARRIVED AT BY THE ASSESSING OFFICER IN THE ASSESSME NT ORDER, INSTEAD OF ONLY RELYING ON THE ASSESSEES CONTENTION THAT THE METHOD OF ACCOUNTING FOLLOWED B Y THE ASSESSEE WAS ACCEPTED BY THE DEPARTMENT FOR EARLIER YEARS. 10. THE LEARNED DEPARTMENTAL REPRESENTATIVE POINT ED OUT THE DIFFERENCE IN RATES APPLIED FOR CONSTRUCTIONS AT DE LHI AND OTHER METROPOLITAN CITIES. SECONDLY, HE SUBMITTED THAT TH ERE IS A CLEAR DIFFERENCE IN THE COST OF CONSTRUCTION AS PER THE B OOKS OF THE ASSESSEE AND AS PER THE AFFIDAVIT FILED BY THE MANAGING DIRE CTOR OF THE ASSESSEE COMPANY BEFORE THE DEBT RECOVERY TRIBUNAL. IT WAS A LSO SUBMITTED ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 6 THAT IN THE VALUATION OF THE REGISTERED VALUER, WHI CH ARRIVED AT THE COST OF CONSTRUCTION AT RS.7,62,13,000 AFTER REDUCI NG THE FROM THE VALUE OF THE DVO, 15/% TOWARDS HIGHER RATES OF CPW D, IN ADDITION TO 15% TOWARDS SELF SUPERVISION. BUT, THE DVO WHILE A RRIVING AT THE COST OF CONSTRUCTION HAS TAKEN ALL MATERIAL FACTS OF THE ASSESSEE INTO CONSIDERATION AND HAS CONCLUDED THAT NO FURTHER ALL OWANCE OR CONCESSION IS REQUIRED TO BE GIVEN IN THE ASSESSEE S CASE IN ADDITION TO CONCESSION GIVEN AT 6% TOWARDS SELF-SUPERVISION. HENCE, THIS LOWER PERCENTAGE FOR SELF-SUPERVISION SHOULD BE ADOPTED. 11. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED O N THE ORDER OF THE CIT(A) AND SUBMITTED THAT SINCE THE ASSESSEE HA S MAINTAINED PROPER BOOKS OF ACCOUNT FOR THE COST OF CONSTRUCTIO N, THE VERY ESTIMATION OF THE COST OF CONSTRUCTION BY REFERENCE TO VALUATION CELL IS NOT WARRANTED. HE SUBMITTED THAT SUCH A REFERENCE T O VALUATION ELL IS WARRANTED WHERE AN ASSESSEE HAS NOT MAINTAINED BOOK S OF ACCOUNT WITH REGARD TO COST OF CONSTRUCTION OR SUCH BOOKS A RE NOT RELIABLE. HE ALSO PLACED RELIANCE ON THE DECISION OF THE HYDER ABAD BENCH OF THE TRIBUNAL IN THE CASE OF VINOD KUAMR AGARWAL(257 ITR (AT) 65). 12. WE HEARD BOTH THE PARTIES. WE FIND THAT THE F ACTS RELEVANT TO ASSESSMENT YEAR 2000-01 ARE SIMILAR TO THE FACTS LEADING TO THE ADDITION MADE BY THE ASSESSMENT YEAR TOWARDS UNEXPL AINED INVESTMENT FOR THE ASSESSMENT YEARS 2003-04 TO 200 5-06. WE ARE OF THE VIEW THAT IT WOULD BE JUDICIOUS AND REASONABLE TO ALLOW A DEDUCTION OF 15% FROM THE ESTIMATED COST OF CONSTRUCTION AS D ETERMINED BY THE DVO AND THEN TO ALLOW A FURTHER DEDUCTION OF 10% T OWARDS SELF- SUPERVISION. IN THE VALUATION REPORT, THE DVO HAS ALLOWED REBATE FOR SELF-SUPERVISION AT 6%. HOWEVER, AS PER THE DECISI ONS OF THE TRIBUNAL IN SIMILAR CASES, THE REBATE TOWARDS SELF SUPERVISI ON AT 10% WOULD BE ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 7 REASONABLE. HENCE, FURTHER DEDUCTION ON ACCOUNT OF SELF-SUPERVISION HAS TO BE ALLOWED. IF THESE DEDUCTIONS ARE ALLOWED , THE ESTIMATED COST OF CONSTRUCTION WOULD WORK OUT TO A FIGURE WHICH IS LESS THAN WHAT THE ASSESSEE HAS SHOWN IN ITS BOOKS OF ACCOUNT AS COST OF INVESTMENT IN CONSTRUCTION OF BUILDING. THUS, IT IS SEEN THAT TH E AMOUNT AS SHOWN BY THE ASSESSEE AS COST OF CONSTRUCTION IN THE BOOKS, IS AT A HIGHER AMOUNT THAN THE COST OF CONSTRUCTION ESTIMATED BY T HE DVO AS MODIFIED IN ACCORDANCE WITH THE RATIO OF THE RULING S OF THE JURISDICTIONAL TRIBUNAL IN SIMILAR CASES NOTED ABOVE. UNDER THESE CIRCUMSTANCES, RESPECTFULLY FOLLOWING THE DECISIONS OF THE COORDI NATE BENCHES OF THE TRIBUNAL IN SIMILAR MATERS, WE HOLD THAT NO ADDITIO N IS CALLED FOR TOWARDS UNEXPLAINED INVESTMENT IN THE CONSTRUCTION OF THE BUILDING FOR THE ASSESSMENT YEARS 2000-01, 2002-03, 2003-04, 200 4-05 AND 2005- 06. 13. IN THE LIGHT OF THE ABOVE DISCUSSION, THE ORD ER OF THE CIT(A) IN DELETING THE ADDITION OF RS.9,39,992 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNEXPLAINED INVESTMENT IN CONSTRUCTIO N IS CONFIRMED AND THE GROUNDS OF THE REVENUE IN THIS APPEAL ARE REJEC TED. ASSESSEES APPEAL: ITA NO.600/HYD/2009 : ASSESSMENT YEAR 2000-01 14. THE ONLY GRIEVANCE OF THE ASSESSEE IN THE GRO UNDS OF THIS APPEAL IS AGAINST THE ACTION OF THE CIT(A) IN SUSTA INING THE REOPENING OF THE ASSESSMENT UNDER S.147 OF THE ACT. IN VIEW OF OUR DECISION ON THE REVENUES APPEAL, BEING ITA NO.7789/HYD/2009, H EREINABOVE, WHEREBY, WE HAVE UPHELD THE ORDER OF THE CITA IN DE LETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNEXPLA INED INVESTMENT, WE ARE NOT INCLINED TO GO INTO THE ISSUE RELATING T O THE LEGALITY AND ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 8 VALIDITY OF THE REOPENING OF THE ASSESSMENT UNDER S .147 OF THE ACT, WHICH HAS BECOME REDUNDANT. BEING REDUNDANT, THE A PPEAL OF THE ASSESSEE IS DISMISSED. 15. THUS, BOTH THE APPEALS OF THE REVENUE AS WELL AS THE ASSESSEE FOR ASSESSMENT YEAR 2000-01 ARE DISMISSED. REVENUES APPEAL ITA NO.1147/HYD/2009 : ASSESSMENT YEAR 2002-03 16. THE FIRST EFFECTIVE GRIEVANCE OF THE REVENUE I N THIS APPEAL IS AGAINST THE ACTION OF THE CITI(A) IN DELETING TH E ADDITION OF RS.25,16,369 MADE BY THE ASSESSING OFFICER ON THE G ROUND OF ASSESSEES UNEXPLAINED INVESTMENT IN THE COST OF CO NSTRUCTION. IT IS ALSO THE CONTENTION OF THE REVENUE THROUGH GROUND N O.5 OF THIS APPEAL THAT THE CIT(A) HAS ERRED BOTH IN FACTS AND IN LAW IN IGNORING THE FINDINGS GIVEN BY THE DVO AND ARBITRARILY DIRECTED DEDUCTION OF 25% WITHOUT ANY BASIS, AS EVEN IN THE CITED CASE OF PUL LA REDDY, THE TOTAL DEDUCTION INCLUDING DEDUCTIONS ALLOWED BY THE DVO, CIT(A), AND ITAT ALLOWED WAS 22.5% ONLY. 17. WE HAVE CONSIDERED THIS VERY ISSUE IN THE CON TEXT OF THE CORRESPONDING GROUNDS OF THE REVENUE FOR THE ASSESS MENT YEAR 2000- 2001, WHILE DEALING WITH ITS APPEAL FOR THAT YEAR, BEING ITA NO.778/HYD/2009. FOR THE DETAILED REASONS GIVEN IN THAT CONTEXT IN PARA 12 HEREINABOVE, WE UPHOLD THE ACTION OF THE CI T(A) IN DELETING THE ADDITION OF RS.25,16,369 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNEXPLAINED INVESTMENT OF THE ASSESSEE IN THE CO ST OF CONSTRUCTION, FOR THE ASSESSMENT YEAR 2002-03 AS WELL. CONSEQUEN TLY, GROUNDS RAISED BY REVENUE IN THIS APPEAL ARE REJECTED. ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 9 18. IN THE RESULT, REVENUES APPEAL FOR THE ASSESS MENT YEAR 2001-02, BEING ITA NO.1147/HYD/2009, IS DISMISSED. CROSS-APPEALS FOR ASSESSMENT YEAR 2003-04: REVENUES APPEAL : ITA NO.1221/HYD/2007 : ASST YEAR 2003-04 AND ASSESSEES APPEAL : ITA NO.1190/HYD/2009 : ASST YEAR 2003-04 19. FIRST GRIEVANCE OF THE REVENUE IN THIS APPEAL RELATES TO DISALLOWANCE OF INTEREST OF AN AMOUNT OF RS.2,25,00 2 MADE BY THE ASSESSEE WHICH HAS BEEN DELETED BY THE CIT(A). 20. FOR THE ASSESSMENT YEAR 2003-04, RETURN OF INC OME WAS PROCESSED UNDER S.143(1) OF THE ACT ON 31.3.2004. SUBSEQUENTLY, NOTICE UNDER S.147 WAS ISSUED ON 9.6.2005 AND THE R EGULAR ASSESSMENT THEREAFTER WAS COMPLETED ON 30.11.2006. WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER DI SALLOWED CERTAIN CLAIMS OF THE ASSESSEE AND HAS ALSO MADE CERTAIN AD DITIONS TO THE TOTAL INCOME. DURING THE FINANCIAL YEAR 1999-2000, THE A SSESSEE HAS AVAILED A TERM LOAN OF RS.150 LAKHS FOR ITS PROJECT AT ABIDS. THE ASSESSING OFFICER HELD THAT THE AMOUNT OF INTEREST OF RS.2,25,002 HAS BEEN PAID ON LOAN TAKEN FOR NEW PROJECT, I.E. DEVE LOPMENT OF COMMERCIAL COMPLEX, WHICH CANNOT BE TREATED AS EX PANSION OF EXISTING HOTEL BUSINESS. THEREFORE, THE ASSESSING O FFICER HELD THAT THIS IS A CAPITAL EXPENDITURE AND NOT ALLOWABLE AS DEDUC TION UNDER S.36(1)(III). THE ASSESSING OFFICER PLACED RELIANC E ON THE DECISION OF THE CALCUTTA BENCH OF THE TRIBUNAL IN THE CASE OF J CT LIMITED (65 ITD 169). 21 AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE C IT(A). IT WAS SUBMITTED BEFORE THE CIT(A) THAT THE LOAN WAS TAKE N FROM APSFC FOR ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 10 CONSTRUCTION OF THE MALL AND THE INTEREST PAYABLE O N THIS LOAN WAS RS.4,73,250. IT WAS STATED THAT CONSTRUCTION OF MA LL IS AN INTEGRAL PART OF THE ACTIVITY OF ASSESSEES BUSINESS AND THE EXPE NDITURE INCURRED IN SUCH CONSTRUCTION WAS LAID OUT FOR THE EXPANSION OF THE ASSESSEES EXISTING BUSINESS. THEREFORE, THE INTEREST ON BORRO WINGS IN SO FAR AS THE SAME PERTAINED TO THE PERIOD AFTER COMMENCEMENT OF BUSINESS ACTIVITY PERTAINED TO REVENUE FIELD. IT WAS ALSO S UBMITTED THAT THE ASSESSEE STARTED GENERATING INCOME DURING THE YEAR, AS EVIDENT FROM THE FINANCIAL STATEMENT FILED WITH THE RETURN. ACCO RDINGLY, ONLY A PART OF THE INTEREST AMOUNTING TO RS.2,25,002 OUT OF RS.4,7 3,250 WAS CLAIMED AS ALLOWABLE REVENUE EXPENDITURE. HE FURTHER SUBM ITTED THAT IN THE CASE OF THE ASSESSEE INTEREST OF RS.1,47,543 WHICH WAS RELATABLE TO ACQUISITION OF CAPITAL ASSET WAS CAPITALISED IN THE BOOKS AND TREATED AS PART OF THE ACTUAL COST AND THEREFORE, NO DEDUCTION WAS CLAIMED FOR THIS AMOUNT, AS REVENUE EXPENDITURE. THE PORTION OF THE INTEREST WHICH ONLY PERTAINED TO THE PERIOD AFTER COMMENCEMENT OF THE BUSINESS WAS ONLY CLAIMED AS REVENUE EXPENDITURE. HE SUBMITTED THAT THE MALL GENERATING REVENUE DURING THE YEAR, AS WOULD BE EVI DENT FROM THE FINANCIAL STATEMENTS. THE TREATMENT OF INTEREST AC CORDS WITH THE GENERAL PRINCIPLES LAID DOWN IN THE MATTER OF CLAIM OF INTEREST, AND ALSO WITH THE PRINCIPLES LAID DOWN BY THE CALCUTTA BENCH OF THE TRIBUNAL IN THE CASE OF JCT LIMITED (SUPRA) RELIED UPON BY THE ASSESSING OFFICER. IT WAS FURTHER CLAIMED THAT THERE WAS NO REVERSAL O F POSITION IN THE RETURN AND NOWHERE IN THE SAID DECISION OF THE CALC UTTA BENCH OF THE TRIBUNAL, THE TRIBUNAL LAID DOWN A STRAIGHT JACKET PRINCIPLE THAT THE INTEREST ON BORROWED CAPITAL UTILIZED IN ACQUISITIO N OF A CAPITAL ASSET WOULD BE TREATED AS CAPITAL EXPENDITURE TILL PERPET UALITY, EVEN IF THE SAME RELATED TO PERIOD AFTER COMMENCEMENT OF BUSINE SS. HENCE, THE RELIANCE PLACED BY THE ASSESSING OFFICER ON THE ABO VE DECISION APPEARS TO BE NOT CORRECT AND THE DISALLOWANCE OF INTEREST OF RS.2,25,002 ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 11 PERTAINING TO PERIOD AFTER COMMENCEMENT OF BUSINESS IS NOT SUSTAINABLE. IT WAS ALSO STATED INVITING SPECIFIC ATTENTION TO THE ORDER OF THE CIT(A) DATED 13.4.2005, THAT IN THE EARLIER YEARS, THE INTEREST PAYMENT WAS ALLOWED BY THE CIT(A) AFTER ELABORATE D ISCUSSION, BASING ON THE PRINCIPLE THAT THE SAME PERTAINED TO EXPANSI ON OF AN EXISTING BUSINESS. 22. THE CIT(A) HELD THAT AS PER THE DECISION OF THE TRIBUNAL IN THE CASE OF JCT LIMITED (SUPRA), THE AMOUNT OF INTE REST PAID ON BORROWED CAPITAL TAKEN FOR ACQUISITION OF NEW ASSET , PERTAINING TO THE PERIOD AFTER COMMENCEMENT OF THE PRODUCTION BY SUCH ASSET CAN BE CLAIMED AS DEDUCTION AS REVENUE EXPENDITURE AND TH E ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT THE MALL CONSTRUCTED BY THE ASSESSEE STARTED GENERATING THE REVENUE DURING THE PREVIOUS YEAR. THE CIT(A) IN THE CIRCUMSTANCES HELD THAT THE AMOUNT OF INTERE ST OF RS.2,25,002 CLAIMED BY THE ASSESSEE PERTAINED TO THE PERIOD AFT ER COMMENCEMENT OF BUSINESS OF THE MALL DURING THE PREVIOUS YEAR, AND THE RATIO OF THE DECISION OF JCT LTD. (SUPRA) IS IN FACT, IN FAVOU R OF THE ASSESSEE AND HENCE, THE CLAIM OF THE ASSESSEE IS ALLOWABLE AS RE VENUE EXPENDITURE. 23. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIE D ON THE ORDER OF THE ASSESSING OFFICER. THE LEARNED COUNSE L FOR THE ASSESSEE, ON THE OTHER HAND, PLACED STRONG RELIANCE ON THE OR DER OF THE CIT(A). 24. WE HEARD BOTH THE PARTIES. ON PERUSAL OF TH E ACCOUNT COPIES OF THE ASSESSEE, WHICH HAVE BEEN FILED BEFOR E US, WE FIND THAT THE INTEREST PAID TO APSFC DURING THE FINANCIAL YEA R 2002-03 IS RS.4,73,250 OUT OF WHICH RS.1,47,543 HAS BEEN CAPIT ALIZED IN THE ACCOUNTS AND THE BALANCE IS TREATED AS REVENUE EXPE NDITURE. WITH RESPECT TO INTEREST ON LIC HOUSING LOAN FOR THE FIN ANCIAL YEAR 2002-03 ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 12 AT RS.4,34,809, IT WAS POINTED OUT BY THE LEARNED C OUNSEL THAT THE LOAN WAS TAKEN TO COMPLETE THE BIG BAZAR PROJECT AND O THER FACILITIES IN MAM MALL, WHICH STARTED GENERATING RENTAL INCOME AN D HAD BEEN OFFERED FOR TAXATION DURING THE YEAR UNDER CONSIDER ATION. HENCE, THE INTEREST EXPENDITURE WAS CONSIDERED CORRECTLY AS RE VENUE EXPENDITURE. PERUSING THE FACTUAL MATRIX OF THE MATTER, WE ARE O F THE PINION THAT THE CIT(A) HAS RIGHTLY ALLOWED AS REVENUE EXPENDITURE, THE AMOUNT OF INTEREST, WHICH RELATED TO THE PERIOD AFTER COMMEN CEMENT OF BUSINESS FROM THE MALL DURING THE PREVIOUS YEAR. HENCE, GRO UNDS OF THE REVENUE ON THIS ISSUE ARE REJECTED. 25. NEXT GROUND OF REVENUE IN THIS APPEAL IS THAT THE CIT(A) ERRED IN HOLDING THAT MISCELLANEOUS INCOME SHOULD BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF ALLOWING DEDUCTION UNDER S.80IB. ON THIS VERY ISSUE THERE IS A GROUND IN THE APPEALS OF THE ASSESSEE, BEING ITA NO.1190/HYD/2007, FOR THIS YEAR ALTHOUGH THE ITEMS OF MISCELLANEOUS INCOME INVOLVED THEREIN ARE DIFFERENT. HENCE, IN T HE CONTEXT OF THIS COMMON GROUND, WE MAY DISPOSE OF BOTH THE APPEALS O F THE REVENUE AND THE ASSESSEE TOGETHER. 26. ASSESSEE HAD CLAIMED DEDUCTION UNDER S.80IB OF RS.28,85,300 IN RESPECT OF WHICH FORM NO.10CCB DATE D 26.3.2003 WAS FILED ALONGWITH THE RETURN OF INCOME. THE ASSESSIN G OFFICER HELD THAT THE MISCELLANEOUS INCOME OF RS.43,39,955 HAS NOT BE EN DERIVED FROM THE UNDERTAKING, AND AS SUCH IT REQUIRES TO BE REDU CED FROM THE PROFITS AND GAINS OF THE UNDERTAKING FOR THE PURPOSE OF COM PUTING DEDUCTION UNDER S.80IB. 27. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE T HE CIT(A) AND SUBMITTED THAT THE DISALLOWANCE OF DEDUCTION UN DER S.80IB IN ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 13 RELATION TO VARIOUS ITEMS INCLUDED UNDER THE MISCEL LANEOUS INCOME IS NOT CORRECT. IT WAS SUBMITTED THAT MOST OF THE ITE MS OF MISCELLANEOUS RECEIPTS ARE ESSENTIAL FOR THE SUBSISTENCE OF THE H OTEL BUSINESS AND INEXTRICABLY LINKED WITH THE RUNNING OF THE HOTEL B USINESS AND PROFIT OF THE UNDERTAKING. THE CIT(A) APPLIED HIS MIND AND G AVE DETAILED ANALYSIS WITH REGARD TO THE MISCELLANEOUS RECEIPTS AND HELD AS FOLLOWS- 6. I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE FACTS OF THE CASE. FROM THE ABOVE SUBMISSIONS O F THE APPELLANT, IT IS SEEN THAT RECEIPTS FROM PAS SYSTEMS, SCRAP SALES, TELEPH ONE & FAX SALES, LAUNDRY REVENUE, MSIC. INCOME HAVE DIRECT NEXUS WITH THE RU NNING OF THE HOTEL BY THE APPELLANT AND THE INCOME FROM THESE SOURCES FORM PA RT AND PARCEL OF THE PROFIT OF THE BUSINESS OF THE APPELLANT. THEREFORE, INCOME FROM THESE SOURCES ARE ELIGIBLE FOR DEDUCTION U/S. 80IB OF THE ACT. HOWEV ER, THE LEASE RENTALS, DERIVED BY THE APPELLANT FROM LETTING OUT OF A PORTION OF T HE BU8ILDIGN CANNOT BE CONSIDERED AS HAVING BEEN DERIVED FROM THE HOSPITAL ITY BUSINESS CARRIED ON BY THE APPELLANT. THEREFORE, THESE RECEIPTS CANNOT BE CONSIDERED AS PART OF THE PROFITS OF THE BUSINESS OF THE APPELLANT AND HENCE, THE SAME IS NOT ELIGIBLE FOR DEDUCTION U/S. 80IB. SIMILARLY, I FIND THAT THE RE CEIPTS FROM SPONSORSHIP AND FOREIGN CURRENCY COMMISSION HAVE NO DIRECT NEXUS WI TH THE BUSINESS CARRIED ON BY THE APPELLANT. THEREFORE, THE INCOME FROM THESE SOURCES CANNOT BE CONSIDERED FOR DEDUCTION U/S. 80IB. LASTLY, THE IN TEREST INCOME AND SUBSIDY, WHICH HAVE BEEN RECEIVED BY THE APPELLANT FORM THE BANKS AND TFCI RESPECTIVELY, I.E. FROM EXTERNAL SOURCES, CANNOT BE CONSIDERED AS PART OF THE PROFIT DERIVED BY THE APPELLANT FROM THE UNDERTAKIN G. THEREFORE, INCOME FROM THESE TWO SOURCES ARE NOT TO BE CONSIDERED FOR DEDU CTION U/S. 80IB. THE ASSESSING OFFICER IS DIRECTED TO COMPUTE THE DEDUCT ION U/S 80IB OF THE ACT ACCORDINGLY. 28. AGGRIEVED, BOTH THE PARTIES HAVE FILED APPEALS BEFORE US ON THIS ISSUE. 29. THE LEARNED DEPARTMENTAL REPRESENTATIVE, REL YING ON THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE C IT(A) WAS NOT CORRECT IN TREATING THE VARIOUS ITEMS OF MISCELLANE OUS INCOME AS PART OF THE INCOME DERIVED BY THE ASSESSEE FORM ITS BUSINES S. 30. LEARNED COUNSEL FOR THE ASSESSEE, SHRI C.P.RA MASWAMY, RELIED ON THE ORDER OF THE CIT(A) AND TOOK US THROU GH THE VARIOUS ITEMS MISCELLANEOUS RECEIPTS AND SUBMITTED THAT ALL THE I TEMS COMPRISED IN THE MISCELLANEOUS INCOME ARE INTRINSICALLY LINKED W ITH THE HOSPITALITY ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 14 BUSINESS OF THE ASSESSEE AND THE ASSESSEE IS ENTITL ED TO RELIEF UNDER S.80IB ON SUCH MISCELLANEOUS INCOME AS WELL . 31. WE HEARD BOTH SIDES. WITH RESPECT TO RECEIPT FROM PAS SYSTEM, SINCE THIS IS INSTALLED IN THE BANQUET HALL AND USED BY THE ASSESSEES GUESTS FOR THE CONFERENCES CONDUCTED BY THEM, IT IS ESSENTIALLY PART OF THE HOTEL TO PROVIDE THIS SYSTE M. IT IS INEVITABLE THAT THE HOTEL SHOULD HAVE WELL EQUIPPED BANQUET HALL IN ORDER TO PROFITABLY RUN THE BUSINESS. HENCE, THE PAS SYSTEM FORMS INTE GRAL PART OF THE ASSESSEES BUSINESS AND INCOME FROM THAT ASSET IS I NEXTRICABLY LINKED WITH THE RUNNING OF THE HOTEL BUSINESS. IN THE CIR CUMSTANCES, INCOME FROM PAS SYSTEM CAN BE SAID TO HAVE BEEN DERIVED F ROM THE HOTEL BUSINESS OF THE ASSESSEE FOR THE PURPOSE OF ALLOWIN G DEDUCTION UNDER S.80IB. HENCE, ORDER OF THE CIT(A) IS CONFIRMED ON THIS ASPECT. 32. WITH RESPECT TO SCRAP SALES RELATING TO SALE OF EMPTY LIQUOR BOTTLES, EMPTY CARTONS, WE APPRECIATE THAT LARGE VA LUE OF SUCH SCRAP HAS TO BE DISPOSED OF, PERIODICALLY BY THE HOTEL AN D HENCE THESE RECEIPTS ARE ALSO DIRECTLY LINKED WITH THE BUSINESS OF THE ASSESSEE AND HENCE, THE SAME ARE ALSO ELIGIBLE FOR DEDUCTION UND ER S.80IB, IN VIEW OF THE RATIO OF THE DECISIONS OF THE MADRAS HIGH CO URT IN THE CASE OF CIT V/S. WHEELS INDIA LTD (141 ITR 745) AND SUNDARA M CLAYTON (183 ITR 34). HENCE, ORDER OF THE CIT(A) IS CONFIRMED ON THIS ASPECT. 33. THE NEXT ITEM OF MISCELLANEOUS RECEIPT IS FR OM TELEPHONE AND FAX SALE. THESE ARE INSTALLED IN THE ROOMS AND ARE AMENITIES WHICH ARE REQUIRED TO BE PROVIDED IN A HOTEL TO THE GUEST S. THESE RECEIPTS ALSO FORM PART OF THE ASSETS OF THE UNDERTAKING AND INCOME THEREFROM HAVE A DIRECT NEXUS WITH THE BUSINESS/PROFITS OF TH E ASSESSEES ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 15 BUSINESS, ELIGIBLE FOR DEDUCTION UNDER S.80IB OF T HE ACT. HENCE, ORDER OF THE CIT(A) IS CONFIRMED ON THIS ASPECT. 34. NEXT MISCELLANEOUS RECEIPT IS FROM LAUNDRY. LAUNDRY FACILITY IS PROVIDED TO THE GUESTS AND IT IS TAKEN FOR GRANTED THAT IN ANY HOTEL, LAUNDRY FACILITY WOULD BE PROVIDED WITHOUT THIS FACILITY, HOTEL BUSINESS CANNOT BE SUCCESSFULLY CONDUCTED. SIMILARL Y WITH RESPECT TO MISCELLANEOUS FROM SALE OF VARIOUS ITEMS LIKE SHAVI NG KITS, TOILET KITS, PROVISION OF SECRETARIAL ASSISTANCE, THESE ARE ALL AMENITIES HAVING A DIRECT NEXUS WITH THE RUNNING OF THE HOTEL INTERTWI NED WITH THE BUSINESS OF HOSPITALITY AND MAKING THE GUESTS COMFO RTABLE AND TAKEN CARE OF AND THEREFORE, HAVE DIRECT NEXUS WITH THE W HICH IS DERIVED FROM SUCH UNDERTAKING AND AS SUCH, SUCH MISCELLANEOUS IN COME IS ELIGIBLE FOR RELIEF UNDER S.80IB. HENCE, ORDER OF THE CIT(A ) IS CONFIRMED ON THIS ASPECT. 35. LAST GRIEVANCE OF THE REVENUE IN ITS APPEA L IS WITH REGARD TO ADDITION OF RS.65,14,277 MADE BY THE ASSESSING O FFICER TOWARDS UNEXPLAINED INVESTMENT IN THE COST OF CONSTRUCTION, WHICH HAS BEEN DELETED BY THE CIT(A). WE HAVE CONSIDERED THIS VE RY ISSUE IN THE CONTEXT OF THE CORRESPONDING GROUNDS OF THE REVENUE FOR THE ASSESSMENT YEAR 2000-2001, WHILE DEALING WITH ITS A PPEAL FOR THAT YEAR, BEING ITA NO.778/HYD/2009. FOR THE DETAILED REASONS GIVEN IN THAT CONTEXT IN PARA 12 HEREINABOVE, WE UPHOLD THE ACTION OF THE CIT(A) IN DELETING THE ADDITION OF RS.65,14,277 MAD E BY THE ASSESSING OFFICER ON ACCOUNT OF UNEXPLAINED INVESTMENT OF THE ASSESSEE IN THE COST OF CONSTRUCTION, FOR THE ASSESSMENT YEAR 2003- 04 AS WELL. CONSEQUENTLY, GROUND RAISED BY REVENUE ON THIS ISSU E IS REJECTED. ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 16 36. FIRST GRIEVANCE OF THE ASSESSEE IN ITS APPEAL IS AGAINST THE ACTION OF THE LOWER AUTHORITIES IN HOLDING THAT THE LEASE RENTALS RECEIVED BY THE ASSESSEE FORMING PART OF ITS MISCELLANEOUS I NCOME, ARE NOT ELIGIBLE FOR RELIEF UNDER S.80IB OF THE ACT. 37. WE HEARD BOTH SIDES. WE FIND THAT INCOME BY WAY OF LEASE RENTALS, HAS BEEN DERIVED BY THE ASSESSEE FROM LETT ING OUT A PORTION OF THE BUILDING. WE DO NOT FIND ANY LINK BETWEEN THE HOTEL BUSINESS OF THE ASSESSEE AND THE LETTING OUT OF THE BUILDING. ANALYSING THE PROVISIONS OF S.80-I, 80IA AND 80IB OF THE ACT., AP EX COURT IN THE CASE OF LIBERTY INDIA V/S. CIT(317 ITR 218) HELD AS FOLL OWS- SECTIONS 80-I, 80-IA AND 80IB PROVIDE FOR INCENTIV ES IN THE FORM OF DEDUCTIONS WHICH ARE LINKED TO PROFITS AND NOT INVESTMENT. ON ANALYSIS OF SECTIONS 80-IA AND 80IB IT BECOMES CLEAR THAT ANY INDUSTRIAL UNDERTAKING WHICH BECOMES ELIGIBLE ON SATISFYING SUB-SECTION (2) WOULD BE ENTITLED TO DED UCTION UNDER SUB-SECTION (1) ONLY TO THE EXTENT OF PROFITS DERIV ED FROM SUCH INDUSTRIAL UNDERTAKING AFTER THE SPECIFIED DATE. AP ART FROM ELIGIBILITY, SUB-SECTION (1) PURPORTS TO RESTRICT T HE QUANTUM OF DEDUCTION TO A SPECIFIED PERCENTAGE OF THE PROFITS. THIS IS THE IMPORTANCE OF THE WORDS DERIVED FROM AN INDUSTRIAL UNDERTAKING AS AGAINST PROFITS ATTRIBUTABLE TO AN INDUSTRIAL UNDERTAKING IN VIEW OF THE RATIO LAID DOWN IN THE ABOVE DECISIO N, WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ASPECT, REJECTING THE G ROUNDS OF THE ASSESSEE IN THIS BEHALF IN ITS APPEAL. 38. NEXT GRIEVANCE OF THE ASSESSEE IN ITS APPEAL IS AGAINST THE ACTION OF THE LOWER AUTHORITIES IN HOLDING THAT THE SPONSORSHIP MONEYS RECEIVED BY THE ASSESSEE FORMING PART OF ITS MISCEL LANEOUS INCOME, ARE NOT ELIGIBLE FOR RELIEF UNDER S.80IB OF THE ACT. THE NEXT GRIEVANCE OF THE ASSESSEE SECOND IS AGAINST THE ACTION OF THE LO WER AUTHORITIES IN HOLDING THAT THE SPONSORSHIP MONEYS RECEIVED BY THE ASSESSEE FORMING ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 17 PART OF ITS MISCELLANEOUS INCOME, ARE NOT ELIGIBLE FOR RELIEF UNDER S.80IB OF THE ACT. 39. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR T HE ASSESSEE THAT THE ASSESSEE UTILIZES PRODUCTS OF REPUTED COMP ANIES SUCH AS ROYAL CHALLENGE, KINGFISHER AND FOSTERS. WHILE PURCHASING LIQUOR DIRECTLY FROM APBCL, SINCE PRODUCTS OF SUCH COMPANIES ARE P ROMOTED BY VARIOUS AGENCIES LIKE, SHRI VENKATESWARA AGENCIES, SPONSORSHIP RECEIPTS ARE RECEIVED FROM THESE PARTIES. THOUGH TH ERE SEEMS TO BE SOME BUSINESS CONNECTION, WE DO NOT SEE ANY DIRECT NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE AND THE SPONSORSHIP RE CEIPTS RECEIVED BY THE ASSESSEE, IN VIEW OF THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF LIBERTY INDIA V/S. CIT, NOTED ABOVE. 40. SIMILAR IS THE CLAIM OF THE ASSESSEE FOR RELI EF UNDER S.80IB WITH RESPECT TO FOREIGN CURRENCY COMMISSION. IT WA S EXPLAINED THAT THE GUESTS SETTLE THEIR BILLS BY TENDERING FOREIGN CURR ENCY, WHICH IS EXCHANGED WITH RECOGNIZED MONEY CHANGERS AND IN THE PROCESS, THE ASSESSEE GETS SMALL AMOUNT OF COMMISSION FROM THESE MONEY CHANGERS. HENCE THE FOREIGN EXCHANGE MANAGEMENT OF THE GUESTS IS PART OF THE ACTIVITY OF THE ASSESSEE. WE DO NOT FI ND MERIT IN THE CONTENTIONS OF THE ASSESSEE ON THIS ASPECT IN VIEW OF THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF LIBERTY INDIA V/S. CIT, NOTED ABOVE. WE ACCORDINGLY CONFIRM THE ORDER OF THE CIT (A) IN UPHOLDING THE CLAIM OF THE ASSESSEE WITH REGARD TO RELIEF UND ER S.80IB WITH REGARD TO SPONSORSHIP RECEIPTS AND COMMISSION FROM MONEY CHANGERS, REJECTING THE GROUNDS OF THE ASSESSEE IN THIS BEHAL F IN ITS APPEAL. 41. THE ASSESSEE ALSO CLAIMED THAT THE INTEREST R ECEIVED ON FIXED DEPOSITS MADE FOR OBTAINING CREDIT FACILITIES , DEPOSITS MADE WITH ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 18 ELECTRICITY BOARD AND APCPDCL, INTEREST SUBSIDY REC EIVED FROM TFCI, ETC. SHOULD BE CONSIDERED AS PART OF ASSESSEES BUS INESS INCOME, ELIGIBLE FOR RELIEF UNDER S.80IB OF THE ACT. 42. WE HEARD BOTH THE SIDES. THE CLAIM OF THE AS SESSEE WITH REGARD TO RELIEF UNDER S.80IB WAS ON THE BASIS THAT DEPOSITS WITH THE BANK AND APCPDCL ARE FOR THE PURPOSE OF SECURING CR EDIT FACILITIES AND VARIOUS BANK GUARANTEE AND FOR SECURING POWER SUPPL Y FOR THE ASSESSEES UNDERTAKING. THE CIT(A) CONFIRMED THE A CTION OF THE ASSESSING OFFICER IN REJECTING THE CLAIM OF THE ASS ESSEE WITH REGARD TO INTEREST INCOME AND SUBSIDY, OBSERVING THAT THEY HA VE BEEN RECEIVED BY THE ASSESSEE FROM BANKS AND TFCI RESPECTIVELY, I.E. FROM EXTERNAL SOURCES, AND AS SUCH THEY CANNOT BE CONSIDERED AS P ART OF THE PROFITS DERIVED BY THE ASSESSEE FROM THE UNDERTAKING. WE F IND NO INFIRMITY IN THE ORDER OF THE CIT(A) IN NOT ALLOWING THIS CLAIM OF THE ASSESSEE, AS IT HAS NOTHING TO DO WITH THE ACTIVITY OF THE ASSESSEE S INDUSTRIAL UNDERTAKING AND IN THE LIGHT OF THE DECISION OF THE APEX COURT IN THE CASE OF PANDIAN CHEMICALS V/S. CIT(262 ITR 278), T HESE RECEIPTS CANNOT BE SAID TO HAVE BEEN DERIVED FORM THE INDUST RIAL UNDERTAKING. 43. THE ALTERNATE GROUND OF THE ASSESSEE IS THAT IF ANY INCOME IS TO BE EXCLUDED FROM PROFITS IN THE COMPUTATION O F RELIEF U/S 80IB, THEN ONLY THE NET INCOME SHOULD BE EXCLUDED. AS HE LD BY THE SUPREME COURT IN THE CASE OF LIBERTY INDIA V CIT (317 ITR 218), THE DEDUCTIONS U/S 80IA/80IB ARE LINKED TO PROFITS AND NOT INVESTM ENTS. THE PROFIT ENTITLED FOR DEDUCTION IS THE PROFIT DERIVED FROM THE UNDERTAKING. THE WORD `DERIVED FROM IS NARROWER IN CONNOTATION THAN THE EXPRESSION ATTRIBUTABLE TO. PARLIAMENT INTENDED TO COVER SOUR CES NOT BEYOND THE FIRST DEGREE. THE APEX COURT HAS HELD THAT DEPB AND DUTY DRAW BACK ARE DUE TO THE STATUTORY POLICY OF THE GOVERNMENT A ND SUCH INCENTIVES ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 19 CANNOT FALL WITHIN THE SCOPE OF `PROFITS DERIVED FR OM THE INDUSTRIAL UNDER TAKING. WE FEEL THAT THE RESTRICTIONS WOULD EQUALLY APPLY TO EXPENDITURES ALSO. IF ANY EXPENDITURE HAS NOT RESUL TED IN OR ESSENTIAL FOR EARNING THE INCOME FROM THE UNDERTAKING- AN EXP ENDITURE WHICH IS NOT CONNECTED WITH THE OPERATIONS OF THE UNDERTAKIN G IN THE FIRST DEGREE, CANNOT BE DEDUCTED FROM THE PROFITS OF THE UNDERTAKING WHILE COMPUTING THE RELIEF U/S 80IA/ 80IB. SECTION 80IA/8 0IB DOES NOT TALK OF EXCLUSION OF INCOME OR EXPENDITURE. IT REQUIRES COMPUTATION OF `PROFITS DERIVED FROM THE UNDERTAKING. IN DOING SO ONLY RECEIPTS AND EXPENDITURES WHICH ARE CONNECTED IN THE FIRST DEGRE E WITH THE UNDERTAKING HAS TO BE TAKEN INTO ACCOUNT. THE AO WI LL EXAMINE THE CLAIM OF THE ASSESSEE REGARDING VARIOUS EXPENDITURE S, WHICH THEY WANT TO `NET AGAINST THE RECEIPTS EXCLUDED AND DETERMIN E WHETHER SUCH EXPENDITURE FALLS WITHIN THE AMBIT OF `FIRST DEGREE ASSOCIATION WITH THE UNDERTAKING AND ITS PROFITS. IF THE EXPENDITURE IS INEXTRICABLY CONNECTED AND NECESSARY FOR EARNING THE INCOME FOR THE UNDERT AKING THEN THE SAME SHOULD BE DEDUCTED IN COMPUTING THE PROFITS OF THE ELIGIBLE UNDERTAKING. FOR THIS PURPOSE THE SAME YARDSTICK AS LAID DOWN BY THE APEX COURT REGARDING INCLUDIBILITY OF THE INCOME OF THE UNDERTAKING SHOULD ALSO BE APPLIED FOR INCLUDIBILITY OF EXPENDI TURE. THIS ISSUE IS SET ASIDE TO THE FILES OF THE ASSESSING OFFICER FOR DE NOVO CONSIDERATION IN ACCORDANCE WITH THE LAW. 44. IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISMISSED AND ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2003-04 I S ALLOWED FOR STATISTICAL PURPOSES. ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 20 REVENUES APPEAL: ITA NO.698/HYD/2008 : ASSESSMENT YEAR 2004-05 45. THE FIRST EFFECTIVE GRIEVANCE OF THE REVENUE I N THIS APPEAL RELATES TO ASSESSEES ENTITLEMENT TO THE RELIEF UND ER S.80IB OF THE INCOME-TAX ACT, WITH REFERENCE TO MISCELLANEOUS INC OME DERIVED FROM TELEPHONE AND FAX SALES, LAUNDRY REVENUE , RECEIPTS FROM PAS SYSTEMS, SCRAP SALES, ETC. WE HAVE DEALT WITH THIS VERY IS SUE, IN THE CONTEXT OF CORRESPONDING GROUNDS OF THE REVENUE IN ITS APPEAL FOR ASSESSMENT YEAR 20003-04. FOR THE REASONS DISCUSSED IN THAT C ONTEXT IN PARAS 31 TO 35 OF THIS ORDER IN THAT CONTEXT, GROUNDS OF THE REVENUE IN THIS APPEAL ON THIS ISSUE ARE REJECTED. 46. THE NEXT EFFECTIVE GRIEVANCE OF THE REVENUE IN THIS APPEAL RELATES TO THE ADDITION MADE UNDER S.69A OF THE ACT , ON ACCOUNT OF UNEXPLAINED INVESTMENT IN THE COST OF CONSTRUCTION. WE HAVE CONSIDERED THIS VERY ISSUE IN THE CONTEXT OF THE CO RRESPONDING GROUNDS OF THE REVENUE FOR THE ASSESSMENT YEAR 2000-2001, W HILE DEALING WITH ITS APPEAL FOR THAT YEAR, BEING ITA NO.778/HYD/2009 . FOR THE DETAILED REASONS GIVEN IN THAT CONTEXT IN PARA 12 HEREINABOV E, WE UPHOLD THE ACTION OF THE CIT(A) IN DELETING THE ADDITION OF RS .14,43,991 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNEXPLAINED INV ESTMENT OF THE ASSESSEE IN THE COST OF CONSTRUCTION, FOR THE ASSES SMENT YEAR 2001-02 AS WELL. 47. IT IS THE FURTHER GRIEVANCE OF THE REVENUE IN THIS APPEAL FOR THE ASSESSMENT YEAR 2004-05 THAT THE DVO DID NOT IN CLUDE THE COST OF SHIP-LIKE STRUCTURE IN HIS REPORT, AND THE CIT(A) A LSO FAILED TO TAKE NOTE OF THE SAME. CONSIDERING TOTALITY OF FACTS AND CIR CUMSTANCES OF THE CASE ON THIS ASPECT, WE SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE FIRST APP ELLATE AUTHORITY WITH A ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 21 DIRECTION TO RE-EXAMINE THE MATTER OF UNEXPLAINED I NVESTMENT, IF ANY, IN THE COST OF CONSTRUCTION OF SHIP-LIKE STRUCTURE, AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE DVO AS WEL L AS THE ASSESSING OFFICER. HE MAY REDECIDE THE ISSUE IN ACCORDANCE W ITH LAW AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. REVENUES GROUNDS ON THIS ASPECT ARE ALLOWED FOR STATISTICAL PURPOSES . 48. IN THE RESULT, REVENUES APPEAL FOR ASSESSMEN T YEAR 2004- 05 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. CROSS-APPEALS FOR ASSESSMENT YEAR 2005-06 REVENUES APPEAL: ITA NO.1705/HYD/2008 49. THE FIRST EFFECTIVE GRIEVANCE OF THE REVENUE I N THIS APPEAL RELATES TO THE ADDITION OF RS.23,59,820 MADE UNDER S.69A OF THE ACT, ON ACCOUNT OF UNEXPLAINED INVESTMENT IN THE COST OF CONSTRUCTION. WE HAVE CONSIDERED THIS VERY ISSUE IN THE CONTEXT OF T HE CORRESPONDING GROUNDS OF THE REVENUE FOR THE ASSESSMENT YEAR 2000 -2001, WHILE DEALING WITH ITS APPEAL FOR THAT YEAR, BEING ITA NO .778/HYD/2009. FOR THE DETAILED REASONS GIVEN IN THAT CONTEXT IN PARA 12 HEREINABOVE, WE UPHOLD THE ACTION OF THE CIT(A) IN DELETING THE ADD ITION OF RS.23,59,820 MADE BY THE ASSESSING OFFICER ON ACCOU NT OF UNEXPLAINED INVESTMENT OF THE ASSESSEE IN THE COST OF CONSTRUCT ION, FOR THE ASSESSMENT YEAR 2005-06 AS WELL. 50. THE NEXT EFFECTIVE GRIEVANCE OF THE REVENUE IN THIS APPEAL RELATES TO ADDITION MADE OF RS.65,56,500 ON ACCOUNT OF PROFITS ATTRIBUTABLE TO THE ADVANCES RECEIVED BY THE ASSESS EE. THE ASSESSING OFFICER ASSESSED PROFITS EARNED ADVANCES AMOUNTING TO RS. OBSERVING AS FOLLOWS- ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 22 THE ASSESSEE COMPANY IS FOLLOWING A PECULIAR SYSTE M OF RECOGNIZING THE SALE ONLY WHEN IT IS REGISTERED IN THE NAME OF THE PURCHASER OR 100% ADVANCES IS RECEIVABLE IRRESPECTIVE OF THE STAGE OF THE PROJECT. THE ASSES SEE COMPANY CAN EITHER FOLLOW SHOWING PROFIT ON THE BAS IS OF THE WORK IN PROGRESS METHOD OR PROJECT COMPLETION METHOD. THE ASSESSEE COMPANY NOT OFFERING ANY PROFI T ON WORK IN PROGRESS BASIS. AND THE PROJECT COMPLETION METHOD DOES NOT MEAN THAT INCOME TO BE POSTPONED TI LL REGISTRATION IS COMPLETE OR 100% ADVANCES IS RECEIV ED IRRESPECTIVE OF THE STAGE OF CONSTRUCTION. IF THE PROJECT IS COMPLETED MORE THAN 95%, THE ASSESSEE COMPANY CANNO T POSTPONE THE PROFITS TO THE SUBSEQUENT YEARS TAKING THE SALE RECEIPT AS ADVANCE. THE TOTAL COST OF CONSTR UCTION PER SFT INCLUDING THE EXPENDITURE INCURRED IN THE SUBSE QUENT YEAR COMES TO ONLY RS.757 PER SFT. THE LAND COST P ER SFT. COMES TO RS.324 PER SFT. WHICH IS BASED ON THE BUI LT UP AREA TO BE GIVEN TO THE LAND LORD TOWARDS LAND COST I.E. THE TOTAL AMOUNT PAID TO LAND LORD COMES TO 757 OF CONS TRUCTION PER SFT X 45,000 SFT. I.E. RS.3,40,65,000. THE SA LABLE AREA TO THE DEVELOPER IS 105000 SFT. ACCORDINGLY, THE L AND COST PER SFT OF SALABLE AREA COME TO RS.324 PER SFT (RS.3,40,65,000/1,05,000 SFT. ACCORDINGLY, THE TOT AL COST OF CONSTRUCTION INCLUDING LAND COST TO THE BUILDER COME TO RS.1081 PER SFT (RS.324 + 757). THE TOTAL ADVANCES RECEIVED AND RECEIVABLE FOR THE 13500 SFT AREA SOL D AS STATED ABOVE IS RS.2,11,50,000. THE TOTAL COST OF CONSTRUCTION INCLUDING LAND COST FOR L13500 SFT COM ES TO RS.1,45,93,500. THE DIFFERENCE OF RS.65,56,500 IS TREATED AS ACCRUED PROFITS AND TAXED ACCORDINGLY. 51. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE TH E CIT(A). IT WAS CONTENDED BEFORE THE CIT(A) THAT THE ASSESSEE HAD UNDERTAKEN CONSTRUCTION OF COMMERCIAL SPACE ON DEVELOPMENT BAS IS AT ABIDS (MPM MALL). THE TOTAL BUILT UP AREA IS 1,50,000 SQ. FT. OUT OF THIS 45,000 SQ. FT WAS THE SHARE OF THE LAND OWNER. THUS OUT OF TH E TOTAL CONSTRUCTED AREA, 1,05,000 SQ. FT BELONGED TO THE ASSESSEE. THE ASSESSEE WAS REGULARLY SHOWING THE REVENUE FROM THIS PROJECT. IT WAS RECOGNIZING THE ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 23 REVENUE FROM THIS PROJECT EITHER WHEN THE SPACE IS REGISTERED IN THE NAME OF THE BUYER ON FULL PAYMENT OF THE CONSIDERAT ION OR WHEN 100% ADVANCE WAS RECEIVED BY IT. THIS METHOD WAS FOLLO WED BECAUSE THE APPELLANT AS IN A POSITION TO KNOW THE REVENUE WITH REASONABLE CERTAINTY ON THE HAPPENING OF EITHER OF THE INCIDEN TS AS STATED ABOVE. THIS METHOD WAS CONSISTENTLY FOLLOWED FOR THE PAST SEVERAL YEARS AND ACCEPTED BY THE REVENUE. THE REVENUE WHICH WAS RECO GNIZED AND TAKEN TO THE PROFIT AND LOSS ACCOUNT WAS AS UNDER- ASSESSMENT YEAR AMOUNT IN RS. 2002-03 1,69,64,748 2003-04 2,25,47,000 2004-05 1,44,17,750* 2005-06 13,50,000* *RELATES TO REVENUE RECOGNISED FOR MPM MALL, ABIDS IT WAS SUBMITTED THAT THE ASSESSING OFFICER DID NOT ACCEPT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. HE WAS OF THE VIEW THAT THE ASSESSEE SHOULD WORK OUT THE PROFIT EITHER ON THE B ASIS OF WORK-IN- PROGRESS METHOD OR PROJECT COMPLETION METHOD. HE W AS FURTHER OF THE VIEW THAT BY ADOPTING THE METHOD OF RECOGNIZING REV ENUE ON THE BASIS OF REGISTRATION OR RECEIPT OF FULL ADVANCE, THE ASS ESSEE WAS POSTPONING THE PROFITS TO SUBSEQUENT YEARS. ACCORDINGLY, THE ASSESSING OFFICER DISCARDED THE METHOD ADOPTED BY THE ASSESSEE AND CO MPUTED THE INCOME BY DEVISING HIS OWN METHOD, WHICH WAS WORKED OUT AS UNDER: COST OF LAND RS. 324 COST OF CONSTRUCTION RS. 757 TOTAL COST RS. 1,081 ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 24 AREA SOLD DURING THE YEAR FOR WHICH ADVANCES WERE EITHER RECEIVED OR RECEIVABLE 13,50 SQ.FT. PART ADVANCES RECEIVED OR A RECEIVABLE IN RESPECT OF 13,500 SFT. 2,11,50,000 IT WAS STATED THUS IN ADOPTING THE ABOVE METHOD, TH E ASSESSING OFFICER TAXED THE ENTIRE AMOUNT OF PART ADVANCES RECEIVED A S ON 31.3.2005 AND THE AMOUNT RECEIVABLE. THIS WAS OVER AND ABOVE THE DECLARED TURNOVER FROM MPM MALL. BY ADOPTING THE REVENUE ON THE BASIS OF PART ADVANCES RECEIVED/RECEIVABLE, THE ASSESSING OFFICER HAS IGNORED THE CONSISTENT METHOD FOLLOWED BY THE ASSESSEE. BY MAK ING SEPARATE ADDITION ON ADVANCES, THE ASSESSING OFFICER TAXED T HE REGULAR INCOME FORM THIS VENTURE AND ALSO THE INCOME ON ADVANCES I NVOLVING HYPOTHETICAL INCOME, WHICH IS NOT CORRECT. IT WAS F URTHER SUBMITTED THAT BY TAKING THE ADVANCES RECEIVABLE IN CASE OF PART P AYMENTS, INTO ACCOUNT, THE ASSESSING OFFICER NOT ONLY DEPARTED FR OM THE REGULAR METHOD OF ACCOUNTING, BUT ALSO SUBJECTED THE ADVANC E AMOUNT TO TAX, THEREBY DISTURBING THE REVENUE RECOGNIZED IN THE AS SESSMENT YEAR 2006-07. IT WAS STATED THAT THE REASON WHY THE ASS ESSEE WAS NOT RECOGNIZING THE ADVANCE RECEIVABLE AS REVENUE WAS T HAT THERE WAS A POSSIBILITY OF CANCELLATION IN RELATION TO THE ARE A SOLD AS FULL AMOUNT WAS NOT RECEIVED. ONCE THE PART PAYMENT OF THE ADV ANCE IS RECOGNISED AS REVENUE, IT WILL POSE DIFFICULTY, IF LATER THE D EAL IS CANCELLED. IT WAS STATED THAT IN FACT DURING THE YEAR AMOUNT INVOLV ED IN CANCELLATION OF BOOKING WAS RS.62,81,818, A FACT RECORDED BY THE AS SESSING OFFICER IN HIS ORDER. THE ASSESSEE WAS RECOGNISING THE REVENUE ON THE BASIS OF AN ELEMENT OF CERTAINTY WHEN THE REGISTRATION WAS TAKI NG PLACE OR FULL AMOUNT OF ADVANCE WAS RECEIVED. ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 25 52. THE METHOD OF ACCOUNTING IN RECOGNIZING THE R EVENUE WAS REGULARLY AND CONSISTENTLY FOLLOWED BY THE ASSESSEE FORM THE ASSESSMENT YEARS 2003-04 TO 2006-07. BY DEVISING H IS OWN METHOD, THE ASSESSING OFFICER MADE A DEPARTURE FROM THE REG ULAR METHOD ADOPTED BY THE ASSESSEE AND ACCEPTED BY THE DEPARTM ENT IN THE PAST IN SCRUTINY ASSESSMENTS. THIS HAS ALSO RESULTED IN DISTORTING THE PROFITS SHOWN IN THE PAST, IN THE CURRENT YEAR AND IN THE A SSESSMENT YEAR 2006-07. IT WAS FURTHER SUBMITTED THAT IT IS A WE LL ACCEPTED PRINCIPLE THAT WHEN AN ASSESSEE FOLLOWS A METHOD OF ACCOUNTIN G CONSISTENTLY MAINTAINED BY HIM, IT IS NOT OPEN FOR THE ASSESSING OFFICER TO DISTURB THE SAME AND MORE SO, WHEN THE SAME HAS BEEN ACCEPT ED BY THE DEPARTMENT. RELIANCE IN THIS REGARD WAS PLACED ON THE DECISION OF DELHI HIGH COURT IN CIT V/S. CONSULTING ENGINEERING SERVICES (INDIA) LTD. (250 ITR 849). FURTHER IN THIS CONTEXT, THE L EARNED AUTHORISED REPRESENTATIVE REFERRED TO THE DECISION OF THE ANDH RA PRADESH HIGH COURT IN CIT V/S. MARGADARSHI CHIT FUND PVT. LTD. ( 155 ITR 442), WHEREIN IT WAS LAID DOWN AS FOLLOWS- IT MUST BE SAID AT THE OUTSET THAT THE CHOICE TO A CCOUNT FOR INCOME ON AN ACCEPTABLE BASIS IS THAT OF THE ASSESS EE, AND NOT OF THE DEPARTMENT. .THE ITOS POWER TO SUBSTITUTE A SYSTEM OF ACCOUNTING FOR THE ONE FOLLOWED BY THE ASSESSEE, FL OWS FORM THE PROVISIONS OF S.145 OF THE I.T.ACT. IT IS, THEREFO RE, IMPERATIVE THAT BEFORE REJECTING THE SYSTEM OF ACCOUNTING FOLL OWED BY THE ASSESSEE, THE ITO MUST REFER TO THE INHERENT DEFECT IN THE SYSTEM AND RECORD A CLEAR FINDING THAT THE SYSTEM O F ACCOUNTING FOLLOWED BY THE ASSESSEE IS SUCH THAT CORRECT PROFI TS CANNOT BE DEDUCED FROM THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE.. THE ITOS VIEW THAT THERE COULD BE A BE TTER SYSTEM OF ACCOUNTING IS NO REASON TO THE APPLICATION OF TH E PROVISIONS OF S.145 OF THE I.T. ACT, ESPECIALLY IN VIEW OF THE FACT THAT THIS SYSTEM OF ACCOUNTING IS FOLLOWED BY THE ASSESSEE UN IFORMLY AND REGULARLY FOR THE PAST SEVERAL YEARS, AND WAS ACCEP TED BY THE DEPARTMENT WITHOUT QUARREL. IT IS NOT OPEN TO THE ITO TO INTERVENE AND SUBSTITUTE A SYSTEM OF ACCOUNTING DIF FERENT FORM THE ONE WHICH IS FOLLOWED BY THE ASSESSEE, ON THE G ROUND THAT THE SYSTEM WHICH COMMENDS TO THE ITO IS BETTER. ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 26 53. THE LEARNED AUTHORISED REPRESENTATIVE FURTHE R SUBMITTED BEFORE THE CIT(A) THAT THE HONBLE SUPREME COURT IN THE CASE OF UNITED COMMERCIAL BANK V/S. CIT(240 ITR 355) LAID D OWN GENERAL PRINCIPLES IN THE MATTER OF DISCARDING THE BOOKS. REFERRING TO THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT A ND THE HONBLE JURISDICTIONAL HIGH COURT IN THE ABOVE CASES, THE A UTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT IT WOULD BE F OUND THAT THE ASSESSING OFFICER HAS NOT MADE OUT A CASE AS TO WHY HE HAS SUBSTITUTED THE METHOD AS SUITABLE TO HIM, EXCEPT MAKING SOME G ENERAL OBSERVATIONS THAT THE ASSESSEE OUGHT TO HAVE FOLLO WED WORK-IN- PROGRESS METHOD OR PROJECT COMPLETION METHOD. IT W AS FURTHER SUBMITTED THAT IT MAY BE SEEN FROM THE COMPUTATION OF INCOME THAT THE ASSESSING OFFICER WHILE WORKING OUT THE PROFIT, HAS NOT FOLLOWED EITHER OF THE METHODS, WHICH WAS THE REASON FOR MAK ING A DEPARTURE FROM THE METHOD FOLLOWED BY THE ASSESSEE. SECONDLY IN HIS ATTEMPT TO CHANGE THE METHOD AND TAX ADVANCES WHETHER RECEIVE D OR RECEIVABLE, THE ASSESSING OFFICER HAS SUBJECTED TO TAX, NOT THE REAL INCOME BUT A HYPOTHETICAL INCOME IGNORING THE REALITY OF THE SIT UATION. STATING THAT, THEREFORE, THE SYSTEM OF ACCOUNTING REGULARLY FOLL OWED BY THE ASSESSEE AND ACCEPTED BY THE DEPARTMENT SHOULD NOT HAVE BEEN DISTURBED, THE AUTHORISED REPRESENTATIVE FOR THE ASSESSEE CONTENDE D THAT THE ENTIRE ADDITION MADE BY THE ASSESSING OFFICER IS LIABLE TO BE DELETED. IN RESPONSE TO A QUERY RAISED BY THE CIT(A) FOR CLARI FYING THE METHOD OF RECOGNITION OF REVENUE WITH REFERENCE TO THE AUDITO RS COMMENTS IN PARA 6 UNDER SCHEDULE N (SIGNIFICANT ACCOUNTING POL ICIES) OF THE AUDIT REPORT, THE LEARNED AUTHORIZED REPRESENTATIVE FURTH ER SUBMITTED THAT IT HAS BEEN MENTIONED THAT THE ASSESSEE FOLLOW COMPLET ION OF CONTRACT METHOD FOR RECOGNIZING REVENUE. AT THE SAME TIME, IT HAS BEEN STATED THAT REVENUE IS RECOGNIZED ON HANDING OVER POSSESSI ON ON COMPLETION OR REGISTRATION OF THE PROPERTY ON COMPLETION WHICH EVER IS EARLIER. THE ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 27 REPORT OF THE AUDITOR IS NOT CLEAR IN REGARD TO REC OGNITION OF REVENUE. IT WAS FURTHER STATED THAT THIS POINT WAS RAISED BY TH E ASSESSING OFFICER IN THE COURSE OF HEARING. IN FACT, A SHOW CAUSE NOT ICE WAS ISSUED BY THE ASSESSING OFFICER DURING THE COURSE OF HEARING CONT AINING INTER-ALIA THE ISSUE OF RECOGNITION OF REVENUE. IT WAS STATED THA T THIS POINT WAS CLARIFIED IN PARA 3 OF THE LETTER SUBMITTED TO THE ASSESSING OFFICER, IN THE FOLLOWING MANNER- THE COMPANY IS RECOGNIZING ITS INCOME EITHER ON RE CEIPT OF FULL CONSIDERATION RECEIVED FROM THE PURCHASER OR ON REG ISTRATION OF THE PROPERTY WHICHEVER IS EARLIER. AS ON DATE THE ABOV E PROJECTS ARE NOT YET COMPLETED. HOWEVER WE ARE ADMITTING THE INCOME GENERATING FORM THESE PROJECTS AS MENTIONED SUPRA. IN OUR RETURNS AND THIS BEING ACCEPTED METHOD OF ACCOUNTING, THE COMPANY IS FOLLO WING THE METHOD. FURNISHING A COPY OF THE SAID LETTER BEFORE THE CIT (A) , THE LEARNED AUTHROISED REPRESENTATIVE FURTHER STATED THAT IT WO ULD BE CLEAR THEREFROM THAT THE REVENUE IS RECOGNIZED ON THE BAS IS OF RECEIPT OF FULL CONSIDERATION OR ON REGISTRATION OF PROPERTY WHICHE VER IS EARLIER, AND THERE WAS NO POSTPONEMENT OF REVENUE AS OBSERVED B Y THE ASSESSING OFFICER. IT WAS FURTHER CONTENDED THAT THERE WAS NO REASON/JUSTIFICATION FOR DISTURBING THE CONSISTENT METHOD FOLLOWED BY TH E ASSESSEE AND ACCEPTED BY THE DEPARTMENT FOR LAST SEVERAL YEARS. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE ALSO REFERRED TO THE ASSESSMENT ORDERS PASSED FOR THE ASSESSMENT YEARS 2002-03, 200 3-04 AND 2004- 05. 54. THE CIT(A) HELD THAT HAVING PERUSED THE ASSES SMENT ORDERS FOR THE ASSESSMENT YEARS 2002-03, 2003-04 AN D 2004-05, WHICH WERE MADE UNDER S.143(3) OF L.T. ACT, THE ASS ESSING OFFICER WAS NOT JUSTIFIED IN DISTURBING THE CONSISTENT METHOD O F ACCOUNTING FOLLOWED BY THE ASSESSEE AND ACCEPTED BY THE DEPARTMENT EVE N IN THE SCRUTINY ASSESSMENTS MADE FOR EARLIER YEARS. ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 28 55. AGGRIEVED, REVENUE PREFERRED APPEAL 56. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE ASSESSING OFFICER AND CONTENDED THAT T HE ADDITION OF RS.66,56,500 MADE ON ACCOUNT OF PROFITS ATTRIBUTABL E TO THE ADVANCES RECEIVED BY THE ASSESSEE IS JUSTIFIABLE. 57. LEARNED COUNSEL FOR THE ASSESSEE SHRI C.P.RAM ASWAMY SUBMITTED THAT THE TOTAL BUILT UP AREA IS 1,50,000 SQ. FT OUT OF WHICH 45.000 SQ.FT. IS THE SHARE OF THE LAND LORD. THUS, TOTAL CONSTRUCTED AREA OF 1,05,000 SQ. FT BELONGED TO THE ASSESSEE. ASSESS EE WAS SHOWING THE REVENUE FROM THIS PROJECT. ASSESSEE WAS RECOGNIZIN G REVENUE FORM THIS PROJECT EITHER WHEN THE SPACE WAS REGISTERED IN THE NAME OF THE BUYER ON FULL PAYMENT OF CONSIDERATION OR WHEN 100% ADVANCE WAS RECEIVED BY IT. THIS METHOD WAS CONSISTENTLY FOLLOW ED FOR THE PAST SEVERAL YEARS AND ACCEPTED BY THE REVENUE. 58. THE ASSESSING OFFICER, THE LEARNED COUNSEL SUB MITTED, DISTORTED THE METHOD ADOPTED BY THE ASSESSEE AND CO MPUTED THE INCOME BY DEVISING HIS OWN METHOD, WHICH IS STATED IN THE ASSESSMENT ORDER. THE ASSESSEE OBJECTED TO THE MAKING SEPARATE ADDITION OF ADVANCES, AS THE ASSESSING OFFICER HAS SUBJECTED TO TAX NOT ONLY THE REAL INCOME FROM THIS VENTURE, BUT ALSO THE INCOME ON ADVANCES INVOLVING HYPOTHETICAL INCOME, WHICH IS NOT CORRECT . HE PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UNITED COMMERCIAL BANK V/S. CIT(249 ITR 355), WHEREIN THE FOLLOWING PRINCIPLES HAVE BEEN LAID DOWN. (1) A METHOD OF ACCOUNTING ADOPTED BY THE TAX PAYE R CONSISTENTLY LAND REGULARLY CANNOT BE DISCARDED BY THE DEPARTMENTAL AUTHORITIES ON THE VIEW THAT HE SHOULD HAVE ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 29 ADOPTED A DIFFERENT METHOD OF KEEPING ACCOUNTS OR O F VALUATION. (2) THE CONCEPT OF REAL INCOME IS CERTAINLY APPLICA BLE IN JUDGING WHETHER THERE HAS BEEN INCOME OR NOT, BUT, IN EVERY CASE, IT MUST BE APPLIED WITH CARE AND WITHIN THEIR RECOGNIZED LIMITS. (3) WHETHER THE INCOME HAS REALLY ACCRUED OR ARISEN TO THE ASSESSEE MUST BE JUDGED IN THE LIGHT OF THE REALITY OF THE SITUATION. 59. HAVING CONSIDERED THE FACTS OF THE CASE, WE FI ND NO INFIRMITY IN THE ORDER SF THE CIT(A) IN HOLDING THA T THE ADDITION OF RS.66,56,500 MADE BY THE ASSESSING OFFICER TOWARD S ACCRUED PROFIT ON ADVANCES, AFTER REJECTING THE METHOD CONSISTENT LY FOLLOWED BY THE ASSESSEE IS NOT SUSTAINABLE IN LAW. WE ALSO FIND T HAT THE AMOUNTS RECEIVED BY THE ASSESSEE AS ADVANCES CANNOT BE CANC ELLED AND THE ADVANCES WILL THEN HAVE TO BE RETURNED. THERE IS N O DEBT CREATED IN FAVOUR OF THE ASSESSEE TO RECEIVE THESE AMOUNTS AS INCOME TILL THE BUYER PAYS THE FULL AMOUNT OR THE PROPERTY IS REGIS TERED IN THE NAME OF THE BUYER. THEREFORE EVEN UNDER THE MERCANTILE SYS TEM THESE ADVANCES CANNOT BE CONSIDERED AS INCOME. THIS METH OD OF ACCOUNTING HAS BEEN REGULARLY FOLLOWED BY THE ASSESSEE AND HAS BEEN ACCEPTED BY THE DEPARTMENT AS REPRESENTING THE CORRECT PROFITS. THERE IS NO CHANGE IN CIRCUMSTANCES TO HOLD THAT THIS METHOD OF ACCOUN TING WILL NOT REFLECT THE TRUE PROFITS. THE CIT(A) HAS FOLLOWED THE RATI O OF THE DECISION OF THE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT V/ S. MARGADARSHI CHIT FUND PVT. LTD. (155 ITR 442), WHEREIN IT HAS B EEN HELD THAT IT IS NOT OPEN TO THE ITO TO INTERVENE AND SUBSTITUTE A SYSTEM OF ACCOUNTING, DIFFERENT FROM THE ONE FOLLOWED BY THE ASSESSEE, ON THE GROUND THAT THE SYSTEM WHICH COMMENDS TO THE ITO IS BETTER. WE ACCORDINGLY UPHOLD THE ORDER OF THE CIT(A) AND REJE CT THE GROUNDS OF THE REVENUE ON THIS ISSUE. ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 30 ASSESSEES APPEAL: ITA NO.1607/HYD/2008 60. FIRST ISSUE INVOLVED IN THIS APPEAL OF THE ASS ESSEE RELATES TO AN ADDITION OF RS.30,000 MADE ON ACCOUNT OF LODGE R ENT RECEIPTS. 61. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESS EE COMPANY IS HAVING TWO DIVISIONS, NAMELY, CONSTRUCTION DIVISION AND HOTEL DIVISION. THE ASSESSEE COMPANY ACCOUNTED FOR RECEIPTS OF HOTE L DIVISION ON RECEIPT BASIS, WHEREAS IT WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING FOR THE CONSTRUCTION DIVISION. THEREFORE, THE ASSE SSEE WAS REQUESTED TO WORK OUT THE RENT RECEIVABLE AS ON 31.3.2005 IN RESPECT OF HOTEL DIVISION. THE ASSESSEE SUBMITTED THAT THE HOTEL REN T RECEIVABLE AS ON 31.3.2005 WAS RS.30,000 AND THIS AMOUNT WAS OFFERED BY THE ASSESSEE FOR ASSESSMENT IN THE SUBSEQUENT YEAR. TH E ASSESSING OFFICER HELD THAT IN VIEW OF THE MERCANTILE SYSTEM OF ACCOU NTING FOLLOWED BY THE ASSESSEE, ACCRUED LODGE RENTAL RECEIPT OF RS.30 ,000 HAS TO BE ADDED TO THE INCOME OF THE ASSESSMENT YEAR 2005-06. 62. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE TH E CIT(A). THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THA T AS PER THE SYSTEM OF ACCOUNTANCY REGULARLY EMPLOYED BY THE ASS ESSEE, THE AMOUNTS WERE RECOGNIZED AS REVENUE IN THE PREVIOUS YEAR 2005-06 RELEVANT TO ASSESSMENT YEAR 2006-07 AND THEREFORE, THE ASSESSING OFFICER SHOULD NOT HAVE ADDED THIS AMOUNT DISTRUS TING THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. HOWE VER, THE CIT(A) AT PARA 11 OF HIS ORDER, OBSERVING THAT THE LEARNED AR HAS NOT SERIOUSLY OBJECTED TO THE ABOVE ADDITION AND SINCE THE ASSESS EE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING IN RESPECT OF HOTEL BUSINESS, CONSIDERED THIS AMOUNT TOWARDS ACCRUED LODGE RENT FOR THE PREVIOUS YEAR UNDER CONSIDERATION AND HAS TO BE CONSIDERED F OR CURRENT ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 31 ACCOUNTING YEAR. ACCORDINGLY, HE CONFIRMED THE ADD ITION MADE BY THE ASSESSING OFFICER. 63. WE HEARD THE PARTIES. WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). WE ALSO FIND THAT UNDER S.145(1) FROM A SSESSMENT YEAR 1997-98 ONWARDS, INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION HAS TO BE CONSIDER ED EITHER IN ACCORDANCE WITH CASH OR MERCANTILE SYSTEM OF ACCOUN TING REGULARLY EMPLOYED BY THE ASSESSEE, AND THEREFORE, IT IS NOT OPEN TO THE ASSESSEE TO ADOPT HYBRID METHOD OF ACCOUNTING, I.E. TO ACCOUNT FOR RECEIPTS FROM LODGE ALONE ON CASH BASIS. WE ACCORD INGLY UPHOLD THE ORDER OF THE CIT(A) AND REJECT THE GROUNDS OF THE A SSESSEE ON THIS ASPECT. 64. THE NEXT ISSUE IS WITH RESPECT TO ADDITION OF RS.59,51,375, MADE ON ACCOUNT OF INTEREST ATTRIBUTABLE TO ADVANCE S MADE TO SISTER CONCERNS WITHOUT INTEREST. 65. IN THE RETURN, THE ASSESSEE CLAIMED DEDUCTION FOR AN AMOUNT OF RS.59,51,375 TOWARDS INTEREST ON BORROWED FUNDS. FROM THE TAILS FURNISHED DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS GIVEN HUGE AM OUNTS AS INTEREST FREE ADVANCES TO ITS SISTER CONCERNS, NAMELY, RELIA NCE BUILDERS, MAHESHWARI RETREATS, MAHESHWARI BUILDERS AND ASHISH BUILDERS. SINCE THE ASSESSEE HAS NOT CHARGED INTEREST ON ADVA NCES GIVEN TO THE SISTER CONCERNS, AND SINCE THE ASSESSEE HAS FAILED TO ADDUCE ANY EVIDENCE TO PROVE THAT BORROWED FUNDS WERE EXCLUSIV ELY USED FOR BUSINESS PURPOSES, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE AMOUNT OF RS.59,51,375 CLAIMED TOWARDS INTEREST ON BORROWED FUNDS CANNOT BE ALLOWED AS DEDUCTION. THE ASSESSING OFFIC ER FURTHER NOTED ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 32 THAT MAHESHWARI BUILDERS AND ASHISH BUILDERS HAVE M ERGED AND FORMED A NEW COMPANY BY NAME, MAHESHWARI MEGA VENTURES LTD . THE INTEREST FREE ADVANCES GIVEN TO THESE CONCERNS WERE TO THE TUNE OF RS.8.37 CRORES. THE ASSESSING OFFICER FURTHER NOTED THAT OUT OF THIS AMOUNT, ABOUT RS. 4 CRORES HAVE BEEN PAID FOR PURC HASE OF LAND FOR A NEW PROJECT WHICH IS YET TO COMMENCE AND THE BALANC E AMOUNT WAS FOR SHARE APPLICATION MONEY PAID TO MAHESHWARI MEGA VEN TURES LTD. SINCE DIVIDEND INCOME IS EXEMPT FROM TAX, THE ASSESSING O FFICER OBSERVED THAT INTEREST PAID ON SHARE APPLICATION MONEY CANN OT BE ALLOWED AS DEDUCTION AS PER THE PROVISIONS OF S.14A OF THE ACT AND THE ASSESSING OFFICER DISALLOWED THE ENTIRE CLAIM OF INTEREST OF RS.59,51,375. 66. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE TH E CIT(A). THE CIT(A) BY HIS ELABORATE ORDER AT PARAS 13.1 TO 13.15 PERUSED THE FACTS OF THE CASE AND SUMMARIZED THE SUBMISSIONS MA DE FOR THE ASSESSEE, AND THEREAFTER ON DETAILED CONSIDERATION OF THE MATTER HELD THAT THERE WAS NO BUSINESS PURPOSE NOR ANY COMMER CIAL EXPEDIENCY IN ADVANCING VARIOUS AMOUNTS TO THE SISTER CONCERNS . THE CIT(A) WAS ALSO OF THE VIEW THAT EVEN THOUGH IT WAS CONTENDED THAT BORROWED AMOUNT TAKEN FROM DIFFERENT BANKS AND FINANCIAL INS TITUTIONS HAVE BEEN USED FOR BUSINESS PURPOSES, THE LIABILITY FOR SUC H BORROWED FUNDS WAS SUBSISTING WHILE THE ASSESSEE HAS ADVANCED HUGE AM OUNTS INTEREST FREE TO THE SISTER CONCERNS AND THAT ASSESSEE HAS I NDIRECTLY UTILISED ITS BORROWED FUNDS FOR ADVANCING THE SAID AMOUNTS TO IT S SISTER CONCERNS. THE CIT(A) FURTHER RELIED ON THE DECISION OF THE HO BLE PUNJAB AND HARYANA HIGH COURT IN CIT V/S. ABHISHEK INDUSTRIES LTD. (286 ITR 1). FURTHER FOLLOWING THE RATIO OF THE TRIBUNAL SPECIAL BENCH (DELHI) DECISION IN THE CASE OF AQUARIUS TRAVELS P. LTD V/S . ITO (301 ITR (AT) 111) AND OF MUMBAI BENCH OF THE TRIBUNAL IN KANKHAL INVESTMENTS AND TRADING CO. V/S. ACIT(301 ITR (AT) 359), THE CIT(A) HELD THAT SINCE ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 33 INDIRECTLY BORROWED FUNDS HAVE BEEN UTILIZED FOR I NVESTING IN SHARES, IN VIEW OF THE PROVISIONS OF S.14A OF THE ACT, INTERES T ATTRIBUTABLE TO SUCH INVESTMENTS/DEPOSITS HAS TO BE DISALLOWED. 67. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 68. LEARNED COUNSEL FOR THE ASSESSEE SHRI C.P.RAM ASWAMY CONTENDED AS FOLLOWS- (A) IT CAN BE SEEN FROM THE DETAILS OF INTEREST PAID TH AT THE PURPOSE FOR WHICH INTEREST WAS PAID BY THE ASSESSEE DURING THE PREVIOUS YEAR ON VARIOUS ACCOUNTS WAS FOR THE P URPOSES OF BUSINESS AND THEREFORE, THE SAME SHOULD HAVE BEEN A LLOWED UNDER SECTION 36(1)(III) OF THE ACT. THE LIABILITI ES WERE INCURRED IN THE PAST YEARS BY THE ASSESSEE FOR THE PURPOSES OF BUSINESS. (B) THE ASSESSING OFFICER HAS FAILED TO PROVE THE NEXU S BETWEEN THE BORROWED FUNDS AND THE INTEREST FREE ADVANCES (C) TOTAL SALES AND DIRECT REVENUE RECEIPTS DURING THE YEAR WERE RS.11,37,79,447, A SUBSTANTIAL PART OF WHICH W AS DEPOSITED IN OD ACCOUNT. RELIANCE WAS PLACED IN THI S BEHALF ON THE DECISIONS OF THE GAUHATI HIGH COURT IN CIT V /S. INDIA CARBON LTD.(247 ITR 510) AND OF THE MADRAS HIGH COU RT IN CIT V/S SUJANNI TEXTILES P.LTD.(225 ITR 560). 69. REFERRING TO THE REASONS FOR DISALLOWANCE MAD E BY THE ASSESSING OFFICER, IT WAS POINTED OUT THAT ONE OF T HE REASONS WAS THAT THE INTEREST RECEIVABLE ON A NOTIONAL WORKING FROM THE INTEREST FREE ADVANCES IS MORE THAN THE INTEREST DEBITED IN THE P ROFIT AND LOSS ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 34 ACCOUNT. THE ASSESSING OFFICER WORKED OUT THE INTE REST THAT WOULD HAVE BEEN RECEIVED BY THE ASSESSEE ON THE INTEREST FREE ADVANCES AT RS.61,28,578(NOTIONAL) AS AGAINST INTEREST DEBITED IN THE PROFIT AND LOSS ACCOUNT OF RS.59,51,375, AND IT IS ON THAT ACC OUNT DISALLOWANCE WAS MADE. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE ASSESSING OFFICER COMPLETELY LOST SIGHT OF THE FACT THAT THE INTEREST DEBITED IN THE PROFIT AND LOSS ACCOUNT FOR THE PURP OSES OF BUSINESS IS ALLOWABLE UNDER S.36(1)(III) AND THE SAME HAS NO CO NNECTION WITH THE NOTIONAL AMOUNT OF INTEREST THAT WOULD HAVE BEEN EA RNED AND THE SAME COULD NOT BE REASON FOR DISALLOWANCE. SECONDLY, IT IS SUBMITTED, THIS OBSERVATION OF THE ASSESSING OFFICER HAS NO RELEVA NCE FOR DISALLOWANCE OF INTEREST UNDER S.36(1)(III), SINCE WHAT IS REQUI RED FOR DISALLOWANCE OF INTEREST AS A PRIMARY CONDITION IS THAT THE ASSESSI NG OFFICER HAS TO ESTABLISH THAT THERE WAS NEXUS BETWEEN THE AMOUNT O F BORROWED FUND AND THE AMOUNT ADVANCED AS INTEREST FREE ADVANCES, AND THERE WAS NO ELEMENT OF COMMERCIAL EXPEDIENCY OR BUSINESS PRUDEN CE INVOLVED IN THE TRANSACTION. IN OTHER WORDS, HE SUBMITTED TH AT THE ASSESSING OFFICER IS REQUIRED TO PROVE THAT THE AMOUNT BORROW ED FOR THE PURPOSE OF BUSINESS AND WAS ADVANCED WAS INTEREST FREE TO S ISTER CONCERNS, FOR NON-BUSINESS PURPOSES. THIS NEXUS HAS NOT BEEN ESTA BLISHED BY THE ASSESSING OFFICER, IN THE ASSESSMENT ORDER BEFORE M AKING DISALLOWANCE OF INTEREST. 70. THE LEARNED COUNSEL SUBMITTED THAT EVEN ASSUMI NG THAT PART OF THE BORROWED FUND WAS UTILIZED FOR INVESTME NT IN SHARES OF A GROUP CONCERN, INTEREST CANNOT BE DISALLOWED. IN T HE CASE OF THE ASSESSEE, SHARES OF MAHESHWARI MEGA VENTURE HAVE B EEN ALLOTTED TO THE ASSESSEE. THE FACT OF ALLOTMENT OF SHARES HAS BEEN INFORMED TO REGISTRAR OF COMPANIES. THE VERY FACT THAT THE ASSE SSEE WAS INTERESTED IN INVESTING MONEY IN THE NEW VENTURE SHOW THAT THE RE WAS AN ELEMENT ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 35 OF BUSINESS PRUDENCE AND COMMERCIAL EXPEDIENCY AS B OTH THE COMPANIES WERE GROUP COMPANIES AND THE NEW COMPANY WAS IN THE PROCESS OF SETTING UP A NEW FIVE STAR HOTEL AND THE ASSESSEE HAD INTEREST IN BEING PART OF A HOTEL CHAIN FOR ITS FUT URE BUSINESS. THERE WAS AN UNDERSTANDING THAT THE ASSESSEE WOULD PROVID E TECHNICAL KNOW AND DETAILS IN WORKING OF THE NEW HOTEL. 71. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER S UBMITTED THAT THE ASSESSING OFFICER HAS OBSERVED THAT ANY IN TEREST PAID ON SHARE APPLICATION MONEY IS DISALLOWABLE UNDER S.14A AS DI VIDENDS ARE EXEMPT FROM TAX. THE LEARNED COUNSEL FOR THE ASSESSEE, IN THE CONTEXT OF THIS OBSERVATION, SUBMITTED THAT THE ASSESSEE HAS NOT EA RNED ANY DIVIDEND, NOR CLAIMED ANY DEDUCTION OF INTEREST FROM THE EXEM PTED INCOME AND HENCE, THE ASSESSING OFFICER HAS DISALLOWED INTERES T ON A WRONG AND HYPOTHETICAL BASIS. THE LEARNED COUNSEL ALSO STATED THAT THE ASSESSING OFFICERS OBSERVATION ABOUT THE AMOUNT OF INTEREST BEING CAPITALIZED IN THE HANDS OF THE ASSESSEE , AS IT FOLLOWS PROJECT COMPLETION METHOD IS NOT RELEVANT. 72. FURTHER MOST EMPHATICALLY, IT WAS POINTED OUT THAT IT WAS PRUDENT THAT THE ASSESSING OFFICER HAS TO ESTABLISH DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND THE SOURCE OF THE LO AN, WHICH IS SINE QUA NON FOR DISALLOWANCE OF INTEREST, ON WHICH ASPE CT THE ASSESSING OFFICER HAS NOT APPLIED HIS MIND. IT WAS SUBMITTE D THAT THE PRINCIPLES ENUNCIATED BY THE APEX COURT IN THE CONTEXT OF DISA LLOWANCE OF INTEREST IN THE CASE OF SA BUILDERS V/S. CIT (288 ITR 1) HAV E TO BE CONSIDERED. 73. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THE AMOUNTS HAVE BEEN BORROWED FROM DISCLOSED SOURCES, WHICH IS EASILY VERIFIABLE FROM ITS ACCOUNTS AND IT IS FOR THE ASSE SSING OFFICER TO ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 36 ESTABLISH THAT THERE WAS DIRECT NEXUS BETWEEN THE A MOUNT OF BORROWED FUND AND THE AMOUNT ADVANCED INTEREST FREE AND THER E IS NO COMMERCIAL EXPEDIENCY INVOLVED IN THE TRANSACTION. THIS NEXUS IS NOT ESTABLISHED BY THE ASSESSING OFFICER BEFORE MAKING DISALLOWANCE OF INTEREST. 74. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND, OPPOSED THE ABOVE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE, AND STRONGLY SUPPORTED THE DISALLOWANCE O UT OF INTEREST MADE, RELYING ON THE ORDERS OF THE LOWER AUTHORITIE S. HE ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS- (A) CIT V/S. GLOBE THEATRES P. LTD.(122 ITR 240)-BOM. (B) ASSAM PESTICIDES & AGRO CHEMICALS V/S. CIT(227 ITR 846)- GAU (C) CIT V/S. RAJENDRA PRASAD MODI AND ANR (115 ITR 519 )-SC 75. WE HEARD BOTH PARTIES AND PERUSED THE MATERIA L ON RECORD. WE FIND THAT THE ASSESSEE IS IN THE BUSINESS OF RUN NING A STAR HOTEL, NAMELY, QUALITY INN RESIDENCY AT HYDERABAD FOR THE LAST SEVERAL YEARS, WHEREAS MAHESHWARI MEGA VENTURE, WHICH IS TH E SISTER CONCERN IS IN THE PROCESS OF SETTING UP A FIVE STAR HOTEL A T AMEERPET, HYDERABAD. OUT OF RS.8.37 CORES WHICH WAS WORKED O UT BY THE ASSESSING OFFICER AS INTEREST FREE ADVANCES, RS.4 C RORES WAS ADVANCED TO M/S. MAHESWARI BUILDERS MERGED WITH ASHISH BUIL DERS TO FORM A NEW ENTITY, NAMELY, MAHESHWARI MEGA VENTURE, SO AS TO ENABLE THE SAID CONCERN TO MOBILISE FUNDS TO PURCHASE LAND AND BAL ANCE RS.4 CRORES WAS ADVANCED TOWARDS SHARE APPLICATION MONEY. IN CIT V/S. HERO CYCLES LTD. (323 ITR 518), HONBLE PUNJAB AND HARYA NA HIGH COURT HAS HELD AS FOLLOWS- ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 37 HELD, DISMISSING THE APPEAL, THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND TH E INVESTMENT IN THE SHARES AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLO WANCE UNDER SECTION1 4A WAS NOT SUSTAINABLE. WHETHER, IN A GIVE N SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALL OWED, WAS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF E XPENDITURE SO INCURRED COULD NOT BE ALLOWED TO BE SET OFF AGAI NST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SE CTION 14A, COULD NOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WH ERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITU RE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. THE SAME VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF ACIT V/S. SUN INVESTMENT (8 ITR (TRIB) 33). RELYING ON THE RA TIO LAID DOWN IN THE ABOVE CASES, THIS ISSUE IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER, TO VERIFY WHETHER ANY EXEMPTED INCOME HAS BEEN EARN ED BY THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO ASSES SMENT YEAR UNDER CONSIDERATION ON THE INVESTMENT TOWARDS SHARE APPLI CATION MONEY AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW, AFTER GIVI NG AN OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE. 76. AS FOR THE BALANCE AMOUNT OF INTEREST FREE AD VANCE OF RS.4.37 CRORES ADVANCED BY THE ASSESSEE, WE FIND TH AT THE ASSESSEE COMPANY, WHICH IS HAVING EXPERIENCE AND EXPERTISE IN RUNNING A STAR HOTEL IS INTERESTED IN THE NEW VENTURE IN AS MUCH A S IT WAS FELT THAT THE ASSESSEE WOULD BE BENEFITTED MAXIMUM BY BEING A PA RT OF A HOTEL CHAIN. THE RUNNING OF A CHAIN OF HOTELS BELONGING T O A GROUP IS QUITE IN VOGUE AND THE ADVANCE HAS BEEN PROMPTED ON THE PRIN CIPLES OF BUSINESS PRUDENCE AND COMMERCIAL EXPEDIENCY. HENCE, IN THE LIGHT OF THE DECISION OF THE APEX COURT IN THE CASE OF SA BU ILDERS (SUPRA), INTEREST IS DEDUCTIBLE AS THE AMOUNT IS ADVANCED TO A SUBSIDIARY COMPANY/SISTER CONCERN, AS A MEASURE OF COMMERCIAL EXPEDIENCY. IN ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 38 ATHERTON V/S. BRITISH INSULATED AND HELSBY CABLES L TD. (1925) 10 TC 155, IT WAS HELD BY THE HOUSE OF LORDS THAT IN ORDE R TO CLAIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MONEY IS E XPENDED NOT OF NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE B ENEFIT, BUT VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDER TO INDIRECTLY FACILITATE THE CARRYING ON THE BUSINESS. SAME VIEW WAS ALSO EXPRESSED BY THE APEX COURT IN EASTERN INVESTMENTS LTD. V/S. CIT(20 ITR 1); AND CIT V/S. CHANDULAL KESHAVLALA AND CO. (38 ITR 601). 77. IN VIEW OF THE ABOVE DISCUSSION, WHILE WE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER INSOFAR AS IT RELATED TO INVESTMENT IN SHARE APPLICATION MONEY OF RS.4 CRORE S, WE DELETE THE DISALLOWANCE RELATABLE TO BALANCE AMOUNT OF INTERES T FREE ADVANCES OF RS.4.37 CRORES. 78. IN THE RESULT, OUT OF THE CROSS APPEALS FOR AS SESSMENT YEAR 2005-06, WHILE REVENUES APPEAL IS DISMISSED, ASSES SEES APPEAL IS PARTLY ALLOWED. 79. TO SUM UP, ALL THE FIVE APPEALS OF THE REVENUE ARE DISMISSED, AND OUT OF THREE APPEALS OF THE ASSESSEE , WHILE APPEAL FOR THE ASSESSMENT YEAR 2000-01 BEING ITA NOS.600/HYD/2 009 IS DISMISSED; APPEAL ITA NO.1190/HYD/2009 FOR ASSESSME NT YEAR 2003- 04, IS ALLOWED FOR STATISTICAL PURPOSES; AND THE AP PEAL ITA NO.1607/HYD/2008 FOR THE ASSESSMENT YEAR 2005-06 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 31ST OCTOBER , 2011 SD/- S D/- (AKBER BASHA) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER. JUDICIAL MEMBER. DT/- 31ST OCTOBER, 2011 ITA NO.778/HYD/2009 & SEVEN OTHERS M/S. MAHESWARI PLAZA RESORTS (P)LTD., HYDERABAD 39 COPY FORWARDED TO: 1. M/S. MAHESWARI PLAZA RESORTS LTD., C/O. SHRI B.N ARSING RAO & CO., CHARTERED ACCOUNTANTS, NO.610, 6 TH FLOOR, BABUKHAN ESTATE, BASHEERBAGH, HYDERABAD 500 001. 2. DY./ASST COMMISSIONER OF INCOME-TAX CIRCLE 16(2) , HYDERABAD 3. COMMISSIONER OF INCOME - TAX(A) - V, HYDERABAD 4. COMMISSIONER OF INCOME-TAX IV HYDERABAD 5. THE D.R., ITAT, HYDERABAD. B.V.S.
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