Taj GVK Hotels&Resorts Ltd, Hyderabad V. ACIT, Hyderabad

ITA 873/HYD/2006

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7168 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 20-12-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 05-10-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K MYTHILI RANI
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Capital asset; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBE R. ITA NO.873/HYD/2006 : A SSESSMENT YEAR 2003-04 M/S. TAJ GVK HOTELS & RESORTS LTD., HYDERABAD (PAN - AABCT 2223 L ) V/S ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE 2(3), HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI V..SIVAKUMAR RESPONDENT BY : SMT. K. MYTHILI RANI DATE OF HEARING 3 11.2011 DATE OF PRONOUNCEMENT 14.12.2011 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-VI, HYDERAB AD DATED 31.7.2006 FOR THE ASSESSMENT YEAR 2003-04. 2. FIRST EFFECTIVE GRIEVANCE OF THE ASSESSEE IN TH IS APPEAL IS AGAINST DISALLOWANCE OF INTEREST OF RS.73,36,381 UN DER S.36(1)(III) OF THE ACT. 3. ASSESSEE, ENGAGED IN HOSPITALITY BUSINESS IN HO TEL INDUSTRY, CLAIMED DEDUCTION OF RS.73,36,381 TOWARDS INTEREST ON BORROWAL. THE ASSESSEE ACQUIRED 100% SHARES IN M/S. PUNJAB HOTELS LTD., WHICH WAS ENGAGED IN CONSTRUCTION OF A HOTEL AT CHANDIGARH. THE CONSTRUCTION OF THE HOTEL WAS NOT COMPLETED BY THE END OF THE YEAR UNDER CONSIDERATION. THE AMALGAMATION PETITION FILED IN THE COURT, AND THE COURT APPROVED THE AMALGAMATION OF ASSESSEE COMPANY AND M/S. ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 2 PUNJAB HOTELS LTD. WITH EFFECT FROM 1.11.2007 VIDE ORDER DATED 31.10.2003. THE CAPITAL WORK IN PROGRESS OF THE HO TEL WAS SOURCED BY EQUITY SHARE CAPITAL SUBSCRIBED BY THE ASSESSEE COM PANY AND FROM OUT OF THE LOAN OF RS.15 CRORES TAKEN FROM ICICI BANK. INCIDENTAL EXPENDITURE DURING THE CONSTRUCTION PERIOD INCLUDED INTEREST OF RS.73,36,381 ON THE AFORESAID LOAN FROM ICICI BANK, WHICH WAS CLAIMED BY THE ASSESSEE AS DEDUCTION UNDER S.36(1) (III) OF THE ACT. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEDUC TION IN RESPECT OF INTEREST RELYING ON THE DECISION IN JCT LTD. V/S. D CIT (276 ITR 1125)- KOL. 4. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE TH E CIT(A). THE CIT(A), OBSERVING INTER ALIA THAT THE LOAN IN T HIS CASE WAS NOT TAKEN FOR ANY PURPOSE OF THE EXISTING BUSINESS OF T HE ASSESSEE, BUT FOR ACQUISITION OF SHARES OF ANOTHER COMPANY, M/S. PUNJ AB HOTELS LTD., WHICH WAS CONSTRUCTING A HOTEL AT CHANDIGARH AND HA D NOT COMMENCED ITS BUSINESS TILL 31.3.2003, AND DISTINGUISHING THE CASE-LAW RELIED UPON BY THE ASSESSEE BEFORE HIM, CONFIRMED THE DISALLOWA NCE OF INTEREST OF RS.73,36,381 MADE BY THE ASSESSING OFFICER. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), ASSESSEE PREFERRED APPEAL ON THIS ISSUE. 6. LEARNED COUNSEL FOR THE ASSESSEE, SHRI SIVA KU MAR, SUBMITTED THAT THE INTEREST CLAIMED OF RS.76,36,381 IS WITH REFERENCE TO THE LOAN TAKEN FORM ICICI BANK, WHICH WAS UTILIZ ED FOR FUNDING THE CONSTRUCTION OF THE HOTEL AT CHANDIGARH, AND NOT BY THE ASSESSEE FOR SUBSCRIBING TO THE SHARE CAPITAL OF M/S. PUNJAB HOT ELS LTD. HE SUBMITTED THAT THE ISSUE INVOLVED WITH REGARD TO AL LOWABILITY OF INTEREST ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 3 UNDER S.36(1)(III) OF THE ACT, IS SQUARELY COVERED BY THE DECISION OF M/S. NAVABHARAT FERRO ALLOYS LTD. IN ITA NO.161/HYD /2002 DATED 28.9.2007. HE ALSO FURNISHED A COPY OF THE SAID DEC ISION. HE ALSO SUBMITTED THAT SIMILAR EXPENDITURE HAS ALSO BEEN AL LOWED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF M/S. DOLPHIN HOTELS LTD., VIDE ORDER DATED 30.4.2007 IN ITA NO.745 & 74 6/HYD/2005. RELIANCE IS ALSO PLACED ON THE DECISION OF THE SUPR EME COURT IN THE CASE OF DCIT V/S. CORE HEALTHCARE LTD. (167 TAXMAN 206) 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE, SMT. M YTHILI RANI, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORD ERS OF THE LOWER AUTHORITIES. SHE ALSO RELIED ON THE DECISION OF TH E CALCUTTA HIGH COURT IN THE CASE OF JCT LTD. V/S. DCIT (276 ITR 1125)-KO L. 8. WE HEARD THE PARTIES AND PERUSED THE MATERIAL A VAILABLE ON RECORD. IT IS THE CASE OF THE ASSESSEE THAT THE I NTEREST CLAIMED OF RS.76,36,381 IS WITH REFERENCE TO THE LOAN TAKEN FO RM ICICI BANK. CONSTRUCTION OF HOTEL AT CHANDIGARH WAS FINANCED FR OM THE EQUITY SHARE CAPITAL SUBSCRIBED BY THE ASSESSEE COMPANY AN D THE LOAN OF RS.15 CRORES FROM ICICI BANK. THE CIT(A), ACCORDIN G TO THE LEARNED COUNSEL FOR THE ASSESSEE, HAS INCORRECTLY PROCEED WITH THE MATTER, AS IF THE BORROWAL WAS FOR THE PURPOSE OF ACQUIRING TH E SHARES OF M/S. PUNJAB HOTELS LTD. WE FIND MERIT IN THIS CONTENTIO N OF THE ASSESSEE. THE SHARE CAPITAL IN M/S. PUNJAB HOTELS LTD., SUBSC RIBED BY THE ASSESSEE WAS ONLY RS.4.66 CRORES, WHEREAS THE LOAN FROM ICICI BANK WAS RS.15.00 CRORES. ACCORDING TO THE ASSESSEE, TH E CONSTRUCTION OF THE HOTEL/WORK IN PROGRESS WAS FUNDED OUT OF THE SH ARE CAPITAL SUBSCRIBED BY THE ASSESSEE AND THE LOAN TAKEN FROM ICICI BANK. IN THAT VIEW OF THE MATTER, WE FIND THAT THE ISSUE REL ATING TO ALLOWABILITY ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 4 OF DEDUCTION OF INTEREST UNDER S.36(1)(III) WAS COV ERED BY THE DECISION OF M/S. NAVABHARAT FERRO ALLOYS LTD. IN ITA NO.161/ HYD/2002 DATED 28.9.2007. WE ACCORDINGLY ACCEPT THE CONTENTIONS OF THE ASSESSEE AND DELETE THE ADDITION OF RS.76,36,381 MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A) ON THIS COUNT. 9. THE NEXT EFFECTIVE GRIEVANCE OF THE ASSESSEE IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF RS.41,780 OUT OF PRIOR PERIOD EXPENDITURE. 10. ASSESSEE PURCHASED COOLING TOWERS FROM PAHARPU R COOLING TOWERS LTD. AND PAID DIFFERENCE IN SALES TAX ON ACC OUNT OF NON- FURNISHING OF C FORMS. ASSESSEE CLAIMED DEDUCTIO N FOR THE PAYMENT OF RS.41,781 MADE IN THE ASSESSMENT YEAR 2003-04. THE ASSESSING OFFICER DENIED THE DEDUCTION ON THE GROUND THAT THE COOLING TOWERS WERE TREATED AS CAPITAL ASSETS AND THEREFORE, THE E XPENDITURE LINKED TO SUCH CAPITAL EXPENDITURE IS TO BE DISALLOWED. 11. AGGRIEVED, ASSESSEE PREFERRED APPEAL AGAINST SUCH DISALLOWANCE. THE CIT(A) ALSO UPHELD THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER. HENCE, ASSESSEE IS IN SECOND AP PEAL BEFORE US. 12. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COOLING TOWERS WERE DISMANTLED DURING ROAD WIDENING IN THE YEAR 2000. THE LIABILITY TOWARDS CST WAS DISCHARGED IN THE FIN ANCIAL YEAR 2002-03. EVIDENCE OF DEMAND FROM SUPPLIER OF COOLING TOWERS IN THIS BEHALF, WAS PRODUCED BEFORE THE ASSESSING OFFICER. SINCE THE E XPENDITURE IN QUESTION WAS INCURRED FOR THE PURPOSES OF BUSINESS, AND INCURRED AFTER ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 5 THE COOLING TOWERS WERE DISMANTLED, THE SAME CONSTI TUTES BUSINESS LOSS AND AS SUCH THE SAME SHOULD BE ALLOWED. 13. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON TH E OTHER HAND, STRONGLY SUPPORTED THE ORDERS OF THE LOWER AU THORITIES AND SUBMITTED THAT THE DISALLOWANCE IN QUESTION MAY BE UPHELD. 14. WE HEARD THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE COOLING TOWERS WE RE DISMANTLED DURING THE YEAR 2000, WHEREAS THE DEMAND TOWARDS THE SALES TAX WAS RECEIVED FROM THE SUPPLIER SUBSEQUENTLY AND THE SAM E WAS DISCHARGED IN THE FINANCIAL YEAR 2002-03. SINCE THE CAPITAL A SSET, VIZ. COOLING TOWERS, IN RELATION TO WHICH THE SALES TAX IN QUEST ION WAS PAID, WAS NO LONGER IN EXISTENCE, HAVING BEEN DISMANTLED IN THE YEAR 2000, THE DIFFERENTIAL SALES TAX PAID IS NOTHING BUT A BUSINE SS LOSS, AND HENCE, THERE IS NO JUSTIFICATION FOR TREATING THE SAME AS CAPITAL EXPENDITURE. WE ACCORDINGLY, ALLOW THE CLAIM OF THE ASSESSEE IN THIS BEHALF, AND DELETE THE ADDITION OF RS.41,780 MADE BY THE ASSES SING OFFICER AND CONFIRMED BY THE CIT(A). 15. THE NEXT EFFECTIVE GRIEVANCE FO THE ASSESSEE I N THIS APPEAL RELATES TO THE ADDITION OF RS. 66,93,686 MADE ON ACCOUNT OF CHANGE IN THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSE E IN RESPECT OF CROCKERY AND CUTLERY. 16. THE ASSESSEE, WHICH IS IN HOTEL INDUSTRY, CHAN GED THE METHOD OF ACCOUNTING IN RESPECT OF CROCKERY AND CUT LERY, FROM THE METHOD OF WRITING OFF OF THE ACTUAL BREAKAGES OF SA ID ITEMS TO THE METHOD OF WRITING OFF AS AND WHEN FRESH ISSUES WERE MADE. THE ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 6 ASSESSING OFFICER, FINDING THAT THE EXPENDITURE ON CROCKERY AND CUTLERY WAS HIGHER BY RS.66.94 LAKHS ON ACCOUNT OF CHANGE I N THE METHOD OF ACCOUNTING OF THOSE ITEMS, AN CONSEQUENTLY, THE PRO FIT OF THE YEAR WAS REDUCED BY THIS AMOUNT, AND NOT CONVINCED WITH THE EXPLANATION OF THE ASSESSEE THAT THE CHANGE MADE BY THE ASSESSEE WAS B ONA FIDE AND IN CONSONANCE WITH THE WELL RECOGNIZED METHOD FOLLOWED IN HOTEL INDUSTRY, MADE THE IMPUGNED ADDITION OF RS.66.94 LAKHS. THE ASSESSING OFFICER ALSO OBSERVED THAT EVEN IF IT WAS HELD THAT CHANGE OF METHOD OF ACCOUNTING WAS REASONABLE, STILL THE EXPENDITURE RE LATED TO THE EARLIER YEARS CANNOT BE ALLOWED IN THE YEAR UNDER APPEAL, B ECAUSE THE ASSESSEE WAS WRITING OFF THE CROCKERY AND CUTLERY W HICH WERE ISSUED OVER THE YEARS. IN SUPPORT OF THIS CONCLUSION, HE OBSERVED THAT OUT OF THE TOTAL AMOUNT OF RS.6.97 LAKHS, AN AMOUNT OF RS. 52.04 LAKHS PERTAINED TO THE EARLIER YEARS AND ONLY AN AMOUNT O F RS.14.89 LAKHS WOULD BE ALLOWABLE IN THE YEAR UNDER APPEAL. 17. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE T HE CIT(A), THE CIT(A) OBSERVING THAT THE CHANGE IN THE METHOD OF ACCOUNTING EFFECTED BY THE ASSESSEE FOR THE YEAR 2002-03 CANNO T BE CONSIDERED AS BONA FIDE AS IT WAS INTENDED TO REDUCE THE TAX LIAB ILITY OF THE YEAR, SUSTAINED THE ADDITION OF RS.66,93,686 MADE BY THE ASSESSING OFFICER. 18. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 19. THE LEARNED COUNSEL FOR THE ASSESSEE, REITERAT ING THE CONTENTIONS URGED BEFORE THE LOWER AUTHORITIES SUBM ITTED THAT THE ASSESSEE CHANGED THE METHOD OF ACCOUNTING, DUE TO T HE DIFFICULTIES FACED IN IDENTIFYING AND ACCOUNTING FOR THE CIRCULA TING STOCK OF CROCKERY AND CUTLERY AND TO ACCOUNT FOR THE BREAKAGES/DISCAR DS UNDER THE EARLIER ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 7 METHOD, WHICH WERE ALREADY EXPLAINED IN THE LETTER DATED 12.9.2005 SUBMITTED TO THE ASSESSING OFFICER. HE SUBMITTED T HAT DETAILS OF CONSUMPTION ON THE BASIS OF NEW METHOD HAVE ALSO BE EN FURNISHED BEFORE THE ASSESSING OFFICER. HE FURTHER SUBMITTED THAT THE CHANGE METHOD OF ACCOUNTING IS CONSISTENT WITH THE METHOD OF ACCOUNTING FOLLOWED ACROSS THE COUNTRY IN ALL STAR HOTELS, AND THE CHANGED METHOD HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE IN T HE SUCCEEDING YEARS. HE FURTHER SUBMITTED THAT THIS ISSUE IS ALS O COVERED IN FAVOUR OF THE ASSESSEE WITH THE DECISION OF THE BANGALORE BEN CH OF THE TRIBUNAL IN THE CASE OF DCITV/S. ITC HOTELS LTD. (1 SOT 703) . 20. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON T HE OTHER HAND, STRONGLY SUPPORTED THE ORDERS OF THE LOWER AU THORITIES AND SUBMITTED THAT THE DISALLOWANCE IN QUESTION MAY BE UPHELD. 21. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IT IS THE CLAIM OF THE ASSESSEE THAT THE A SSESSEE HAS CHANGED OVER TO A METHOD FOR ACCOUNTING THE CROCKERY AND CU TLERY, WHICH HAS BEEN FOLLOWED BY OTHER STAR HOTELS ACROSS THE COUNT RY. ACCORDING TO THE ASSESSEE, THIS CHANGE WAS MADE IN VIEW OF DIFFICULT IES FACED IN IDENTIFYING THE ITEMS IN CIRCULATION AND ACCOUNTING THE BREAKAGES. IT IS ALSO THE SUBMISSION OF THE ASSESSEE THAT THE CHANGE METHOD IS CONSISTENTLY FOLLOWED BY THE ASSESSEE IN THE SUCCEE DING YEARS. IN THE ABSENCE OF ANY MATERIAL TO THE CONTRARY BROUGHT ON RECORD BY THE DEPARTMENT, IT CAN NEITHER BE SAID THAT THE CHANGE IN THE METHOD OF ACCOUNTING MADE BY THE ASSESSEE WAS NOT BONA FIDE N OR THAT THE CHANGE WAS MADE ONLY TO REDUCE THE PROFIT OF THE YE AR UNDER CONSIDERATION. MERELY BECAUSE ON ACCOUNT OF CHANGE IN THE METHOD OF ACCOUNTING, ISSUES OF EARLIER YEARS TOO GET WRITTEN OFF IN THE YEAR UNDER ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 8 CONSIDERATION, IT CANNOT BE SAID THAT THE CHANGE IS NOT BONA FIDE OR THE CLAIM OF THE ASSESSEE FOR THE LOSS WRITTEN OFF DURI NG THE YEAR IS NOT ALLOWABLE. THERE IS NO MERIT IN THE OBSERVATION OF THE ASSESSING OFFICER THAT EVEN IF IT WAS HELD THAT CHANGE OF MET HOD OF ACCOUNTING WAS REASONABLE, STILL THE EXPENDITURE RELATED TO TH E EARLIER YEARS CANNOT BE ALLOWED IN THE YEAR UNDER APPEAL BECAUSE IF THE CHANGE IN THE METHOD IS ACCEPTED, BUT WRITE OFF OF ISSUES OF EARLIER YEARS IS DENIED, OCCASION FOR WRITING OFF THE ISSUES OF EARL IER YEARS WOULD NEVER ARISE, IN VIEW OF THE CHANGED METHOD OF ACCOUNTING, AND THEREFORE, IT IS OBVIOUS THAT THE ISSUES OF THE YEAR UNDER APPEAL AN D EARLIER YEARS HAVE TO BE WRITTEN OFF IN THE BOOKS IN THE YEAR IN WHICH CHANGE IN THE METHOD OF ACCOUNTING IS INTRODUCED, AND LOSS HAS TO BE ALLOWED AS SUCH BASED ON THE CHANGED SYSTEM OF ACCOUNTING. WE AR E SUPPORTED IN THIS BEHALF BY THE BANGALORE BENCH DECISION OF THE TRIBUNAL IN THE CASE OF ITC HOTELS LTD. (SUPRA), WHICH SQUARELY APPLIES TO THE FACTS OF THE PRESENT CASE. IN THE CIRCUMSTANCES, WE ALLOW THE G ROUNDS OF THE ASSESSEE ON THIS ISSUE AND DELETE THE ADDITION OF R S. 66,93,686 MADE ON THIS COUNT. 22. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON SD/- SD/ - (CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER. JUDICIAL MEMBER. DT/- 14/12/2011 COPY FORWARDED TO: 1. M/S. TAJ GVK HOTELS & RESORTS LTD., ROAD NO.1, BANJ ARA HILLOS, HYDERABAD ITA NO.873/HYD/2006 M/S. TAJ GVK HOTELS & RSORTS LTD., HYDERABAD 9 2. ASST. COMMISSIONER OF INCOME - TAX , CIRCLE 2(3), HYDERABAD 2 . COMMISSIONER OF INCOME - TAX(A) - II I HYDERABAD 4. COMMISSIONER OF INCOME-TAX II, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. B.V.S.