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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SHRI A. MOHAN ALANKAMONY & SHRI S.S. GODARA
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A”, HYDERABAD BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER ITA No.1450/Hyd/2016 Assessment Year: 2012-13 TAJ GVK HOTELS & Vs. Asst. Commissioner of RESORTS LTD, Income Tax, Hyderabad. Circle-2(2), PAN: AABCT 2223 L Hyderabad. (Appellant) (Respondent) Assessee by: Sri V. Siva Kumar Revenue by: Sri Ashok Kardam, DR Date of hearing: 29/09/2021 Date of pronouncement: 22/12/2021 ORDER PER A. MOHAN ALANKAMONY, AM.:
This appeal is filed by the assessee against the order of the Ld. CIT (A)-2, Hyderabad in appeal No.0048/2015-16, dated 28/07/2016 passed U/s. 143(3) r.w.s 250(6) of the Act for the AY: 2012-13.
The assessee has raised three grounds in its appeal however, the crux of the issue is that:
“The Ld. CIT (A) has erred in confirming the order of the Ld. AO who had denied the claim of deduction U/s. 35AD of the Act by stating that the appellant did not build the hotel building.”
The brief facts of the case are that the assessee is engaged in the business of running hotels and resorts filed its return of income for the AY 2012-13 on 28/09/2012. Thereafter the case was selected for scrutiny through CASS and assessment was completed U/s. 143(3) of the Act vide order dated 31/3/2015 wherein the Ld. AO disallowed the claim of deduction U/s 35AD of the Act for Rs. 101,98,52,291/-. The contention of the assessee was that the assessee had incurred expenditure of Rs. 101,98,52,291/- towards construction of new Five Star Hotel “Vivanta by Taj - Begumpet, Hyderabad”. It was further submitted that this expenditure was incurred by the assessee prior to commencement of operation of hotel on12/11/2011 and was shown as addition to fixed assets under various heads. However, on perusal of the expenditure incurred by the assessee it was observed by the Ld.AO that the assessee had disclosed the expenditure incurred in its statement of accounts as under: -
Sl Description Amount No In Rs. 1. Land & Landscaping 0 2. Buildings 63,25,56,677 3. Plant & Machinery 31,34,54,193 4. Furniture & Fixtures 5,79,58,544 5. Vehicles 0 6. Office Equipment 1,34,93,363 7. Intangibles 23,89,515 Total 1,01,98,52,291
It was further observed by the Ld.AO from Note-5 of the Balances Sheet that the expenditure incurred towards building pertained to improvements to leasehold building during the FY 2011-12. Further, in Note-2 to the Fixed assets schedule of the balance sheet it was stated that the land and building was taken on lease for 60 years extendable for further period of 30 years. The assessee vide its letter dated 8/3/2015 made the following submissions before the Ld. AO.
“4.6……. With reference to your query on the admissibility of the deduction under section 35AD of the IT Act, we submit herewith the following: The Vivanta by Taj – Begumpet hotel at Begumpet, Hyderabad was constructed on land that was leased with the bare shell constructed by the lessor. The bare shell comprised of the pillars and slabs for ground + 8 Floors and 3 basements for car parks as also brick walls on all the floors with one layer of plaster, a water tank and 2 passenger lifts and 1 service lift. TAJGVK then constructed the 9th Floor as well as extended 1st and 2nd level basements to provide for additional car parking and sewage treatment plant. All Civil Interiors including plastering of all the floors in which guest rooms, banquet halls, restaurants, health club and spa, swimming pool, back offices, bar and public areas, Façade were got one by our company. All plants and machinery including Air Conditioning, plumbing, electricals, boilers, Diesel, Generators, 2 Elevators, Fire Fighting Equipment, Audio Video Equipment, security and CCTV equipment, kitchen equipment and other equipments required for hotel operations were produced and got installed by our company. Only part of core shell was built by the lessor and the rest of the hotel was constructed as per the TAJ standards and specifications which are required to be adhered to make hotel operational as per the Taj Band Standards. We further submit that Rs. 63.25 Crs shown as improvements to leasehold building comprises of cost of civil
work including construction of 9th Floor, extension of the basement as explained above, entire civil interiors sanitary lines, building façade, plumbing lines, ducts as well as landscaping. All this work was executed on the bare shell taken over from the lessor to build the hotel. We also submit herewith photographs of the bare shell as handed over to us by the lessor as well as those of the hotel fully completed to demonstrate the work executed by us on the bare shell to build the hotel. The company incurred Rs. 1,01,98,52,291/- for the construction activity and operating equipment which was claimed as deduction U/s. 35AD. Bare shell constructed by the lessor on the land would not constitute a building suitable to operate a hotel of two star or above category. Such bare shell can be put to use for any purpose, such as offices, shops etc. further there are also certain minimum criteria required by Ministry of Tourism, Government of India to grant star status and such status will be granted depending on the facilities provided in the hotel.We emphasize that the standards in star category hotel are high and the capital expenditure needs to be done to meet the specifications required for setting up a star hotel. Thus, it is the facilities provided in the Hotel Building which makes it a star hotel but not just building. It is unlike other commercial construction (eg software companies, shopping malls, multiplexes etc) where in just a shell with pillars and slabs with the basic plastering is sufficient to commence operations. Hence, we submit that owner of the land had constructed only core shell for part of the building and leased out the same to our company and it is the expenditure of capital nature incurred by our company amounting to Rs. 101.98 Crs that has resulted in setting up of the Hotel Vivanta by Taj – Begumpet as a five-star hotel. We therefore submit that deduction claimed by our company under section 35AD complies with the requirement in the section.”
4.1. However, the Ld.AO with the observations from the balance sheet and the submissions of the assessee came to a conclusion that the assessee neither owned the land or building nor constructed the building.
Accordingly, the ld. AO rejected the submission of the assessee and denied the claim of deduction U/s. 35AD of the Act by observing as under:-
“4.7. The above submissions of the assessee were considered and found to be not acceptable for the following facts. i) S. 35AD(8)(c)(iv) of the Act, gives the meaning of ‘specified business w.r.t hotel business as follows: “building and operating, anywhere in India, a hotel of two-star or above category as classified by the Central Governments”. In the instant case, the assessee has not built the hotel. The hotel building in which Vivanta is being operated is a leased premises and it was further observed from the lease deed dated 14/12/2006 entered into by the assessee with the lessor, that the assessee has to pay considerable share of its gross receipts to the lessee till the end of the lease period ( for instance, the assessee has to pay to the lessor rent equivalent to 12% of gross income of “Vivanta” Hotel for the first three years of the lease period). ii) Here, it should be further noted that S. 35AD of the Act is intended for the purpose of promoting fresh investment in specified businesses. In the instant case, the assessee has not made any investment to the extent of the value of the leasehold land and building. It is pertinent here to reproduce the explanatory note to Finance Act, 2009 as follows: 9. Investment-linked deduction for specified businesses 9.1.1 Investment-linked tax incentive, which was introduced by the Finance (No. 2) Act, 2009, allows 100 per cent deduction in respect of the whole of any expenditure of capital nature (other than on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the “specified business” during the previous year in which such expenditure is incurred. Such “specified business” includes the business of setting up and operating cold chain facilities, warehousing facilities for storage of agricultural produce and laying and operating a cross-country natural gas or crude or petroleum oil pipeline network.
9.1.2 The benefit of investment linked tax incentive under section 35AD has now been extended to the following specified businesses in addition to the existing businesses: - (i) building and operating, anywhere in India, a new hotel of two-star or above category as classified by the Central Government and commencing operations on or after the 1st day of April, 2010; (ii) building and operating, anywhere in India, a new hospital with at least one hundred beds for patients and commences operation on or after the 1st April, 2010; (iii) developing and building a housing project under a scheme for slum re-development or rehabilitation framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed and commences operation on or after the 1st day of April, 2010. 9.2.1 Sub-section (3) of section 35AD has been substituted so as to provide that where a deduction under this section is claimed and allowed in respect of the specified business for any assessment year, no deduction shall be allowed under the provisions of Chapter VI-A under the heading “C.- Deductions in respect of certain incomes” in relation to such specified business for the same or any other assessment year. A similar amendment has been made in section 80A. 9.2.2 Applicability - These amendments have been made applicable with effect from 1 st April, 2011 and will accordingly apply to the assessment year 2011-12 and subsequent assessment years. iii) In the light of the above, provisions, it would be pertinent to discuss the facts of the assessee’s case as follows” a) On perusal of the lease deed, it is seen that the said deed was executed on 14/12/2006 by and between Sri R. Surender Reddy, Sri Raghuram Reddy, Dr. R. Indira Reddy (herein after referred to as the “lessor”) and the assessee. From the occupancy certificate dt: 17/10/2011 issued by the GHMC to Sri R. Surender Reddy & Others (lessor) it was further observed that the permission for the construction of the said hotel was sanctioned by GHMC on 26/04/2007 and revised permission was sanctioned on 08/02/2008. From the above facts, it is evident that hotel was being constructed by the lessor since the financial year 2007-08. It is pertinent to mention again that the S. 35AD of the Act
was amended I FY 2010-11 to include the hotel business within the meaning of section 35AD of the act w.e.f 1st April 2011 and apply to AY 2011-12 and subsequent assessment years. Thus, it is seen that the assessee has claimed deduction U/s 35AD of the Act for a hotel, the construction of which was being carried out by the lessor since FY 2007-08. Here it should be noted that the intention S. 35AD is to promote fresh investment but not to accommodate the old investments and give tax benefits. 4.8. In view of the above discussion, the deduction claimed U/s. 35AD of the Act is disallowed as the assessee’s case is not covered within the meaning of the said section ie. Since the assessee has not built the hotel, it is not eligible to claim deduction U/s. 35AD of the Act.”
When the matter cropped up before the Ld. CIT (A), the Ld. AR reiterated the submissions made before the ld. AO. However, the Ld. CIT (A) confirmed the order of the Ld. AO by observing as under: -
“5.2. I have gone through the AO’s observations and AR’s contentions. On perusal fo the elaborate observations made by the AO, I am in agreement with the AO’s view that the assessee is not eligible for deduction U/s. 35AD (sic) of the Act, as the assessee did not build the hotel building and has been operating the same on the leasehold land and building and the intention of section 35AD (sic) of the Act is to promote fresh investment but not to accommodate the old investments and give tax benefits. Therefore, the AO’s action in not allowing the claim made by the assessee for deduction U/s. 35AD of the Act, is upheld. As a result, the grounds in this regard are dismissed.”
Before us, the Ld. AR vehemently argued reiterating the submissions made before the Ld. Revenue Authorities and prayed for the grant of deduction U/s. 35AD of the Act. The Ld. DR on the other hand relied on the orders of the Ld. Revenue Authorities.
We have heard the rival submissions and carefully perused the material available on record. From the above it is apparent, that the Ld. Revenue Authorities had denied deduction U/s. 35AD of the Act to the assessee because of the following reasons: -
(i) The assessee had not constructed the main structure of the ‘building’.
(ii) The intention of section 35AD is for the purpose of promoting fresh investment in specified business and in the instant case the assessee had not made any investment in the land and building.
(ii) The construction of the building was carried by the Lesser in the FY 2007-08.
8.1 At this juncture it is pertinent to mention that the meaning of the word “building” does not appear to be defined under the provisions of the Income Tax Act, 1961. When a word is not defined in the Act, it is permissible to refer to Dictionaries to find out the general sense in which the word understood in common parlance as held by the Hon’ble Apex Court the case Nagulapatti Lakshmamma vs. Mupparaju Subbaiah (1998) 5 SCC 285. Further, the words of a Statute are first understood in the natural, ordinary or popular sense and phases and sentences are construed according to their grammatical meaning unless that leads to some absurdity or unless there is something in the context, or in the
object of the Statute to suggest the contrary. As observed by the Hon’ble Apex Court in the case Jugal Kishore Saraf vs. Raw Cotton Company Limited AIR 1955 SC 376, P. 381.
8.2 Further,
• When we look into the Oxford Dictionary the meaning of the word building is stated as follows: • “building n. 1. a structure with a roof and walls.
the process or trade of building houses and other structures.”
• Google also elaborates the meaning of the word “building” as follows:
“1. A structure with a roof and walls, such as a house or factory. Similar to Structure, construction, edifice, erection, pile, property, premises, establishment, place. 2. The action or trade of constructing something. “the building of motorways”. Similar to construction, erection, raising, establishment, fabrication, production, assembly.”
From the Dictionary meaning of the word “building” it is apparent that the word building not only connotes Civil Construction but also organising an establishment, fabrication, erection, assembly etc. Further, while interpreting a beneficial provision the Hon’ble Apex Court has observed that the Court shall take pragmatic view and a liberal interpretation should be adopted while deciding the case “The
Commissioner of Sales Tax vs. Industrial Coal Enterprises reported in 114 STC 365 (SC)”. The Hon’ble Apex Court further observed that a provision granted for promoting economic growth and development in taxing Statutes should be liberally construed and restriction placed on it by way of exception should be construed in a reasonable and purposive manner so as to advance the object of the provision. The Hon’ble Apex Court further observed that the objects of an exemption provision should not be frustrated by a language or expression which may defeat the purpose.
Further, from the lease deed dated 14/12/2006 produced before us by the assessee the concise gist of certain clauses is stated herein below for reference: -
• Clause-3 (Page No.6) specifies that the lessee(assessee) undertake to execute the following work at its own expense (Page No.21, Annexure-II): 1) Interior of the Guest Rooms and Public Arears. 2) All Movable Assets. 3) Complete Plant & Machinery 4) All equipment for operation of the hotel. 5) Elevators (2). 6) Sewerage Treatment Plant (STP). 7) Operating Supplies.
8) Air Conditioning Systems. 9) Fire Fighting Equipment. 10) All Electrical Works. 11) All Plumbing works with Fixtures and Fittings. 12) Any other works, item/equipment required to complete the hotel for the commencement of the operation and not included in the Annexure-1 hereto. • Clause-5, Page No.7 specifies that the lessor shall construct only what he specified in Annexure-1. Any further construction has to be undertaken by the lessee(assessee). • Clause-8, page No.8 specifies that on handing over the possession of the property to the lessee(assessee), the lessee shall take up the remaining construction work as mentioned in Annexure-II within a period of Nine Months.
From the above, it is apparent that the assessee is also required to spent considerable amount for constructing a portion of the building such as interior civil works, plumbing works, electrical works and other civil work relating to erecting equipments, elevators, firefighting equipment, Air Condition systems etc. Therefore, it cannot be said that assessee had not participated in constructing the building though the basic civil structure is constructed by the lessor. Provisions of section 35AD of the Act does not specify that the assessee has to construct the
entire building by itself or own the building and land. The provisions only specify that the specified business should be in the nature of building and operating a new hotel of 2 star or above category as classified by the Central Government. In the case of the assessee, there is no doubt that the entire investment made by the assessee was for constructing a portion of the building and for operating a new hotel of the category specified under the Act. Further, from the provisions of section 35AD of the Act, it is obvious that these provisions are brought into the Act in order to promote certain specified business in the country. These provisions grant deduction to the assessee in respect of the entire capital expenditure incurred wholly and exclusively for the purpose of the specified business which has commenced during the previous year. Even otherwise, by virtue of section 32 of the Act, the assessee is entitled for deduction towards such expenditures U/s. 32 of the Act by way of depreciation over a period of time. Therefore, there is no loss to the revenue when the whole issue is viewed in its entirety, because when the assessee derives the benefit of Section 35AD of the Act it saves payment of tax in the initial years but in the subsequent years ends up paying higher tax as it is deprived of the benefit of depreciation u/s. 32 of the Act. Provisions of section 35AD of the Act, only helps the assessee to maintain higher cash liquidity during the initial years of its business. Once deduction U/s.35AD of the Act is claimed then by virtue of section 35AD(4) of the Act, no other deduction
in respect of these expenditure shall be allowed as deduction. Therefore, keeping in view of the facts and circumstance of the case, the beneficial provisions of the Act and our observations mentioned herein above, We are of the considered view that in the instant case before us the assessee is entitled for the benefit of deduction U/s. section 35AD of the Act towards the expenditure incurred by it for establishing its hotel business of specified category as provided under the Act. Hence, we hereby direct the Ld. AO to grant deduction to the assessee for Rs. 101,98,52,291/- under the provisions of section 35AD of the Act.
In the result, appeal of the assessee is allowed.
Pronounced in the open Court on 22nd December, 2021.
Sd/- Sd/- (S.S. GODARA) (A. MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 22nd December, 2021
OKK
Copy to:- 1) TAJ GVK HOTELS & RESORTS LTD, Taj Krishna, Road No.1, Banjara Hills, Hyderabad – 500 034. 2) Asst. Commissioner of Income Tax, Circle-2(2), Hyderabad. 3) The CIT(A)-2, Hyderabad. 4) The Pr. CIT-2, Hyderabad. 5) The DR, ITAT, Hyderabad 6) Guard File