ACIT CC - 13, NEW DELHI vs. A B HOTELS LIMITED, NEW DELHI

This appeal filed by the Revenue is directed against the order dated 12.12.2019 of the CIT(A)-37, New Delhi, relating to Assessment Year 2016-17.

The grounds of appeal

The ld. Sr. DR, supporting the assessment order, submitted that the AO has made disallowance of 10% of operating expenses, employee benefit expenses and administrative & general expenses, keeping in view that the total rental income is approximately 10% of total revenue/income including rental and hotel business. The ld. Sr. DR vehemently pointed out that the ld.CIT(A) has granted relief to the assessee without any justified and reasonable basis ignoring the fact that the principle of res judicata is not applicable to the income-tax proceedings. The ld. Sr. DR also submitted that the assessee has claimed deduction u/s 24(a) of the Act, but, has not apportioned the relevant part of the expenses incurred by it and claimed in the P&L of operating expenses, employee benefit expenses and administrative & general expenses, therefore, the impugned first appellate order may kindly be set aside by restoring that of the AO. The ld. Sr. DR also submitted that the ld.CIT(A) while granting relief to the assessee, has considered irrelevant facts and circumstances and by observing that the AO for AY 2014-15 and 2015-16 had accepted the method of accounting after scrutiny ignoring that principle of res judicata is not applicable to the income-tax proceedings.

Replying to the above, the ld. AR supported the first appellate order and submitted that in the scrutiny assessment orders u/s 143(3) of the Act, the AO had not made any disallowance or addition on this issue in the immediately preceding assessment year 2014-15 and 2015-16 and had accepted the method of accounting without any dispute. Therefore, the AO cannot take a different or deviated view on the similar facts and circumstances keeping aside the principle of consistency which is followed by the tax authorities as per the tax jurisprudence. The ld. AR, briefly reiterating her submissions made before the ld.CIT(A), submitted that this is a fundamental rule of justice and it is well established that there has to be more than bare suspicion to support and findings of the assessing authorities to make any addition in the hands of the assessee. Placing reliance on the various judgements of the Hon’ble Supreme Court and order of the ITAT Delhi Benches in the case of Widex India (P) Ltd. vs. DCIT, reported as MANU/ID/0870/2011, the ld. AR submitted that the suspicion backed by no evidence cannot be a cogent reason for making disallowance and where the expenses were duly vouched and the audited accounts were duly supported by the vouchers have been made available to the AO who has not rejected the books of accounts, then, he was not justified in estimating the disallowance to be made as, apart from mere suspicion, there is no adverse material or fact on record. Further,

Placing rejoinder to the above, the ld. Sr. DR submitted that there is no quarrel regarding the proposition rendered by the Hon’ble jurisdictional High Court of Delhi, Hon’ble Madras High Court and the coordinate Bench of the Tribunal which had been rendered under peculiar facts and circumstances of the relevant cases. The ld. DR further pointed out that in the present case, the assessee had received rental income and had claimed deduction u/s 24(a) of the Act on the entire rental income. The ld. Sr. DR further submitted that from the balance sheet and statement of Profit & Loss Account for the year ended 31.03.2016, it is clearly discernible that the assesse had shown an amount of Rs.2,47,24,241 in Table 20 to the accounts as maintenance charges received, undisputedly, this amount has been received from the tenants from whom rental income was received. The ld. Sr. DR further pointed out that the assessee, in the P&L Account, had claimed other operating expenses, employee benefit expenses and administrative general expenses totaling to Rs.76,72,12,582/- which includes expenses incurred by the assessee towards maintenance of rental operation of the building complex of the assessee. The ld. Sr. DR submitted that the AO was right in disallowing 10% of common expenses as the assessee has not maintained any separate books of accounts clearly establishing the expenses incurred towards

On careful consideration of the above submissions and on perusal of the orders of the authorities below, we find from the assessment order that the ld. AO had made the following observations and findings:-

The findings recorded by the ld.CIT(A) in the first appellate order while granting relief to the assessee are as follows:- “Findings: 5. Ground No. 1: pertains to disallowance expense amounting to Rs.7,67,21,258/-. The fact of the case that the appellant had claimed business expenses under the heads ‘operating expenses’ of Rs.41,75,19,132/-, ‘employee benefit expenses’ of Rs.20,10,42,449/- and ‘administrative and general expenses’ of Rs. 14,86,51,001/- totaling to Rs.76,72,12,582/-. The AO has made disallowance of 10% of these expenses amounting to Rs.7,67,21,258/- on the ground that since the rental income earned by the appellant constituted 10% of the total income earned by the appellant, a proportionate disallowance is warranted. The AO is of the view that the assessee is claiming double deduction by booking maintenance/other expenses in the P&L account incurred for earning rental income and at the same time claiming deduction u/s 24b of the Act. 5.1 In appeal, the Ld. AR of the appellant submitted that sufficient details were filed before the AO by various letters during the course of the assessment proceedings and AO has not pointed out any single instance of expenses being related to the rental income. The appellant was already claiming a deduction u/s 24 of the Act on the rental income earned by it and had voluntarily made disallowance of expenses debited on account of earning of such rental income i.e. expenses incurred towards municipal taxes and the lease rent of such portions rented out. The appellant had made a disallowance of 8

We note that undisputedly, the assessee received rental income of Rs.9,86,07,579/- and received maintenance charges of Rs.2,47,24,241/-. We also find that the assessee has suo moto disallowed part of lease rent of rental portion and municipal taxes related to rental portion and had also claimed deduction of 30% for repair u/s 24(a) of the Act in the computation of income. However, being dissatisfied by the suo moto disallowance made by the assessee and exemption claimed u/s 24 of the Act, the AO picked up the issue and observed that the assessee had only shown receipt of Rs.2,47,24,241/- as maintenance charges from the tenants and has incurred expenditure towards maintenance from the common pool which consisted of expenditure towards hotel area as well as rental area, therefore, the AO proceeded to make disallowance of 10% of total claim of expenditure on operating expenses, employee benefit expenses and administrative & general expenses

First of all, we may point out that the principle of res judicata does not apply to the income-tax proceedings, but, rule of consistency is always respected by the tax authorities. It is also amply clear from the various propositions rendered by the Hon’ble Supreme Court and High Courts that the reasonableness of any expenditure has to be looked into from the point of view of a prudent businessman and not from the view point of taxing authorities. At the same time, we cannot ignore that the AO is not only an AO, but, he is an investigator and adjudicator also who is duty bound to examine the issue from all angles to stop leakage of revenpue and evasion of tax. In the present case, the assessee had shown and included in the other income an amount of Rs.2,47,24,241/- received as maintenance charges, but, the expenditure towards maintenance of rental area has been incurred from the common pool of expenses which provoked the AO to make the impugned disallowance.

From the written submissions filed by the ld. Counsel of the assessee, we observe that the first limb of the argument is that since the assessee has already claimed deduction u/s 24 of the Act on the rental income earned by it and it had voluntarily made disallowance of expenses debited on account of earning of such rental income, then, any further disallowance would amount to double disallowance which cannot be made as per the settled principles of law. On this contention, we are of the view that undisputedly, from the computation of taxable income, the assessee, for AY 2015-16, placed at page 19 of the assessee’s paper

The next contention of the ld. Counsel is that no depreciation was claimed on the commercial block. Obviously, when the assessee is claiming deduction u/s 24 of the Act on the rental income earned by it, then, it is not entitled for claiming any depreciation on the commercial block from which rental income has been earned. From the assessment order, we also observe that it is not the case of the AO that the assessee has claimed depreciation on the rental commercial block and, therefore, he is making disallowance of proportionate expenditure. Therefore, this contention of the ld. Counsel of the assessee is also not acceptable.

It is also the contention of the ld. Counsel that actual expenses incurred towards renting activity was under separate rental agreement and actual expenses of a mere renting activity are much lesser. It has also been contended that the AO

On the other hand, it is the contention of the ld. Sr. DR that the onus was on the assessee to show that actual expenses of renting activity are less than the amount reflected as income from maintenance charges of Rs.2,47,24,241/-. The ld. Sr. DR also submitted that undisputedly, the actual expenses incurred towards renting activity under a separate maintenance agreement, but, the onus was on the shoulder of the assessee to show that the amount received as maintenance charges shown in the P&L Account is equal or less than the actual expenses on the rental portion to conduct business of renting activity by the assessee. The ld. Sr. DR has drawn our attention towards Schedule 21, 22 and 25 of the assessee’s audited report and submitted that as per suo moto disallowance calculated at page 19 of the assessee’s paper book, the assessee has disallowed 14.65% of lease rent of rental portion and 64.67% of municipal taxes which shows that the area of rental portion wherein a rental activity has been undertaken by the assessee is of huge size, therefore, the assessee has apportioned and suo moto disallowed 64.67% of municipal taxes and such big area cannot be maintained properly the onus is on the assessee to show that the actual expenditure on other operating expenses, employee benefit expenses and administrative & general expenses was equal or lesser in comparison with the maintenance charges of Rs.2,47,00,000/- received by the assessee. Therefore, the 10% disallowance made by the AO was quite justified and reasonable. It has also been contended by the ld. Sr. DR that the rule of consistency has to be followed by the tax authorities, but, if a factual mistake has been made by the AO in the preceding or subsequent, then, the same cannot be allowed to be persisted blindly following the rule of consistency. Therefore, the first appellate order may kindly be set aside by restoring that of the AO.

On careful consideration of the above rival submissions, first of all, we may point out from the audited accounts of the assessee that the assessee has shown ‘other operating expenses’ in table 21, employee benefit expenses in table- 22 and administrative & general expenses in table 25 which are reproduced for the sake of completeness as follows:- “21. Other Operating Expense Particulars 31.03.2016 31.03.2015 Power and fuel 3,52,25,035 4,36,98,585 Electricity charges 9,61,04,588 8,73,16,445 Insurance 18,73,930 13,67,851 Repairs and Maintenance -Building 76,17,554 87,3 7,977 -Plant & machinery 2,41,58,930 2,73,34,063 -Others 66,71,205 54,61,946 Food & Beverages 12,37,86,890 12,95,70,636 14

From the above, it is clear that the assessee has made expenditure of Rs.76,72,12,580/- on these three broad heads. From the table 20 we also note that the assessee has shown maintenance charges received as Rs.2,47,24,241/- as ‘other income.’ On being asked by the bench, the ld. Counsel of the assessee, in all fairness, admitted that the assessee has incurred maintenance expenses against maintenance charges received from the common pool which includes other operating expenses, employee benefit expenses, administrative & general expenses. From the tables as reproduced hereinabove, it is clear that some of the expenditures are exclusively pertaining to hotel business such as food and beverages, housekeeping expenses, laundry charges, linen and uniform, as shown in table 21 of the audit report. But, in all the three tables, maximum expenditure pertains to the hotel business and rental operation which has not been apportioned or segregated by the assessee to show that the actual maintenance charges received by it are equal or less than the actual expenditure incurred by the assessee from common pool towards maintenance of rental area which contains other operating expenses, employee benefit expenses and administrative & general expenses. In this situation, when the assessee is not discharging its onus to show the expenditure incurred on rental operation, maintenance is equal or less than the actual amounts received against maintenance charges, then, the AO is very well entitled to make proportionate disallowance in this regard keeping in view the surrounding facts and circumstances and totality of the situation before him on the issue.

Identical situation arose before the ITAT Mumbai Bench in the case of Runwal Developers P. Ltd. vs. ACIT reported as (2016) 50 ITR (Trib) 260 (ITAT Mum) and the Tribunal restored the issue to the AO for proper verification,

At the cost of repetition, we may again point out that the onus was on the shoulders of the assessee to show that the actual expenditure incurred on rental operation from the common pool of expenses was equal or less than the amount received as maintenance charges and shown in the P&L Account. But, in the present case, the assessee has not discharged its onus and we are of the view that blindly following the rule of consistency a mistake cannot be allowed to be persisted when the leakage of revenue is clearly discernible.

Therefore, in view of the above, we reach to a logical conclusion that the ld.CIT(A) was not correct and justified in deleting the disallowance by observing that the AO, without identifying any expenses attributable to rental income, assumption of the AO without identifying any expenses attributable to rental income and such disallowance without identifying any expenses cannot be sustained. As the ld. CIT(A) has ignored some factual position as noted above from the audited accounts of the assessee and has completely ignored the audited financial statements and accounts of the assessee especially table 21, 22 and 25 wherein some expenses are clearly identifiable and attributable to hotel business as well as rental activity and which has been incurred from the common pool and the assessee has not made any sustainable and acceptable apportionment to establish that the actual maintenance charges received by it are equal or less than