VATIKA HOTELS PVT. LTD.,,NEW DELHI vs. DCIT CIRCLE-17(1), NEW DELHI

The assessee has raised the following grounds:

At the time of hearing, Sh. C.S. Aggarwal, learned senior counsel appearing for the assesse, on instructions, submitted that except ground nos. 3, 4 and 5, which are on merits, the other grounds challenging the validity of reopening of assessment under section 147 of the Act are not to be pressed.

In view of the aforesaid submissions of learned senior counsel appearing for the assessee, ground nos. 1, 2 and 6 are dismissed as not pressed.

The issues raised in ground nos. 3, 4 and 5 are interconnected and relate to claim of expenditure of Rs.49,56,211/-.

Briefly the facts are, the assesse is a resident company engaged in the business of running and managing of hotels, resorts, motels, restaurants, cafeteria, beer house, pub, refreshment room, guest house, banquets etc. For the assessment year under dispute, assessee filed its return of income on 30.09.2008 declaring loss of Rs.58,53,911/-. Subsequently, the assessee filed a revised return of income declaring loss of Rs.49,56,211/-. During the assessment proceeding, on examination of the financial statements of the assessee, the Assessing Officer observed that the assessee has debited an amount of Rs.49,56,211/- comprising of personnel expenses of Rs. 30,24,673/- and operating expenses of Rs.19,31,538/-. Being of the view that the assessee has not yet started its business operation and has not generated any income, the Assessing Officer treated the expenditure claimed as pre-operative expenses, hence, not allowable. Against the disallowance so made, the assessee preferred an appeal before learned Commissioner (Appeals).

Before us, learned senior counsel appearing for the assessee submitted that assessee’s business has been set up. Merely because there was no operational income, the expenditure claimed cannot be disallowed. Proceeding further, he submitted, expenses claimed by the assessee are routine expenses, such as, salary paid to the employees of the company, which have to be incurred by the company for the purpose of business. Thus, he submitted, the expenses incurred has to be allowed and the loss resulting as a consequence should be carried forward. Further, he submitted, similar expenses incurred by the assessee in the preceding assessment year, i.e., assessment year 2007-08, has been allowed by the departmental authorities. Without prejudice, he submitted, if the expenditure incurred is to be treated as capital expenditure, as has been held by learned Commissioner (Appeals), the Assessing Officer may be directed to allow depreciation. In support of his contention, learned counsel relied upon the following decisions:

We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. It is evident, certain expenses stated to be in the nature of administrative and operation expenses were claimed as deduction by the assessee. The Assessing Officer disallowed assessee’s claim solely on the ground that neither the assessee has started operation of its business, nor has shown any income from business. This view of the Assessing Officer has been accepted by learned Commissioner (Appeals).

Before us, it is the specific contention of learned Senior Counsel appearing on behalf of the assessee that the business of the assessee has already been set up, though, no income has been generated. However, he has submitted that generation of income is not a criteria for allowing expenditure. While advancing such argument, learned Senior Counsel has heavily relied upon the order passed by learned Commissioner (Appeals) in assessee’s own case in assessment year 2007-08 and submitted that under identical factual position, learned Commissioner (Appeals) has allowed assessee’s claim of expenses. For the sake of clarity, we reproduce the relevant observations of learned Commissioner (Appeals) in this regard while deciding assessee’s appeal for assessment year 2007-08:

Keeping in view the submissions of learned Senior Counsel for the assessee and the decision of learned Commissioner (Appeals) in assessment year 2007-08, as discussed above, we direct the Assessing Officer to verify the status of similar expenditure claimed by assessee in assessment year 2007-08, in pursuance to the directions of learned Commissioner (Appeals), and thereafter decide the issue keeping in view the ratio laid down in the decisions cited before us by learned counsel for the assessee.

As regards without prejudice submission of learned Senior Counsel appearing for the assessee that, in case, the expenditure is held as capital expenditure, depreciation should be allowed, it is necessary to observe, learned Commissioner (Appeals) while deciding the issue in the impugned assessment year did observe that the pre-operative expenditure incurred by the assessee has to be treated as capital expenditure. However, his order is silent on allowability of depreciation. Therefore, in case, the expenditure claimed by the assessee is to be treated as capital expenditure, the Assessing Officer must consider assessee’s claim of depreciation in accordance with law.

At this stage, we must observe, in the submissions made before us, learned Senior Counsel appearing for the assessee has submitted that the depreciation has to be allowed in the assessment year, wherein, the assets are put to use. In this regard, he has submitted, in case of the assessee assets were put to use in assessment year 2011-12. Thus, he submitted that depreciation has to be allowed to the assessee in assessment year 2011-12. In support of such contention, learned Senior Counsel has relied upon the decision of Hon’ble Supreme Court in case of M/s. Wipro Finance Ltd. Vs. CIT (Civil Appeal No.6677 of 2008, dated 12.04.2022). The Assessing Officer is directed to examine the aforesaid aspect in the light of ratio laid down by the Hon’ble Supreme Court in case of M/s. Wipro Finance Ltd. (supra) after factually verifying assessee’s claim regarding the use of assets.

In the result, the appeal is partly allowed for statistical purposes.