CLARIDGE HOTELS P.LTD,NEW DELHI vs. DCIT, CENTRAL CIRCLE-3, NEW DELHI

Per Dr. B. R. R. Kumar, Accountant Member:

1. That on the facts and circumstances of the case and in law, the order dated 26.02.2019 passed by the Learned Commissioner of Income tax Appeals (“Ld. CIT(A)

) is erroneous and bad in law.

2. The Ld. CIT (A) has erred on facts and in law in confirming the total income at Rs. 3,39,51,476/- as against the returned loss of Rs. 3,84,00,967 by confirming the disallowance-of Rs. 44,49,491 made by the Learned Assessing Officer (“Ld. AO”) despite the fact that the Assessee has provided all documents and evidences to support his claim.

2 Claridge Hotels Pvt. Ltd. 3. The Ld. CIT(A) has erred on facts and in law by confirming the action of the Ld. AO in making disallowance of Rs. 828,000 on account of lease equalization charges despite that fact that the Assessee has followed Accounting Standard -19 issued by ICAI and has submitted all documents in support of the claim.

3.1 Without prejudice to the above, the Ld. CIT(A) has erred on facts and in law in appreciating that the Assessee can be charged only on real income which can be calculated after applying the prescribed method.

4.1 Without prejudice to the above, the Ld. CIT(A) has erred on facts and in law in confirming the disallowance despite the fact that the contract was terminated mid way and the new logo was not delivered and no intangible asset alleged by the Ld. AO came into existence and the Assessee has submitted all documents in support of the claim.

4.2 The Ld. CIT(A) has erred on facts and in law by confirming the action of the Ld. AO without appreciating the fact that the expenses incurred are in nature of normal advertisement expenses and hence revenue in nature.

4.3 The Ld. CIT(A) has erred on facts and in law by confirming the action of the Ld. AO without appreciating the fact that the Ld. AO failed to issue show cause notice in respect of the addition.

5. That on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in law in summarily rejecting the additional evidence filed by 3 Claridge Hotels Pvt. Ltd. the Assessee under Rule 46A of the Income-tax rules, 1962 and has violated the principle laid down in Rule 46A.

6. The Ld. CIT(A) has erred on facts and in law by confirming the action of the Ld. AO in not granted adequate opportunity of being heard to the appellant and thereby violated the principles of audi alteram partem.

7. The Ld. CIT(A) has erred on facts and in law in relying upon various judicial decisions against the assessee which are unconnected and irrelevant and are distinguishable upon facts and in law.

8. That the grounds of appeal are independent and without prejudice to each other.”

Lease Equalization Charges:

2.1 On examination of books of accounts of the assessee and documents submitted during the course of scrutiny assessment proceedings, it was noticed that the assessee has made a ‘Provision for rent of Rs. 8,28,000/-. The Assessee/AR was confronted about the same vide order sheet noting dt. 06.11.2017 and asked why such provision, which is not allowable for deduction under Income Tax Act, 1961 be not added back to the final computation of income. AR couldn’t offer any satisfactory reply and submitted that they have created this provision and treated it in its books of accounts as Rent Equalization Reserve’. The submission of the assessee/AR is being perused and examined and not found in-sync with the provisions of the Income Tax Act. Accordingly, Rs. 8,28,000/- is being added back to the total income of the assessee.

4 Claridge Hotels Pvt. Ltd. 4. The ld. CIT(A) confirmed the addition invoking the provisions of Section 30 of the Income Tax Act, 1961 and held that no other deduction except as allowed u/s 30 be claimed. The ld. CIT(A) has also held that the judgment of the Hon’ble Apex Court was in terms of finance lease and not applicable to the facts of the instant case.

27 Claridge Hotels Pvt. Ltd. 10. Section 145(2) of the Income Tax Act, 1961 reads that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.

Provided that the items contained in such financial statements shall be in accordance with the accounting standards:

Section 133 of the Companies Act indicate that the Central government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

28 Claridge Hotels Pvt. Ltd.

23. Lease payments under an operating lease should be recognized as an expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user's benefit.

“9. Section 211 of the Companies Act, 1956 as it stood before the amendment dealt with "the Form and contents of balance- sheet and profit and loss account". Sub clause (3C) of Section 211 was added vide 1999 amendment with retrospective effect The relevant portion of Section 211 of the Companies Act is reproduced herein as under:

"(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government 30 Claridge Hotels Pvt. Ltd. in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A:

Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub- section."(Emphasis supplied by us)

10) The purpose behind the amendment in Section 211 of the Companies Act 1956 was to give dear sight that the accounting standards, as prescribed by the ICAI, shall prevail until the accounting standards are prescribed by the Central Government under this sub-section. The purpose behind the accounting standards was to arrive at a computation of real income after adjusting the permissible deprecation. It is not disputed that these accounting standards are made by the body of experts after extensive study and research.

…………………………….

16) In the present case, the relevant Assessment Year is 1999- 2000. The main contention of the Revenue is that the Respondent cannot be allowed to claim deduction regarding lease equalization charges since as such there is no express provision regarding such deduction in the IT Act. However, it is apt to note here that the Respondent can be charged only on real income which can be calculated only after applying the prescribed method. The IT Act is silent on such deduction. For such calculation, it is obvious that the Respondent has to take 31 Claridge Hotels Pvt. Ltd. course of Guidance Note prescribed by the ICAI if it is available. Only after applying such method which is prescribed in the Guidance Note, the Respondent can show fair and real income which is liable to tax under the IT Act Therefore, it is wrong to say that the Respondent claimed deduction by virtue of Guidance Note rather it only applied the method of bifurcation as prescribed by the expert team of ICAI. Further, a conjoint reading of Section 145 of the IT Act read with Section 211 fun-amended) of the Companies Act make it dear that the Respondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to the principles of law. Moreover, the rule of interpretation says that when internal aid is not available then for the proper interpretation of the Statute, the court may take the help of external aid. If a term is not defined in a Statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, we do not find any force in the contentions of the Revenue that the accounting standards prescribed by the Guidance Note cannot be used to bifurcate the lease rental to reach the real income for the purpose of tax under the IT Act.

17) To sum up, we are of the view that the Respondent is entitled for bifurcation of lease rental as per the accounting standards prescribed by the ICAI. Moreover, there is no express bar in the IT Act regarding the application of such accounting standards.

18) In view of above detailed discussion, we are not inclined to interfere in the impugned decision of the High Court. Accordingly, the appeal is hereby dismissed leaving parties to 32 Claridge Hotels Pvt. Ltd. bear their own cost In view of the above, other connected appeals are also disposed off accordingly."

Logo Development Expenses:

33 Claridge Hotels Pvt. Ltd.

"The approach of the Tribunal was not correct in law. Interestingly, the Tribunal had accepted the fact that even when there was no formal written agreement with the consultancy firm, the report was submitted by the said company for the task assigned. The report was produced before the Assessing Officer/Commissioner (Appeals). The Tribunal noted that as per the assessee, the perusal of the report clearly indicated that the engagement was for the purpose of improving the operational efficiencies of the assessee and to enhance the profitability of the existing business. In those circumstances, not much importance could be attached to the fact that there was no written agreement with the said consultants to ascertain the scope of the study when such scope of study could very well be discerned from the report submitted by the consultants.

The helplessness shown by the Tribunal, for want of written agreement, was, therefore, clearly inappropriate. Once it was accepted as a fact that the assignment given to the said consultants was for the purpose of improving operational efficiencies and was not to incur any enduring benefit in capita/ field, but to carry on the existing business more efficiently and profitably, the irresistible conclusion was that such expenditure was allowable as business expenditure.” b) In the case of CIT vs. Priya Village Roadshows Ltd. 332 ITR 594 (Delhi) has held that "A harmonious reading of Triveni Engg. Works Ltd. vs. CIT [1998] 232 ITR 639/100 Taxman 19 (Delhi) and CIT vs. Modi Industries 200 ITR 341/68 Taxman 114 (Delhi) would demonstrate that one has to keep in mind the essential purpose for which such an expenditure is incurred. If the expenditure is incurred for starting a new business which was not carried out by the assessee earlier, then such expenditure is held to be of capital nature. In that event, it would be irrelevant as to whether project really materialized or not. However, if the expenditure incurred is in respect of the same business which is already carried on by the assessee, even if it is for the expansion of the business, namely, to start a new unit which is same as earlier business and there is unity of control and a common fund, then such an expense is to be treated as business expenditure. In such a case, whether a new business/asset comes into existence or not would become a relevant factor. If there is no creation of a new asset, then the expenditure incurred would be of revenue nature. However, if the new asset comes into existence which is of enduring benefit then such expenditure would be of capital nature.”

In the instant case, expenditure was incurred in respect of same business, which was already carried on by the assessee. Two projects which were undertaken were for the expansion of the same business, namely, one for taking over another cinema for conversion into multiplex and operation and management thereof and other for 37 Claridge Hotels Pvt. Ltd. conversion of self- owned cinema into multiplex. Payments were made to the consultants for preparing feasibility reports in respect of both the projects. However, ultimately projects were not found to be financially and technically viable and were shelved. Thus, finding given, that no new asset came into existence, which was the basis adopted by the Assessing Officer for treating the expenditure as capital expenditure was wrong.

In the instant case, both the ingredients were satisfied, namely,— (i) the feasibility study conducted by the assessee was for the same and existing business with a common administration and common fund, and (ii) the study was abandoned, without creating any new asset In such circumstances, the Tribunal was correct, in law, in holding that expenses on new project development were allowable as business expenditure under section 37. c) In the case of CIT vs. ACL Wireless Ltd. [2014] 361 ITR 210 has held that expenditure incurred in ordinary course of business on upgradation, improvement, removal of glitches of existing or already developed software to improve its product is to be treated as revenue expenditure.

Relevant paras are reproduced herein under:

38 Claridge Hotels Pvt. Ltd. "To keep pace with the requirements and ensure product sale ability, software development companies have to constantly incur expenditure to upgrade, improve and remove problem areas of the software. They have to employ professionals whose job is to continuously upgrade the software and provide newer features and updates on a regular basis. The shelf life of the software without constant improvement would be very small.

Expenditure which enables the profit making structure to work more efficiently leaving the source of profit making structure untouched, would be revenue in nature.

The aforesaid expenditure did not bring into existence a new asset but rectified and improved the product being sold. It was accepted that there had to be recurring expenditure which had to be incurred in the said business to ensure sale of the software. This expenditure was incurred for removal of obstructions, restrictions or disabilities on the sale and to ensure that there was demand of the said product. These were normal day-to-day expenses for running the business in Question and did not create enduring rights or advantage or benefit over a long period time. While determining and deciding a question whether the expenditure is capital or revenue in nature, the determination should be based upon consideration of facts and circumstances and by applying principles of commercial trading and business expediency. Enduring benefit test is not a universal test and can break down. The said principles had been rightly applied by the 39 Claridge Hotels Pvt. Ltd. Tribunal in the facts of the present case to hold that expenditure incurred was revenue in nature and not capital.” d) In the case of CIT vs. Euro India Ltd. [2014] 45 taxmann.com 173 (Delhi) has followed the decision of Indo Rama Synthetics (I) Ltd. (supra) and held that where expenditure is incurred on obtaining feasibility report for expansion of existing business where there is unity of control and common funds, then such expenditure would be treated as business expenditure. e) Hon'ble Madras High Court in the case of Tamil Nadu Magnesite Ltd. vs. ACIT [2018] 95 taxmann.com 239 (Madras) has held that where assessee-company entered into an arrangement for implementation of a project which was later on ordered to be closed by Government, since said project was in same line of existing business of assessee and there was no creation of any new asset of enduring nature, entire exp. incurred on said project was to be allowed as revenue expenditure. f) Hon'ble Bombay High Court in the case of CIT vs. Rajesh Khanna [2012] 28 taxmann.com 415 and in the case of CIT vs. Venus Records & Tapes (P.) Ltd. [2016] 66 taxmann.com 89 have held that entire expenditure incurred on production of film which is abandoned before it was completed is allowable revenue expenditure.

40 Claridge Hotels Pvt. Ltd. g) Hon'ble High Court of Andhra Pradesh in the case of CIT vs. Praga Tools Ltd. [1986] 157 ITR 282 (AP) has held that “the amounts which were expended by the assessee should be regarded as revenue expenditure. The facts would show that the so-called development expenditure incurred by the assessee was no more than expenditure which had been incurred by the assessee for the purpose of preparing and perfecting designs which were required with reference to the execution work of specific contracts of those years. The expenditure incurred in connection with the execution of those specific contracts could not therefore, be said to be an expenditure incurred for acquiring an asset of enduring nature. They were both in design and in purport the expenditure incurred only towards the execution of those contracts. It was therefore, held that the so-called development expenditure incurred was only revenue expenditure.”

Similarly, the amounts paid to the consultancy firms also could not be regarded as expenditure incurred in acquiring any asset of enduring nature. The amount paid to the 'NPC' was for the benefit of increasing the manufacturing efficiency and formulating incentive schemes. In an age of speedy technological progress, no degree of permanency can be attached to these opinions given by the firms like the 'NPC' on how to increase the production. They are all susceptible to modifications and alterations. For that reason, it could not held that the fee paid to 'NPC' should be regarded as an expenditure incurred for acquiring a 41 Claridge Hotels Pvt. Ltd. capital asset. So was the case with the amounts paid to the ASC' and so was the case with the amounts paid to 'EMFC'. Therefore, the expenditure incurred was revenue in nature."