C.I.T.-IV, BOMBAY. vs. M/S.PIEM HOTELS LTD., BOMABY.

IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION

INCOME TAX REFERENCE NO. 415 OF 1988

M/s Piem Hotels Ltd.

... Applicant.

V/s.

The Commissioner of Income Tax ... Respondent.

Shri Ashok Kotangale for the applicant.

Shri

F.B.

Andhyarujina,

Senior

Counsel

with

P.C.Tripathi and Ms. Pallavi Divekar for the

respondent.

CORAM CORAM CORAM : V.C.DAGA AND J.P. DEVADHAR, JJ. : V.C.DAGA AND J.P. DEVADHAR, JJ. : V.C.DAGA AND J.P. DEVADHAR, JJ.

DATED DATED DATED : 25.10.2005. : 25.10.2005. : 25.10.2005.

ORAL ORAL ORAL JUDGMENT JUDGMENT JUDGMENT: (Per V.C.DAGA,J.) (Per V.C.DAGA,J.) (Per V.C.DAGA,J.)

This is a reference under section 256(1) of

the

Income Tax Act, 1961 (‘The Act’ for short) made

the Income Tax Appellate Tribunal, Bombay Bench,

‘E’,

Bombay.

(‘Tribunal’

for

short)

referring

following

two

questions

for the opinion

this

Court;

one

at the instance of the

assessee

and,

another

at the behest of the Revenue, arising

from

its

order

dated

6.2.1986 passed

I.T.A.

No.

1721/Bom/1986, for the A.Y. 1982-83 of which

relevant accounting year ended on 31.3.1982.

At At At the instance of the Assessee the instance of the Assessee the instance of the Assessee

(1).

Whether on the facts and in the

circumstances of the case, the Income-tax

Appellate Tribunal was right in law, in

holding that the amount of Hotel Receipt Tax

(HRT) collected by the petitioner company

constituted trading receipts ?" CNR No : HCBM020001891988 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

(2)

At At At the instance of the Revenue the instance of the Revenue the instance of the Revenue

(2).

Whether on the facts and in the

circumstances of the case, the Tribunal was

right in law in holding that for assessment

year 1982-83 the assessee was entitled to a

deduction of Rs. 84,95,504/- in respect of

the Hotel Receipt Tax ?"

The The The Facts: Facts: Facts:

This reference relates to the amount

collected

under the provisions of the Hotel Receipt

Act,

1980 (‘HRT’ Act) which received the assent

the Hon’ble President of India on 9th December 1980.

This Act levied Hotel Receipt Tax (HRT) @ 15% of the

chargeable receipts with effect from 1st February,

1981.

The assessee is engaged in the business of

running

chain

of 5 star hotels.

The assessee

had

collected

hotel

receipts

tax in the

sum

Rs.

14,55,241/- during the period 1.2.1981 to 31.3.1982.

The present reference relates to the period 1.4.1981

31.3.1982,

which

was the

relevant

accounting

year.

During this period, the HRT collection was in

the sum of Rs.

84,95,503.

The assessee did not pay

HRT

collected

and

payable under the HRT

Act

but

chose

challenge the constitutional validity

the

said

legislation

before the

Hon’ble

Supreme

Court of India along with various hotelliers as well

the Hotel Associations by way of writ

petition. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

(3)

The

Hon’ble

Supreme Court stayed operation of

the

said

Act

during the pendency of the writ

petition

subject

the

condition

that in

the

event

assessee

failing

the petition, they

shall

liable to pay HRT irrespective of the fact whether

or not they had collected HRT from its customers.

The aforesaid order of stay was renewed from

time

to time and it operated during the pendency of

the petition. Ultimately, validity of HRT Act was

upheld by the Supreme Court.

The assessee during the pendency of the

petition,

had credited the amount received from its

customers

account of hotel receipts tax

(‘HRT’

for

short)

a separate account that

was

shown

under the Head of Other Liabilities and consolidated

under

the

head of Sundry Creditors in the

Balance

sheet.

Thus, the amount collected were not treated

as a part of trading receipts and, accordingly, not

routed through the Profit and Loss Account.

The Assessing Officer considered the HRT

collected

by the assessee as its trading receipt by

placing

reliance on the decision of the Apex

Court

the

case

of Chowringhee Sales Bureau

(87

ITR

542)and

rejected the assessee’s claim for deduction

corresponding

amount on the ground

that

no Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

(4)

legally

enforceable

liabiity had arisen since

the

operation of the HRT Act itself had been stayed by

the Apex Court.

The Commissioner of Income Tax (Appeals)

vide

its order dated 6.2.2003 held that the HRT has

been

collected

alongwith

the sales

made

the

assessee

the

regular day today

basis

the

course

the assessee’s business.

The same

thus

constituted

trading receipt and

the

accounting

treatment

given by the assessee is immaterial.

The

claim

for deduction was also rejected since as

per

the

Commissioner of Income Tax (Appeals);

the Apex

Court

had granted stay on the operation of HRT

Act

and,

therefore,

there

was

liability

the

appellant

to make payment of the HRT collected from

the

customers.

The amount was thus held deductible

business

expense in the year

which

the

liability arises or the year in which it is

discharged, depending upon method of accounting.

Being aggrieved by the aforesaid order of

the CIT (A);

an appeal was carried to the Tribunal.

The

Tribunal

vide

its order dated

6th

February,

1987,

held

that the HRT collected by the

assessee

was

not subject to diversion by over-riding

title;

the obligation to pay could not be discharged out of

other receipts also.

The same is, therefore, in the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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nature

trading

receipts.

regards

corresponding

deduction,l

was

held

that

liability

had

definitely

arisen

during

the

accounting

year;

the moment the taxable event i.e.

receipt of room rent, took place. The liability was

directed to be allowed as a deduction.

As pointed out hereinabove, the Apex Court

2nd May 1989, upheld constitutional validity

the

HRT Act in the decision rendered in the case of

Elel

Hotels

and

Investments Ltd.

and

anr.

vs.

Union

of India (178 ITR 140), as a result

thereof,

the

assessee

discharged its liability

during

the

year

ended

March

31,1990

and

March

1991.

The

decision

the Supreme Court has resulted in

the

HRT

Act being valid right from the day on which

received assent of the President of India along with

various

provisions

relating

inter

alia;

changeability, deductibility in computing the profit

and

loss

gains

of the

business.

Thus,

the

liability

the assessee to collect and

pay

HRT

stood

confirmed by the Supreme Court right from the

inception of HRT Act as if HRT Act was in full force

applicable to the assessee for the year under

consideration.

10.

Both the parties to the appeal sought

reference

get the substantial questions of

law Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

(6)

referred

for

the

opinion

this

Court.

The

Tribunal

after hearing rival parties was pleased to

refer

this Court, two substantial questions

law for opinion, extracted in the opening part of

the judgment.

Submissions: Submissions: Submissions:

11.

Shri Andhyarujina, Learned Senior Counsel

appearing

for the assessee relying upon

provisions

of section 21 of the HRT Act contends that amount of

tax

collected

ought to have

been

treated

receipt

and

the

amount ought to

have

been

held

deductible

from

the

profits

and

gains

the

business of the hotel assessable for that assessment

year.

He relies on the judgment of the Apex

Court

the case of Jonnalla Narashimharao and Co.

vs. Jonnalla Narashimharao and Co.

vs. Jonnalla Narashimharao and Co.

vs.

C.I.T. C.I.T. C.I.T.

(1993) 200 ITR 588 (SC).

(1993) 200 ITR 588 (SC).

(1993) 200 ITR 588 (SC).

In that case, the

appellant

had

collected certain amount by

way

sales

tax describing it as "rusum" inasmuch as

its

liability to sales tax was disputed by it.

The same

was

questioned

the

various

proceedings.

maintained

its

accounts on the mercantile

system.

The

questions for consideration was whether or

not

the amount collected by the appellant in the name of

‘rusum’

was the income of the assessee, and whether

not

the

sales

tax paid

was

allowable

deduction

the relevant assessment

year.

High Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

(7)

Court

held

that amounts collected in the

name

‘rusum’

were income but were not deductible in

the

assessment

year.

The Apex Court reversed and

held

that the amounts collected in the name of ‘rusum’

constituted business receipts of the assessee.

12.

Learned Senior Counsel for the assessee also

relied

upon decision of the Apex Court in the

case

Kedarnath

Jute

Manufacturing Co.Ltd

vs.

CIT

(1971) 82 ITR 363 (SC) to buttress his submission

and to demonstrate correct legal position.

13.

Learned Senior Counsel for the assessee

further pressed into service another judgment of the

Supreme

Court in the case of CIT vs.

Kalinga Tubes

Ltd.(1996)

218

ITR

164.

that

case,

the

assessee-company

had

manufactured and

sold

steel

tubes.

During

the previous year relevant

the

assessment year 1962-63 the assessee was held liable

pay

sales tax under the Central Sales Tax

Act.

The

Sales

tax Officer completed the assessment

respect

the

Assessment Year 1962-63

March

31,1966

and

demanded

additional

amount

Rs.11,02,698/-.

The assessee unsuccessfully carried

appeal

before

first appellate authority

and

then

filed 2nd appeal before the Sales Tax Tribunal.

The

Tribunal vide its order dated May 28, 1970, reduced

the of additional sales tax to Rs. 2,22,161/-. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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14.

On the basis of the above order of the

Tribunal,

the respondent assessee in its Income tax

return

claimed

deduction

of the

said

amount

business

expenditure in the assessment year 1971-72

The

Income

Tax

Officer

disallowed

the

said

deduction.

This

was

upheld

the

Income

tax

Tribunal

However, the High Court

reference

held

that

the

assesssee

was

entitled

the

deduction

the assessment year 1971-72.

the

appeal, the Supreme Court held that liability to pay

the

Central Sales Tax arose or accrued on the basis

mercantile system of accounting followed by

the

assessee

during

the

previous

relevant

the

assessment

year

1962-63

The

liability

pay

quantified

sales tax under the orders of the

Sales

Tax

Officer

accrued to the assessee for

the

A.Y.

1962-63.

Although the assessee had challenged

the

same

and

ultimately got the liability to

pay

the

sales

tax for the A.Y.

1962-63, reduced in

second

appeal before the Sales tax Tribunal on May 28, 1970

to Rs.

2,22,161/- that would not affect the accrual

liability

pay

sales tax of

the

basis

mercantile

system

of accounting.

was

further

held

that even if it were held to be that the order

the Sales Tax Officer had merged in the order of

the

Sales Tax Tribunal that would not have

created

any

impact on the question as to when the liability Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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pay sales tax had accrued to the assessee on the

basis

mercantile

system of accounting

and

which

assesment year the claim for deduction

under

section

of the Act could not have been made

the

assessee.

The

assessee

was

thus

held

not

entitled to deduction of Rs. 2,22,161 towards sales

tax liability for the assessment year 1971-72.

15.

While deciding the above case the judgment

the

Apex

Court in the case of

Kedarnath

Jute

Manufacturing

Co.

Ltd.

(supra) was relied upon to

reach

the

conclusion

that

the

assessee

was

following

mercantile

system of accounting

the

case

sales tax payable by the assessee and

the

liability

pay sales tax would arise the

moment

tax

event takes place attracting sales tax, as such

the

obligation to pay the sales tax arises at

that

stage and that any attempt to dispute liability to

pay before any higher authority was irrelevant.

16.

Learned Senior Counsel also relied upon

judgment

this

Court

in the case

CIT

vs.

Central

Provinces

Manganese Ore Co.

Ltd.

(1978)

112

ITR 534, wherein this Court has held that if

statutory

liability

arises in a

particular

year,

then

assessee maintaining books of accounts

the

mercantile basis is entitled to claim deduction

the

year

which

the

liability

arises Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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notwithstanding

the

fact

that

the

liabiity

was

disputed

and

no entries were made in his books

accounts.

The mere fact that such a deduction

was

not claimed before the Income tax Officer was not of

much

significance.

If the liability arises then

claim

can be made bona fide at any stage before any

higher

authority, who is competent to grant relief.

While

taking

this

view, the

Division

Bench

has

relied upon judgment of the Madras High Court in the

case

of Pope the King Match Factory v.

CIT

(1963)

ITR 495.

A similar view was taken by the Madras

High Court which was approved by the Apex Court as

laying down correct law.

17.

The learned Senior Counsel for the

petitioner

based

on the above

precedents

submits

that

notwithstanding

the

fact

that

the

dispute

having

been raised as regards the amount to be paid

way

HRT or failure to make entries

the

books

accounts is of no significance.

the

statutory

liability arises in a particular relevant

year;

then

the assessee maintaining the books

accounts

on mercantile system is entitled to

claim

deduction

in the year in which the liability arises

notwithstanding

the fact that he has taken steps to

dispute his liability, and, ultimately failed or

omitted to make entries in the books of accounts. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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18.

In the above premises, according to the

learned

Senior

Counsel, first question has

answered

in the affirmative i.e.

in favour of

the

Revenue

and second question needs to be answered in

the negative i.e. in favour of the assessee and

against the Revenue.

Per Per Per Contra: Contra: Contra:

19.

Learned Counsel appearing for the Revenue

submitted that the assessee collected the amount but

had

not

paid the same to Government

hotel

receipt

tax.

appeal

the

assessee

different issue, the Commissioner (Appeals) directed

the

Income Tax Officer to bring to tax the said sum

enhancing the assessment only on further

appeal

by the assessee.

He placed reliance on the judgment

of the Madras High Court in the case of C.I.T. vs.

Hotel Srilekha (P) Ltd. 250 ITR 573.

Rejoinder: Rejoinder: Rejoinder:

20.

In rejoinder, learned

Senior Counsel

appearing for the assessee tried to dinstinguish the

view

of the Madras High Court in the case of

Hotel

Srilekha

(supra)

and submitted that the said

case

came

decided

without

reference

the

provisions

the HRT Act.

According to

him,

in Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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that

case,

the assessee had merely

collected

the

amount but did not challenge the validity of the Act

any Court.

He further submits that the said Act

came

into force on 1.4.1981 whereas period involved

in that case of Hotel Srilekha (P) Ltd.

(supra)

was

1981-82.

In the said case, the only issue

was

whether amount collected was a trading receipt.

The

principles

sought

be applied is based

the

judgment

the

Supreme

Court

related

only

trading

receipt collected and retained.

He further

submits

that

section 21 of the HRT Act was not

all considered as such said authority cannot be said

to be an authority laying down correct law.

21.

While reiterating his earlier submissions,

learned

Senior

Counsel for the assessee

submitted

that

liability

the

case at hand

was

the

collection

itself.

further

submits

that

obligation

pay

always existed in

the

interim

order of the Apex Court.

He, alternatively, submits

that

assuming it to be trade receipt, even then

virtue

of section 21 of the Act, the same would

deductible

that year.

He tried to

press

into

service

section 21 and tried to emphasis the

words

"deductible

for that assessment year" appearing

the

section.

He, thus, submits that on the face of

section 21 assessee is entitled to succeed in the

Reference at hand. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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Consideration: Consideration: Consideration:

22.

Having heard rival parties, we are of the

considered

view

that

the facts

involved

the

present

case

are identical with that of the

facts

involved in the case of Jonnalia Narashimharao & Co.

(cited

supra), wherein the Apex Court has held that

since

the

appellant

therein

had

maintained

its

accounts

the

mercantile

basis,

the

amount

collected

"rusum" were deductible

business

expenditure

for the A.Y.

1968-69, though they

had

not

been remitted to the treasury in that year.

the

case of Kedarnath Jute Manufacturing Co.

Ltd.

(supra)

the

Apex Court ruled that once it is

held

that the assessee was following mercantile system of

accounting

in the case of sales tax payable by

the

assessee,

the

liability

to pay

sales

tax

would

accrue

the

moment the dealer made the sales

which

were

subject to sales tax.

The liability would not

arise

case assessee had challenged validity

imposition

tax

and

obtained

stay

from

the

competent Court.

However, in the case at hand while

granting

stay the Apex Court had made it clear that

the

assessee

will have to discharge tax

liability

irrespective

the

fact whether or

not

tax

collected

by them from their customers.

Therefore,

statutory

liability

pay

was

inbuilt

the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07

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interim order granted by the Apex Court in favour of

the petitioner.

23.

In the above premises, (HRT) Tax collected

the assessee will have to be held as treating as

trading

receipt.

This

view

shall

also

consonance

with

the text of section 21 of the

HRT

Act.

The assessee will, thus be entitled to

claim

deduction of the amount of HRT to extent it was paid

to discharge their liability under HRT Act.

24.

For the reasons recorded hereinabove, we

have

no hesitation to answer the first question

favour of the Revenue and second question in favour

of the assessee as indicated hereinabove.

Reference accordingly stands answered with

no order as to costs.

(J.P. (J.P. (J.P. DEVADHAR,J.) DEVADHAR,J.) DEVADHAR,J.)

(V.C. (V.C. (V.C. DAGA,J.) DAGA,J.) DAGA,J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:24:07 Powered by TCPDF (www.tcpdf.org)