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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
order passed by the learned Commissioner of Income Tax (Appeals)-7, Chennai, dated 28.06.2018 and pertains to assessment year 2013-14.
The assessee has raised following grounds of appeal:-
“1. The order of The Commissioner of Income Tax (Appeals) 3, Chennai dated 30.06.2017 in l.T.ANo.31/2016-17/ClT(A)-3 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The CIT (Appeals) erred in sustaining the disallowance of Rs.5,30,65,42,205/- being the claim for deduction u/s 35 AD (5)(aa) of the Act pertaining to the expenses incurred in creating
the eligible hotel in the computation of taxable total income without assigning proper reasons and justification.
3. The CIT (Appeals) failed to appreciate that the conditions prescribed in section 35AD(5)(aa) of the Act were fully complied with and ought to have appreciated that the delay in issuing star classification by the Ministry of Tourism was completely overlooked, thereby vitiating the findings in para 4.3 of the impugned order.
The CIT (Appeals) failed to appreciate that having accepted the income generated for the running of the eligible hotel, the sustenance of the said disallowance based on technical reasons would defeat the purposive construction, thereby vitiating the findings in para 4.3 of the impugned order.
The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing of impugned order and any order passed in violation of principles of natural justice would be nullity in law.”
Brief facts of the case are that the assessee company is engaged in the business of operation of hotels filed its return of income for assessment year 2013-14 on 29.09.2013 declaring total loss of Rs.5,57,38,69,597/-. During the financial year relevant to the assessment year 2013-14, the assessee company has developed and started operating a hotel at Chennai. The assessee company has claimed deduction u/s.35 AD(5)(aa) of the Income Tax Act, 1961, in respect of whole of capital expenditure incurred for purpose of development of hotel amounting to Rs.5,30,65,42,205/-. During the course of assessment proceedings, the Assessing Officer, on the basis of information submitted by the assessee and also on analysis of provisions of section 35AD of the Income Tax Act, 1961, opined that in order to claim deduction 35AD of the Act, specified business should be carried on by the assessee in the previous year in which deduction is claimed. In the present case, the assessee has claimed deduction for whole of the capital expenditure incurred for development of hotel u/s. 35AD of the Act for assessment year 2014-15 and further, on perusal of details filed by the assessee, including approval to the assessee granted by the competent authority i.e Assistant Director-General (H&R) and Member Secretary (HRACC) has certified and classified hotel of the assessee under five star category from 21.03.2014 to 20.03.2019, which is beyond assessment year in which the assessee has claimed deduction.
Therefore, the Assessing Officer opined that deduction claimed by the assessee towards capital expenditure incurred for development of hotel is not allowable u/s. 35AD of the Act, and hence, disallowed total expenses claimed by the assessee and added back to the total income.
4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has reiterated its arguments taken before the Assessing Officer and contended that the assessee has taken approval from the competent authority for development of five star category hotel in the year 2007-08 itself. However, after completion of construction of hotel, it has commenced its business operations during the financial year relevant to assessment year 2013-14 and hence, it has rightly claimed whole of the capital expenditure incurred for development of hotel u/s. 35AD of the Act. The assessee further contended that although approval has been accorded by the competent authority from subsequent financial year, but fact remains that the assessee has filed an application for approval on 12th May, 2011 and competent authority, for the reasons best known to them, has accorded approval after inspection of hotel on 19.03.2014 from 21.03.2014 to 20.03.2019. Therefore, the assessee contended that it is a fact that the assessee has developed five star hotel for which necessary approval has been taken from competent authority for commencement of construction and approval has been finally granted by the competent authority. Therefore, merely for the reason that there was delay in granting approval from the competent authority, deduction claimed u/s. 35AD of the Act, for capital expenditure incurred for development of hotel cannot be denied.
5. The learned CIT(A), after considering relevant facts and also taken note of provisions of section 35AD of the Act, observed that in order to claim deduction u/s.35AD, specified business should be carried out during relevant previous year and further, said specified business should be approved by the competent authority. In this case, it is not in dispute that assessee could not get recognition for assessment year 2013- 14 under consideration and thus, there is no error in the reasons given by the Assessing Officer to disallow deduction claimed u/s.35AD of the Act, towards capital expenditure incurred for development of hotel. Hence, rejected arguments of the assessee and sustained additions made by the Assessing Officer towards disallowance of expenses claimed u/s.35AD of the Income Tax Act, 1961. The relevant findings of the learned CIT(A) are as under:-
“4.1 The only point for consideration in this appeal is whether the assessing officer was justified in denying the claim for deduction made by the appellant under section 35AD of the Act. The assessing officer denied the deduction as the appellant had not satisfied the conditions laid down in the provisions of the said section 35AD. According to the assessing officer, the appellant had failed to obtain the star classification for the hotel us required under section 35AD for the impugned year under consideration and therefore the appellant is not entitled to the deduction.
4.2 On the other hand, the AR submitted that section 35AD(1) does not mandate a prior approval from Central Government for claiming deduction. It only specifies that star classification needs to be obtained and. the appellant had obtained star classification in the financial year 2013-14 from the Ministry of Tourism though it had applied for such classification very much earlier, The AR therefore submitted that the appellant should not be unduly punished for the delay of the Ministry of Tourism in giving star classification.
4.3 The appellant had claimed a deduction of Rs.30,30,65,42,205/- as deduction u/s 35AD being the capital expenditure incurred by it The provisions of section 35AD(I) allows deduction of capital expenditure incurred wholly and exclusively for the purpose of the specified business earned on during the previous year. Specified business is defined as building and operating anywhere in India, a new hotel of two star or above category as classified by the Central Government. It, therefore, foIlows that to allow a deduction, the appelIant had to comply strictly with the provisions of section 35AD of the Act. It is not in dispute that the appellant could not get star classification for the assessment year 2013-14 under consideration and it was able to get the classification only from the subsequent assessment year 2014-15. It is well settled law that when an assessee wishes to avail a beneficial deduction, he should strictly comply with the provisions of the Act and satisfy all the conditions Iaid down therein. The contention of the AR that prior approval of star classification is not required cannot be accepted. If this submission is accepted, any hotel can claim the deduction under section 35AD without getting any star classification.
4.4 All things considered,. the appellant is not entitled to deduction under section 35AD for the assessment year 2013-14 as it has not strictly compiled with the requirements of section 35AD and got the star classification for the impugned assessment year. The grounds taken by the appellant are dismissed.”
The learned A.R for the assessee submitted that the learned CIT(A) has erred in sustaining disallowance of expenditure claimed u/s.35AD(5)(aa) of the Act, towards capital expenditure incurred for development of specified business, without appreciating fact that the assessee has fully complied with conditions specified under said provision to claim deduction and also competent authority has accorded five star category hotel to be constructed and operated by the assessee. The learned A.R for the assessee further referring to provisions of section 35AD of the Act, submitted that in order to claim deduction under said section what is required to be seen is whether the assessee incurred expenditure for specified business and further, such business was commenced on or before specified period. In this case, there is no dispute with regard to fact that the assessee has developed five star hotel and such specified business has been approved by the competent authority. Therefore, merely for the reason approval has been accorded from subsequent financial year, deduction claimed towards capital expenditure incurred for development of hotel cannot be rejected, when the assessee has proved with necessary facts that it has filed its application much prior to commencement of business and further, there is a delay from the side of competent authority to accord approval. In this regard, he relied upon decision of the Hon'ble Jurisdictional High Court of Madras in the case of CIT vs Ceebros Hotels P.Ltd. (2018) 409 ITR 422.
The learned DR, on the other hand, strongly supporting order of the learned CIT(A) submitted that as per the provisions of section 35AD of the Act, the assessee shall claim deduction towards expenditure incurred for specified business, in case such business has been commenced on or after specified period. In this case, the assessee has claimed deduction for impugned assessment year, even though the competent authority has not accorded approval to the facility. Although, the assessee claims to have filed application way back in the year 2011 and also claims that there was a delay from the side of competent authority, but failed to justify its arguments with necessary evidences. Since the assessee has not fulfilled conditions specified u/s.35AD of the Act, to claim deduction, the Assessing Officer as well as learned CIT(A) have rightly denied deduction under said section and their orders should be upheld.
We have heard both the sides, perused material available on record and gone through orders of the authorities below.
The provisions of section 35AD of the Act deals with deduction in respect of whole of any expenditure of capital in nature incurred wholly and exclusively for purpose of any specified business carried on by him during the previous year in which such expenditure is incurred by him, if such expenditure is incurred for specified business and further, said business commences its operations on or after specified date. In this case, there is no dispute with regard to fact that the assessee has incurred expenditure for specified business of development and operation of hotel and further, the assessee commences its operations within specified period to be eligible for claiming deduction under said section. The only dispute is with regard to period of approval. The assessee has got approval from competent authority from the period 21.03.2014 to 20.03.2019 and the competent authority has classified hotel under five star category. The Assessing Officer was of the opinion that in order to get benefit of deduction u/s.35AD, the assessee should carry out specified business and expenditure incurred for specified business should be claimed in the year in which such expenditure has been incurred. In this case, the assessee has incurred expenditure for the financial year relevant to assessment year 2013-14.
According to the Assessing Officer, the assessee has not carried out any specified business for the financial year relevant to assessment year 2013-14, when the assessee has claimed deduction for expenditure. It was explanation of the assessee before the Assessing Officer as well as learned CIT(A) that although, the competent authority has accorded approval from subsequent financial year, but the assessee has obtained in principle approval from the competent authority on 30.11.2007 and same was valid for a period of five years and further, the assessee has filed application for approval on 12th May, 2011. The assessee further contended that there was a delay at the Department of Tourism, for processing application filed by the assessee and the assessee had to submit fresh applications for several times and process took considerable time at the Department of Tourism. Therefore, in the process, they have visited our facility only on 19.03.2014 and has granted approval w.e.f 21.03.2014 for the period from 21.03.2014 to 20.03.2019 Therefore, when the assessee has filed application much before date of commencement of business and has also incurred expenditure for specified business, merely for reason for delay in getting approval from authority, expenditure incurred for specified business cannot be disallowed.
We have given our thoughtful consideration to the facts brought out by the Assessing Officer in light of arguments advanced by the learned A.R for the assessee and in principle, we are in agreement with the arguments advanced by the learned A.R for the assessee for reason that it is not in dispute that the assessee has carried out specified business of running five star category hotel during the impugned assessment year. It is also not in dispute that the assessee has incurred expenditure for the purpose of specified business.
Therefore, in our considered view, in principle, the assessee is eligible for claiming deduction u/s. 35AD(5)(aa) of the Act.
However, fact remains that if you go by language used in the provisions of section 35AD of the Act, it is very clear that in order to claim deduction under said section, the assessee shall incur expenditure for specified business and said business should be commenced its operations during the specified period. As per sub-section (2) of section 35AD of the Act, specified business means any one or more of the following businesses, including building and operating anywhere in India a new hotel of two star or above category as classified by the Government. From the above, it is abundantly clear that in order to get deduction u/s.35AD of the Act, expenditure should be incurred for specified business. In this case, specified business has been defined, as per which it should be a new hotel of two star or above category. There is no dispute that the assessee has constructed five star category hotel which has been approved by the competent authority, but such approval has been accorded from subsequent financial year. Since the provision makes it mandatory to incur expenditure for specified business, the Assessing Officer has to verify whether the assessee has incurred expenditure for specified business or not. As per approval granted by the competent authority, hotel operated by the assessee is not a specified business for impugned assessment year. In fact, the assessee has not disputed this fact. The only argument of the assessee to get benefit of deduction was that it has incurred expenditure for specified business and for this purpose, it has taken in principle approval from the competent authority in the year 2007 and further, the assessee has filed application on 12.05.2011 for approval of the business, but, the authority has taken considerable time for granting approval for which benefit of deduction cannot be denied to the assessee.
No doubt, once it is an admitted fact that the assessee is in the business of running and operating five star category hotel, then it can be said that the assessee is into the specified business which is eligible u/s. 35AD of the Income Tax Act, 1961, because revenue has not disputed fact that the assessee is operating a new hotel of five star category from the relevant financial year and also had filed an application for classification of hotel before the assessment year in question. But, fact remains that the assessee is shifting onus on the competent authority in not according approval during the relevant assessment year. According to the assessee, it has filed an application in the year 2011 itself, but the competent authority has misplaced their application and the assessee had to resubmit application for many times and this process took considerable time. No doubt, if claim of the assessee is correct that competent authority has taken considerable time for granting approval, because of their fault, then the assessee cannot be penalized by denying deduction claimed under said section when all conditions prescribed therein are satisfied. But, claim of the assessee that there was considerable delay from the competent authority is not substantiated with necessary evidences. In case, claim of the assessee is correct that it has filed application in the year 2011 and pursued its application for getting approval, but competent authority has taken considerable time for processing application for their fault, then deduction claimed by the assessee u/s. 35AD of the Act, cannot be denied, because the assessee has satisfied all other conditions prescribed under said provision. This legal position is supported by decision of the Hon'ble Jurisdictional High Court of Madras in the case of CIT Vs. Ceeabros Hotels P.Ltd. (supra), where under identical set of facts the Hon’ble High Court has upheld deduction claimed by the assessee u/s. 35AD of the Act in respect of expenditure incurred for specified business, even though said specified business was approved during next assessment year, when the assessee has filed an application for classification of hotel in impugned assessment year and further, was operating new hotel from relevant assessment year.
Therefore, we are of the considered view that for ascertaining correct facts with regard to claim of the assessee that it was mistake of competent authority in granting approval for relevant assessment year, even though the assessee has filed application in time needs to be examined by the Assessing Officer in light of evidences filed by the assessee.
Hence, we set aside order of the learned CIT(A) and restore the issue to file of the Assessing Officer and direct the A.O. to examine claim of the assessee in light of arguments of the assessee that there was no fault from their side in getting approval from competent authority. In case, the Assessing Officer finds that there is a delay from competent authority side in granting approval, then the Assessing Officer is directed to allow claim of deduction u/s. 35AD of the Act, in respect of expenditure incurred for specified business.