SAROVAR HOTELS P.LTD,MUMBAI vs. DCIT CIR 3(3), MUMBAI

आदेश / O R D E R

PER S. RIFAUR RAHMAN (ACCOUNTANTMEMBER):

The present two Appeals have been filed by the assessee against the separate order of Commissioner of Income Tax (Appeals)-8, Mumbai, dated 12th August, 2016 & 27th December, 2016 for the Assessment Years ( in short, ‘A.Y) 2011-12 & 2012- 13 respectively. 2 ITA Nos.7348/M/16 2384/M7/17

ITA No. 7348/Mum/2016 for AY 2011-12

3.Brief facts of the caseare, the assessee filed its return of income for the AY 2011-12 on 27-09-2011 declaring the total income at Rs. Nil. The assessee claimed total current year loss of Rs. 28,22,83,268/- to be carried forward for future years and assessee computed its tax liability on the book profit of Rs. 11,66,64,770/- u/s. 115JB of the Income-tax Act, 1961 ( in short, the ‘Act’). Subsequently, revised return of income was filed 27-03-2012 to claim additional TDS. The revised return was processed u/s. 143(1) of the Act on 30-03-2013 and refund of Rs. 81,78,550/- was issued. The case was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) of the Act were issued and were served on the assessee. 4. The A.O observed that the assessee has claimed deduction u/s. 35AD of the Act and claimed set off of loss u/s. 73A of the Act. In this regard, the business module of the assessee is given below: A) During the year, assessee has shown revenue from operations from its branches, they are: Mumbai-declared as 3 ITA Nos.7348/M/16 2384/M7/17

management and consultancy fees, income from running a hotel at Chandigarh ( Hometel Chandigarh Hotel),and hotel at Indore (Sarovar Portico Indore) and income from running hospitality services at IIM, Ahmedabad and ISB, Hyderabad. B) The assessee is the owners of two hotels located at Chandigarh & Indore. The assessee claimed deduction u/s 35AD of the Act at Rs. 41,86, 00,563/-. The assessee claimed loss from operation from the Chandigarh hotel at Rs.35,94,62,610/- after claiming deduction u/s. 35AD of Rs. 41. 86 cores. 5. The AO observed that the assessee has set out the loss from the Chandigarh against the income from operations from other hotels and allied business services. Accordingly, the assessee has claimed a business loss of Rs. 28,45,51,797/- in the return filed by the assessee. After analysing the section 35AD and 73A of the Act, AO analysed the various operations carried on by the assessee, according to him, the operations in various branches of the assessee are not fulfilled the conditions of specified business as per section 35AD. He discussed the reasons as under:- i) Income from Mumbai operations : Observation :The said properties i.e. hotels in various parts of the country are not built and owned by the assessee and the assessee has been merely managing the properties. As per the submission, the assessee has itself used the nomenclature Management and Consultation Fees for the income from the said properties. Therefore, the said income cannot be said to be from Specified business. ii) Income from Ahmedabad Operations at IIM Ahmedabad. Observation ;The said property is not a hotel and also not built by the assessee and the assessee has been engaged merely in the services of providing hospitality services. Hence, the income from the -said property cannot be said to be as income from Specified business. iii) Income from Hyderabad Operations at ISB Hydrebad.

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Observation :The said property is not a hotel and also not built by the assessee and the assessee .has been engaged merely in the services of providing hospitality services. Hence, the income from the said property cannot be said to be as income from Specified business. iv) Income from Indore Operations. While discussing the issue as to whether the Indore property will qualify for any benefit under 35AD and section 73A of the Act it la important to note that the beneficial provisions of section 35AD of the Act are applicable only in respect of Hotels built on or after 1.4.2O1O. However, the assessee itself has admitted that the operation of the hotel has started from 1.7.2007. Thus, the claim of the assessee in this regard is outrighly wrong.' After considering the submissions of assessee on Indore property, he observed as below:

(i) Section 35AD of the Act was introduced by the Finance Act ( No. 2) 2009 with effect from A.Y 2010-11. The explanatory Notes to provisions of Finance Act 2009, apart from explaining the other provisions of section 35AD has termed as “investment linked tax incentive” for specified business. (ii) The relevant extract of the explanatory note on objective clause of the section reads as under: “16. Investment linked tax incentive for specified business 16.1 The Income-tax Act provides for a number of profit-linked exemptions/deductions. Such benefits are inefficient, inequitable, impose higher compliance and administrative burden, result in revenue loss, increase litigations and lead to competitive demand for similar tax benefits. Further, these benefits also encourage diversion of profits from the taxed sector to the exempt/untaxed sector. However, investment-linked incentives are relatively less distortionary in their impact. 16.2 With a view to creating rural infrastructure and environment friendly alternate means of transportation for bulk goods, provide investment-linked tax incentive has been provided by inserting a new section 35AD in the Income-tax Act for the following businesses:— (a) setting up and operating cold chain facilities for specified products; (b) setting up and operating warehousing facilities for storage of agricultural produce; (c) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network". (iii) Thus the objective behind introducing the said section was to promote investment for the specified business. 5 ITA Nos.7348/M/16 2384/M7/17

Further, as the heading suggests,making of investment (building) is the key criteria for claiming deduction u/s. 35AD of the Act. (iv) Further for better understanding, the CBDT Circular No. 02/2O12 [F. No.l42/01/2012-SO(TPL)], dated 22-5-2012 explaining the amended provisions of section 35AD with respect to the set off of losses u/s. 73A is reproduced here as under: 9.2.1A reading of section 73A implies that a specified business operating under section 35AD will be able to set off its losses only against profits and gains of any other specified business. As discussed in Para 9.1.1, "specified business" in the case of hotels and hospitals has been defined as "new" hotel or "new" hospital under section 35AD. 9.2.2 Thus, 'a new hotel' was defined as "specified business" and was eligible for investment- inked deduction under section 35AD provided it began operation on or after 1-4-2010. The loss of this new hotel claiming investment-linked deduction was allowed set-off against profit of another specified business. Thus, this loss could be set off against the profit of another new hotel (whether eligible for deduction under section 35AD or but not against an old hotel First, it was difficult to specify what is ' or'old' unless a date is specified. Second, there was no real incentiveif loss of the new hotel business was not allowed set-off against the profit of old hotel of the same taxpayer, which was otherwise allowable if no investment- inked deduction was claimed. 9.2.3 Therefore, section 35AD has been amended to allow set-off of loss of a specified business against a similar business/like activity by removing the word "new" from the definition of 'specified business' in the case of hotels and hospitals under section 35AD(8)(c). With this amendment, under section 73A. the loss of specified business claiming deduction under section 35AD would be allowed for set-off against the profit of another specified business whether or not the latter is eligible deduction under section 35AD. It would, therefore, allow balance sheet financing in the case of a person who runs a hospital or a hotel. The person would be able to set off the profits of such an entity with the losses of a new hospital or hotel which begins to operate after 1-4-2010 and which is eligible for deduction of expenditure under section 35AD. (v) Thus as explained above, the scope of deduction u/s. 35AD is confined to investments in the specified business only and in the hands of the investors only on fulfilling certain other provisions of the Act. Further in the case of business of Hotel after amendment brought about by the Finance Act 2012, the assessee can claim deduction u/s. 35AD in respect of

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Building and operating of Hotel of Two-star or above built after 01.04.2010. (vi) The assessee has further relied on the provisions of sub section 6A of Section 35AD inserted by the Finance Act, 2012 with retrospective effect from 01.04.2011. The above reliance by the assessee on newly inserted provisions of sub-section 6A is misplaced. As already referred by the assessee, sub-section 6A of section 35AD which readsasunder; 'Where the assessee builds a hotel of two-star or above category as classified by the Central Government and subsequently, while continuing to own the hotel, transfers the operation thereof to another person, the assessee shall be deemed to be carrying on the specified business referred to in sub-clause (iv) of clause (c) of sub-section (8)." (vii) The expression used in sub-section 6A is "where the assessee builds a Hotel—" and **— while continuing to own the Hotel—". Thus on plain reading of the above provisions of sub-section 6A, it is clear that the basic object of providing investment-linked deduction and to remove the practical this new subsection was inserted. However, the basic criteria of"building a hotel" is in existence throughout and applicable only when the construction is after 1.4.2010. Further, the above provisions are not vice versa, deduction allowance is confined to the hands of the builder and operator only. Therefore, the assessee has wrongly interpreted the above provisions of the Act. As regards the assessee's claim of treating the business of Sarovar Portico Indore as Specified Business, the following discussion is relevant. (i) As already stated above, the assessee in its submissions has claimed to own the Hotel Sarovar Portico Indore. The assessee has however, debited lease rentals in respect of this Hotel in its accounts. The assessee, accordingly during the course of assessment proceedings was asked to furnish copy of the lease agreement. (ii) The assessee vide its letter dated 24.02.2014 has furnished the copy of lease agreement and by referring to clause 1.1, 2.3 & 3.4 has submitted that the above Hotel at Indore also qualify for eligibility as Specified business. (iii) The claim of ownership of the assessee has been verified with the leave and license agreement furnished by the assessee. Various terms and clauses of the agreement, without any ambiguity, reveal that the assessee has taken Hotel Premises on lease for operation only and ownership of the Hotel premises vests with the lessor only. The following fact emerges from perusal of leave & license agreement dated 16.03.2006: 7 ITA Nos.7348/M/16 2384/M7/17

I. The said leave & License agreement is entered into between M/s. Entertainment World Developers" Pvt. Ltd. (EWDPL) (Licensor) and between M/s. Sarovar Hotels Pvt. Ltd. (SHPL) (Licensee) II. The clause A(i) of the said agreement provides that the Plot and the entire building constructed thereon comprising of twelve floors is owned jointly by M/s. Kalani Brothers (Indore) Pvt. Ltd. and M/s. Padma Homes Pvt. Ltd., together referred as Owners. III. Further clause of the agreement provides that the Licensor has constructed a Hotel along with Hotel Infrastructure at the said building retaining its ownership and given the Hotel Premises to the Licensee for operation of Hotel on leave and license basis for a period of 29 years. The relevant clauses of the agreement are also reproduced hereunder, which are clearly establishing that the assessee is not theowner of the said premise. A. (ii) The said plot has been leased out by the Owners to the Licensor for a period of 29 years with effect from 1st July, 2003 in terms of two lease deeds both dated 05.07.2003 (hereinafter catted the 'Lease Deeds') inter alia to develop thereon a Shopping Mall - cum-Multiplex-cum-Hotel -hereinafter referred to as the 'Commercial Complex') and to sub-license the same in part or whole to such party/(ies) on such terms and conditions as the Licensor deems fit and to enjoy the benefits thereof to the exclusion of the Owners. (iii) Pursuant to and in accordance with the Lease Deeds, the Licensor has developed the Commercial Complex with hotel premises on the ground, sixth, seventh and eighth floors as more fully and particularly described in Schedule B hereunder written (hereinafter referred to as 'Hotel Premises'), with approx. 100 rooms (subject to finalization of architectural plans) with approx. 100 rooms (subject to finalization of architectural plans) and a total covered area of approx. 75,000 sq. ft. and is desirous of giving the same along with all fittings, fixtures furnishings, facilities and equipment already installed/'provided therein or to be installed/provided for operation of a Hotel from the Hotel Premises, more Jutty described in Schedule C hereunder written (hereinafter referred to as the 'Hotel Equipment') and the Hotel Infrastructure (Schedule 3.1) to be installed therein on leave and license basis for being used as a hotel. B) The Licensee is engaged in the business of planning, constructing, developing, managing and operating hotels, resorts and standalone restaurants interalia under its brand names Sarovar Portico or any other name as decided by the Licensee and has requested the Licensor to allow the Licensee to occupy, use and enjoy the Hotel Premises alongwith the Hotel Equipment 8 ITA Nos.7348/M/16 2384/M7/17

and Hotel Infrastructure on leave and license basis for carrying on its business of operating and managing a hotel from the Hotel Premises under its brand name 'Sarovar Portico' or any other Brand at the sole discretion of the licensee. C) The Licensor has agreed to allow the Licensee to use, occupy and enjoy the Hotel Premises, Hotel Equipment and Hotel Infrastructure on leave and license basis for carrying on the business of operating and managing a hotel from the Hotel Premises' and the parties have agreed to enter into this leave and license agreement on the terms and conditions recorded therein. Term and Renewal 1.1 The Licensor hereby allows the Licensee on leave and license basis to use, occupy and enjoy the Hotel Premises, Hotel Equipment and Hotel for carrying on its business of operating and managing ahotel from the Hotel Premises (the Hotel' in short) for a period of 29 years from the Opening Date. The Opening Date shall mean the first date on which the Hotel is fully open for business, which is by when Ninety (90) percent of the rooms and related facilities and services are fully ready to accept guests, at the hotel and as determined by the Licensee and communicated to the Licensor in writing. Deposit 3.1 During the term of this License, the Licensee shall pay to and keep deposited with the Licensor an interest free refundable deposit (the Deposit') of Rs.5 crores to enable the Licensor to equip and furnish the Hotel Premises with the required infrastructure as per the specifications set out in Schedule 3.1 hereunder written (referred to as the 'Hotel Infrastructure') which shall be completed by the licensor in accordance with the milestones agreement therein. 3.3 The Deposit shall be refunded by the Licensor to the Licensee at the end of the License Term or any earlier termination after the initial lock in period of 9 (nine) years. However, any pending dues, liability of the license under this agreement shall be deducted from the Said Deposit 3.4 (b) The balance Deposit, if any, remaining after development and completion of the Hotel Infrastructure shall be used towards the construction and commissioning of a swimming pool for the exclusive use of the Hotel and if such balance Deposit is insufficient for meeting the aforesaid costs, additional funds therefore shall be paid by the Licensor and Licensee in equal proportion. The additional amount so contributed by the Licensee would be added to the Deposit account as defined and specified under Article 3 (Deposits) and its related sub clauses of this Agreement. 9 ITA Nos.7348/M/16 2384/M7/17

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build and operate the hotel. In the current case, the assessee is operating the hotel on license basis. (x) In view of the above facts, the operation of hotel at Indore does not qualify for being treated as specified business. Hence the claim of the assessee of claiming the income from operations of Indore hotel is squarely rejected on this ground. v) Hotel at Chandigarh; The Chandigarh hotel of the assessee has been built by the assessee and also been operated by the assessee, hence the Income/Loss from the said hotel can be said to be qualified as Specified Business as per provisions of sec 35AD of the Act. In conclusion none of the business of the assessee apart from building and operating Hotel at Chandigarh is qualified as specified business and therefore income from these units cannot be available for set off against any eligible specified business after allowing deduction u/s. 35 AD of the Act. During the course of assessment proceedings, the assessee has submitted the income and loss from various properties that has been operated by it. The same is tabulated as under. Income from Business Mumbai Chandigarh Indore AAhmedabad Hyderabad Total 267,14,456 (35,94,62,610) 72,65,523 1,80,27,710 2,29,03,075 (28,45,51,846)

From the above working it can be seen that the assessee has incurred business loss of Rs 35,94,62,610/- from its hotel that qualifies for the definition of Specified Business, while it has earned income of Rs 7,49,10,764/- from business that does not qualify as specified business. It has been discussed in length in this order that as per provisions of section 73A of the Act any loss arising to the assessee out of specified business is eligible to be set-off against income from the specified business only. Since the income from revenue operations of other activities of the assessee cannot said to be from Specified business, the said set-off as claimed by the assessee is hereby disallowed. 6. Aggrieved, with the above order, the assessee preferred an appeal before the ld. CIT(A) and ld. CIT(A) after considering the submissions of the assessee dismissed the appeal of assessee with the following observations:

5.2.14 I have given due consideration to the reasoning adopted by the assessing officer as well as the arguments extended by the 11 ITA Nos.7348/M/16 2384/M7/17

appellant. There is no controversy or dispute relating to the appellant's hotel at Chandigarh as it clearly falls into the category of "specified business" mentioned in section 35AD of the Act. 5.215 As regards the hotel at Indore, I do not find force in the contention of the appellant that clause 3 of the "License Agreement" with the licensor establishes that the appellant had "built" the hotel. Equipping, furnishing or improving hotel infrastructure cannot be considered tantamount or equivalent to building. Since provisions of section 35AD are in nature of "investment linked deductions" as against "profit linked deductions", the most important thing is to look at the nature of investment. 5.2.16 As per appellants own contention at para 53 of their written submission, "thepurpose of introducing investment linked deduction was to give a boost to theinvestment sector in the tourism industry which has high employment potential”. Clearly, the intent of the Legislature was to attract investment in creation of basic infrastructure to promote tourism/hospitality industry. While construction of a building which can be used as a hotel can be considered as creation of infrastructure,equipping/furnishing/improvements cannot be termed as "building" or creation but can only be seen as augmentation/improvement of basic infrastructure. Therefore, in my opinion, reliance of the appellant on clause 3 of the impugned License Agreement does not holdwejght. In fact, post amendment, the licensorwho actually built the premises may still be entitled to deduction u/s 35AD but in my opinion, the appellant is not entitled. 5.2.17 As regards operations at IIM Ahmedabad and ISB Hyderabad, undoubtedly the appellant is providing hospitality services at the hostels of those Business Management Institutes. However, business of hospitality cannot be interpreted as business of building and operating hotels. The question of whether or not these hostel premises are technically considered as "Two Star Hotels" is also not at all established. In normal parlance, a hotel is a place where anyone can rent a room/dining space/Banquet Hall etc., for a price and enjoy the hospitality of the staff andinfrastructure. Many of government's National Academies such as Lal Bahadur ShastriNational Academy of Administration for IAS, National Academy of Direct Taxes for IRS,Sardar Vallabh Bhai Patel National Police Academy for IPS etc., now have themaintenance/Management/hospitality/catering functions outsourced. However, the vendor's to whom such functions have been outsourced cannot be said to have contributed to creation of any infrastructure. In my opinion, similarly, the appellant'soperation at IIM Ahmedabad or ISB Hyderabad cannot be interpreted as investment in infrastructure relating to hotel 12 ITA Nos.7348/M/16 2384/M7/17

industry/tourism. Therefore, the conclusion of theassessing officer that these operations also do not qualify for deduction u/s 35AD is alsological. 5.2.18 As regards operations of Mumbai Head Office, by no stretch of imagination, can it be said that it is performing the business of building or/and operating hotel. I am, therefore, in agreement with the conclusion of the assessing officer. 5.2.19 A perusal of the appellant's Memorandum of Association informs, the appellant's main object is, "To run the Hotels and to carry on the business of providing technical services and management services for putting up, conducting, running and managing Hotels, Guesthouses, Lodging and Boarding Houses, Motels, Taverns, Holiday camps, Restaurants, Cafe, Eating Houses, Refreshment Rooms, Permit Rooms and Snack Bars" 5.2.20 Thus, while very clearly the business of the appellant can be said to be within the broad parameters of hospitality industry, there is no indication that the specific requirement of "building" of hotels is one of the main objectives. Wherever the appellant fulfils that requirement, the Memorandum of Association supports the view that business activity includes "operating" hotels. However, in absence of building activity, the business activity of the appellant lacks the necessary component of "building" hotels to qualify for "specified business" as envisaged in section 35AD. 5.2.21 As regards arguments with reference to Memorandum to Finance Bill, 2011, it is seen that the Memorandum seeks to allow the benefit of s 35AD to those having older "eligible business" of hotels by allowing them to set-off losses from newer hotels they have built and are operating. This does not indicate that merely the activity of operating hotel business or providing hospitality services in itself would make any person eligibleto claim the benefit if the infrastructure was not built by that person. 5.2.22 Finally, coming to the argument of the appellant that for the purpose of section 35AD, the overall business of the appellant has to be seen and not the activity of component units, it would lead to bizarre situations. For example, one company could have built and is operating a hotel, another unit of that company is only providing catering/house keeping services for airlines and a 3rd unit is operating live-gaming casino in a place like Goa where such activities are permissible by law. All the 3 activities cannot be clubbed and seen as an over-arching business activity of "building and operating" hotels. Losses of the hotel cannot be allowed to be set off against profits of airline catering or casino entertainment operations even if all the operations exist under the same company, with common management and funds. 5.2.23 In view of the above, I do not find any infirmity in the action of the assessing officer in denying eligibility of all other units barring Chandigarh hotel u/s 35AD. Similarly, he is right in 13 ITA Nos.7348/M/16 2384/M7/17

concluding that losses of "eligible business" of Chandigarh hotel can only be carried forward and set-off against profits of the same hotel. The assessing officer has not specifically denied carry forward and set-off of losses of currently "eligible business" viz. Chandigarh hotel against any future "eligible business". Therefore, I see no necessity to intervene with the conclusion of the assessing officer. Therefore, these grounds of appeal are dismissed.

7.Aggrieved, with the above order, the assessee is in appeal raising following grounds of appeal:-

ITA No. 7348/Mum/2016 for the A.Y 2011-12:

1) a) The Learned CIT(A) has erred in law and in facts in disallowing the loss u/s 73A of the Income Tax Act, 1961 for Rs. 35,94,62,610/- of Chandigarh unit against the profits of the other units of the assessee by not considering the other units to be specified business without considering the facts and circumstances of the case. The same be considered. b) The Learned CIT(A) has erred in law and in facts in interpreting the business of the assessee by assuming that the assessee provides different type of service to the various units as against the same line of service provided to all units. The assessee's business be accepted as specified hotel business being eligible for deduction u/s 35AD of the Income Tax Act, 1961. The additions be deleted. c) The Learned CIT(A) has erred in stating that the other units (other than Chandigarh unit) are not specified business of the assessee as per Section 35AD of the Income Tax Act, 1961 without considering the facts and circumstances of the case. The same be allowed. d) The Learned CIT(A) has erred in not considering the submission filed by the assessee for justifying the loss from Chandigarh unit to be eligible for set off against other units. The same be considered. e) The Learned CIT(A) has erred in referring to the old provisions of Section 35AD without considering the retrospective amendment brought about by the Finance Act, 2011. The amended provisions be considered and the loss be eligible for set off. 2) The Learned CIT(A) has erred in making an addition of Rs. 3,777/- on account of Interest on TDS assuming that it is not for business purpose without considering the facts and circumstances of the case. The same be deleted. 3) The assessee craves leave to add, alter, amend or delete the grounds of appeal at the time of or before the hearing. 14 ITA Nos.7348/M/16 2384/M7/17

8.Before us, the ld. AR brought to our notice facts of the case and brought to our notice that claim of the assessee in the below table:- Reporting Nature of operations Net taxable income unit (Rs.) Mumbai Income from operation of 2,67,14,456 various hotels Chandigarh Income from operation of 5,91,37,953 Hometel Chandigarh Indore Income from operation of 72,65,523 Sarovar Portico, Indore Ahmadabad Income from hospitality 1,80,27,710 sector Hyderabad Income from hospitality 2,29,03,075 sector Total 13,40,48,717 Less: Deduction u/s. 35AD of the Act in respect 41,86,00,563 of the Chandigarh Hotel (-) 28,45,51,846

9.With regard to operations from Chandigarh hotel, he submitted that it is owned and operated by assessee. With regard to hotels at Mumbai/Indore he submitted that it is operated by the assessee and the facilities at Ahmedabad & Hyderabad, it is management of hospitality at IIM & ISB. Further, he brought to our noticesection 35AD(8) ( c )(iv) that of definition of specified business relating to the assessee as per which building and operating, anywhere in India, a hotel of two star of above category as classified by Central Government. He brought to our notice,theFinance Act 2011 has substituted the word ‘new hotel’ as ‘hotel’ w.e.f 1-4-2011. Further, he brought to our noticethe Clarification noted 15 ITA Nos.7348/M/16 2384/M7/17

onFinance Bill 2011, It has clarified the amendment u/s. 73A, which is reproduced below: “Under section 73A, any loss of a "specified business" (under section 35AD) is allowed set off against profit and gains of any other "specified business". In order to remove any ambiguity in this regard in respect of the business of hotels and hospitals/ it is proposed to remove the word "new" from the definition of “specified business” in the case of hotels and hospitals under section 35 AD (8) (c). With this, the loss of an assessee on account of a "specified business" claiming deduction under section 35AD would be allowed to be set off against the profit of another "specified business" under section 73 A, whether or not the latter is eligible for deduction under section 35ADTTherefore, an assessee who currently operates a hospital or a hotel would be able to set off the profits of such business against the losses, if any, of a new hospital or new hotel which begins to operate after 1st April,2010 and which is eligible for deduction of expenditure under section 35AD. This amendment will take effect retrospectively from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.

10.Further, he submitted as per the definition of specified business, it is stated as building and operating. He submitted that the word ’and’ in the definition is not conclusive, it can be “or” . Further, he submitted that above proviso talks about expenditure prior to commencement but how it can be interpreted for deduction. He brought to our notice Finance Minister’s Budget Speech at para 131 and 132, to submit that this deduction is investment linked incentive. He submitted that in similar deduction u/s. 80IA the Delhi Bench of ITAT has adjudicated in para 19 of the order as below: “19. In order to decide above prime issues, we deem it appropriate to reproduce relevant provision of the concession agreement for effective and proper adjudication of the case which read as under:— "The provisions of section 80IA(1)(2), (4) and (6): 16 ITA Nos.7348/M/16 2384/M7/17

Deduction in 'respect of profits and gains from' industrial undertakings or enterprises engaged in infrastructure development, etc. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of profits and gains derived from such business for ten consecutive assessment years. (2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park (or develops a special economic zone) rendered to in clause (iii) of sub-section (4) or generates power or commences transmission or distribution or power (or undertakes substantial renovation and modernisation of the existing transmission or distribution lines. (3)** (4) This section applies to— (i) any enterprise carrying on the business l[of (i) developing orjji) operating and maintaining or (iii) developing. operating and maintaining] any ' Infrastructure facility which fulfils all the following conditions, namely: (a) it is owned by a company registered in India or by a consortium of such companies 2[ or by an authority or a board or a corporation or any other body established or constituted under any Central or state Act. (5) *** (6) The amount of deduction in the case of the business of a ship shall be thirty per cent of the profits and gains derived from such ship for a period of ten consecutive assessment years including the initial assessment year provided that the ship- (i) is owned by an Indian company and is wholly used for the purposes of the business carried on by it; (ii) was not previous to the date of acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and (iii) is brought into used by the Indian company at any time during the period beginning on the 1st day of April, 1991 and ending on the 31st day of March, 1995.” 24. The Id. DR vehemently contended that as per language used by the legislature in sub-section (2) to section 80IA of the Act and the similar language which was again used by the CBDT in Circular No. 1/2006 stipulates that the assessee will be entitled for exemption 17 ITA Nos.7348/M/16 2384/M7/17

u/s 80IA(4)(i) of the Act only when the enterprise develops and begins to operate infrastructure facility, means the exemption is not available when the enterprise only develops infrastructure facility because the word "and" used by the legislature in sub-section (1) and CBDT circular (supra) between the word "develops" and "begins to operate" between the word "develops" and "begins to operate" requires both the conditions to be fulfilled simultaneously and the assessee has begun to operate the infrastructure facility only when the toll road was actually inaugurated by the Chief Minister of UP on 9.8.2012, which is related to FY 2012-13 pertaining to AY 2014-15, then exemption is not allowable for AY 2009-10 i.e the assessment year under appeal. 27. Ld. AR further submitted that section 801A(2) and is to be seen in the context of section 80IA(4) and the words used in sub-section (2) viz. "develops and begins to operate" has to be read and interpreted in the context of intention and spirit of section 80IA(4) and the words "and" in section 80IA(2) may be read or used as "or" as to avoid unworkable, unreasonable or absurd interpretation which is not reconcilable with the intention and literal meaning of sub-section (4). Ld. AR placing reliance on the decision of Hon'ble Supreme Court in the case of Ishwar Singh Bindra v. State of UP 1968 AIR 1450 and decision of Full Bench of Hon'ble Orissa High Court in the case of CIT v. Gangaram ChapoHa [9761 103 ITR 613, submitted that the conjunctive "and" in sub-section (2) of section 80IA of the Act between "develops" and "begins to operate" and should be construed as "or" to save the very purpose of 'the beneficial provisions of Section SOLA of the Act and CBDT Circular 1/2006 (supra). Ld. AR also pointed out that the allegation of non-compliance of CBDT Circular (supra) has not been mentioned in the notice u/s 263 of the Act and the same cannot be used for revising the assessment order. 28. On careful consideration of above rival submissions of both the sides, firstly we are in agreement with the contentions of the Id. AR that the allegation of non-compliance of the CBDT Circular No. 1/2006 (supra) has not been mentioned by the Id. CIT Noida in the notice issued to the assessee u/s 263 of the Act (supra). Secondly, the construction of language and words used by the legislature in sub-section (2) of section 80IA of the Act and used by the CBDT in Circular No. 1/2006 (supra) are similar viz. "develops and begins to operate". The heading given by the legislation to section 801A of the Act reads as "Deductions in respect of profits and gains from industrial undertaking or enterprise engaged in infrastructure development etc." which, to our humble understanding, express the intention of the legislature that the exemption therein section 80IA of the Act is available for the undertakings or enterprise which are engaged in the business of infrastructure development etc. Meaning thereby infrastructure development is paramount consideration for grant of exemption u/s. 80IA of the Act. If the literal meaning is given to the conjunctive word “and ” between “develops” and “begins 18 ITA Nos.7348/M/16 2384/M7/17

to operate”then the enterprise would be entitled to exemption only when the enterprise develops and begins to operate infrastructure facility on or after 1.4.1995, as required by condition ( c) of section 80IA (4)(i) of the Act. 77.We may further observe that the elaborate meaning of collective and cumulative reading of sub section (2) and (4)(i) mandates three pre-conditions in clause (i) of sub-section (4) viz. (a), (b) and (c) and it is required for the enterprise which claim deduction that all three conditions should be fulfilled simultaneously. If the intention of legislation was the deduction would be allowed only to the enterprise who develops and begins to operate and maintain infrastructure facility then it was not required to segregate or mandate the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining as stipulated in sub section (4)(i) and condition (a) and (b) thereto. This interpretation also finds support from proviso to sub-clause (c) i.e. third condition wherein the transferee of infrastructure facility is also held to be eligible in the same manner in which the transferor which developed such infrastructure facility, is eligible for the remaining or unexpired period of deduction. In this situation, we may safely infer or draw a conclusion that the intention of the legislation is to grant deduction not only to an enterprise which develops, operates and maintains but also to an enterprise which only develop infrastructure facility. We, therefore, decline to acceptance interpretation of section 80IA of the Act as given by Id. CIT DR in her written submissions placed before us during arguments.

11.With regard to hospitality sector, he brought to our notice meaning of hotel in Oxford Dictionary as ‘a place providing accommodation and meals for travellers and tourists’. Further, he brought to our notice a decision in the case of Associated Hotels of India Ltd V/s. R.N. Kapoor, it is stated that whether the definition should be adopted for the purpose of interpreting of section 2(b) of Rent Control Act, it is sufficient to state that in its ordinary connotation the word ‘hotel ‘means a house for entertaining strangers or travellers, a place where a lodging is furnished to transient guests as well as one where both lodging and food or other amenities are furnished. Further, he brought to our notice page-304 of paper book-II in A.Y 2012- 19 ITA Nos.7348/M/16 2384/M7/17

13, it is service agreement between Indian School of Business and the assessee, the duties of the service manager are given as below:- a. Reception - Manage all guest arrivals and departures. Keep record of the accommodation status and room allotment. Maintain and record key movement (if the card system is not provided) This will be manned on a 24 hour a day basis. b. Coordinate with the 'School' for rooming list which the 'SCHOOL' will endeavor to provide 24 hours in advance for individuals and 72 hours in advance for groups of six or more people. c. The'SCHOOL' will provide a property management system for the Executive Housing which the 'SERVICES MANAGER' will use for better services and to provide daily reports to the 'SCHOOL', d. d.Baggage handling during check in and check out of guests e.Billing - Keep record of all billable services rendered to guest. Prepare bill and collect payment from guest on check out. f. Telephones - Managing the telephone board, receiving and transferring calls. g. Concierge services to include accepting messages on behalf of and delivering them to the guests. To manage travel arrangement for hotel guests, on request To make arrangement including pickup/drop fromairport/railway station to Hotel, arrange for tickets - air / railway andorganize guided tours. Advise guests on the places of interest h. Allocate and Document safe deposit lockers, i. Attending and responding to complaints, j. Maintain record of lost and found items, k. Attempt to place a lady Guest Relations Executive for guest facilitation from4 pm to 9pm every day and also ensure that a senior executive is available on duty at all times from 9.00 am in the morning till 10.00 p.m l. All other services as would reasonably come under the purview of Reception/ Front Office services compared to a 5* category hotel.

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21 ITA Nos.7348/M/16 2384/M7/17

He brought to our notice the findings of the ld. CIT(A) in para 5.2.14. 16. With regard ground no. 1(b), he submitted that it is fallacious ground because assessee is not providing similar business activities in all the facilities run by it. 17. With regard ground no. 1(e), he submitted that it is incorrect ground, this ground was not coming out of ld. CIT(A)’s order. 18. In the rejoinder, the ld. AR submitted that there is no dispute as far as star category is concerned as AO himself allows the deduction. As far as deduction for Indore Unit is concerned, the assessee is not claiming the deduction for this Indore hotel and finally he submitted that the section 35AD is introduced as incentive provision, it should be interpreted not in narrow manner. 19. Considering the rival submissions and material on record, we notice that assessee is managing the hotel operations in Mumbai, Chandigarh and Indore, provides hospitality services to IIM & ISB at Ahmedabad and Hyderabad respectively. The question before us is whether the facilities managed by assessee are within the meaning of section 35AD(8)(c)(iv). The definition given in the above sub-section is building and operating a hotel of two star or above. The word ‘hotel’ was amended from the word ‘new hotel’ in the Finance Act, 2011. In our considered view, the legislature has removed the word ‘new’ from the definition. It indicates that the 22 ITA Nos.7348/M/16 2384/M7/17

legislature intends to give benefit to the existing hotel and existing owners, who are owning the building and operates the same, the persons who are owning not necessarily to own a new building for the purpose of running hotel. This is because the government wanted to increase the infrastructure facilities in the country. We need to interpret the intention of the legislature in more pragmatic way. The reason for removal of word ‘new’ from the definition is to give the benefit of deduction u/s. 35AD to all the intended or prospective investors in the hotel industry. These measures are to improve the availability of the affordable hotels in the country. 20. To commence a new hotel business, it is not necessary that the assessee should build the new facility, it is enough that the prospective investors can occupy existing building on ownership or passive ownership like taking the building on lease. In the changing economic scenario, it is not possible to construct a new building. To occupy an existing building itself needs huge capital and it requires considerable modification in the building. Therefore, the word ‘building and operating’ means creating a facility and operating the same. The creation of facility will include construction of a new hotel building or occupying a existing building and making suitable modification to run the hotel business. In our view, the hotel business run on the facilities by occupying the existing building on lease or otherwise is eligible to be treated as specified Business. Therefore, the units operated by the assessee in Mumbai and Chandigarh will fall within the 23 ITA Nos.7348/M/16 2384/M7/17

definition of “specified business”. Ld.AR has submitted that, it is not claiming the benefit in Indore branch, accordingly, it should be eliminated. 21. With regard to hospitality services carried on by the assessee in IIM, Ahmedabad & ISB, Hyderabad are concerned, they are only managed by the assessee to the extent of providing lodging and boarding services to the occupants in those facilities. The occupants are the visitors to those facilities and assessee does not have any control over kinds of visitors visiting those facilities. The hospitality agreement between IIM & ISB clearly indicates that the assessee is only the managing the facilities and not controlling the facilities. Therefore, these facilities managed by the assessee will not fall under the definition of specified business given under section 35AD. 22. Therefore, considering the above discussions, we direct the AO to treat the business carried on by the assessee in Mumbai & Chandigarh as specified business and the assssee is allowed to set off the loss of Chandigarh branch against the profit earned in Mumbai branch. We are sustaining the disallowance of deduction claimed u/s. 35AD by assessee from profit earned in Ahmedabad & Hyderabad branches. Therefore, assessee is eligible to set off the losses and carry forward the same u/s 73A of the profits earned from Chandigarh branch and Mumbai Branch. Accordingly, the grounds raised by the assessee are partly allowed.

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ITA No. 2384/Mum/2017 A.Y 2012-13 23. The facts in AY 2012-13 are similar to AY 2011-12, therefore, the findings in the para 19-22 are applicable to this AY also. Accordingly, ground raised by assessee is partly allowed. 24. Alternative ground raised by the assessee is as under: The Learned CIT(A) has erred in confirming the Order passed by the Ld. AO u/s. 143(3) of the Income Tax Act, 1961 by offsetting the brought forward loss u/s 73A of the Income Tax Act, 1961 for Rs. 4,64,28,272/- being Net Profit before Tax of Chandigarh unit in place of Income from Business of Chandigarh Unit amounting to Rs. 5,62,11,853/- without considering the facts and circumstances of the case. The same be allowed at net taxable income of Rs. 5,62,11,853/-. 25. With regard to alternative plea, we are directing ‘AO’ to evaluate the submissions of assessee after giving effect to our order. In case, Chandigarh unit has earned independent profit and AO should allow the set off of loss from previous AY after giving effect to our order in the normal provision of Sec. 72 of the Act and pass such order as per law. Accordingly, ground no. 2 is allowed for statistical purpose. 26. In the net result, both the appeals filed by the assessee stand partly allowed.

Order pronounced in the open court on 20th Dec, 2019.

Sd/- Sd/- (Ramlal Negi) (S. Rifaur Rahman) न्याययकसदस्य / Judicial Member लेखासदस्य / Accountant Member मुंबई Mumbai;यदनांक Dated : 20.12.2019 Sr.PS. **PP 25 ITA Nos.7348/M/16 2384/M7/17

आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : अपीलाथी/ The Appellant 1. प्रत्यथी/ The Respondent 2. आयकरआयुक्त(अपील) /The CIT(A) 3. आयकरआयुक्त/ CIT- concerned 4. यवभागीयप्रयतयनयि, आयकरअपीलीयअयिकरण, मुंबई/ DR, ITAT, Mumbai 5. गार्डफाईल / Guard File 6. आदेशधिुसधर/ BY ORDER,

.उि/सहधयकिंजीकधर (Dy./Asstt.Registrar) आयकरअिीिीयअनर्करण, मुंबई/ ITAT, Mumbai

26 ITA Nos.7348/M/16 2384/M7/17