ACIT, CIRCLE-8(2), KOLKATA, KOLKATA vs. M/S OBEROI HOTELS PVT. LTD., KOLKATA

is the application of Rule 8D of Income Tax Rules, 1962 ("Rules") for disallowance u/s 14A of the Income Tax Act, 1961 ("the Act"). In the return of income, the appellant treated interest and DEMAT charges are the only expenses relatable to tax free dividend income and offered Rs.10,90,01,363/- as expenditure disallowable u/s 14A of the Act. Further, during the appellate proceedings, the appellant submitted that interest income on bank deposit amounting to Rs.15,49,776/- should be netted off from the interest already offered u/s 14A of the Act in computation. The AO did not consider this submission of the appellant. In this regard, the appellant placed reliance on the decision of the jurisdictional

2. Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited

ITAT, Kolkata in the case of DCIT Vs M/s. Trade Apartment Ltd (ITA No.1277/Kol/2011).

Now the issues are dealt herein below one by one: 1. So far as the applicability of Rule 8D is concerned, this issued has been dealt by the ITAT, Kolkata in the case of the appellant itself in for AY 2008-09. The relevant portion of the ITAT order is reproduced as follows:

''''We are also of the view that the primary object of investment of assessee is for holding controlling stake in group concerns and not for earning of income out of that investment, In both the eventualities, no disallowance can be made u/s 14A of the Act read with Rules 8D of the Rules. Accordingly, this issue of assessee's appeal is allowed. "

Considering the decision of ITAT Kolkata as mentioned above, I hold that Rule 8D is not applicable in the case of the appellant.

2. Once it is decided that Rule 8D is not applicable, the other claim of the appellant with regard to computation of expense u/s 14A of the Act needs to be discussed. First claim of the appellant is netting off of interest earned with interest incurred. This is additional claim of the appellant made during the assessment proceedings. In earlier years, the respective CIT(A) has already held that net interest (reducing interest earned from gross interest paid) needs to be considered for the purpose of section 14A of the Act. Accordingly, I direct the AO to consider Rs.10,72,88,038/- as interest disallowable u/s 14A of the Act instead ofRs.10,88,37,814/- as interest paid.

Vide ground 15 the appellant has challenged the applicability of Rule 8D for the purpose of computation of book profit under the MAT provisions. In this regard, the appellant relied on the judgment of Jurisdictional High Court in the case of CIT -vs.- Jayshree Tea & Industries Ltd. [G.A. No. 1501 of 2014 dated 19- 11-2014] wherein it has been held that provision of Section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to Section 14A of the Act.

Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited

Under the similar facts and discussions in the preceding paragraphs, I held that Rule 8D is not applicable for the purpose of computation of book profit”.

I find that this issue is squarely covered in appellant's own case for earlier assessment years i.e. 2006-07, 2007-08 and 2008-89. In the earlier order in Appeal No. 246/CIT(A)-VIII/Kol/10-11 and 187/CIT(A)- VIII/Kol/11-12 for Assessment Years 2008-09 and 2009-10 respectively, it has been held that the A.O. can not deviate from his position merely based on Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited assumption, surmise and conjecture and that the allegation that the appellant must have fetched more rental value from the subject property has not been proved by the A.O. The A.O. could not establish that the appellant had actually received anything extra over and above the sum as agreed under the agreement. In this regard, it is worthwhile to mention here that the issued is covered by the decision of IT AT Kolkata in case of the appellant itself in A. y. 2007-08, 2008-09 and 2009-10. The Hon'ble Kolkata Tribunal in case of the assessee itself in for A.Y.2008-09 (departmental appeal) allowed the appeal in the favour of the assessee. The relevant extract as mentioned in the point no.23 of the order is reproduced as below: "We find that the AO erred in determining an arbitrary annual value of property by holding that Section 23 is a deeming provision and determination of annual value does not depend on actual realization of rent. The AO while applying clause (a) of Section 1 to section 23 in the assessee case failed to appreciate that in present case actually let out property being a farm house is on rent to EIH Limited and if a property is actually let out, then the expectation of its letting out becomes an actual reality and such property cannot be expected to let from year to year at any figure higher than the rent which is being produced actually by the property in question. Hence, even as per the deeming provision of Section 23(1)(a), in the case of let out property, only the actual rent received was required to be considered as annual value of property. The AO failed to appreciate such estimation of annual letable value as per provision of section 23(1)(a) was called for only in case of vacant property and not where the property was actually let out since in the case of let out property, the assessee was not entitled to anything over and above the agreed rent. The said action of the AO has resulted in taxing notional income in the hands of the assessee, which never accrued and hence cannot be brought to tax. Accordingly, we are of the view that the CIT(A) has rightly deleted the addition and hence we confirm the order of the CIT(A) on this issue. I once again hold that the A.O. cannot ignore the actual rent received by the appellant i.e. Rs.30,000/- p.m. and under the facts of the present case, he cannot substitute the said actual rent by any other notional figure. Accordingly, the A.O. is directed to compute the income of the appellant by considering the rental income at Rs. 30,000/- p.m. i.e Rs.3,60,000/- for the immediate previous year. Thus, this Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited ground of appeal of the appellant is allowed in favour of the appellant”.

Fees for technical services Rs.4,27,39,076/- rendered Royalty and Membership fees Rs.10,84,95,779/- Other income (dividend, Rs.12,22,99,497/- interest, rent etc.) TOTAL Rs.30,92,94,408/- During the course of assessment proceedings, the assessee was required by the Assessing Officer to allocate the expenditure against each of the above four heads of income. In reply, a detailed working was filed by the assessee and from the perusal of the same, it was noted by the Assessing Officer that no expenditure was allocated by the assessee against the head “Royalty and Membership fees”. He also noted that total expenditure was Rs.21,37,58,604/- out of which expenditure only to the extent of Rs.14,01,83,6-7/- was allocated against the different heads of income other than “royalty and membership fees”. According to the Assessing Officer, the balance expenditure of Rs.7,35,74,997/- thus was claimed to be incurred by the assessee against the income earned from royalty and membership fees. He, therefore, asked the assessee to establish that the expenditure to that extent was incurred for earning the income from royalty and membership fees. In reply, it was submitted on behalf of the assessee that actual expenditure to the extent of Rs.49,78,823/- was incurred relating to the royalty income. According to the Assessing Officer, the assessee-company thus had claimed an excess expenditure of Rs.6,85,96,174/- (Rs.7,35,74,997/- minus Rs.49,78,823/-). He noted that the assessee-company on its own had disallowed an expenditure of Rs.1,05,14,908/- in the computation of total income. He also noted that there was a difference of Rs.14,71,501/- in the disallowance offered by the assessee in the computation of total income on account of pro-rata expenditure for Management fees from Mena House Oberoi, Egypt. After making adjustment of these two amounts against the alleged excess expenditure of Rs.6,85,96,174/-, the Assessing Officer worked out the disallowance of expenditure to be made at Rs.5,95,52,767/- and since he Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited had already disallowed expenditure of Rs.82,81,539/- under section 14A, the balance amount of Rs.5,12,71,228/- was disallowed by him.

Less: 28,460,360 Expenditure of Clarkes Hotel as per unit accounts claimed against income from hotel business

Expenditure 3,699,403 allocated against foreign management fees Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited

Expenditure 169,801 claimed against rental income Expenditure 107,854,043 140,183,607 U/s.14A relatable to exempt income Expenses/Items 508,200 added back in return Rent Provision for 380,362 diminution in value of investments Guest house 4,101,408 maintenance expenses Contribution to 1,100 Staff Welfare Fund Depreciation as 5,456,929 per books of account Loss in 66,899 10,514,908 150,698,515 partnership firm 63,060,089 Less: Legal, 48,505,475 Professional & Consultancy Fees as per accounts

Share of (A) 14,554,614 common business expenses allocable against royalty Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited

Add: Legal (B) 4,978,823 expenses incurred for protecting royalty income (*being part of Rs.48,505,475/- _ Total expenses (A + B) 19,533,437 allocable against royalty income Total earnings 108,495,779 from royalty Percentage 18.00 expenses to revenue Note: Items of common expenses considered for allocation against royalty income- Employees remuneration, rent, advertisement, travelling, postage & telephone, printing & stationery, statutory payments and other expenses as reflected in the annual accounts (Refer schedules 17 & 19)

From the perusal of the assessment order it is noticed that the AO at para no.4.1 calculated the expenses against each source of income other than royalty and membership fees earned at Rs.14,01,83,607/- based on the allocation submitted by the appellant vide letter dated 11.03.2013. The detail is as follows: Head of income Income amount Expenditure allocated by the assessee Guest, 3,57,60,056 2,84,60,360 Accommodation, restaurants, bars and banquets Fees for 4,27,39,076 36,99,403 technical service Rental income 6,33,896 1,69,801 Interest income 59,19,787 NIL Dividend 11,57,45,814 10,78,54,043 Total 20,07,98,629 14,01,83,607

The above numbers mentioned by the AO at para 4.1 is in agreement with the allocation submitted by the appellant during the assessment proceedings which has been reproduced for the sake of convenience.

The total expenditure during the relevant financial year as per the profit & loss account is Rs.21,37,58,604/- out of which specific expenditure against the sources as mentioned above is Rs.14,01,83,607/- Further, the appellant disallowed Rs. 1,05,14,908/- in the computation of income as per the provision of law. Accordingly, the residual expenditure comes at Rs.6,30,60,089/- (21,37,58,604-14,01,83,607- 11 Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited

1,05,14,908). Out of this amount the appellant calculated common expenses for royalty income at Rs.49,78,823+Rs.l,45,54,614 totalling to Rs.l,95,33,437/- but on overall perusal of records it seems that the AO missed out to. consider Rs.l,45,54,614/- and he considered only Rs.49,78,823/- since no comment has been mentioned by AO for non considering of Rs.1,45,54,614/- .

From the details of allocation made by the appellant during assessment stage, it is crystal dear that the ratio of common expenses has been calculated for the purpose of royalty only as mentioned in the note to the calculation sheet submitted during assessment stage and re submitted before me. The appellant has already considered the disallowable expenses i.e. Rs.1,05,14,908/- in the computation of total income which is also mentioned by the AO at para 4.5. Further disallowance made by the AO has been discussed separately in the respective grounds taken by the appellant. The AO calculated the residual amount at Rs.5,12,71,228/-. The calculation is as follows: Total expenditure debited to 213,758,604 PIL Account Less: Specific Expenditure 140,183,607 against other source other than royalty and Less membership fees 73,574,997 Less: Specific Expenditure 4,978,823 against royalty income

68,596,174 Less: Expenditure disallowed 10,514,908 further in computation of income

58,081,266 Add: Expenditure further 1,471,501 disallowed by the assessee at assessment stage against fee for technical service

59,552,767 Less: Disallowed in assessment 8,281,539 order u/s 14A 51,271,228

From the above mentioned table it is transparent that the AO did not consider the common expenses allcoated by the appellant i.e. Rs.1,45,54,614. During the appellate proceedings, the appellant submitted that the allocation of common expenses was done only with respect to royalty income as required by the AO. For other sources, only specific expenses with respect to that source are considered. For example, the expenses against hotel operation have been taken from audited unit accounts only which is specifically mentioned by the Assessment Year: 2010-2011 M/s. Oberoi Hotels (P) Limited appellant in the calculation submitted before the AO. It is quite common in a corporate like assessee that some expenses like financing, legal matters, audit fees under various statutes at HO level. Therefore, there is no reason to disallow further Rs.5,12,71,228/- treating the same as excess expenditure claimed by the appellant more so when the AO could not bring any material to this effect. Balance expenses has to be considered for earning taxable source of income i.e. Hotel business and royalty income. The AO has also mentioned the same thing at para 4.3. The AO has disallowed Rs.5,12,71,228/- on the whimsical ground that the appellant has incurred excess expenditure. Neither he disputed the allocation made by the appellant nor he could bring any material on record to prove that expenses is excessively claimed by the appellant. Accordingly, I direct the AO to delete the addition on this account”.