ACIT, NEW DELHI vs. M/S. ELEL HOTELS & INVESTMENT LTD., MUMBAI

Date of Hearing 05.05.2016 Date of Pronouncement 29.07.2016 ORDER

PER DIVA SINGH, JM

1. “The order of Ld.CIT(A) is not correct in law and facts.

before or during the course of hearing of the appeal.”

2. The relevant facts as borne out from the record are that the assessee in the year under consideration declared a total loss of Rs.11,03,49,616/- on I.T.A .No.-1080/Del/2014 30.09.2008. The assessee revised the said return on 04.05.2009 declaring a loss of Rs.1,09,60,211/-. During the scrutiny proceedings, the assessee was required to furnish reasons for revising the return. Considering the same, the AO observed that in the revised return the assessee though has voluntarily disallowed certain expenses claimed in the return of income filed on 30.09.2008 however, at the same time new expenses to the extent of Rs.63,89,741/- had been claimed.

Referring to the profit and loss account and balance sheet filed alongwith the return it was observed that these expenses had been considered as Capital Work in progress and had not been charged as expenses. The assessee accordingly was required to submit an explanation for allowability of these expenses. The assessee explained that these expenses were incurred for maintaining its corporate structure, existence and preserving the assets-infrastructure. It was explained that the assessee had maintained all licenses etc for the operation of a hotel.

Referring to the chart containing the details of expenses it was submitted that the description of expenses itself would show that these were bona fide, largely Government dues. Reliance was placed on CIT v.Rampur Timber Company Ltd. 129 ITR 58 Allahabad; Nokodar Bus Services Pvt. Ltd., 179 ITR 506 (Punj); Chennai & Co. Pvt. Ltd. v. CIT 206 ITR 616 (Bom); Hindustan Chemicals Works Ltd. V. CIT, 124 ITR 561; Birla Cotton Spinning and Weaving Mills Ltd. v. CIT 64 ITR 568, 584 (cal.) and affirmed by the Hon'ble Supreme Court as reported in 82 ITR 166.

2.1. The following details in respect of the expenses claimed were filed by way of a chart vide letter dated 15.11.2010:-

I.T.A .No.-1080/Del/2014

2.5. “A similar situation was observed in the case of the assessee company for the assessment year 2005-06. In this context, it is relevant to note the observation of the Assessing Officer in the order dated 31.12.2008 for the proceedings u/s 153A r.w.s 143(3) as reproduced below: - "As extracted above, the assessee has furnished head-wise details of the revenue expenses claimed by it against the only main receipt of interest on income tax refund. I have gone through the said contentions and explanations. As found earlier, Page 3 of 10

I.T.A .No.-1080/Del/2014 these claims are made by the assessee at a time when the entire business empire has tumbled down long back and no activity except various litigations as mentioned, have been going on. With the change in the control of the affairs now, the question that remains unexplained is whether he change over was business of the assessee in its old garb of management or whether the spoils of the past has anything to do with the futuristic adventures of the new controlling segment. The essential feature that the expenses should not only be incidental or necessary, but it should be "wholly, and exclusively" for the purpose of business, has not been satisfactorily brought out by the assessee after having spent so many words as quoted above. Therefore, only the following expenses are allowed:- Auditors remuneration of Rs.11,000/- Bank Charges of Rs.19,461/-, Insurance expenses of Rs.12,445/- and Professional tax of Rs.12,600/- Rest of other expenses claimed by the assessee company, are disallowed. "

3.1. As a result of this reasoning, the following expenses were allowed and addition of Rs.53,31,894/- was made by way of a disallowance treating these as work in progress:-

S.No. Particulars Amount(Rs.) 3. Government Dues (a) Duties & Taxes 14,500/- (b) Insurance of Assets 36,724/- (c) License Fees 4,45,790/- (d) MVAT 5,60,833/- Total Rs.10,57,847/-

179 ITR 506 (Pun.); Chennai & Co.Pvt.Ltd. vs CIT 206 ITR 616 (Bom.); Hindustan

I.T.A .No.-1080/Del/2014 Chemicals Works Ltd. vs CIT 124 ITR 561; Birla Cotton Spinning & Weaving Mills Ltd. vs CIT 64 ITR 568, 584 (Cal.).

4.1. It was argued that the AO has merely allowed the government dues and has disallowed the remaining claim of expenses relating to security charges, electricity, water charges and salary to one Accountant and one office boy.

4.2. Considering the submissions, the CIT(A) came to the following conclusion:-

3.2. “I have considered the assessment order, the submissions made and the documents filed before me. The appellant company does not have any income under the head business. In the computation of income filed with the revised return, the appellant has added back expenses / disallowances to the tune of Rs.9,92,57,354/- and claimed expenses to the tune of Rs.3,68,02,016/- resulting in net loss of Rs.1,09,60,211/- under the head 'income from business'. The amount of expenses claimed in the revised return include Rs.63,89,741/- which is in dispute in the present appeal. The revenue is of the opinion that only government dues are required to be paid for preserving the corporate status of the appellant. However, I find that expenses on the security of the property of the company, salary to an accountant who is to maintain the day-to-day accounts, records and books of the appellant, salary to an office boy who is required to do all menial work and errands relating to the company - even depositing the said government dues, water and electricity that are essential for preserving and maintaining the hotel property owned by the appellant company are also bare minimum expenses required for maintaining the company and its assets. It was held in Birla Cotton Spinning & Weaving Mills Ltd. vs. CIT [64 ITR 568, 584 (Cal.)] that business includes day-to- day running of the business, preservation of business and protection of its assets and property from expropriation, coercive process or hostile title, payment of statutory dues and taxes and things incidental to carrying on business and expenses relating thereto were allowable business expenses. This ruling was affirmed by the Hon'ble Supreme Court [82 ITR 166]. I am also of the view that expenses on security, electricity and water are outright consumables and cannot be capitalized as these expenses do not add any value to the capital asset. Moreover, the loss returned by the appellant was reduced from Rs.8,60,18,830/- filed in the original return to Rs. 1,09,60,211/- in the revised return and as such the claim of the expenses made by the appellant has not increased the loss returned. In these facts and circumstances of the case, the expenses claimed by the appellant are allowed. The disallowance of Rs.53,31,894/- made by the revenue is deleted.”

I.T.A .No.-1080/Del/2014

Accordingly in the circumstances disallowing expenses on security of the property, salary paid to an accountant to maintain the day-to-day accounts books and records and salary paid to one office boy definitely would constitute essential and bare minimum expenditure to maintain the corporate existence of the assessee.

The incurring of the said expenditures it was submitted has not been disputed by the Revenue.

7.1. Inviting attention to the explanation offered before the AO dated 15.11.2010, it was submitted that when the nature of expenses are examined, it would show that the expenditure which has been disallowed by the AO is water expenses, security charges, salary of accountant Ranjeet and one office boy and electricity charges. It was his submission that the assessee cannot keep its building

I.T.A .No.-1080/Del/2014 unprotected and rundown especially when it is carrying out renovations. In response to a query, it was submitted that the renovations are still going on and being an expensive project the assessee is looking out for a partner and in fact is in the process of being amalgamated.

7.2. Reliance was placed upon Shingar Lamps Ltd. vs ACIT [2006] 150 taxman 17 (ASR) (MAG.); K.N.P. Securities P.Ltd. [2010] 1 ITR 130 (Mum.); CIT vs Anita Jain [2009] 182 taxman 173 (Del.); Urban Mass Transit Co.Ltd. vs ACIT [2013] 39 taxmann.com 121; CIT vs Rampur Timber Company Ltd. 129 ITR 58 (Allahabad); Nakodar Bus Services Pvt.Ltd. 179 ITR 506 (Pun.); Chennai & Co. Pvt.Ltd. vs CIT 206 ITR 616 (Bom.); Hindustan Chemicals Works Ltd. vs CIT 124 ITR 561; and Birla Cotton Spinning & Weaving Mills Ltd. vs CIT 64 ITR 568, 584 (Cal.).

I.T.A .No.-1080/Del/2014 that referring to the details of the expenditure which have been extracted in the earlier part of this order the assessee has submitted that the expenses were bonafide and were necessary government dues which statutorily are required to be paid and have been necessarily incurred for keeping its business alive. We fail to comprehend the relevance of the facts reference to which has been made by the AO namely in the proceedings under section 153A read with section 143(3) in 2005-06 AY. The Revenue has submitted that business still has not commenced even today an argument unsupported by any fact. The ld.AR also responded again without any evidence that the assessee was on the look out for a partner and/or for a take over/amalgamation options as the costs of renovation are prohibitive and the assessee is managing to keep and protect its corporate entity alive and carrying out whatever renovations the financial position permits. We find that all these arguments based on probabilities and possibilities are of no relevance. What is relevant is that all necessary licenses etc. required to keep the hotel business alive are being maintained by the assessee. The Assessing Officer himself was convinced that “the government dues” being the minimum statutory expenses were allowable and as a result thereof he has allowed “duties and taxes”, “insurance of assets”, “license fees” and “MVAT expenses”. Considering the nature of expenses which have been allowed by the AO, we find no good reason why “water expenses” and “electricity expenses” can be disallowed. We also find no good reason why security charges paid to secure the assets of the assessee can be disallowed as maintenance of physical assets and securing the property from vandals, trespassers etc. is the bare minimum expenditure necessarily required to I.T.A .No.-1080/Del/2014 be incurred. Similarly, salary of one Accountant and one office boy can hardly be said to be an expenditure which was not incurred wholly and exclusively for the business of the assessee.

8.1. While arriving at the conclusion, we have taken into consideration the decision relied upon by the Ld. Sr. DR that is CIT(A) vs PIEM Hotel Private Limited (cited supra). On a perusal of the same, it is seen that the issue before the Hon’ble Bombay High Court was whether the business could have been said to have been “set up” or not. The business being hotel business. Considering the fact that only a banquet Hall which had been completed at the relevant point of time which had been let out the claim of the assessee that income was from hotel business was not allowed. The Hon’ble Court came to the conclusion that the hotel business could not be said to have been set up simply because a banquet hall was let out because unless the hotel building was completed the Hon’ble Court held that the gamut of activities which a hotel is required to undertake cannot be said to have been ready for use and thus merely because the banquet Hall was ready in the incomplete hotel building the hotel business it was held could not have been set up. We find on consideration of the principle laid down therein, on the facts available and the issue under consideration by the Court it is seen that it has no bearing on the facts of the present case.

8.2. Accordingly considering the judicial precedents relied upon and the facts and circumstances of the case, we find that the decision arrived at in the peculiar facts and circumstances of the case fully supports the impugned order. A temporary lull at a point of time in the business of the assessee in the absence of I.T.A .No.-1080/Del/2014 any fact or evidence to the contrary cannot lead to the conclusion in the peculiar facts and circumstances of the case that the business has permanently closed especially in view of the fact that as per the assertions of the assessee before the Assessing Officer that its licenses etc are being maintained and kept intact ensuring that the hotel is ready for operation. A fact which has not been disputed as license fees have been allowed by the AO himself.

The order is pronounced in the open court on 29th of July 2016.