DCIT, BANGALORE vs. M/S ROYAL ORCHID HOTELS PRIVATE LIMITED, BANGALORE

Facts apropos are that assessee engaged in running hotels had filed its return of income for the impugned assessment year declaring total income of Rs.8,42,64,776/-. During the course of assessment proceedings it was noted by the AO that assessee had a business expenditure of Rs.2,24,70,345/- towards covering of open drainages near its hotel premises. Submission of the assessee was that the drainage was running along a common area belonging to BBMP. As per the assessee, open drainage was over-flowing with sewage water resulting in bad smell and mosquito menace. Further as per the assessee, guests of the hotel were complaining of the unhealthy atmosphere which necessitated it to take steps to overcome this problem. As per the assessee, BBMP was not prepared to cover the drainage with slabs and assessee was constrained to do it by itself resulting in the expenditure. Claim of the assessee was that it did not result in any capital expenditure. Premises on which work was done was not owned by it but by the BBMP. However the AO was not impressed by the above explanation. According to him, assessee derived enduring benefit out of the expenditure. Relying on the judgment of Hon’ble Apex Court in Indore Municipal Corporation v. CIT [247 ITR 803], he denied the claim.

Aggrieved assessee moved in appeal before the CIT (A). Argument of the assessee was that the expenditure did not result in any enduring benefit. As per the assessee, the concrete slabs constructed were on drainage which was not owned by the assessee and was not its asset. Expenditure was incurred only to safeguard its business interests and did not add to its income generating capacity. No new assets came into existence on account of this outgo. Assessee also relied on the permission letter issued by BBMP which inter alia stated that assessee had no ownership over the slabs laid over the length of the drain and could never utilise it for any business purpose. 05. CIT (A) was appreciative of the above contentions. According to him just because the outgo was a one-time expenditure would not mean that it was a capital outgo. Relying on the judgment of Hon’ble Apex Court in the case of CIT v. Associated Cement Companies Ltd [(1988) 172 ITR 257], CIT (A) held that assessee had not augmented its capital structure through the outgo. As per the Ld. CIT (A) no income earning apparatus was created. Further he also noted that assessee could never use it for its own business operations. He held the expenditure to be a revenue out go and deleted the disallowance.

Now before us, Ld. DR strongly assailing the order of CIT (A) submitted that laying of slabs on drainage running through the property of the assessee did bring enduring benefits to the assessee. Even if no capital asset as such was brought into existence, the slab over the drain could have been used by the assessee for parking the cars, since one side of the drain was assessee’s hotel building and the other side was the car parking. Thus according to him, CIT (A) fell in error in allowing the claim of the assessee.

Nobody appeared for the assessee.

We have perused the orders and heard the contentions of the Ld. DR. There is no dispute that the drain was running on the side of hotel building of the assessee and the other side of the drain was used by the assessee for parking of vehicles. Revenue had also not disputed the finding of the CIT (A) that Asst. Engineer of BBMP while permitting the assessee to lay slabs over the drain restrained the assessee from using it for any business purpose. Drain was owned by BBMP. By virtue of slabs laid by the assessee what assessee gained was improved functioning of its hotel. Assessee, if it had not covered the drain with the slabs would have been consistently pestered by its guests complaining of bad smell and mosquito

Vide its ground 3, grievance raised by the Revenue is that CIT (A) deleted the disallowance made by the AO on credit card commission.

Facts apropos are that assessee had paid Rs.1,46,36,138/- to the bank for credit / debit card payment realisation. AO was of the opinion that such payments fell within the ambit of commission and therefore Section 194H of the Act stood attracted. As per the AO, relationship between the bank and the merchant was established under the merchant contract and hence contention of the assessee that bank was acting on behalf of card holder was incorrect. AO also noted that CBDT vide Notification No.56/2012, dt.13.12.2012 exempted seven services from the rigors of deduction of tax at source with effect from 01.01.2013 and hence according to the AO, prior to that date, such payments fell within section 194H of the Act. Since the assessee had not deducted tax, AO had applied section 40(a)(ia) of the Act and made a disallowance of Rs.1,46,13,188/-.

In its appeal before the CIT (A), argument of the assessee was that what was released by the banks was the net amount and assessee had not paid any direct commission to the bank. Bank itself had retained their charges out of the payments received from customers and passed on only the balance to the assessee. Reliance was placed by the assessee on the decision of the Hyderabad bench of this Tribunal in the case of DCIT v. M/s. Vah magna Retail Ltd [I.T.A.No.1105/Hyd/2011, dt.10.04.2012]. CIT (A) was appreciative of these contentions. According to him, coordinate bench in the case of Tata Teleservices Ltd v. DCIT (TDS) [(2013) 140 ITD 451], had held as under :

Now before us, Ld. AR strongly assailing the order of CIT (A) submitted that commission payments fell within section 194H of the Act. According to him, assessee having not deducted tax at source on such commission payments, Section 40(a)(ia) automatically stood attracted.

We have perused the orders and heard the contentions of the Ld. DR. Grounds raised by the Revenue relies on CBDT notification No.56/2012, dt.31.12.2012 which exempts certain types of payment from deduction of tax at source. Said notification has been issued under powers vested on the central government vide Section 197A(1D) of the Act. Nodoubt one of the type of payments mentioned in the above circular is credit card/ debit card commission on transactions between merchant establishment and acquirer bank. Notification was effective from 01.01.2013. But in our opinion this notification cannot be construed in a manner to say that prior to 01.01.2013 charges deducted by the bank from credit card payments received from customers of the assessee fell within the purview of Section 194H for warranting a deduction of tax at source. As mentioned by CIT (A), coordinate bench in the case of Tata Teleservices (supra) had clearly held that such payments were more in the nature of bank charges than in the nature of commission and Section 194H of the Act would not be attracted. In such circumstances, we do not find any reason to interfere with the order of CIT (A). Ground 3 stands dismissed.

In the result, appeal of the Revenue is dismissed.