DCIT, CIRCLE - 8, KOLKATA, KOLKATA vs. M/S. EIH LIMITED, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri Mahavir Singh, JM & Shri M. Balaganesh, AM]

I.T.A No.314/Kol/2011 Assessment Year: 2006-07 EIH Limited (PAN: AAACE6898B) Vs. Deputy Commissioner of Income-tax, Circle-8, Kolkata. (Appellant) (Respondent) & I.T.A No.348/Kol/2011 Assessment Year: 2006-07 Deputy Commissioner of Income-tax, Vs. EIH Limited Circle-8, Kolkata. (Appellant) (Respondent) & C.O. No.23/Kol/2011 In I.T.A No.348/Kol/2011 Assessment Year: 2006-07 EIH Limited Vs. Deputy Commissioner of Income-tax, Circle-8, Kolkata. (Cross Objector) (Respondent)

Date of hearing: 16.05.2016 Date of pronouncement: 01.06.2016

For the Assessee/Cross Objector: Shri R.N. Bajoria, Advocate & Shri A. K. Gupta, FCA For the Revenue : Shri Vijay Shankar, CIT, DR

ORDER Per Shri M. Balaganesh, AM: These cross appeals by assessee and revenue and the Cross Objection by assessee are arising out of common order of CIT(A)-VIII, Kolkata vide Appeal No. 426/CIT(A)- VIII/Kol/08-09 dated 29.11.2010. Assessment was framed by DCIT, Circle-8, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2006-07 vide his order dated 26.12.2008. Since both these appeals and the cross objections are arising out of common order, we dispose them off together for the sake of convenience.

2 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 2. Disallowance of Advertisement , Publicity and Sales Promotion Expenses The assessee had raised the following ground No. 1 :- “1. That on the facts and in the circumstances of the case, the Ld. CIT(a) erred in confirming the disallowance made by the Assessing Officer u/s. 40(a)(i) of the Act of Rs.4,223,522/- paid to foreign parties towards sales promotion services rendered outside India for alleged non deduction of tax u/s. 195 from such payment without appreciating that no tax withholding was called for from such remittance.”

The revenue had raised the following ground no. 1:- “1. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by holding that provisions of section 40(a)(ia) do not apply on foreign payments on account of Advertisement, Professional & Consultancy Fees and Commission to foreign travel agents.”

The assessee had also raised the following sole ground in its cross objection :- “1. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in ignoring to consider the Publicity and Sales Promotion Expenses of Rs.4,242/- and Rs.7,88,126/- respectively incurred by The Oberoi Grand, Kolkata and Oberoi Hotels, Mumbai, the two units of the appellant while adjudicating Ground No. 1 and thereby not concluding that the aforesaid payments do not attract the provision of section 40(a)(i) of the Act.”

3.1. Before the Learned CITA, the assessee claimed that the entire detail party wise was filed before the Learned AO and he ought not to have made any disallowance on estimated basis. The Learned CITA made extensive verification of the details filed by the assessee. It was argued that payments towards foreign advertisements to the extent of Rs. 2,05,46,761/- should not be subjected to tax in India as services were rendered outside India and the respective payees do not have any permanent establishment in

3 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 India. It was further contended that the payments in the instant case constituted business profits in the hands of the payees and would be taxed in the countries of their residence by virtue of tax treaties with the respective countries. Thus the question of deduction of tax at source u/s 195 of the Act does not arise.

3.1.1. The Learned CITA held that the payments to the foreign parties on account of advertisement outside India should not be taxable in India as per the provisions of section 9(1)(vii) of the Act since earning income through advertisement are not in the nature of ‘managerial, technical or consultancy services’. He held that at best it can be considered as business profits in the hands of the payees and however, in the absence of permanent establishment of the payees in India, the amount would not be taxable in India. Accordingly, he held that there is no need to deduct tax at source and hence the provisions of section 40(a)(i) of the Act cannot be made applicable. He further held that even otherwise, there is no justification for the Learned AO to disallow 20% of expenses on an estimated basis for alleged violation of provisions of section 40(a)(i) of the Act. Accordingly, he deleted the disallowance of Rs. 41,09,352/- (2,05,46,761*20%) made by the Learned AO.

3.2. Before the Learned CITA, the assessee claimed that a sum of Rs. 2,11,17,612/- incurred by the assessee pertains to Publicity and Sales Promotion Expenses. These payments were made to non-residents in connection with sales promotion and publicity matters in respect of services rendered abroad by the foreign parties, who do not have permanent establishment in India. It was argued that payments were made for publicity, sales promotion and reservation services and payments were not in the nature of royalty or fees for technical services either under the relevant provisions of DTAA or under the provisions of the Act and hence not taxable in India. Accordingly, it was argued that there was no obligation to deduct tax at source on the payments made thereon. The assessee also placed reliance on the decision of Hon’ble Delhi High Court in the case of Director of Income Tax vs Sheraton International Inc reported in (2009) 178 Taxman 84 (Delhi) wherein it has been held that income by way of advertisement, publicity and

4 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 sales promotion were not assessable u/s 9 of the Act as well as under Article 7 of the DTAA.

3.2.1. The Learned CITA on verification of the details filed by the assessee and the explanations offered by the assessee that the payments made by the assessee are not taxable in India and are not in the nature of royalty or fees for technical services cannot be outrightly accepted in full. He observed that it depends on the nature of services provided by those foreign parties in different tax jurisdictions. He further held that even otherwise, there is no justification for the Learned AO to disallow 20% of expenses on an estimated basis for alleged violation of provisions of section 40(a)(i) of the Act without examining the nature of payments made thereon and giving specific findings thereon. Hence the entire details were sent back to Learned AO by the Learned CITA for obtaining remand report. He observed that the Learned AO did not make any additional remark in the remand report. He observed that similar disallowance was made in Asst Year 2005-06 and the same was upheld by the Learned CITA. But he found that there is a marked difference with the case of the assessee in Asst Year 2005- 06 and the facts of the case for the year under appeal. He found that in Asst Year 2005- 06, the Learned AO inflicted the disallowance in respect of foreign currency payments to non-resident entities for providing Advertisement and Sales Promotion services based on some specific observation. Unlike the current year, no ad hoc disallowance was made by the Learned AO. He found that in Asst Year 2005-06, his predecessor had concluded that the payments represent FTS as per the Act and as well as treaty.

3.2.2. He observed that as far as the taxability of payments from the perspective of DTAA , the payments should not be taxable as fee for technical services (FTS) only on those cases where the treaty demands that the services should make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design in order to fall within the purview of FTS. Accordingly he held that in respect of the tax jurisdictions such as USA, UK, etc, where the tax treaty provides for a make available clause for deciding the FTS, the payments should not be considered as FTS and thus should not be taxable in India as

5 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 there was no making available of a technology from the perusal of the various services provided. The Learned CITA listed out the payments made to various parties in various tax jurisdictions amounting to Rs. 1,43,42,248/- where make available clause is provided in the treaty. The Learned CITA also listed out the payments made to various parties in various tax jurisdictions amounting to Rs. 59,82,996/- where make available clause was not provided in the tax treaty. However, he restricted the addition to Rs. 42,23,523/- being the remaining portion of the disallowance (i.e 83,32,875 – 41,09,352).

3.3. Aggrieved, the assessee as well as the revenue both are in appeals before us.

3.4. The Learned AR argued that the payments made to various parties in abroad does not fall under the ambit of FTS. He placed reliance on the decision of the Co-ordinate Bench of Mumbai Tribunal in the case of Rich Graviss Products P Ltd vs Addl CIT reported in (2014) 166 TTJ 329 . He argued that the services were not rendered by those parties in India. He also argued that the retrospective amendment to the provisions of section 9 of the Act in Explanation 2 would not confer the TDS obligation on the assessee with retrospective effect. He placed reliance on the decision of this tribunal in assessee’s own case for the Asst Year 2005-06 in this regard. In response to this, the Learned DR vehemently supported the orders of the Learned AO and prayed for setting aside of this issue to the file of the Learned AO for verification of the details filed by the assessee before the Learned CITA. In defence, the Learned AR stated that the Learned AO had been given due opportunity by the Learned CITA by obtaining remand report and the Learned AO did not make any remark in the said remand report and vehemently objected to set aside of the issue to AO.

3.5. We have heard the rival submissions and perused the materials available on record. We are in agreement with the Learned AR that setting aside of this issue to the file of the Learned AO would not serve any purpose as the Learned AO had not made any remark in the remand proceedings wherein the entire details of expenses were before him. We find that the genuinity of the expenditure incurred by the assessee was not disputed by the lower authorities. It is not the case of the revenue that the said expenditure is not incurred wholly and exclusively for the purpose of business of the

6 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 assessee. The only grievance of the Learned AO is that the subject mentioned payments were made without deduction of tax at source.

3.5.1. It is not in dispute that the services were rendered outside India. The retrospective amendment in Explanation 2 to section 9 of the Act with regard to retrospective TDS obligation was elaborately dealt with by the co-ordinate bench decision of this tribunal in the case of ACIT vs Subhotosh Majumder in ITA Nos. 1629/Kol/2012 for Asst Year 2009-10 ; ITA No. 366/Kol/2012 for Asst Year 2008-09 and ITA No. 2058 /Kol/2009 for Asst Year 2006-07 dated 27.11.2015 wherein, it was held that :- “From the above facts and circumstances of the case and also precedents cited above, we are of the view that till amendment in explanation to section (2) of the Act, the prevailing legal position was that unless the technical servies were rendered in India, the fees for such services could not be brought to tax under section 9(1)(vii) of the Act. The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax deductor is not expected to know how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect. The tax withholding obligations from payments to non-residents, as set out in section 195 of the Act, require that the person making the payment ‘at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force’. When these obligations are to be charged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the light of the law as it stands at that point of time.”

3.5.2. While rendering the decision in assessee’s own case for the Asst Year 2003-04 in ITA No. 57/Kol/2007 dated 9.12.2015, we had also relied on the aforesaid decision together with the decision of the Hon’ble Apex Court in the case of CIT vs Hindustan Electro Graphites Ltd reported in (2000) 243 ITR 48 (SC) as below:-.

In this case, the assessee company filed a writ petition in the High Court challenging the very constitutionality of section 143(1)(a) read with section 143(1A) and section 4 and also the intimation sent by the AO levying additional tax. High court speaking through one of us (Ruma Pal, J.) noticed that section 28 of the Act was amended with retrospective effect from 1st April 1967. It said: “An assessee cannot be imputed with clairvoyance. When the return was filed , the assessee could not possibly have known that the decision on the basis of which cash compensatory support has been claimed as not amounting to the assessee’s income ceased to be operative by reason of retrospective legislation.”

7 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 3.6. We hold that the assessee cannot be expected to foresee an amendment in the statute with regard to TDS obligations and any retrospective amendment in the law could only disturb the computation mechanism of determination of income. Accordingly, we hold that by virtue of a retrospective amendment, the income of an assessee could be disturbed on a higher side or lower side. But the TDS obligations that are cast on the assessee are only procedural in nature and assessee could maximum be expected to follow the law as it stood at the time of making payment or crediting the account of payee whichever is earlier. Hence we hold that the assessee cannot be faulted with for violation of TDS obligations due to retrospective amendment in procedural law.

3.7. In view of the aforesaid findings and judicial precedents relied upon including the co-ordinate bench decision of this tribunal, we hold that a retrospective amendment in statute does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability with retrospective effect.

Accordingly the ground no. 1 raised by the assessee is allowed. Ground No. 1 of Cross Objection of the assessee is allowed. Ground No. 1 raised by the revenue in respect of Advertisement expenses and Sales promotion expenses is dismissed.

In view of our aforesaid decision, the Ground No.2 raised by the assessee is dismissed as superfluous.

8 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 deduction of tax at source was provided. Since, the assessee did not provide the reasons for not withholding the tax and the applicability of DTAA in respect of each specific foreign remittance, the Ld. AO inflicted an ad hoc disallowance of Rs 5,607,666/- u/s. 40(a)(i) of the Act, being 20% of the actual expenses of Rs 2,80,38,329/-. The assessee, before the Learned CITA, submitted that party wise details of the relevant units were furnished to the AO during the assessment proceedings. As per the assessee, the contention of the Ld. AO that no tax was deducted on the above payments is not true. The assessee submitted that entire remittance of Rs.8,41,027/ - by the Bangalore unit and a sum of Rs. 4,348,330/ - paid by The Oberoi, New Delhi had been subjected to TDS. Further to the above, the assessee submitted that the payments under this head was mostly for legal charges for services rendered abroad or towards purchase of designs prepared abroad. In case the above services were rendered abroad, no tax was deducted due to the following reasons: i) Since there is no "technical services" involved, the provisions of section 9(i)(vii) (b) are not attracted. ii) The non-residents are not assessable in respect of income accruing and received abroad. iii) The non-residents under consideration are residents of countries with which India have Double Taxation Avoidance Agreements (DTAA) and the favourable tax treaty provisions should be considered. iv) It is well settled that if services rendered are in the nature of professional services then those provisions of DTAA are to be applied which specifically deal with" professional services". v) Under Tax Treaties "professional services" rendered by non corporate include legal and architectural services and the same could only be taxed in the countries of residence of the non-residents unless the services are rendered in India. vi) Under the provisions of most of the DTAAs, mere rendering of technical services would not make any service "technical". The services should be such that "make available" to the recipient of services technical knowledge, skills

9 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 etc possessed or deployed by the provider of services. In other words, if the recipient of any technical service can apply the same independently in future without depending on the service provider then only the technical knowledge is said to be made available. vii) Where there is conflict between the provision contained in the Treaty and the corresponding provision in the domestic law, the provision in the Treaty will prevail, unless the domestic law provision is more beneficial to the assessee. viii) The non-resident payees did not have any permanent establishment in India. In addition to the general submission, the appellant provided the reasons for non deduction of taxes in respect of some specific payees to whom the major payments were made. The assessee paid an aggregate amount of Rs.45,99,014/ - to M/ s. Atanoskovic Hartnell, the Australia based firm of solicitors on account of legal consultancy charges. The assessee submitted that by virtue of Article XIV of DTAA with Australia, the payment was not subject to tax in India. The assessee also furnished the Australian tax residency certificates of the above party. In view of the above, the assessee contended that since the income was not taxable in India, there was no requirement to withhold tax while making the remittances. The assessee submitted that the similar principle should also apply for the payments to other legal consultants like Clifford Chance and Kurtz Ahlers & Associates. As regards the payments made to M/s. Deloitte & Touch, USA the assessee submitted that the payment was made to the above payee in relation to the review of market prospects in Dubai. The assessee contended that since the above services were provided outside India and was not utilized in any business in India, the same should not be taxable in India. In respect of consultation and professional fees amounting to Rs.66,35,747/- for Trident Mumbai project, the assessee contended that the amount was capitalized and thus not claimed as tax deductible. Accordingly, the question of disallowing such expenditure does not arise.

10 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 5.1. The Learned CITA observed that most of the payments have been made to the payees of USA, UK, Germany, France and UAE i.e the countries where treaty is entered into by India and thus the payees should be eligible to tax treaty benefits. He further observed that on perusal of the details, the payees are either corporate or non-corporate entiries and the services provided by the said parties are varied in nature. He held that the payment should not be considered as taxable in India since the services are provided outside India and also utilized outside India. He detailed the payments made to various parties as under:-

(a) Payment to M/s Deloitte & Touche, USA – Covered by Article 12 of the treaty (b) Payment to Deutsche Immobilien, Germany – Payment does not fall within the scope of section 9(1)(vii) of the Act. (c ) Payment to Clifford Chance, LLP, UAE – Covered by Article 14 of the treaty (Independent Personal Services) (d) Payemnt to Atanoskovic Hartnell, Australia – Covered by Article 14 of the treaty . (e) Payment to Kurtz Ahlers & Associates , USA – Covered by Article 12 of the treaty. (f) Payment to Victoria King Public Relation Inc, USA – Covered by Article 12 of the treaty. (g) Payments to London Stock Exchange and Romeike, UK – Covered by Article 13 of the treaty. (h) Payment to P.Interior & Associates Co. Limited, Thailand – Covered by Article 14 of the treaty. (i) Payment to Synovate , USA – Covered by treaty

In respect of payments to various parties amounting to Rs. 66,35,747/- , he held that the said payment was capitalized and not charged to revenue and hence the provisions of section 40(a)(i) could not be made applicable.

Based on the aforesaid specific findings in respect of each payments, the Learned CITA held that since the incomes are not taxable in India, there is no liability on the part of the assessee to deduct tax at source and accordingly deleted the disallowance made u/s

11 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 40(a)(i) of the Act. He further held that in any case, there is no case made out by the Learned AO in the assessment order to make an estimated disallowance @ 20% of total expenditure in the sum of Rs. 56,07,666/-. Hence the entire ad hoc disallowance of Rs. 56,07,666/- was deleted by the Learned CITA. Aggrieved, the revenue is in appeal before us.

5.2. The Learned DR prayed for set aside of this issue to the file of the Learned AO for verification of the entire facts as according to him the details were filed by the assessee only before the Learned CITA . In response to this, the Learned AR objected to the same as the Learned CITA had duly called for a remand report from the Learned AO before disposing off the appeal.

5.3. We have heard the rival submissions and perused the materials available on record. With regard to the prayer of the Learned DR for setting aside of this issue to the file of the Learned AO, we find that the Learned AO had submitted his remand report vide letter dated 12.3.2010 and assessee had also duly filed its rejoinder to the remand report. The Learned CITA after taking into account the remand report and rejoinder filed by the assessee and on perusal of the entire details had deleted the addition. We also find that the Learned CITA had given categorical finding in respect of each and every payment by referring to relevant provisions of the Act and with specific reference to treaties of various countries. None of these findings were controverted by the revenue before us. Hence we find no infirmity in the order passed by the Learned CITA on this issue. Accordingly, the Ground No. 1 raised by the revenue in respect of Professional and Consultancy fees is dismissed.

12 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 and the amount paid to them as commission but not the detailed reasons for non deduction of tax in respect of each payment. As per the Ld. AO, the assessee summarily stated to the Ld. AO that no tax was deductible while making the said payments. In the submissions made during the course of appellate proceedings, the assessee submitted that the amount paid to the foreign travel agents are not taxable in India since the services were provided from outside India and the travel agents do not have any Permanent Establishment in India. The assessee further submitted that the payment of commission to the foreign travel agents is not deemed to accrue or arise in India since such payment is not in the nature of technical or consultancy fees. In support of its arguments the assessee relied on the decision of Hon'ble Supreme Court in the case of CIT -vs.- Toshoku Ltd. (1980) 125 ITR 525 (SC). The matter was subsequently sent back to the AO for remand proceedings. The Ld. AO stated in his remand report that in view of amendment in Section 9 with retrospective effect from 1st June 1976 vide Finance Act, 2010, it is likely that whole payment of Rs. 2,92,38,340/- under the head 'commission' may become taxable u/s 40(a)(i) of the Act. In reply to the remand report the assessee, inter alia, submitted that the amendment to section 9 vide Finance Act, 2010 is not applicable in the instant case since the amendment is related to the payment of interest, royalty and fees for technical services and the payment of commission to the foreign travel agents do not fall under any of the above heads. Moreover, even if the payment were covered as taxable in India under the domestic law due to the recent amendments, that should not affect the case of the assessee since the assessee had claimed the favourable treaty provisions as applicable. The Learned CITA held that the payment of commission to foreign travel agents outside India would not fall under the ambit of interest, royalty or fees for technical services and accordingly the amendment in Explanation 2 to section 9 with retrospective effect from 1.6.1976 would not alter the situation. Accordingly he held that commission paid to foreign agents for sales outside India do not accrue or arise in India and thus is not taxable in India. Accordingly the provisions of section 40(a)(i) of the Act could not

13 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 be made applicable in the facts of the instant case. Aggrieved, the revenue is in appeal before us.

6.1. We have heard the rival submissions and perused the materials available on record. With regard to the prayer of the Learned DR for setting aside of this issue to the file of the Learned AO, we find that the Learned AO had submitted his remand report vide letter dated 12.3.2010 and assessee had also duly filed its rejoinder to the remand report . The Learned CITA after taking into account the remand report and rejoinder filed by the assessee and on perusal of the entire details had deleted the addition. We also find that the Learned CITA had given categorical finding in respect of this issue which is stated hereinabove and we find that none of these findings were controverted by the revenue before us. Hence we find no infirmity in the order passed by the Learned CITA on this issue. Accordingly, the Ground No. 1 raised by the revenue in respect of Commission expenditure is dismissed.

The Learned AO observed that the assessee had debited a sum of Rs. 17,91,388/- on account of commission paid as “reservation charges” for its unit at “The Oberoi Udaivilas”. The detailed break up of this expenditure filed by the assessee contained provisions for different month. The Learned AO observed that assessee had not deducted tax at source in respect of provisions made for expenses and also in respect of payments made to few parties like Trust International, The Leading Hotels of the World etc. Accordingly, he proceeded to disallow the entire expenditure claim of Rs.

14 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 17,91,388/- in the assessment. Before the Learned CITA, it was submitted that the assessee submitted that the reservation charges were mainly paid to Oberoi Contact Centre, a unit of the Company, who handles the centralized reservation system of the hotels under the Oberoi Group. As per the assessee, it was informed to the AO that payments to Oberoi Contact Centre were not subject to TDS in view of inter unit payments. In respect of the other payments the assessee submitted that no tax was required to be deducted at source as the party rendered services from abroad and did not have any permanent establishment in India. It was further submitted by the assessee that services rendered towards securing guest reservation cannot be considered as technical fees and as such are not deemed to accrue or arise in India. In respect of the contention of the AO that the expenses represent monthly provisions, the assessee submitted that the expenditure represent actual expenses for different' months and the Ld. AO was merely guided by the narrations in the details filed and did not ask for any further clarification. The assessee further submitted that the disallowance inflicted by the Ld. AO was purely based on surmise and conjecture and thus, should be deleted. The Ld. CIT(A) perused the submissions made by the assessee as well as the relevant documents filed during the appellate proceedings. On examination of the relevant documents he found the details of payment under this head is as under: Oberoi Contact Centre 8,36,037.00 Trust International 68,782.13 The leading Hotels of the World 72,817.08 Leading Interactive Reservation 16,406.00 Provision for 388 nights 14,379.00 Provisions of different months 7,82,966.53 -------------------- 1,79,13,387.84 -------------------- Out of the above payments, the assessee submitted that payments to Oberoi Contact Centre being inter unit payments, should not be taxable in India and consequently, not liable to tax deduction. The Learned CITA agreed with the contention of the asesssee that payment by one division to another division of the same assessee is not liable to tax withholding and accordingly, in his considered opinion held , that the assessee was not liable to deduct tax at source while making the above payments.

15 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 The Learned CITA granted relief to the extent of Rs. 8,36,037/- and confirmed the disallowance to the extent of remaining amount of Rs. 9,55,351/- as according to him, the assessee had not substantiated the claim with supporting evidence. Aggrieved, the assessee as well as the revenue both are in appeals before us.

7.1. The Learned AR argued that the assessee had filed complete details before the lower authorities. It is the claim of the assessee that the payments made to various parties outside India who do not have permanent establishment in India. He also agreed for set aside of this issue to the file of the Learned AO for verification of this fact at his end. The Learned DR fairly conceded to setting aside of this issue to Ld. AO in respect of assessee’s appeal. In respect of revenue appeal, he relied on the order of the Learned AO.

7.2. We have heard the rival submissions and perused the material available on record. We find that the Learned CITA had given a categorical finding with regard to payments made to Oberoi Contact Centre being inter unit payments for which TDS provisions could not be made applicable. The Learned DR could not controvert this finding of Learned CITA before us. Accordingly, we find no infirmity in the order of the Learned CITA with regard to deletion of disallowance of Rs. 8,36,037/- .

Apropos the assessee’s appeal, we find that the issue under appeal deserves to be set aside to the file of the Learned AO for verification of the fact as to whether the parties to whom payments were made by assessee to three parties outside India to the tune of Rs. 1,58,005/- have any permanent establishment in India. In respect of provision of expenses to the tune of Rs. 7,97,345/- , we feel that the same requires verification by the Learned AO that the liability had crystallized during the year under appeal and for verification of actual payments thereon. Accordingly, the Ground Nos. 3 & 4 raised by the assessee are allowed for statistical purposes.

16 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 “2. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by overlooking the fact that provision for over-riding commission debited by the assessee and claimed as expenses are not allowable because these are mere ‘provisions’.”

The Learned AO observed that the amount of Rs. 37,00,563/- represents provision and hence not allowable as a business expenditure. Before the Learned CITA, the assessee, on the other hand, submitted that, the overriding commission is paid to the travel agents who are able to generate additional business and the overriding commission is paid over and above the normal commission payments, The assessee submitted that the overriding commissions do not represent an unascertained liability since the concerned parties had fulfilled their contractual obligations and they were entitled to additional commission. Since the actual payment of the commission was made in a later date and the assessee was following mercantile system of accounting, the amount as determined was shown as "provision" in the books of the assessee. Subsequently, vide its submission dated 15th November, 2010, the assessee further submitted that the services were provided during the relevant year and thus the liability for payment of overriding commission did accrue during the relevant year. In the books of account, the expense was inadvertently reported as provisions. With the submission, the assessee furnished the sample copies of the letters issued by the travel agents in respect of the conditions to be fulfilled for entitlement of overriding commission and a statement of overriding commission paid to travel agents for the FY 2005-06. In view of the above submissions the assessee prayed that the disallowance of Rs.37,00,563/- inflicted by the Ld. AO in respect of overriding commission should be deleted.

8.1. The Learned CIT(A) deleted the disallowance by observing as under :- “I have perused the details submitted by the appellant and carefully gone through the submissions made during the appellate proceedings. In the instant case, the services against which the impugned sum was payable was provided in the Financial Year 2005- 06. Merely since the amount was not paid within the relevant previous year the appellant company provided the same in its books of accounts and claimed the same to be tax deductible. The appellant had also provided the details of subsequent payments of the provision amounts ( page 286/1). On perusal of the details of subsequent payments it is observed that out of the aggregate amount of Rs.3,700,563/ - disallowed in the assessment order, Rs 27,21,258/- was paid subsequently. The remaining amount of Rs.9,19,303/ - was written back in the books of account in March 2008. During the appellate proceedings, the appellant submitted that the written back amount was offered

17 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 to tax in the relevant assessment year. Under the circumstances, I do not find any reason as to why the amount should not be allowed as deduction in the hands of the appellant in the-assessment year under appeal. In my opinion the amount represents a crystalised liability and thus the appellant should be eligible to deduction of the said amount. In view of the above discussion, this ground of the appellant is allowed.”

8.2. We have heard the rival submissions. From the detailed observations made by the Learned CITA as reproduced hereinabove and in view of the fact that revenue was not able to produce the contrary evidence in this regard we find no infirmity in the order of the Learned CITA in this regard. Accordingly, the Ground No. 2 raised by the revenue is dismissed.

The Learned AO during the course of assessment proceedings observed that the assessee had debited a sum of Rs. 3,63,25,075/- towards aircraft maintenance expenses. The Learned AO disallowed 10% of the same on an ad hoc basis on account of alleged personal element of expenditure incurred thereon. The Learned CITA after making verification of the detailed break up of expenditure provided by the assessee which were also subjected to remand proceedings, and based on the order in the assessee’s own case for the Asst Years 2004-05 and 2005-06 , upheld the disallowance made by the Learned AO. Aggrieved, the assessee is in appeal before us on the following ground:- “5. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the estimated disallowance of rs.3,632,508/-, on account of aircraft running and maintenance expenses being 10% of the aggregate expenditure of Rs.36,325,075/- on the basis of past assessments ignoring the fact that the aircrafts were exclusively used for the purpose of the business and unlike the past years, there was total compliance before the AO and the CIT(A) so far as the submissions of details were concerned, a fact which has been admitted by the lower authorities.”

9.1. We have heard the rival submissions and perused the materials available on record. We find that this issue is covered in assessee’s own case for the Asst Years 2003-04 , 2004-05 & 2005-06 in ITA Nos . 57/Kol/2007 ; 1846/Kol/2007 and 299/Kol/2010 dated 9.12.2015 respectively, wherein it was held that :-

18 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 6.3. We have heard the rival submissions and perused the materials available on record. We find that this issue is squarely covered by the decision of the co-ordinate bench decision of this tribunal in assessee’s own case for Asst Year 2002-03 in ITA No. 316/Kol/2006 dated 11.9.2015 in para 4.4 had held as under:-

“It is seen that the net expenditure towards running and maintenance of aircrafts debited in profit and loss account is only Rs. 95,64,995/- and hence the premise of the Learned AO that a sum of Rs. 2,14,04,416/- is debited to profit and loss account is grossly incorrect. It is observed that ultimately the assessee had derived surplus of Rs. 1,07,87,457/- being the difference between the chartering income of Rs. 2,02,52,452/- and maintenance and running of aircrafts expenditure to the tune of Rs. 95,64,995/-, even though deriving surplus thereon is not a pre-requisite for allowance of expenditure incurred. We also find that complete details of the entire expenditure towards running and maintenance of aircrafts together with the log book has been filed before the Learned AO and hence there is absolutely no case for the Learned AO to reject the same and proceed to make disallowance on estimated basis to be in line with the disallowances made in earlier years. We also find that the earlier years ITAT order on this issue need not be followed for the asst year under appeal as in this year, the entire details were very much before the Learned AO. We also find lot of force in the arguments of the Learned AR that the assessee company being a non-natural person cannot have any personal element thereon and all the expenditure incurred thereon had to be construed only for business purposes . To this extent, the reliance on the Gujarat High Court decision in 253 ITR 749 is well placed and supports the case of the assessee. We also find lot of force in the arguments of the Learned AR that if at all there is any personal element involved in the aforesaid expenditure, the same have to be taxed as perquisite in the hands of the directors and it is only for the TDS officer to look into the violations, if any, on the same and hence on that ground also, no disallowance of expenditure could be appreciated. We find that the Learned AO had made the entire addition based on surmises and conjectures and made on adhoc basis . It is well founded proposition that what is apparent is real and the allegation to prove the contrary is on the person making such allegation. The following decisions support our view in this regard:-

CIT vs Daulat Ram Rawatmull (1973) 87 ITR 349 (SC) Sukhdayal Rambilas vs CIT (1982) 136 ITR 414 Madura Knitting Co vs CIT (1956) 30 ITR 764 (Mad)

In view of the aforesaid facts and circumstances and respectfully following the judicial precedents thereon, we have no hesitation in deleting the addition made in the sum of Rs. 42,80,883/- on an estimated basis. Accordingly, the Ground No. 4 raised by the assessee is allowed.

In view of the aforesaid facts of the case and respectfully following the co-ordinate bench decision (supra), we hold that no addition need to be made on an estimated basis towards running and maintenance of aircrafts. Accordingly, the ground nos. 6 & 7 raised by the assessee are allowed.

19 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07

Respectfully following the aforesaid decision in assessee’s own case, we allow the Ground No. 5 raised by the assessee.

During the course of assessment proceedings the Ld. AO found that an amount of Rs.39,13,08,052/ - was given by the appellant as advances to various sister concerns associates free of interest. The details of the advances as per the assessment order is as under :

Balaji Hotels and Enterprises Limited 17,83,91,145 Green Field Resorts Pvt. Ltd 8,00,00,000 Others Misc advances 13,29,16,907 Total 39,13,08,052

As per the Ld. AO, during the assessment proceedings, the assessee stated that the loans / advances were from its own surplus but the assessee could not provide any evidence in support of the same. In absence of any evidence, the Ld. AO disallowed an amount of Rs 4,69,56,966/- being 12% of the amount advanced. The rate of 12% is computed to be the average rate of interest for the relevant year.

The assessee, during the appellate proceedings contended that the advances were given to associate enterprises and other parties due to commercial expediencies and the amount advanced were not out of the borrowed funds. As per the assessee, the company had sufficient funds at its disposal far exceeding the amount advanced. The assessee further submitted that even in cases where interest had been charged by the assessee, the notional interest disallowance of interest had been made at a flat rate. Moreover, as per the assessee the actual average rate of interest is considerably lower than the rate adopted by the Ld. AO.

The assessee filed a detailed submission on 15th November, 2010 in respect of the advances made to Balaji Hotels & Enterprises Ltd. In terms of the said submission, the

20 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 party had a piece of land in Chennai where it proposed to start a hotel. For this purpose, the party took loan from IFCI and TFCI. The appellant entered in to a Technical Service Agreement and a Project Consultancy Agreement with the said party in respect of the proposed hotel. However, eventually the project went through financial crunch and the party could not arrange for funds. At this point, at the request of the party, the assessee provided an advance of Rs 15.12 crores to the party for the completion of the hotel project. However, ultimately the project could not be succeeded and the financial institutions identified the loan provided to the party as NPA. Subsequently, IFCI took possession of the hotel and sold it to a third party. As per the assessee, it had business interest in providing advances to the party since it wanted an early completion of the project so that it can earn revenue from the project by virtue of Technical Services Agreement. Moreover, all the loans were provided from its own fund. The assessee further submitted that out of the amount of Rs. 17,83,91,145/ -, only Rs. 15,12,00,000 represents the amount of advance, The remaining amount of Rs.2,71,91,145/- represents accumulated interest. The appellant duly offered such interest to income tax in the respective years. Thus, while computing the notional interest for the purpose of disallowance, the AO mistakenly considered the entire amount as advance. In respect of amount advanced to Green Field Resorts Pvt. Ltd, the assessee submitted that the amount was given to the party as a project advance towards 50% share in joint venture agreement with the party for operating hotel/ resort. Further to the above submission, the assessee vide its submission dated 15th November, 2010 provided in detail the necessity for providing the advance to the party. As per the assessee Hiranandani Group was holding a piece of land in Maharashtra and was planning to acquire some further land. During the year 1995 the assessee entered into a Memorandum of Understanding (MOU) with Hiranandani Group for the purpose of setting up hotels, resort complex, golf course and real estate development through a Joint Venture Company (JVC). As per the MOU a company Green Field Resorts Pvt Ltd from the Hiranandani Group was to be restructured to give effect to the joint venture agreement with the appellant company. As per the arrangement Rs 10 crores was advanced by the appellant to Green Field Resorts Pvt. Ltd. as an equity investment in

21 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 the potential project. However, the amount was shown as loan till the restructure of Green Field Resorts Pvt. Ltd was completed. As per the MOU, the assessee was supposed to manage and operate the hotel, club house and golf course and other related activities of the joint venture project. However, subsequently, considering the depression in the real estate market the MOU was cancelled and the amount was refunded to the assessee on 1.6.2006. As far as the Others Misc. advances of Rs.13,29,16,907/- is concerned, the assessee provided the details of the advances as below:- Debit balances in Sundry Creditors A/ c Rs.1,06,77,718 Advances to suppliers Rs.4,16,07,594 Staff Loan Rs. 64,10,541 Staff Advance Rs. 31,83,878 Advance for imports Rs. 93,27,759 Gratuity Receivable Rs. 42,39,347 Sales Tax aid in advance Rs. 6,86,396 Insurance claim Rs. 5,83,055 Advance Entertainment Tax & other statutory payments made by different units Rs.2,76,59,906 Payments made by different units Deferred Foreign Exchange Fluctuation Rs. 22,93,187 Advance to DPS Society Rs. 10,00,000 Amounts recoverable from group companies for Rs.1,39,45,733 services rendered/capital goods purchased on their behalf Sundries Rs.1,13,01,793 Total Rs.13,29,16,907

In respect of the above, the assessee submitted that during the assessment proceedings the AO did not ask for the details of "Other Miscellaneous Advances". Further, the assessee submitted that the perusal of the above details would reveal that in almost all cases the advances were given by the assessee due to commercial expediencies, In addition, the assessee submitted that the items like Debit balances in Sundry Creditors A/ c, advance to suppliers, Gratuity Receivable etc. having business advances did not

22 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 represent any loan on which interest can be charged. On the other hand, as per the assessee, in case of staff loan, interest was charged by the assessee @12%. The assessee further submitted that it had earned a profit of Rs.260,74,50,176/- during the relevant financial year. In addition to that, it had a reserves and surplus of Rs.992,56,27,750/ -. It was also submitted that Ld. AO that all receipts including the sale proceeds and the borrowings were deposited in cash credit account and all payments including the advances were effected through this mixed account. Thus the question of submission of separate accounts for utilization of own surplus and borrowed funds does not arise. Further, the net increase of loans and advances during the year much lesser than the profit earned during the year. Thus, to summarize, with its submission, the assessee argued that all loans and advances were given out of commercial expediencies and out of its own funds and not out of any borrowed funds. Thus the question of disallowance of notional interest does not arise. Beside the above, the assessee submitted that for inflicting a disallowance, the onus is on the AO to make out a case and in the impugned assessment order which the AO has failed to do so. In addition, the assessee also submitted that the notional rate of interest of 12% as computed by the Ld. AO is arbitrary. As per the assessee, the average rate of interest for the relevant year is 8.60%. Thus, even assuming without conceding, that if any disallowance is called for, the applicable rate of interest should be 8.60%.

10.1. The Learned CITA by placing reliance on the decision of his predecessor in assessee’s own case for the Asst Year 2005-06 confirmed the disallowance of interest in respect of amounts advanced to Balaji Hotels and Enterprises Limited and Green Field Resorts Pvt Ltd. However, he deleted the disallowance of interest on account of other Miscellaneous Advances. Aggrieved, both the assessee is well as the revenue are in appeal before us. The assessee has raised the following grounds:- “6. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of notional interest of Rs.31,006,937/- on interest free advances given to the associate companies solely based on assessment of past years even after admitting that the advances were given out of commercial expediency. 7. That on the facts and in the circumstances of the case and without prejudice to the Ground no. 6 above, the Ld. CIT(A) erred in sustaining the disallowance of notional interest on interest free advances given to associate companies without appreciating the

23 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 fact that the advances were made wholly from the bank accounts, where the income from sales are deposited and thus the question of disallowance of notional interest on borrowed funds does not arise. 8. that without prejudice to the Ground Numbers 6 & 7 above, even assuming but not admitting that the advances were made out of the borrowed funds, the Ld. CIT(A) erred in sustaining the assumed rate of 12% p.a. for the purpose of computing the disallowance of notional interest.”

The revenue has raised the following ground:- “3. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by holding that the miscellaneous advances made are purely trade advances/deposits and not in the nature of loan when the assessee could not furnish any evidence to show that the advances given were trade advances/deposits and were made from its own surplus.”

10.2. We have heard the rival submissions and perused the materials available on record. We find that this issue is covered in assessee’s own case for the Asst Years 2003-04 , 2004-05 & 2005-06 in ITA Nos . 57/Kol/2007 ; 1846/Kol/2007 and 299/Kol/2010 dated 9.12.2015 respectively, wherein it was held that :-

7.4. We have heard the rival submissions and perused the materials available on record. We find from the paper book filed by the assessee that the entire details as to for what purpose the monies were paid by the assessee company to the aforesaid parties were given before the Learned AO . We find that in respect of amounts advanced by the assessee to certain group companies where interest is charged by it, there is absolutely no dispute. In respect of interest free advances, it has to be seen whether the same were advanced out of own funds or out of borrowed funds by the assessee. The Learned AO simply states that similar disallowances were made in the earlier years and accordingly the same is to be made for this asst year also brushing aside all the submissions of the assessee. In the instant case, the assessee had in fact made borrowings and utilised the same for the purpose of its business. The borrowed funds and the own funds in the form of share capital, reserves & surplus, cash profits derived during the year, etc were inextricably mixed in the same bank account and hence presumption could be drawn that interest free advances were made out of own funds provided the own funds are more than the amounts advanced interest free to parties. The own funds available with the assessee company is worked out as below:-

31.3.2003 31.3.2002 (Rupees in Crores)

Share Capital 152.39 152.39 General Reserve 451.21 446.21 Surplus in Profit and Loss A/c 29.34 38.75 Capital Redemption Reserve 2.42 2.42 Foreign Exchange Earnings Reserve 0.00 5.00 Debenture Redemption Reserve 0.00 1.95

24 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 ------------- ------------ Total Own Funds 635.36 646.72 ------------ ------------

7.4.1. Moreover, it is well settled proposition that it is not for the income tax department to suggest how the businessman should conduct his business and have his affairs. The businessman knows his interest best. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of CIT vs Dhanraj Girji Raja Narasingherji (1973) 91 ITR 544 (SC). Further reliance is also placed on the decision of the Hon’ble Apex Court in the case of CIT vs Walchand and Co. (1967) 65 ITR 381 (SC) wherein it was held that in applying the test of commercial expediency whether the expenditure was excessively laid down for the purpose of business, reasonableness of the expenditure is to be judged from the point of view of a businessman and not that of the revenue. It is well decided that what is to be seen for the purpose of allowability of interest u/s 36(1)(iii) of the Act is as to whether the borrowed funds were utilized for the purpose of business.

7.4.2. From the above workings of availability of own funds, it could safely be concluded that the borrowed funds were not utilized for making the interest free advances by the assessee. This finding is given irrespective of the fact that the same were advanced as a measure of commercial expediency and for the purpose of business. We find that all the advances were made as Strategic Investments to pursue its further business interests and those companies were also using the brand of the assessee, rendering technical services and assessee’s staff were used by the group companies and hence had to be construed as advances made during the course of assessee’s business.

7.4.3. We draw our support from the following decisions in support of our findings :-

a) CIT vs Gopalakrishna Muralidhar reported in (1963) 47 ITR 469 (AP)

b) Woolcombers of India Ltd vs CIT reported in 134 ITR 219 (CAL)

c) CIT vs Hotel Savera reported in 239 ITR 795 (MAD)

d) CIT vs Britannia Industries Ltd reported in 280 ITR 525 (CAL)

e) S A Builders Ltd vs CIT reported in 288 ITR 1 (SC)

f) Addl. CIT vs Tulip Star Hotels Ltd in CC No. 7138-7140 / 2012 dated 30.4.2012 by the Supreme Court , wherein it was held as below:-

In our view, S.A.Builders Ltd vs CIT reported in 288 ITR 1, needs reconsideration.

Though it is stated that the decision in S.A.Builders Ltd in 288 ITR 1 (SC) requires reconsideration, notice has been ordered to be issued to both the parties and the matter is still pending before the Supreme Court as on date. Hence the decision in 288 ITR 1 (SC) is very much applicable as on date until the judgement in Tulip Star Hotels Ltd is pronounced by the Supreme Court.

25 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 g) Munjal Sales Corporation vs CIT and Another reported in 298 ITR 298 (SC) h) CIT vs Reliance Utilities and Power Ltd reported in 313 ITR 340 (BOM) i) Recent decision of the Hon’ble Apex Court in the case of Hero Cycles (P) Ltd vs CIT reported in (2015) 63 taxmann.com 308 (SC) dated 5.11.2015. The operative portion of the aforesaid judgements are not reproduced herein for the sake of brevity. However the principles laid down by the various courts including the apex court is considered in our final decision rendered herein. 7.4.4. We also find that this issue is squarely covered by the decision of the co-ordinate bench decision of this tribunal in assessee’s own case in favour of the assessee for Asst Year 2002-03 in ITA No. 316/Kol/2006 dated 11.9.2015 in para 6 of the said order. 7.4.5. In view of the aforesaid facts and circumstances and the judicial precedents on the impugned issue, we hold as under:- - that the interest free advances were made by the assessee to various parties during the course of its business and are strategic investments. - that the borrowed funds were not diverted for non-business purposes as sufficient own funds were available with the assessee to make interest free advances to its group concerns. - that when borrowed funds and own funds were inextricably mixed in the same bank account and if the own funds are more than the amounts advanced interest free to sister concerns, then the presumption could be drawn in favour of the assessee that those advances were made only out of own funds of the assessee. - that from the aforesaid facts available on record, the assessee had advanced monies to various concerns during the course of its business to further strengthen its business interests with the said parties and as a measure of commercial expediency. - that in applying the test of commercial expediency whether the expenditure was excessively laid down for the purpose of business, reasonableness of the expenditure is to be judged from the point of view of a businessman and not that of the revenue. Accordingly we hold that the action of the Learned AO in disallowing a sum of Rs. 4,67,38,966/- and Learned CITA restricting the said disallowance to Rs. 3,73,32,024/- is not warranted and Ground Nos. 8 & 9 raised by the assessee are allowed.

10.3. It is not in dispute that the assessee had sufficient own funds to make these advances. The assessee had earned a profit of Rs. 260,74,50,176/- during the year and had reserves and surplus of Rs. 992,56,27,750/-. Hence it could be safely concluded

26 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 that the assessee was flooded with own funds and borrowed funds were not utilized for making these interest free business advances. None of the findings given in the aforesaid order in assessee’s own case were controverted by the revenue before us. Respectfully following the aforesaid decision in assessee’s own case, we allow the Ground Nos. 6 to 8 raised by the assessee and dismiss the Ground No. 3 raised by the revenue.

The revenue has raised the following ground:-

27 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 “5. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by restricting the disallowance made by the AO even when provisions of section 14A of the Act were correctly applied in respect of management expenses which were incurred for earning exempt income.”

11.2. We have heard the rival submissions. The relevant assessment year under appeal is 2006-07 at which point of time , the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej & Boyce Manufacturing reported in 328 ITR 81 (Bom) . However, it is not in dispute that the assessee had derived taxable income as well as tax free income and incurred expenditure for deriving both the incomes and hence disallowance is definitely warranted in terms of section 14A which is brought in the statute book with retrospective effect from 1.4.1962. The disallowance had to be made only on an estimated basis with regard to the expenditure incurred for the purpose of earning tax free income. The Hon’ble Jurisdictional High Court in the case of CIT vs M/s R.R.Sen & Brothers P Ltd in GA No. 3019 of 2012 in ITAT NO. 243 of 2012 dated 4.1.2013 had held as under:- “ The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under income tax. The tribunal has computed expenditure at 1% of such dividend income, which, according to them, is the thumb rule applied consistently. We find no reason to interfere.

The appeal is dismissed.”

We find that the Learned CITA had also directed the Learned AO to restrict the disallowance u/s 14A of the Act at 1% of dividend income. Hence we find no infirmity in the order passed by the Learned CITA in this regard. Accordingly, the Ground No. 9 raised by the assessee is dismissed and Ground No. 5 raised by the revenue is dismissed.

The AO in the assessment order passed, has stated that Oberoi Flight Services, an

28 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 unit of the assessee company, had paid an amount of Rs 59,63,025/ - as commission to the Airport Authority of India. From the details submitted during the assessment proceedings, it was observed that no tax was deducted by the assessee company on such commission expenses. In absence of deduction of tax at source, the Ld. AO applied the provisions of section 40(a)(ia) of the Act and disallowed the said sum in the assessment order. The assessee submitted that the Ld. AO came across the details of commission payment while checking the unit wise liability for expenses for the relevant year. The details submitted during the assessment proceedings did not provide for the tax withholding from the above payments. The assessee further submitted that out of the aggregate payable of Rs.59,63,205/ -, Rs 29,00,000/- was actually paid and the balance amount of Rs 30,63,205/- stood as payable at the year end. The assessee argued that tax was duly deducted and deposited on the above payments.

12.1. The Learned CITA based on the TDS certificate filed before him for the payment of Rs. 29,00,000/- held that assessee had complied with the TDS obligations for Rs. 29,00,000/- and confirmed the disallowance to the tune of Rs. 30,63,205/- for want of supporting evidences. Aggrieved, the assessee is in appeal before us on the following ground:- “10. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in sustaining the disallowance of Rs.3,063,205/- on account of commission paid to Airport Authority of India for alleged non-deduction of tax at source.”

12.2. The Learned AR prayed that the assessee be given one more opportunity to produce the TDS certificates and other evidences before the Learned AO with regard to the compliance to TDS obligations. In response to this, the Learned DR vehemently relied on the order of the Learned CITA.

12.3. We have heard the rival submissions and perused the material available on record. We find in the facts and circumstances, the assessee be given one more opportunity to furnish before the Learned AO TDS certificates or any other evidences in support of its compliance to TDS obligations with regard to commission payments made to Airports

29 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 Authority of India. We direct the Learned AO accordingly. Hence the Ground No. 10 raised by the assessee is allowed for statistical purposes.

30 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 made subsequent to the filing of the return is accepted. However, he observed that the assessee had claimed this amount as deduction on account of write off out of amounts advanced towards equity participation in a joint venture, which is capital in nature. Hence he held that the write off of the said advance cannot be allowed as revenue expenditure. Aggrieved, the assessee is in appeal before us on the following ground :- “11. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of rs.20,150,000/- made by the Assessing Officer on account of advance written off, holding that the advance was of capital nature.”

13.2. The Learned AR reiterated the factual submissions and the circumstances which led to the write off of the said amount. He stated that out of the amounts advanced in the sum of Rs. 9,01,50,000/- to Nandi Hills and Resorts Ltd, due to failure of joint venture, the assessee could recover only a sum of Rs. 7,00,00,000/- pursuant to the order of the Hon’ble Calcutta High Court. Hence the chances of recovery of the balance sum were completely and lost. Hence the assessee had no other option but to write off the remaining sum of Rs. 2,01,50,000/- and claim the same as deduction. He placed reliance on the decision of the Hon’ble Calcutta High Court in the case of Binani Cement Ltd vs CIT reported in (2016) 380 ITR 116 (Cal) in support of his contention. He argued that the advance was made during the course of business of the assessee and hence the same has to be construed as a regular business loss. In response to this, the Learned DR argued that this is a joint venture investment made by the assessee and the income had it been derived would have been taxed in the hands of the said joint venture which would invariably be a separate legal entity and accordingly the loss arising out of the said joint venture investment should be incurred only in the said joint venture hands and not in the hands of the assessee. He accordingly pleaded that the decision of the Calcutta High Court relied upon by the Learned AR is not applicable to the facts of the case. In defence, the Learned AR stated no such separate entity as claimed by the Learned DR was ever started for joint venture participation. The assessee was to get royalty from various hotels for using its trademark, logo and name at various locations across India. The assessee was not entitled to any other income other than royalty out of making this joint venture investment.

31 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 13.3. We have heard the rival submissions. The facts stated hereinabove remain undisputed and hence are not reiterated for the sake of brevity. We had already held in assessee’s own case for the Asst Year 2002-03 in ITA No. 316/Kol/2006 dated 11.9.2015 in the context of allowability of interest on borrowed funds alleged to be used for advance to Nandi Hills Resorts Ltd that the said advance was for the purpose of business. We find lot of force in the argument of the Learned AR that the assessee would get only royalty from various hotels for using its trademark, logo and name for which purpose it had made investments in joint venture equity participation. Due to the fact that the project could not take off and got abandoned for various reasons beyond the control of the assessee, the assessee had to claim the same as a regular business loss. We find that the reliance placed by the Learned AR on the decision of the Hon’ble Calcutta High Court in the case of Binani Cement Ltd vs CIT reported in (2016) 380 ITR 116 (Cal) is well founded, wherein it was held that : “The Commissioner (Appeals) found that the assessee claimed deduction of the expenditure on a project which had been abandoned when it was found to be unviable, that the expenditure was not claimed or allowed earlier as business expenditure because it was of capital nature entitled to depreciation after completion and on commencement of its use for business but since that stage was not reached no asset having come into existence the capital-work-in- progress had to be written off. The Commissioner (Appeals) held that when construction/acquisition of a new facility was abandoned at the work-in- progress stage, the expenditure did not result in an enduring advantage and such expenditure, when written off, had to be allowed under section 37 of the Income-tax Act, 1961. The Tribunal reversed the order of the Commissioner (Appeals) holding that the expenditure incurred in the earlier years could not be deducted in the year 2003-04. On appeal: Held, allowing the appeal, that there was no challenge on the finding of the Commissioner (Appeals) on the facts before the Tribunal or even the appeal. There would have been no occasion to claim the deduction if the work- in-progress had completed its course. Because the project was abandoned the work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. Thus, the expenditure arose in the relevant year.”

We find similar view has been taken in the following cases :- (a) Decision of Hon’ble Delhi High Court in the case of Indo Rama Synthetics (I) Ltd vs CIT reported in ( 2011) 333 ITR 18 (Del). (b) Unreported decision of Hon’ble Calcutta High Court in the case of CIT vs Alcove Industries Ltd in ITA No. 724 of 2004 dated 17.8.2015

32 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 (c ) Decision of Hon’ble Karnataka High Court in the case of Asia Power Projects (P) Ltd vs DCIT reported in (2015) 370 ITR 257 (Kar) Respectfully following the ratio laid down in the aforesaid judgements, we allow the claim of assessee in respect of advances written off in the sum of Rs. 2,01,50,000/- as deduction in the year under appeal. Accordingly, the Ground No. 11 raised by the assessee is allowed.

The assessee has raised the following ground:- “12. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of Rs.12,70,751/- made by the Assessing Officer on account of claim for Provision for Leave Encashment made in assessment on the basis of the decision of the jurisdictional High Court in the case of Exide Industries Ltd. & Anr. Vs. Union of India reported in (2007) 292 ITR 470 (Cal) for the reason that the Hon’ble apex Court has ordered a stay on the aforesaid judgment.”

14.1. At the outset, we find that the CIT(A) confirmed the disallowance of Rs.12,70,751/- as made by the Ld. AO on account of claim for provision for leave encashment. Ld. counsel for the assessee stated that the deduction on account of provision of leave encashment was made on the basis of the judgment of Hon'ble jurisdictional High Court in the case of Exide Industries Ltd. Vs. Union of India (2007) 292 ITR 470 (Cal) but he fairly conceded that subsequently Hon'ble Supreme Court has stayed this judgment of Hon'ble jurisdictional High Court vide order 08-05-2009 by following observations:- “Pending hearing and final disposal of the Civil Appeals, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if section 43B(f) is on the Statue Book but at the same time it would be entitled to make a claim in its returns.”

In view of the above, Ld. counsel for the assessee fairly stated that let Hon'ble Supreme Court decide the issue and by that time the matter can be remitted back to the file of AO for fresh adjudication in term of the decision of Hon'ble Supreme Court. On this, Ld.

33 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 CIT DR has not objected to the same. Accordingly, we set aside this issue to the file of the AO to await the decision of Hon'ble Supreme Court and decide the issue accordingly. This issue of assessee’s appeal is remitted back to the file of AO and accordingly the Ground No. 12 raised by the assessee is allowed for statistical purposes.

15.1. The Learned CITA observed that the Ld. AO had made the impugned disallowance on ad hoc basis which is not based on any specific observation on the details provided by the assessee. Even in the remand report, the Learned AO could not justify his addition. The Learned CITA held that the Learned AO had summarily mentioned that the general charges include payments for penalty and TDS write off. He also agreed with the contention of the assessee that the TDS written off should be allowed as deduction in view of the decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs Shreyans Industries Ltd reported in (2006) 157 Taxman 417

34 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 (P&H). Accordingly, he deleted the disallowance. Aggrieved, the revenue is in appeal before us on the following ground:- “4. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by overlooking the fact that general expenses contained certain expenditure in the nature of penalty, tax deducted at source write offs.”

15.2. The Learned DR argued that this issue may be set aside to the file of the Learned AO for verification of the details submitted by the assessee. In response to this, the Learned AR vehemently supported the order of the Learned CITA and stated that the Learned CITA had passed the order after obtaining the remand report from the Learned AO.

15.3. We have heard the rival submissions. We find that the addition has been made by the Learned AO merely on surmise and conjecture. The Learned CITA had rightly deleted the addition after going through the comments made by the Learned AO in the remand report in respect of this addition. Hence we find no infirmity in the order of the Learned CITA in this regard. Accordingly, the Ground no. 4 raised by the revenue is dismissed.

35 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 includes the provisions for bonus of all the units of the assessee company which inter alia includes the provision in respect of "Oberoi Airport Services, Mumbai". Thus, as per the assessee, the sum of Rs.29,65,542/- already includes the amount of Rs.7,12,000/- . In view of the above the assessee argued that a further disallowance of Rs 7,12,000/- would result into double disallowance and should be deleted. 16.1. The Learned CITA observed that the Tax Auditor of the assessee had duly certified that a bonus amount of Rs. 29,65,542/- remain unpaid and accordingly the same was disallowed voluntarily by the assessee in the return of income. He observed that the sum of Rs. 7,12,000/- is included in the disallowance made in the sum of Rs. 29,65,542/- and accordingly deleted the double disallowance. Aggrieved , the revenue is in appeal before us on the following ground:- “6. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by allowing provision for bonus u/s. 43B of the Act even when such provision is not an allowable expenditure.”

16.2. We have heard the rival submissions. We find that no contrary evidence has been brought on record by the revenue in respect of the categorical finding given by the Learned CITA in his appellate order. Hence we find no infirmity in the order of the Learned CITA in this regard. Accordingly, the Ground No. 6 raised by the revenue is dismissed.

The Ld. AO has stated that from the details submitted during the assessment proceedings, it was observed that Oberoi Flight Services Mumbai, an unit of the assessee company had an outstanding liability of Rs.1,20,851/- on account of "unclaimed salaries & wages". The above liability relates to 66 employees who had left the company. As per the Ld. AO, since the employees had left the company, the liability in the hands of the assessee company had ceased to exist. Hence, the Ld. AO applied the provisions of section 41(1) of the Act and added Rs.1,20,851/ - while computing the assessed income of the assessee.

36 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 Similarly, in respect of Oberoi Airport Services, Mumbai, another unit of the assessee company, the Ld. AO observed an amount of Rs 2,21,896/ - was disclosed as unclaimed salaries and wages. Since, in this case also, the unclaimed salary and wages were related to the employees who had left the organisation, the Ld. AO applied the provisions of section 41(1) of the Act and added the sum while computing the assessed income of the assessee company. The assessee submitted that the addition made by Ld. AO u/s. 41(1) on account of unclaimed salaries and wages was not based on correct appreciation of facts or law and thus liable to be deleted. As per the assessee, section 41(1) of the Act is applicable in a situation where deduction of any expenditure is claimed and allowed in any past year and subsequently the assessee gets any benefit or amount in respect of such expenditure. In such cases, the benefit is offered to tax in the subsequent year. As per Explanation 1 of section 4](1) remission or cessation of any trading liability by an unilateral act would be chargeable to tax only if such liability is written back in accounts. In view of the above, the assessee submitted that in cases of Oberoi Flight Services and Oberoi Airport Services no amount on account of unclaimed salary and wages was written back in the accounts and there was no cessation of liability. The assessee further submitted that employees who had left the organisation did not file any declaration that they had waived their dues from the Company. Thus, as per the assessee the liabilities as shown in the books exists and has not ceased. In view of the assessee, the left employees may claim their salaries and wages in the subsequent years. Thus, the liability to pay the admitted dues still exists on part of the company and merely in absence of a valid claim it cannot be concluded that the liability has ceased to exist.

17.1. The Learned CITA held that section 41(1) of the Act in order to be operative, there should be a write back in the books of accounts of the assessee and there should be cessation of liabiities. He agreed with the various judicial decisions relied upon by the assessee and deleted the addition made u/s 41(1) of the Act. Aggrieved , the revenue is in appeal before us on the following ground:- “7. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by holding that section 41(1) of the Act is not applicable in the assessee’s case regarding

37 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 unclaimed salaries and wages in respect of Oberoi flight Services Mumbai and Oberoi Airport Services.”

17.2. We have heard the rival submissions. We find that no specific arguments were advanced by the Learned DR in respect of this addition. We agree with the contentions of the assessee that the employees who had left the organization had not filed any declaration that they had waived their dues from the assessee and the liabilities towards unclaimed salaries and wages continue to be reflected in the books of the assessee. No benefit was derived by the assessee in this regard. We hold that the liability to pay the agreed dues exists on the part of the assessee and merely in the absence of a valid claim from the resigned employees, it cannot be concluded that the liability had ceased to exist. Hence the provisions of section 41(1) of the Act cannot be invoked in the facts of the instant case. Accordingly, the Ground No. 7 raised by the revenue is dismissed.

The Ld. AO, in the assessment order for the assessment year under appeal has provided a list of certain items of additions to plant & machinery during the year. As per the Ld. AO, in respect of the items mentioned in the list the store keeper of the appellant had signed and certified that the respective items were received on 30the September, 2005 or 31st March, 2006. The Ld. AO has stated in the assessment order that the machineries in question were imported and thus requires some special expertise for installation. Hence, as per the Ld. AO, if certain imported machineries are received on 30th September, 2005 or 31st March, 2006 it is not possible that on the very same day the machineries are taken out of the store, installed and put to use. However, the assessee had shown the date of receipt of the machineries as the date of as addition and accordingly claimed depreciation. The Ld. AO contended that the depreciation had been claimed by the assessee on certain machineries on the basis of the date of receipt and not on the basis of the date on which the items were put to use. In view of the above, the Ld. AO disallowed the claim of depreciation on the selected items of additions to plant and machinery on the following grounds:

38 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 - On examination of each invoices, the AO observed that the invoices were stamped showing the receipt of the goods in the store along with the sign of the store keeper. In spite of this, the assessee stated that no register is maintained. Thus, in view of the AO the reply of the appellant is not tenable. - In the metro cities there is a restriction of plying of the goods vehicle during 7.00 am to 10 pm. Thus, in view of the Ld. AO the assessee must have received the goods after 10pm on 30the September, 2005 or 31st March, 2006, as the case may be. Thus, it is not possible to put such items into use on 30th September, 2005 or 31st March, 2006 itself. The Ld. AO could not check the actual time of delivery in absence of the challans. - Since, the specific items of fixed assets in question are imported, as per the Ld. AO, the work of installation of the items would require some special expertise. Thus, the contention of the assessee that the items were ready to use is not tenable since, even the work of unpacking the goods, preparing the platform for installation etc would require some time.

In view of the above, the Ld. AO concluded that the selected items of additions made on 30th September, 2005 should be allowed depreciation for the use of less than 180 days during the year. On the other hand, additions of the selected items on 31st March, 2006 should not be eligible for depreciation. The Ld. AO further observed that the assessee claimed 60% depreciation on APC SL 80KH (UPS) and Software of 9 series Mailing System Machines. He rejected the claim of 60% depreciation on these items and allowed 15% depreciation.

The assessee, filed a detailed submission on 2nd March, 2010 contending the disallowance of depreciation. In summary, the assessee submitted the following:

- During the assessment proceedings, the store register and copies of the delivery challans could not be produced since the concerned person was on leave. - As mentioned by AO, all the selected items were not imported - Installation of the machineries did not require any expert knowledge. Moreover, even if any technical knowledge was required, the assessee had competent personnel to handle the same. Since the imported machineries were costly, the assessee ensured the immediate installation by keeping available technical personnel. - Machineries were ready to use and thus put to use on the day of its receipt.

39 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07

- The additions to the fixed assets were duly verified and certified by the tax auditor. The AO had relied on all other matters except the dates of additions of fixed assets in certain cases. - The assessee submitted the certificate from a competent technical person regarding the purpose of the machineries in question and their respective dates of installations. - It is possible that the goods have been received before 7 am of the respective dates and not after 10 pm of such dates as contended by AO. Moreover, the assessee mentioned that the entry restriction in the metro cities between 7 am and 10pm does not apply for all goods vehicle. The restriction is applicable only for full size trucks/lorries.

In addition to the above submission, the assessee furnished specific submission in respect of certain items as under:

- In respect of item no 1 of the list as provided by the AO in the assessment order, the assessee submitted that the item was purchased from Delhi and was not an imported item. The specific item is an UPS system which could be very easily installed by the technical personnel of the assessee company and the local supplier. - In respect of item no 2 of the list as provided by the AO in the assessment order, the assessee submitted that the AO had himself recorded the date of receipt as 27.3.2006. As per the assessee, there is no valid reason to presume why any asset acquired on 27.3.2006 could not be installed and put to use by 31.3.2006. - In respect of the machineries received on 30th September, 2005, the assessee submitted that even if the machineries were not put to use on the date of its receipt, it should be allowed full depreciation since only the assets put to use after 2.10.2005 would qualify for 50% of normal depreciation, being used for less than 180 days .

18.1. The Learned CITA observed that the disallowance made by the Learned AO was not based on any specific observation and had merely acted merely on the basis of a pre- conceived notion that a machinery cannot be installed on the very same day of its receipt. He further observed that a certificate from the Production Manager of the assessee was produced before the Learned AO confirming the fact that the machinery under consideration was put to use on a particular date and in the instant case , going by

40 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07 the size of the assessee company, where there are designated persons to deal with individual departments , a certificate from the person heading the particular division cannot be lightly and summarily ignored. However, in respect of depreciation on a specific machinery APC SL 80KH, the Learned AO reduced the depreciation rate to 15% which was confirmed by the Learned AO. In respect of software of 9 series mailing systems machine, the Learned CITA held that this is a software and hence assessee is eligible for depreciation at the rate of 60%. Aggrieved, the revenue is in appeal before us on the following ground :- “8. That the Ld. CIT(a) has erred on facts and circumstances of the case and in law by allowing the assessee’s claim of depreciation on Plant & Machinery items on the bsis of the date on which it was received in stores and not on the basis of the date of its put to use and also ignoring the fact that such assets were either used for less than 180 days or not put to use in financial year under consideration.”

18.2. We have heard the rival submissions. We find that the Learned CITA had given categorical finding in respect of this addition made by the Learned AO. None of these findings were controverted by the revenue before us. Hence we find no infirmity in the order of the Learned CITA in this regard. Accordingly, the Ground No. 8 raised by the revenue is dismissed.

Dated : 1st June, 2016

Jd.(Sr.P.S.)

41 ITA Nos.348-314/K/2011 & CO No.23/K/2011 EIH Limited AY 2006-07

Copy of the order forwarded to:

APPELLANT – EIH Limited, 4, Mangoe Lane, Kolkata-700 001. 1. Respondent –DCIT, Circle-8, Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata

/True Copy, By order,

Asstt. Registrar.