KAMAT HOTELS (INDIA) LTD,MUMBAI vs. ADDL CIT 8(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद� राजे� के अनुसार PER RAJENDRA, AM- Challenging the order,dtd.01/03/2012 of the CIT (A)-16,Mumbai the Assessee has filed the present appeal.Assessee-company filed its return of income on 30/11/2006, declaring total income at rupees NIL.The AO completed the assessment,u/s.143(3) of the Act, on 26/12/2008, determining the income of the assessee at rupees NIL. 2.First ground of appeal is about disallowance of interest of Rs. 1.07 crores on timeshare deposits. During the assessment proceedings the AO found that assessee had claimed deduction of Rs.1,07,98,065/-under the head interest on timeshare up to 30/06/2005. He directed the assessee to furnish details of the expenditure and to show cause and explain as to why instead of debiting in the profit and loss account it had been claimed separately in the competition of income is also to show cause and explain as to why the same should not be disallowed. In response to the notice the assessee filed a letter and stated that Himco was engaged in the business of time-sharing duties under which members were no either against refundable deposits were advanced membership fees for specified period, that under the timeshare agreement Himco was obliged to provide accommodation facilities for specified holiday period every year for members were eligible to exchange their holiday accommodation with other person in other hotels or resorts worldwide through a centralised agency, that it had accepted deposits from the members that were refundable on the expiry of 6th year or 12th year (25%) , that balance 75% of the deposit was to be refunded without any interest on expiry of the creditor, that at the option to claim 25% of the deposit rested with the members, that Himco adopted the accounting policy of not providing interest on the 25% portion of the deposit every year but in the year of payment of such interest at the time of refunding the deposit as and when any claim was made by a member, that it disclose the amount of such liability for the year and cumulative liability of sub-s interest in the notes on accounts by way of contingent liability, that the statutory auditors had qualified their report to the shareholders on the annual accounts every year to the fact that Himco had not provided for the interest liability has the same was accounted for on payment. After considering the submission of the assessee, the AO held that because of deduction of tax at source the assessee was not entitled to claim expenditure unless it was proved that liability had accrued in the relevant year,that the assessee itself had stated that liability of Rs. 1.07 crore was that of erstwhile transferred company,that the assessee had merely made the provision for the 4120/12Kamat Hotels same without Actually making the payment of the interest, that the liability of interest expenditure could not be said to have been accrue in the case of the assessee. Finally, the AO disallowed the amount in question holding it on business expenditure. 2.1.Aggrieved by the order of the AO, that the assessee preferred an appeal before the first appellate authority(FAA).Before him, it was contended that the assessee under the scheme of amalgamation(with effect from 1/7/2005)under which all the assets and liabilities of Himco were taken over by it,that the amalgamation was approved by the Hon’ble Bombay High Court by its order dated 9/12/2005,that Himco was engaged in the business of providing time-share Activities under refundable and non-refundable schemes,that under the refundable scheme Himco had accepted the deposits from timeshare member for providing hotel accommodation for specified period every year for 25 years and at the end of the agreed period the deposit received from such a member was refundable along with interest, that under the scheme of amalgamation the said accrued interest liability was calculated on the refundable deposits taken over by the assessee, that liability for refundable deposits and accrued interest was duly shown as liability in the balance sheet, that the auditors of Himco qualified their report in respect of the said liability of interest up to 30/6/2005 in the balance sheet,that the assessee followed accrual method of accounting,,that as per the AS-14 it was necessary to quantify and provide for the existing liability for interest payable to the members on the refundable deposit which was quantified at Rs. 1.07 crores by the auditors,that the amount in question was shown in the balance sheet and was duly accounted for in the books of accounts for the year ended on 31/3/2006, that as per the accounting method adopted by the assessee the amount of accrued interest was reduced from the amalgamation reserve account, that the said account was approved by the Hon’ble Bombay High Court,that the amount in question debited to amalgamation reserve account (being the general reserve)was an existing liability though the amount thereof was quantified on payment, that in subsequent years provision made in the books of accounts for the liability towards interest payable was being allowed by the AO in the assessments for the AY.2007-08 onwards, that it had paid TDS of Rs. 11.01 lakhs on the entire amount of expenditure and had complied with the provisions of section 194A of the Act. After considering the submission of the assessee and the assessment order, the FAA held that assessee under the scheme of amalgamation took over the assets and liabilities of Himco ,that the liabilities included the liability in respect of refundable deposits which carried interest in terms of timeshare agreement, that it was required to quantify and adjust the difference in accounting policies on the date of amalgamation by debiting the said difference to the amalgamation reserve account, that it had made a provision and paid the interest after rejecting the relevant tedious in accordance with the provisions of Sec.40 (a)(ai) of the Act during the year under consideration, that the assessee had only created provision but no payment had been made, that the creation of provision is therefore only notional which was required as per the accounting standard 14, that no payment had been made, that the expenditure in question could not be allowed. Finally, he upheld the order of the AO. 2.2.During the course of hearing before us, the authorised representative (AR) contended that the scheme of amalgamation was approved by the Hon’ble Bombay High Court, that the assessee had taken over all the assets and liabilities of Himco , that Himco was engaged in the business of providing time-share holiday services under refundable/non-refundable schemes, that under the first the scheme Himco had accepted deposits from timeshare members for providing portal accommodation for a specified period and at the end of the agreed period the deposit was to be refunded back to the members, that the liabilities taken over under the scheme of amalgamation included the liability in respect of refundable deposits, that in terms of the time share agreement under refundable scheme 25% of the deposit and interest, that the assessee was following a different method of accounting as compared to the method adopted 4120/12Kamat Hotels by Himco for interest payable,that method followed by Himco was not in accordance with the provisions of companies Act,that the auditors of Himco qualified their reports on its annual accounts, that the un-provided liability towards interest accrued to 30/06/2005 on 25% of refundable deposit had been taken into consideration while merging the accounts of Himco with the accounts of the assessee in the scheme of amalgamation. He referred to paragraph 34 of accounting standard 14 and stated that there was a conflict between the accounting policy followed by the transfer company and the transferee company it was necessary for the assessee to regularise the accounting policies followed by Himco to give full effect to the Bombay High Court order approving the scheme of amalgamation,that para 9.4 of the scheme of amalgamation provided that difference arising out of the accounting policies of both the company should be qualified and should be adjusted on the date of amalgamation in the amalgamation reserve account, that in order to comply with the provisions of the companies Act, income tax Act and accounting standard the assessee made provision for un-provided liability towards interest accrued on 25% of the refundable deposit of 30/06/2005 amounting to Rs. 1.07 crores and existed the same based amalgamation this account in the books of company,that the side liability of interest accruing on the refundable portion of the deposit from 1.07.2005 onwards had been entered in the accounts of the assessee in the profit and loss account, that the assessee had taken over all the assets and liabilities of Himco,that included liability in respect of refundable deposits. Departmental representative argued that the liability was contingent, that it was only a provision, that same was not an allowable expenditure as per the provisions of the Act. 2.3.We have heard the rival submissions and perused the material before us. We find that as per the orders of the Hon’ble Bombay High Court, Himco had amalgamated with the assessee, that it had taken over all the liabilities and assets of amalgamated company, that both the companies were following different system of accounting, that following the directions of the Hon’ble High Court and the mandate of the Act and the Companies Act the assessee had made provision for liability towards interest accrued on 25% of refundable deposits of 30/06/2005,that the assessee had given proper treatment to the amount in question in its books of accounts. In our opinion,if a liability can be ascertained on a scientific basis then it cannot be termed a contingent liability. The Hon’ble Apex court in the case of Rotork Controls India P. Ltd.(314ITR62) has laid down the following principles with regard to the business liabilities: A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.” We find that the obligation of the assessee had arisen during the year under consideration as a result of a past event and outflow of resources was required to settle the obligation.The assessee had followed the provisions of AS-14 and had adopted a policy which was approved by the Hon’ble High Court. We have also taken cognizance of the fact that the amalgamation scheme was approved by the Hon’ble Bombay High Court and assessee had Acted in pursuance of the order of the court. Here we would like to refer to the case of Hind Motor Cycle Ltd.(134ITR348).Facts of the case were that the assessee-firm carried on the business which was formerly carried on by another firm. The erstwhile firm had appointed another firm as its sole selling agents under an agreement dated 15/06/1965.Under the terms of the agreement, the sole selling agents were to receive commission on sales and had to deposit a certain sum as security deposit. The sole selling agency was terminated on 24/09/1969, but the deposit was not returned.The sole 4120/12Kamat Hotels selling agents filed a suit for the refund of the security deposit as also their commission and interest. Meanwhile, by an agreement dated 1/01/1969, the assets and liabilities of the business, which were carried on by the erstwhile firm, were taken over by the assessee-firm at their book value as on 31/03/1969. Before the assessee-firm took over the assets and liabilities of the erstwhile firm, the sole selling agents had filed their suit claiming various amounts against the erstwhile firm and the suit was decreed on 18/12/1969, for, inter alia, an amount of Rs. 14,250 payable to the sole selling agents by way of interest. The assessee claimed the amount as its trading liability which was disallowed by the AO on the ground that the liability related to the erstwhile firm.The FAA affirmed the order of the AO. On further appeal,the Tribunal held that the agreement of 1/04/1969,was comprehensive enough to saddle the assessee with the liability of the erstwhile firm qua its sole selling agents and allowed the assessee's appeal.On a reference the Hon’ble Allahabad High Court held as under: “ …..as the assessee-firm had taken over the entire assets and liabilities of the erstwhile firm and as the suit had already been filed before the agreement of April 1, 1969, was reached the agreement included the liability of the erstwhile firm in regard to the payment of interest payable to the sole selling agents, for, the parties must be assumed to be in full knowledge of the affairs of the erstwhile firm. Therefore, the liability to pay the sum of Rs. 14,250 under the court decree was a trading liability and was allowable as a deduction.” Considering the above discussion,we are of the opinion that the order of the FAA cannot be endorsed.So,reversing the same,we decide ground no.1 in favour of the assessee. 3.Next ground is about disallowance made under section 14A of the Act.During the assessment proceedings the AO found that assessee had shown income of Rs. 21,509/-by way of dividend, that it had claimed exemption for the said income. He directed the assessee to furnish complete details of investment on which it had derived the exempt income and to furnish the competition of disallowance under section 14 A in accordance with rule 8D of the income tax rules, 1962. The assessee vide its letter dated 1812 2008 furnished the details of dividend income and competition of disallowance under rule 8D. He worked the disallowance under section 14 A of the Act and made a disallowance of Rs. 6.53 lakhs. 3.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA.Before him it was argued that all the investments made in the shares were out of its interest free funds, that the dividend income was directly credited to its bank account, that it had incurred no expenditure to earn dividend income.After considering the submission of the assessee and the assessment order the FAA referred to the case of Godrej and Boyce Mfg. Co. Ltd. (328 ITR81) and held that Rule 8D had no application to the facts of the case,that the assessee did not make any apportionment on its own,that the AO had to apply the apportionment of the expenditure as per the provisions of Section 14A of the Act.Finally, he restricted the disallowance to Rs.1.00 lakhs. 3.2.Before us,the AR stated that provisions of Rule 8D were not applicable for the year under consideration, that assessee had earned exempt income of Rs.21,000/- (approx). He relied upon the case of Shakuntaladevi Trade & Investments Pvt.Ltd.(ITA/8006/M/2010(AY-2007- 08 dt. 06. 12.13).In that case matter of Godrej Agrovet Ltd.(Income tax Appeal No.934 of 2011 dt. 08. 01. 2013) was referred to.The DR supported the order of the FAA. 3.3.We have heard the rival submissions and perused the material before us. We find that in the case of Godrej Agrovet (supra),the Hon’ble Court had held that percent of exempt income would constitute a reasonable estimate for making disallowance in the years earlier to 2008- 09. Following the same,we direct the AO to restrict the disallowance to 2% of the exempt income. Ground No.2, is allowed in favour of the assessee, in part.

4120/12Kamat Hotels 4.Last ground of appeal is about determination of income as per the provisions of section 115 JB of the Act.While calculating the book profit the AO made certain addition. During the course of appellate proceedings,before the FAA,the assessee submitted that the AO had proceeded with the computation of book profit u/s. 115JB of the Act by taking net profit of Rs.15.57 crores,that he had overlooked various clauses of scheme of amalgamation,that AO did not consider the published accounts and notes on accounts,that for computing the book profit all relevant facts were placed before him,that the assessee was entitled to deduction of Rs. 1.07crores for the accrued interest calculated on the interest bearing deposits to the time sharing members. After considering the submission of the assessee and the assessment order,he held that while computing the income as per the provisions of section 115JB the AO had not given any reasons for making additions,that there was no merit in the argument of the assessee that the provisions in respect of Income tax/fringe benefit tax could not be added while computing the book profits,that the additions made by the AO squarely fell within the provisions of section 115JB.Finally,he upheld the order of the AO. 4.1.Before us,the AR made the same submissions that were made before the FAA.The DR supported the order of the FAA.We have heard the rival submissions and perused the material before us.We find that the AO not given any reasons for adding certain items while determining the income u/s.115JB of the Act,that the FAA has rejected the claim of the assesse.He had not adjudicated the issue of accrued interest calculated on the interest bearing deposits to time sharing-members for the purposes of calculating the book profit.The assessee had made submissions in that regard.Even if it was a new claim,the FAA was supposed to decide the issue for computing book profit for the year under consideration. Though the AO cannot accept a new claim without a revised return of income.But,the appellate authorities are not bound by such restrictions.The FAA should have decided the issue on merits. Therefore,we are of the opinion that, in the interest of justice,matter should be restored back to the file of the FAA for adjudication of the issue raised by the assessee.Here,we would like to mention that allowability of expenditure u/s.37 has been dealt by us ,while deliberating upon the ground no.1. 4.2.As far as FBT is concerned we want to mention that the CBDT,vide its circular no.8/2005 (F.No.142/21/2005TPL,dtd.29.08.2005)has dealt the issue in answer to question no.103.It has been clarified by the Board that FBT was an allow able deduction in the computation of books profit u/s.115JB of the Act.Considering the above facts,we are reversing the order of the FAA. Ground no.3 is decided in favour of the assesse,in part. As a result,appeal filed by the assessee stands partly allowed. फलतः िनधा�रती �ारा दािखल क� गई अपील अंशतः मंजूर क� जाती है। Order pronounced in the open court on 31st,March, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 31 माच�, 2016 को क� गई । Sd/- Sd/- (अिमत शु�ल /Amit Shukla) (राजे�� / RAJENDRA) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई Mumbai; �दनांकDated : 31.03.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ�

2. Respondent /��यथ� 5