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2016 (3) TMI 369 - ITAT COCHIN

2016 (3) TMI 369 - ITAT COCHIN - TMI - Entitlement to deduction u/s. 80IB(7)(a) - Held that:- Section 80IB(7)(a) states that 50% of the profits and gains derived from the business of such Hotel. In this context also, it can be stated that the term 'profits and gains derived from the business of such hotel' has wider meaning than the term 'profits and gains derived from an undertaking'. We have mentioned in the earlier paragraphs with reference to the ICAI audit guidelines that these are receipts .....

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eduction u/s. 80IB(7)(a). Therefore, our findings and conclusions for the assessment year 2007-08 will hold good for the assessment year 2008-09 and 2010-11. - Decided in favour of assessee - ITA Nos. 240-242/Coch/2015 - Dated:- 1-3-2016 - B. P. Jain, AM And George George K, JM For the Appellant : Shri Balakrishnan K, CA For the Respondent : Shri Shantam Bose, CIT(DR) & Shri K P Gopakumar, Sr. DR ORDER Per Bench These three appeals at the instance of the assessee are directed against the two .....

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law, the learned Commissioner of Income-tax(Appeals)-I ("CIT(A)" while considering the claim of the Assessee for deduction u/s. 80IB(7) (a) of the Income Tax Act, 1961 ("Act") has erred in disallowing the receipts earned by the Assessee under various heads of income which have a direct nexus to the business activities of the Assessee and without considering the fact that the same is eligible for a deduction u/s. 80IB(7)(a) of the Act. 2. On the facts and circumstance of the c .....

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aring. 4. First we shall consider the facts for the assessment year 2007-08 and adjudicate the issues therein which will be binding on the other assessment years namely 2008-09 and 2010-11. 5. The brief facts in respect of the assessment year 2007-08 are as follows: The assessee is a private limited company which is engaged in the business of running hotel by the name and style of 'Kumarakom Lake Resort'. For the relevant assessment year, the return of income was filed on 14/11/2007 decl .....

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the Income Tax Act amounting to ₹ 6,84,491/-, for the reason that the assessee had not received approval from the Director General of Income Tax (DGIT) (Exemption). The Assessing Officer also excluded 'other income' earned by the assessee amounting to ₹ 9,85,097/- from the purview of business profits for the purpose of calculating deduction u/s. 80IB(7)(a) of the Act stating that the same is not derived from the business of the Hotel. 6. Aggrieved, the assessee preferred an a .....

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, inter alia, containing computation statements, balance sheet and various judicial pronouncements. The Ld. Counsel for the assessee reiterated the submissions made before the first appellate authority. 8. The Ld. DR on the other hand submitted that the income is enumerated as 'other income' does not have direct nexus with the running of the hotel. It was submitted that in view of the judgment of the Apex Court in the case of CIT vs. Sterling Foods reported in 104 Taxman 204, the assesse .....

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ed to tax in the Return of Income filed for the Assessment Year 2007-08. ii) Whether the CIT(A) is justified in excluding 'other income' earned by the assessee company for the purpose of deduction u/s. 80IB(7)(a) of the Act. During the assessment year 2007-08, the following income earned by the assessee company was grouped under the head "other income" and the detailed split up of the other income earned by the assessee company are as follows: Sl. No Particulars Nature of Incom .....

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ellaneous Income Income from sale of used packing materials, recovery of material damage from staff etc. 112,695 Total 1,222,507 Out of the above other income, the assessee had already offered interest income on Fixed Deposit from SIB, (Kumarakom) amounting to ₹ 2,37,410/- to be taxed in the return of income. 9.1 For the balance amount of ₹ 9,85,097 (Rs.12,22,507-2,37,410/-), the assessee had claimed deduction u/s. 80IB(7)(a) of the Act. According to the assessee, the above mentioned .....

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gh "other income" appears to have arisen from business and its related activities of the assessee, it cannot be said to have been "derived from" business of Hotel. 9.2 As regards the CIT(A)'s inclusion of interest income on FD from SIB amounting to ₹ 2,37,410/- for the purpose of denial of deduction u/s. 80IB(7)(a) of the Act, according to us, is misconceived because the assessee company itself had offered the same to tax. This is evident from the computation of tot .....

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0IB, necessarily, we have to examine the meaning of the word "derived from" contained in section 80IB of the Act. Section 80-IB of the Act provides for deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. As per the provisions of section 80-IB of the Act, deduction is available to profits and gains "derived from" the specific business. The phrase derived from used in section 80-IB is highlighted for .....

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ent years as specified in this section." 9.4 Further, sub-section (7) to section 80IB reads as follows: "(7) The amount of deduction in the case of any hotel shall be - (a) fifty percent of the profits and gains derived from the business of such hotel for a period of ten consecutive years……….. 9.5 The Institute of Chartered Accountants of India ("ICAI") has prescribed Technical Guide on Audit in Hotel Industry. The guide provides for key revenue generatio .....

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bills; 9.6 As per generally accepted Uniform System of Accounting followed by hotel industries in India revenue is divided into four categories as follows:- Particulars Amount Revenue: I) Rooms Xxx II) Food and beverages Xxx III) Other operated departments Xxx IV) Rentals and other income Xxx Food and Beverages revenue shall include the following:- Particulars Amount Food and Beverage Revenue: Outlet Food Revenue Xxx Outlet Beverage Revenue Xxx In-Room Dining Food Revenue Xxx In-Room Dining Beve .....

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gory can be summarized in the below table Sl. No. Other income received by the Company Key revenue generation category as per the ICAI guidelines and Uniform system of accounting 1. Rent received from Heritage Shop Rent received Space Rentals, Arcade revenue, Housekeeping bills 2. for space and amenities given to M/s. Kumarakom Water Transport Pvt. Ltd. 3. Revenue from staff mess used by the Guest drivers Food and Beverages 4. Revenue from telephone used by staff Communications revenue(both tele .....

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eration category of 'Space Rentals' and 'Arcade revenue' and 'Housekeeping bill' for a hotel industry. Revenue from staff mess of ₹ 7,139/- will also fall within the key revenue generation category of 'Food and Beverages' for a hotel industry. Revenue from staff telephone of R.90,048/- will fall within the key revenue category of 'Communication revenue (both telephone & internet)' as per ICAI guidelines. Income from club cultural program/DJ of &# .....

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the hotel business of the undertaking. 9.8 The Assessing Officer has disallowed the deduction u/s. 80-IB(7)(a) of the Act towards 'other income' on the contention that, the assessee in the books of account has termed it as "Other Income" and, accordingly, the same is not derived from the business of the assessee. The Hon'ble Supreme Court of India in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (82 ITR 363) has held that, "Whether the assessee is entitled to a par .....

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ks of account are maintained. 9.9 The High Court of Madras in the case of Fenner (India) Ltd. vs. CIT (125 Taxman 386) has held that, "In the industrial undertaking in the manufacture of V-belts, oil seals, O-rings and rubber moulded products, certain scrap materials resulted, which have a saleable value. To say that the scrap materials had no direct link or nexus with the industrial undertaking cannot at all be expected to commend acceptance, especially, on the facts and in the circumstanc .....

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Ltd. (11 taxmann,.com 322) has held that, 'Keeping in view the activities of the assessee in giving heat treatment for which it had earned labour charges and job-work charges, it can thus be said that the appellant had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking. These receipts cannot be said to be independent income of the manufacturing activities of the undertakings of the assessee and thus could not .....

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being proximate thereto would also be within the ambit of gains derived from industrial undertaking for the purpose of computing deducting u/s. 80-IB." 9.10 In the instant case, the following income which has been classified as 'other income' in the books of account:- i) Rent received from Heritage Shop. ii) Rent received for the space and amenities given to Kumarakom Water Transport Pvt. Ltd. iii) Revenue from staff mess used by guest drivers. iv) Revenue from telephone used by sta .....

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fits of the 'other income' as mentioned above continues to be the business profits from the hotel industry and there is no other commercial activity which is carried on by the assessee. 9.11 Moreover, section 80IB(7)(a) states that 50% of the profits and gains derived from the business of such Hotel. In this context also, it can be stated that the term 'profits and gains derived from the business of such hotel' has wider meaning than the term 'profits and gains derived from a .....

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