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Judgment
This appeal by the Revenue u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') is directed against the order dated 31.10.2001 passed in ITA. No. 280/Bang/01 by the Income Tax Appellate Tribunal, Bangalore Bench. The Tribunal as per the order had allowed the appeal of the assessee by reversing the findings and conclusions arrived at by the Assessing Authority and the First Appellate Authority particularly, in the context of ascertainment of profits attributable to the receipts in the nature of foreign exchange receipts received by the Assessee engaged in the activity of hotelering, which activity in turn earns or fetches foreign exchange for the country. The dispute between the assessee and the revenue mainly revolves around the manner in which such profits are to be ascertained for the purpose of extending the special benefit provided as an incentive in terms of Section 80HHD of the Act, which reads as under :-
Deduction in respect of earnings in convertible foreign exchange.
80HHD. (1) Where an assessee, being an Indian company or a person (other or of a tour operator, approved by the prescribed authority in this behalf of a travel agent, there shall, in accordance with and subject to the provisions of this section, be allowed,) [ in computing the total income of the assessee -
(a) for an assessment year beginning on the 1st day of April, 2001, a deduction of a sum equal to the aggregate of -
(i) forty per cent of the profits derived by him from services provided to foreign tourists; and
(ii) so much of the amount not exceeding forty per cent of the profits referred to in sub-clause (i) as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee in the manner laid down in sub-section (4);
(b) for an assessment year beginning on the 1st day of April, 2002, a deduction of a sum equal to the aggregate of -
(i) thirty per cent of the profits derived by him from services provided to foreign tourists; and
(ii) so much of the amount not exceeding thirty percent of the profits referred to in sub-clause (i) as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee in the manner laid down in sub-section (4);
(c) for an assessment year beginning on the 1st day of April, 2003, a deduction of a sum equal to the aggregate of -
(i) [twenty - five ] per cent of the profits derived by him from services provided to foreign tourists; and
(ii) so much of the amount not exceeding [twenty-five] per cent of the profits referred to in sub-clause (i) as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized for the purposes of the business of the assessee in the manner laid down in sub-section (4);
(d) for an assessment year beginning on the 1st day of April, 2004, a deduction of a sum equal to the aggregate of-
(i) [fifteen] per cent of the profits derived by him from services provided to foreign tourists; and
(ii) so much of the amount not exceeding [fifteen] per cent of the profits referred to in sub-clause (i) as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee in the manner laid down in sub-section (4),
and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year]:
[Provided that a hotel or, as the case may be, a tour operator approved by the prescribed authority on or after the 30th day of November, 1989 and before the 1st day of October, 1991, shall be deemed to have been approved by the prescribed authority for the purposes of this section in relation to the assessment year commencing on the 1st day of April, 1989 or the 1st day of April, 1990 or, as the case may be, the 1st day of April, 1991 if the assessee was engaged in the business of such hotel or as such tour operator during the previous year relevant to any of the said assessment years. ]
(2) This section applies only to services provided to foreign tourists the receipts in relation to which are received [in, or brought into, India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or, [ within such further period as the competent authority may allow in this behalf].]
[Explanation [1] - For the purposes of this sub-section, any payment received by an assessee, engaged in the business of a hotel or of a tow operator or of a travel agent, in Indian currency obtained by conversion of foreign exchange brought into India through an authorised dealer, [from another hotelier, tour operator or travel agent, as the case may be,] on behalf of a foreign tourist or group of foreign tourists, shall be deemed to have been received by the assessee in convertible foreign exchange if the person making the payment furnishes to the assessee a certificate specified in sub-section (2A).
[Explanation 2. - For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.]
(2A) Every person making payment to an assessee referred to in the Explanation [1] to subsection (2) out of India currency obtained by conversion of foreign exchange received from or on behalf of a foreign tourist or a group of foreign tourists shall furnish to that assessee a certificate in the prescribed form indicating the amount received in foreign exchange, its conversion into Indian currency and such other particulars as may be prescribed.]
[(3) For the purposes of sub-section (1), profits derived from services provided to foreign tourists shall be the amount which bears to the profits of the business (as computed under the head "Profits and gains of business or profession") the same proportion as the receipts specified in sub-section (2) [[as reduced by any payment, referred to in sub-section 92A), made by the assessee)]] bear to the total receipts of the business carried on by the assessee.]
(4) The amount credited to the reserve account under clause (b) of sub-section (1), shall be utilised by the assessee before the expiry of a period of Jive years next following the previous year in which the amount was credited for the following purposes, namely :-
(a) construction of new hotels approved by the prescribed authority in this behalf or expansion of facilities in existing hotels already so approved;
(b) purchase of new cars and new coaches by tour operators already so approved or by travel agents;
(c) purchase of sports'' equipment for mountaineering, trekking, golf, river-rafting and other sports in or on water:
(d) construction of conference or convention centres;
(e) provision of such new facilities for the growth of Indian tourism as the Central Government may, by notification in the Official Gazettee, specify in this behalf;
(f) subscription to equity shares forming part of any eligible issue of capital made by a public company:]
Provided that where any of the activities referred to in clauses (a) to [(f)] would result in creation of any asset owned by the assessee outside India, such asset should be created only after obtaining prior approval of the prescribed authority.
(5) Where any amount credited to reserve account under clause (b) of sub-section (1), -
(a) has been utilised for any purpose other than those referred to in sub-section (4), the amount so utilised; or
(b) has not been utilised in the manner specified in sub-section (4), the amount not so utilised,
shall be deemed to be the profits, -
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following the period of Jive years specified in sub-section (4),
and shall be charged to tax accordingly.
[(5A) Where any amount credited to the reserve account under clause (b) of sub-section (1) has been utilised for subscription to any equity shares referred to in clause (f) of sub-section (4) and either while or any part of such equity shares are transferred or converted into money by the assessee at any time within a period of three years from the date of their acquisition, the aggregate amount so utilised in respect of such equity shares shall be deemed to be the profits of the previous year in which the equity shares are transferred or converted into money.
Explanation. - A person shall be treated as having acquired any shares on the date on which his name is entered in relation to those shares in the register of members of the public company.]
(6) The deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed on the basis of the 33[34[***] amount of convertible foreign exchange received by the assessee for services provided by him to foreign tourists [,payments made by him to any assessee referred to in sub-section (2A)] and the payments received by him in Indian currency as referred to in the Explanation [1] to sub-section (2).]
(7) Where a deduction under sub-section (1) is claimed and allowed in respect of profits derived from the business of a hotel, such part of profits shall not qualify to that extent for deduction for any assessment year under any other provisions of this Chapter under the heading "C.-Deductions in respect of certain incomes", and shall in no case exceed the profits and gains of such hotel.]
Explanation. - For the purposes of this section. -
(a) "travel agent" means a travel agent or other person (not being an airline or a shipping company) who holds a valid licence granted by the Reserve Bank of India u/s 32 of the Foreign Exchange Regulation Act 1973 (46 of 1973);
(b) "convertible foreign exchange" shall have the meaning assigned to it in clause (a) of the Explanation to section 80HHC;
(c) "services provided to foreign tourists" shall not include services by way of sale in any shop owned or managed by the person who carries on the business of a hotel or of a tour operator or of a travel agent;
(d) "authorised dealer", foreign exchange" and "India currency" shall have the meanings respectively assigned to them in clauses (b), (the) and (k) of section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973);]
[(e) "eligible issue of capital" means an issue made by a public company formed and registered in India and the entire proceeds of the issue is utilised wholly and exclusively for the purpose of carrying on the business of -
(i) setting up and running of new hotels approved by the prescribed authority; or
(ii) providing such new facility for the growth of tourism in India, as the Central Government may, by notification in the Official Gazettee, specify.]
While the Assessing Officer as well as the First Appellate Authority were of the view that in ascertainment of such profits attributable to the receipts in the nature of foreign exchange receipts of the assessee, which had chain of hotels, some of which were eligible and enabled to claim the benefit of Section 80HHD of the Act and some of which though had been receiving foreign exchange payments were nevertheless not getting the benefit for not having undergone the procedure in terms of sub-section (2) of Section 80HHD of the Act and therefore, there being a dispute in the manner of ascertainment of the profits attributable to the foreign exchange receipts of the assessee, the assessee''s claim that such ascertainment of profits attributable to the foreign exchange receipts should be computed in terms of formula provided under sub-section (3) can only be with reference to the over all profits earned from such of the hotels which had been qualified and recognized in terms of sub-sections (1) and (2) and that the total profits earned from out of such hotels which had been qualified for the benefit under sub-section (1) is the criteria in working the formula under sub-section (3). On the other hand, the Assessing Authority and the First Appellate Authority having taken the view that for the purpose of foreign exchange receipts and for the purpose of sub-section (3), the over all profits of the assessee attributable to the very business of running or managing the hotels as a whole should be taken and such a controversy having reached the Tribunal and the Tribunal in the appeal of the assessee having opined that the claim made by the assessee was the proper one and in terms of the statutory provision, it is the turn of the revenue to feel aggrieved now and to approach this court for settlement of law on this aspect and for such purpose, this appeal has been admitted to examine the following substantial questions of law suggested for examination by the revenue as arising out of the order of the Tribunal, which reads as under :-
Whether the Tribunal was correct in holding that deduction u/s 80HHD of the Act should be computed based on each approved hotel individually and out of the profit derived from each such hotel ?
Whether the deduction u/s 80HHD of the Act was correctly computed by the Assessing Officer based on the entire profits and gains derived by the assessee in respect of his entire business ?
Whether the Appellate authorities recorded a perverse finding that deduction u/s 80HHD of the Act in respect of hotel situated at Port Blair, Bay Island could not be considered as the orders of the CIT (A) dated 19.6.2000 had merged with the order of assessment and reached finality with the assessment order passed originally despite the fact that u/s 80HHD of the Act deduction was not considered by the Appellate Commissioner ?
The brief facts that has led to the present appeal are that the assessee as a company inter alia is engaged in the activity of owning, managing and maintaining chain of hotels of star value and in the process generates good amount of revenue to the State quantified in terms of the provisions of the Income Tax Act, 1961.
The Income Tax Act, 1961, though is a piece of legislation to raise revenue to the State and a law made by the parliament with reference to Entry 81 of List I schedule VII to the Constitution of India and being a piece of legislation for supporting Governmental activities and in turn being dependent on the policies and programs of government, at a given point of time, may have and also being dependent on meeting the other requirements to support and meeting the other functions of the State which are essential and India being a welfare country, it is also used as a tool for giving the expression to the policies of the Government governing the people.
Under the Income Tax Act, 1961, Chapter VI-A was introduced by Finance Act, 1965 w.e.f. 1.4.1965 and a mere glance at the various Sections contained in Chapter VI-A will reveal to any person that it comprises of various Sections which are in the nature of incentives and to encourage particular type of activity by an assessee, which if followed would bring down the assessee''s tax liability by the mechanism of excluding the amount identified under each Section, significance being the tax liability with reference to the total income of the assessee and if such an incentive linked the activity of producing income is to be either exclude or the same is required to be applied in a particular manner or even some goods, which can fetch a further additional benefit, they are all necessarily dependent on the policy of the Government and may keep changing from year to year or from term to term or a Government or may be momentary and may keep changing even during the middle of the year etc., The Government of India is pursuing the policy of promoting such industrial and business activities, which can fetch good amount of foreign exchange to the State which can in turn boost the foreign exchange results of this country. One such incentive process is to be found in the provisions of Section 80HHD of the Act giving an incentive to the persons or the assessees carrying on business in the running of hotels and other activities mentioned in sub-section (1) of Section 80HHD of the Act, which in turn can fetch good amount of foreign exchange for the country.
It is in this background, the present question arises for examination and particularly, being a question directly linked to the kind and the extent of benefit the assessee gets, by complying with the requirement envisaged u/s 80HHD of the Act.
While, there is no dispute that the assessee does carry on the business of running hotels and such activity in turn is also generating good amount of foreign exchange to the country, which are reflected as foreign exchange receipts as disclosed by the assessee an income and in fact go into and form a component of ascertaining the profits and in turn income of the assessee is liable for tax. An assessee should comply with the requirement of Section 80HHD of the Act. In terms of this provision such profits attributable to the foreign exchange earning of the assessee qualifies for the benefit in the form of excluding that amount from out of the total income of the assessee, a deduction of a sum which is at a percentage of such profits which amount is varied from year to year.
The questions of law eliciting answering in this appeal arises in the course of determination of the tax liability of the assessee in the assessment year 1996-97 corresponding to the accounting year 1-4-1995 to 31-3-1996.
The assessee had claimed that during this period it had carried on business in running of hotels also and that while some of the hotels were owned and managed by the assessee itself, many others were owned by some one else i.e., the building with its equipment which enabled it to use it as a hotel owned by some one else but the assessee carried on the hotel business in such premises and in turn paid the owner some payment known as Royalty on the basis of an agreement entered into with the owner of the building and the assessee for convenience sake categorised such business activity as running under licence of the owners and a third category where the building with equipment was owned and was also supported by the staff of the owner, nevertheless the management of the same was that of the assessee and some of them also carried on the business under the brand name of the assessee and one common factor which has group running and that they are all described as a group of hotels belonging to Welcome Group and it is generally made known to the customers/guests that they are receiving hospitality in a Welcome Group Hotel.
The list of such hotels as claimed by the assessee for the accounting period relevant for the year 1996-97 is as under:
Owned Hotels:
Welcomgroup Windsor Manor Sheraton
Hotel & Towers, Bangalore
Welcomgroup Rajputana Palace
Sheraton, Jaipur
Licensed Hotels:
Welcomgroup Chola Sheraton, Madras
Welcomgroup Mughal Sheraton, Agra
Welcomgroup Vadodara., Baoda
Welcomgroup Bay Island, Port Blair
Welcomgroup Usha Kiran Palace, Gwalior
Lal Garth Palace, Bikaner
Umed Bhawan Palace, Kota
Managed Hotels:
Welcomgroup Maurya Sheraton Hotel &
Towers, New Delhi
Welcomgroup Park Sheraton Hotel & Towers, Madras
Welcomgroup Umaid Bhawan Palace, Jodhpur
Welcomgroup Rama International, Aurangabad
Welcomgroup Royal Castel, Khimsar, Rajasthan
Joymat Resort, Cochin
The information furnished in this regard by the assessee in terms of Rule 18 BBA(4) of the Income Tax Rules 1961 for the purposes of Section 80HHD of the Act is as under :
ITC HOTELS LIMITED-CONSOLIDATED 80 HHD CALCULATION WORKING
WINDSOR
RPS
CHOLA
MUGHAL
UKP
VADODARA
LALLGARH
BAY ISLAND
UMED BHA
SUBTOTAL
CHQ
TOTAL
INCOME :
INCOME FROM OPERATIONS
315,399,367
169,768,359
181,796,534
210,075,446
17,701,981
94,360,892
17,330,724
16,540,070,
292,508
1,023,265,881
168,747,205
1,192,013,085
OTHER INCOME
418,950
20,054
71,609
0
19,944
0
0
0
0
530,557
40,912,125
41,442,683
sales tax
13,991,581
6,750,069
3,341,355
5,025,147
306,521
2,416,532
1,254,787
33,085,992
33,085,992
LUXURY TAX
45,324,845
0
24,387,917
9,336,287
804,871
8,144,950
0
87,998,870
87,998,870
EXPENDITURE TAX
32,522,005
17,414,741
18,685,586
21,443,124
0
9,689,719
0
99,755,175
99,755,175
PAIDOUTS & TIPS
7,586,774
2,589,495
1,990,197
203,723
12,370,189
12,370,189
0
0
TOTAL INCOME
415,243,522
196,542,718
228,283,001
247,870,201
19,037,040
114,612,093
18,585,511
16,540,070
292,508
1,257,006,664
209,659,331
1,466,665,995
SETTLEMENT OF BILLS
11,695,748
4,729,185
8,133,589
8,388,988
114,545
4,026,127
562,542
570,405
38,221,129
35,221,129
INTER. CREDIT CARDS
166,260,564
21,677,220
67,968,673
46,597,178
1,594,757
25,914,326
1,743,690
2,100,430
333,856,838
333,856,838
TRAVEL AGENTS
4,807,232
61,904,823
2,215,158
77,971,784
5,375,815
67,647
10,022,195
1,006,701
163,371,355
163,371,355
BILATERAL AGREEMENT
0
0
0
0
0
0
FOREIGN AIRLINES
0
0
0
0
0
0
TOTAL. FOREX EARNINGS
182,763,544
88,311,228
78,317,420
132,957,950
7,085,117
30,008,100
12,328,427
3,677,536
0
535,449,322
0
535,449,322
80 HHD BENEFIT
40,054,838
17,944,306
20,453,920
39,096,984
2,328,842
8,204,094
2,594,201
817,315
0
135,494,500
0
135,494,500
The assessee had filed its return of income for the assessment year 1996 as per its return dated 28-11-1996 disclosing income of Rs. 11,18,37,000/-. In such return the assessee had claimed a benefit which the assessee can avail of u/s 80HH(d) of the Act to an extent of Rs. 13,54,94,500/-.
The Assessing Officer after notice to the assessee u/s 143(1)(a) of the Act processed the return and so far as this appeal is concerned our attention being fixed on the amount quantified u/s 80HHD and such deduction to the extent of Rs. 13,46,77,185/- being allowed by the Assessing Officer.
While doing so the Assessing Officer had disallowed a claim for deduction of an amount of Rs. 8,17,315/- as an amount not quantifying for the benefit of Section 80HHD for the reason that the particular unit with reference to which the amount had been computed i.e., Bay Island Hotel at Port Blair had not been certified as a hotel eligible for claiming the benefit of Section 80HHD of the Act.
In respect of this claim though the assessee had indicated that approval of the competent authority of the Bay island hotel was pending consideration of the orders at the request of the assessee, with the matter having not reached finality the Assessing Officer thought it fit to exclude the same for the assessment year as it was found in fact the assessee had not yet received such recognition.
The assessee being aggrieved by said order of Amendment had carried the matter in appeal to the Appellate Commissioner(Appeals) in so far it related to the question of its disallowing this sum of Rs. 8.17,315/- as a sum not qualifying for the benefit u/s 80HHD in appeal No. IAT 10/DC-SR-V/CIT(A)-V/99-2000
Before this appeal was disposed of by the Appellate Authority the assessee was able to point out that the assessee in fact had produced such a certificate even before the Assessing Officer as on 25-2-1999 but the assessing Officer though passed the order u/s 143(3) of the Act on 31-3-1999 had overlooked the same as it was not part of the return.
The Appellate Authority on noticing this anamoly thought it proper to remand the matter to the Assessing Officer to re-examine the question but nevertheless with a direction to the assessing officer to allow the claim of deduction u/s 80HHD in respect of Bay Island Hotel after necessary verification of the appeal filed by the appellant as per the order dated 19-6-2000.
While the assessee was in the process of seeking further relief before the appellate Commissioner in respect of the disallowed amount, the assessing authority, it appears, also got alerted by this time and thought it proper to rectify the assessment order as the Assessing Officer realised that there was an error apparent on the face of the record. In passing of the Assessment Order and in determining the actual tax liability of the assessee which in turn was depending on the proper quantification entitlement of the assessee in terms of Section 80HHD of the Act as such amount played a role in reduction of total taxable income of the assessee by the very amount.
While the assessing officer was required to examine the matter in terms of the remand of the Appellate Commissioner and in the meanwhile was also of the view that the original assessment order was required to be rectified, caused notice to the assessee u/s 154 of the Act as per the notice dated 7-7-2000.
The assessee filed its objections/explanation to this notice as per its reply dated 4-9-2000 the relevant portion of which can be seen as extracted in the order of the assessing officer and which reads as under:
The assessee is in receipt of the captioned notice whereby it is proposed to rectify the assessment order dated 31.03.1999, u/s 143(3) by reducing the deduction of Rs. 13,46,77,185/- allowed u/s 80HHD of the Income Tax Act ("the Act") to Rs. 8,80,04,548/- As per Annexure to the said notice, the deduction u/s 80HHD is proposed to be computed by apportioning the total profit of the assessee including all the hotels owned by/licensed to the assessee, in the ratio of foreign exchange receipts of these hotels to the total receipts of the assesse''s business.
It is respectfully submitted that the proposed action is not in accordance with the provisions of law. It is nowhere required u/s 80HHD of the Act that the said deduction be allowed with reference to the aggregate profits and the aggregate foreign receipt and total receipt of the assessee''s business. It may kindly be appreciated that under various of the asessee''s business. It may kindly be appreciated that under various provisions of chapter VIA of the Act, the deduction envisaged therein is to be computed with reference to the eligible undertaking and not to the aggregate business whereby losses or insufficiencies of one unit may adversely affect the deduction claimed with reference to another unit The assessee has rightly computed u/s 80HHD on the basis of the profits, foreign exchange receipts and total receipts of each hotel treating the same as an independent unit
The Supreme Court in the case of Commissioner of Income Tax (Central), Madras Vs. Canara Workshops (P) Ltd., Kodialball, Mangalore, in the context of section 80E of the Act held that the deduction under that section was allowable at the aggregate profits of the priority industry unaffected by the losses suffered in other priority industries owned by the same assessee.
In the context of section 80HHD/ 80I of the Act, it has been held in the following cases that the deduction under those sections is available on the profits of the industrial undertaking and not on the aggregate profits of the assessee:
i) Commissioner of Income Tax Vs. Siddaganga Oil Extractions Pvt. Ltd.,
ii) HMT vs. DCIT: 59 ITD 76 Bangalore
ii) Rajasthan Petro Synthetics Ltd. Vs. DCIT: 60 ITD 682 (Del).
Your Honour''s kind attention is invited to the decision of Delhi Bench of the Tribunal in the case of Eastern Leather Products (p) Ltd. vs. DCIT : 68 ITD 358 wherein the Hon''ble Tribunal held that for computing deduction u/s 80HHC of the Act, loss incurred in one unit not connected with the export unit could not be adjusted against profits of the export unit
Besides the aforesaid decisions, your Honour''s kind attention is invited to various provisions of Section 80HHD. Under sub-section (1), the deduction is available to a resident assessee who is engaged in the ''business of a hotel''......... Approved by the prescribed authority" and the deduction is available to the extent of fifty percent of the profits derived by such assessee from services provided to foreign tourists and such part of the balance profits as may be utilized in the specified purpose and manner.
Since a hotel would be rendering services to person other foreign tourists, or such services to foreign tourists for which payment is not received in convertible foreign exchange, sub-section (3) lays down an artificial method for determining derived from service provided to foreign tourists''. As per this subsection profits derived from service provided to foreign tourists shall be that proportion of the profits of ''he business'' as the receipts in convertible foreign exchange described in sub-section (2) bear to the total receipts of the business'' carried on by the assessee.
The term "the business" as appearing in sub-section (3) of section 80HHD refers, in our respectful submission, to the business of a hotel approved by the prescribed authority and not to the aggregate of all business carried on by the assessee.
In the present case the assessee runs several hotels which are approved by the prescribed authority as being eligible for deduction u/s 80HHD. The hotels run by the assessee may be broadly categorised into three categories, viz.
i) owned properties,
ii) leased properties, and
iii) managed properties.
The assessee''s right and liabilities as well as income from these different categories of properties are different from each other. The assessee, therefore, regards, each hotel, located at substantial distance from each other, as a separate business. The finds and management of each other are kept separate from each other.
In view of the aforesaid and in view of the absence of any specific requirement in section 80HHD to compute the deduction allowable under provision, with reference to the aggregate business of the assessee, it is respectfully submitted that the rectification proposed in the captioned notice would not be in accordance with law.
In addition to the aforesaid, it may kindly be appreciated that even if your honour were to take a view different from that submitted herein above by the assessee, the issue could at best regarded as debatable. As held by the Supreme Court in the case of T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, a mistake apparent from records is one in respect of which there can conceivably be no two opinion. The allowance of deduction u/s 80HHD in accordance with the assessee''s claim cannot at all be considered to be mistake apparent from record which can be rectified u/s 154 of the Act.
It is, therefore, respectfully prayed that the proposed action u/s 154 may kindly be dropped in accordance with detailed submissions made herein above."
The objection of the assessee is not correct The provision contained in Sec. 80HH and 80IA is different from the provision contained in section 80HHD. The word used in section 80HH is profit or gain of such Industrial unit whereas for 80IA there is a specific sub-section (7) which states that the deduction is to be calculated unit wise. However, section 80HHD provides that it is the profit of the business and the total receipt of the business which is the figure to be adjusted and nor of sub-business. As such the method adopted by the assessee from the calculation of deduction u/s. 80HHD is not correct and in accordance with law. The profit of the Hotel business is to be taken as a whole taking the receipts of all the units into consideration and the unit from which there was no income or negative income cannot be ignored. Decisions relied upon the assessee are not applicable to the provisions contained u/s 80HHD. Decisions are in respect of other sections such as 80HH, 801 etc. As such the deduction admissible u/s. 80HHD is worked out as under:
i)
Total income as per order u/s. 143(3)
Rs. 24,32,47,317/-
Add: On account of capital expenditure as discussed above
Rs. 27,00,000/-
Rs. 24,59,47,317/-
ii)
Receipts of foreign exchange on account of services rendered to the foreign tourists.
Rs. 53,54,49,322/-
iii)
total receipts from business 10CCAD
Rs. 1,46,66,65,995/-
Income from the head profits and gains of business x Receipts in foreign exchange from services provided to foreign tourists
total receipts of business = Rs. 24,59,47,317/- x Rs. 53,54,49,322 = Rs. 8,97,90,225
1,46,66,65,995
Disallowance on account of fixed assets discarded/sold -Rs. 21,00,915 In the petition dated 27-7-1999 u/s 154 it has been claimed that the amount of Rs. 21,00,915 on account of fixed assets discarded/sold has been included in the computation of total income attached with the return. The claim of the assessee is factually not correct No such addition has been made in the computation of total income attached with the return. As such the claim of the assessee that this was double addition for the same amount which require rectification is rejected."
The sum and substance of which was that even in terms of the provisions of Section 80HHD of the Act the computation of the proportionate profit attributable to the foreign exchange has to be necessarily with reference to each unit or each hotel and the total profits that quantifies for the benefit of Section 80HHD of the Act, being the sum total in respect of each such unit which otherwise qualifies for the benefit under the terms of Section 80HHD. The assessing Officer has taken up the above stand as the Assessing Officer had indicated the basis, the reason for rectification and also joined issue on the question as to whether such a correction to the assessing order can be brought within the jurisdiction of rectification as contemplated u/s 154 of the Act.
In this regard it was the specific stand of the Assesee before the Assessing Officer that he had no jurisdiction to rectify the original assessment order for the reason that the question as to whether the amount that quantified for deduction u/s 80HHD of the Act as claimed by the assessee or as opined by the Assessing Officer was a debatable question and if so a matter of this nature cannot be characterised as an order suffering from a mistake apparent on the face of the record within the scope of Section 154 of the Act and therefore the jurisdiction u/s 154 was not exercisable in respect of such debatable difference of opinion.
The Assessing Officer did not agree with the stand taken by the Assessee and the contention urged on behalf of the Assessee and passed an order said to be a combined order both for the purpose of Section 154 rectification and also for the purpose of giving effect to the remand order as contemplated u/s 251 of the Income tax Act and in that order indicated that on the proper working of the formula as envisaged u/s 80HHD which in fact had not been done so while passing the order on remand and the proportionate business profits attributable to the foreign exchange receipts earned by the assessee during the accounting period in question and corresponding assessing year was actually a sum of Rs. 8,97,19,225/- and not as had been originally allowed at a sum of Rs. 13,46,77,185/-.
The actual computation and the method of working of this amount as indicated in the rectification order is as follows:
i)
Total income as per order u/s. 143(3)
Rs. 24,32,47,317/-
Add: On account of capital expenditure as discussed above
Rs. 27.00.000/-
Rs. 24,59,47,317/-
ii)
Receipts of foreign exchange on account of services rendered to the foreign tourists.
Rs. 53,54,49,322/-
iii)
total receipts from business 10CCAD
Rs. 1,46,66,65,995/-
Income from the head profits and gains of business x Receipts in foreign exchange from services provided to foreign tourists
total receipts of business = Rs. 24,59,47,317/- x Rs. 53,54,49,322 = Rs. 8,97,90,225"
1,46,66,65,995
The aggrieved assessee appealed to the Commissioner yet again invoking the Appellate remedy u/s 246 of the Act, nevertheless did not meet with much success on the aspect in issue in the present appeal as in terms of the Appellate Order dated 15-2-2001 copy at Annexure: "B" in ITA No. 59/SR-CIT (A)-V/2000-2001, the appellate commissioner rejected the contention of the assessee for the reason that for the subsequent assessment year in respect of the very assessee the Appellate Commissioner had taken the view as had been canvassed by the Assessing Officer and therefore in so far as this aspect of the matter is concerned had no hesitation in affirming the action of the Assessing Officer in rectifying the original assessment order and disallowing a part of Section 80HHD of the Act as had been claimed by the Assessee and as had been originally allowed.
The Assessee carried the matter in further appeal to the Income tax Appellate Tribunal as enabled u/s 253(a) of the Act.
In the appeal in so far as the present questions are concerned the Assessee raised two contentions namely the order of the Assessing Authority rectifying the order of the Assessing Authority, being bad in law due to improper exercise of Section 154 jurisdiction and also for the reason that even on merits the view taken by the Assessing Officer and affirmed by the First Appellate Authority was not correct; that the assessee''s stand and claim about the method of working of sub-section (3) of Section 80HHD was the proper and correct method i.e., unit wise method of computing proportionate profits attributable to the foreign exchange receipts for the purpose of Section 80HHD of the Act. The Assessee also raised the ground in this appeal that the original assessment order of the Assessing Officer dated 31-3-1999 had got merged with the Appellate Order of the Commissioner dated 19-6-2000 though the Commissioner was issuing further directions to the Assessing Officer for further verification of facts so far as the question of permitting the claim for deduction of otherwise of the amount quantified proportionate profits as the assessee in respect of its Bay Island Hotel at Port Blair. The appellate Order nevertheless had the effect of denuding jurisdiction to the Assessing Officer in dealing with the original assessment order in any manner.
The learned representative of the Department of Income tax joined issue on this and the appellate Tribunal on hearing the respective learned counsel for the appellant and the revenue in terms of its order dated 31-10-2001 allowed the appeal of the Assessee being of the view that the contention of the assessee of the merger principle coming in the way of the Assessing Officer to exercise the rectification jurisdiction merits acceptance placing reliance on
9(i) It is to be noted that the powers of the CIT(A) are co-terminus with that of the Assessing Officer and traverses the whole assessment We find support from the decision of the Hon''ble Apex Court in the case of Commissioner of Income Tax, M.P., Bhopal Vs. M/s. Nirbheram Deluram, in which the above proposition has been laid down. So, the CIT(A) is deemed to have considered the claim of deduction u/s 80HHD of the Act in a 11 its aspects and the order of the Assessing Officer on that issue is to be taken have merged with the order of the CIT(A).
9(ii) In other case viz, Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., the Hon''ble Supreme Court has held that when a question is raised before the Tribunal but fails to deal with it, it must be deemed to have been dealt with by it and is therefore one arising out of its order. At page 612 of the judgement (supra) it has been observed:
Where the question itself was made issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distance question for the purpose of sec. 66(1) of the Act.
9(iii) This proposition was further reiterated by Hon''ble Supreme Court in the case of Raja Sharda Narain Singh Vs. Commissioner of Income Tax, Uttar Pradesh, and again in the case of Commissioner of Income Tax, West Bengal Vs. Indian Molasses (Private) Ltd.,
9(iv) To further fortify our findings, we would also like to refer to the Madras High Court decision in Commissioner of Income Tax Vs. First Leasing Co. of India Ltd. and others, in which it was held that the question whether investment allowance could be granted to the assessee on bulldozer was squarely before the Tribunal, but the Tribunal did not actually consider one aspect of it in the light of one of the statutory conditions prescribe in sec 32A (2) (b)(iii) of the Act, in relation to the bulldozer hired out of the assessee, it was held that the aspect must be deemed to have dealt with by the Tribunal and therefore, it was arising out of its order.
9(v) It has been held by various High Courts that "each aspect of a question is not distinct question and each aspect need not be raised as an independent question of law''. Some of the cases are:
i) Narendra Mafatlal Mehta Vs. Union of India and another,
ii) Harish Chandra Golecha (HUF) Vs. Commissioner of Income Tax,
iii) N.A. Mody Vs. Commissioner of Income Tax, and
iv) Commissioner of Income Tax Vs. Anaimugan Transports (P) Ltd.,
and therefore opined the merger principle came in the way. The Tribunal was also of the opinion that the question as to whether the computation of proportionate profits quantifying for the benefit under Sub-Section(1) of 80HHD in terms of Sub-Section (3) of Section 80HHD of the Act being of debatable point and for this reason also it cannot be made the subject matter for a rectification invoking power and jurisdiction u/s 154 of the Act.
In so far as the appeal of the assessee relating to the proper manner of working of the benefits u/s 80HHD of the Act is concerned the Tribunal opined that while the approval of the prescribed authority is a sin-quo-non i.e., entry quantification to get into provisions of Section 80HHD of the Act, the provisions of Sub-Section (3) of Section 80HHD was a machinery provision for effectuating the provisions of Section 80HHD, the computation Section can only quantify what is recognised and provided for in the main provision i.e., sub-section (1) and for this reason as the benefit of Sub-section (1) of section 80HHD is only in respect of hotels approved by the prescribed authority even for the purpose of ascertaining the proportionate profit attributable to foreign exchange receipt, the computation should be necessarily with reference to the total receipts of only such hotel which quantifies for the benefit u/s 80HHD of the Act and not by including the other hotels which did not quantify for the benefit of Section 80HHD, also for claiming the benefit. For arriving at this view sought support from the following decisions:
(i) English Electric Co. Ltd. Vs. Commissioner of Income Tax,
(ii) Commissioner of Income Tax Vs. Siddaganga Oil Extractions Pvt. Ltd.,
(iii) HMT vs DCIT (59 ITD 76) Ban
(iv) Rajasthan Petro Synthetics Ltd. Vs DCIT (60 ITD 682) (Del).
Provisions of Section 80HHD of the Act and also 2, 3, 4 rendered in the context of similar other beneficial Section 80HHD of the Act all found in chapter VI(a) of the Act.
In this view of the matter the Tribunal concluded that the deduction has to be permitted from out of the total income of the assessee as envisaged u/s 80HHD of the Act has to be with reference to each approved hotel individual vis-a-vis the profit derived by that particular hotel. The Tribunal also opined no deduction is admissible in respect of profits derived from hotel not approved for the purpose of Section 80HHD. In other words the Tribunal understood the matter and as contended by the assessee that the method of computation in terms of sub-Section (3) was on the basis of individual unit hotel wise and for arriving at total receipts quantified for 80HHD benefit the profit ascertained in respect of individual hotel has to be added up and some total constitute...benefit u/s 80HHD of the Act.
It is because of such finding by the Tribunal present appeal by the revenue as indicated above on the questions as noted above.
Appearing on behalf of the appellant revenue submission of Sri. Seshachala, learned Senior Standing counsel for the Department is though not elaborate to the point and precise, Mr. Seshachala would submit that in the first instance the determination of the total income of the assessee and the corresponding tax liability for the assessment year for which in return depending upon the proper computation or determination of the benefits the assessee could observe in terms of Section 80HHD of the Act had escaped the attention of the Assessing Officer and the assessment proceedings had been concluded even without being aware of the requirements u/s 80HHD of the Act submitted that in the first instance the claim of the assessee for the benefit u/s 80HHD had been just not looked into and but allowed to pass as it is only on the limited verification of the hotel which did quantify for claiming benefit and on notice Bay island hotel at Port Blair had not been so approved by the prescribed authority.
Submission is that in respect of the balance of the claim, the assessee had virtually overlooked the requirements of working of the benefits in terms of Sub-Section (3) of section 80HHD of the Act and this is a mistake in law and error apparent on the face of the record. Learned counsel would submit that the mistake by the Assessing Officer though is a mistake in law was one of being oblivious to the existence of the statutory provisions of sub-Section (3) of Section 80HHD.
It is therefore submitted that it was a clear case qualifying for rectification u/s 154 of the Act.
Joining issue on the question of rectification jurisdiction being not available as the computation ultimately has been worked by the Assessing Officer and has initially allowed being a debatable point could not be characterized as an error apparent on the face of record and therefore could not have been made the subject matter of Section 154 of the Act. Sri. Seshachala would submit that the question as to whether the claim of assessee as put forth about the method of working of Sub-Section (3) of Section 80HHD of the Act as understood by the Assessing Officer would have been a debatable issue only if the Assessing Officer had in the first instance examined the claim and had indicated that he is not inclined to allow the claim as put forth by the assessee when the Assessing Officer has not even bestowed his attention due to his ignorance to sub-section (3) of Section 80HHD of the Act. The scope for debate in that arises if at all there could have been debate and the matter could have been considered and due to the non-consideration of the actual consideration of sub-section (3) of Section 80HHD the debate itself had been preempted and it cannot consider the question as a debatable question having been considered and had remained as a mistake of law and not working provision of Section 80HHD(3) if had been subsequently given, the debate in such a situation does not arise as in the present case. The learned counsel for the revenue would further submits that the Tribunal has grossly erred in misapplying the principle of merger and the Tribunal has also grossly misunderstood the principle of merger as to the principle and applicability of this principle and the situation to which it is applicable. The submission is merger principle is attracted only in so far as it relates to an aspect which had been made the subject matter of appeal and the principle cannot be extended to an aspect of a point which was never made subject matter of appeal that in the present case the question as to whether the assessee claimed for deduction of the benefit u/s 80HHD Act from out of the total income of the Assessee which never been made an issue as the Assessing Officer had virtually allowed the claim by his over sight and by overlooking the requirement of sub-section (3) section 80HHD and the Appellate Commissioner whose order is one which is called in aid for urging the principle did not in any way advert the question of the manner of computation of the benefits of Section 80HHD of the method of working under sub- Section (3) of 80HHD as it is not even the subject matter of appeal and there was no issue before the appellate Commissioner on this question. A matter which is never a subject matter of appeal cannot be categorised as an aspect which gets merged with this appellate Order and therefore the principle of merger is not at all attracted in the present case is a subject matter of the rectification authority to learned counsel for the revenue.
In this regard while our attention is drawn to the statutory provisions of Sub-section 1(a) of Section 154 of the Act which reads as under:
Rectification of mistake:- (1) With a view to rectifying any mistake apparent from the record an income tax authority referred to in Section 116 may-
(a) amend any order passed by it under the provisions of this Act;
Submits on this premise that debate in this question as to whether it can be made subject matter of order u/s 154 is virtually preempted by the Statutory provisions and it is not taken beyond any scope of such a debate. In support of such submission Sri. Seshachala has placed reliance on the decision reported in Additional Commissioner of Income Tax Vs. India Tin Industries (P) Ltd., Additional Commissioner of income tax Vs. India Tin Industries(P) Ltd. wherein it has been categorically held what was not the subject matter of appeal before the appellate Authority cannot in any way attract the principles of merger of merging that part of the original order getting passed in appeal.
Sri. Seshachala has placed further reliance on the decision of the Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., wherein the principle of merger had been authoritatively explained by the Supreme Court as one of the leading cases on the subject.
On the question of the assessee''s claim about the manner of working of sub-section (3) of Section 80HHD Act for arriving at the benefit under this Section Sri. Seshachala would submit that the statutory provision is quite clear and unambiguous and to ascertain proportionate profits attributable to the foreign exchange earnings of the assessee is only a ratio of the total profits of the assessee and computed as owned and not with reference to the individual unit. In other words the submission is that the Section does not enable the computation in a manner as claimed and suggested on behalf of the assessee for the reason that sub-section (3) mandates that the profits of the assessee attributable to the foreign exchange earnings has to be necessarily in the same proportion as the profits of the assessee as a whole vis-a-vis the total receipts of the assessee from its activity of hotel business. It is therefore submitted that when once statute expressly mandates the ascertaining of Total turnover and no other manner can be resorted and even for assuming for arguments the method suggested on behalf of the assessee could have been a possible method of ascertaining such profits otherwise in the wake of the statutory provisions there is no scope for doing so for such quantification and only in accordance with formula envisaged in sub-section (3) of Section 80HHD of the Act is required to be adopted.
The manner of working of sub-section (3) of Section 80HHD of the Act has been demonstrated by the employment of the formula, the actual working of the same and in this regard the learned counsel for the revenue would submit that the method of applying the formula and working the formula which is also the requirement even for ascertaining the deductible amount u/s 80HHD of the Act the subject matter of appeal before this Court but even independent of it the formula should not only be worked, employed in terms of sub-section (3) of Section 80HHD of the Act and only in that manner and for the amount arrived at under sub-Section (3) of Section 80HHD of the Act.
Countering such submissions on behalf of the assessee Sri. Vikram. H, in the first instance and later carried on by Sri. Ajay Vohra, learned counsel appearing for the assessee have put forth several forcible contentions in the following manner.
Mr. Vikram in the first instance has contended that invoking of Section 154 jurisdiction was erroneous and the jurisdiction was not available to the Assessing Officer as the earlier Assessment order of the Assessing Officer had got merged with the Appellate Order of the first appellate Authority.
It is therefore urged that the Assessing Officer could not have passed an order u/s 154 of the Act. For this reason it is further contended the question as to whether the computation should have been as claimed by the Assessee or as being claimed by the Assessing Officer which is being debatable question and if so the debatable question cannot be made subject of rectification being settled legal position. For this reason also the Assessing Officer could not have invoked his jurisdiction for rectification and for altering the original assessment order or passing the order at variance with the original order.
The learned counsel would submit that the legal position as it emerges on applying the doctrine of merger is too well known to burden with the authorities relied upon by the learned counsel for the assesse, as these decisions by themselves illuminate this aspect of the matter and not necessarily in the manner as contended and as espoused by the learned counsel for the revenue.
In so far as the merits of the order in the sense as to whether the assessee was entitled to claim deduction u/s 80HHD of the Act in terms of the computation as indicated and claimed or in the alternative as to whether sub-section (3) of section 80HHD of the Act in the manner as claimed by the assessee and not indicated by the Assessing Officer and first Appellate Authority but only as indicated by the Tribunal, learned counsel would submit that sub-section (3) of Section 80HHD of the Act being for the purpose of sub-Section (3) of section 80HHD would have to be necessarily understood and interpreted to advance the object as envisaged in sub-Section (1) and not to independently understand and interpret provision which could in any way detract the benefit which otherwise available to the assessee under sub-section (1) of Section 80HHD of the Act.
While the matter had been adjourned yesterday after the end of the Court hours, on the resumption of the hearing of the case today, learned counsel Sri. Ajay Vohra sought our permission to join the arguments midstream and submitted that if the Court permits, the learned counsel would continue arguments from the stage upto which Sri Vikram Huilgol, learned Counsel for respondents, who had argued the matter hitherto and had brought the matter upto this stage.
Though this is not normally done nor is appreciated, nevertheless as the endeavour is only to find a satisfactory answer to the questions put forth before the Court and receiving assistance from any counsel is always to the advantage of the Court and if better light can be thrown by any learned member of the bar who is authorised to appear on behalf of parties and that being welcomed, that being our attitude, we permitted Mr. Vohra to join midstream and continue submissions on rest of the issues/questions i.e., the question relating to the merits of the manner of understanding Section 80HHD of the Act, as to whether the understanding of the tribunal as reflected in the order under appeal is the correct understanding or if it is otherwise.
Mr. Vohra, learned counsel for the respondent/assessee has drawn our attention to paragraph 14 of the order of the Tribunal and in this regard has also read us the contents of paragraph 10 of the very order and submits that the finding given by the Tribunal as recorded in these paras is only in consonance with the provisions of Section 80HHD(1) and (3). It is submitted that the phrase "business" in sub-Section (3) should be read as the "business" as is referred to in sub-Section (1) which means that it is only such business turnover carried on by the assessee who is managing/maintaining such utilization viz., the hotels which have been certified for the purposes of claiming the benefits under the Section and therefore, would submit that the total turnover which goes into the denominator part of the formula can only be the total turnover of such hotels which have been recognized by competent authority or in respect of which a certificate has been issued by the competent authority indicating that such hotels are recognized for the purpose of Section 80HHD of the Act and also for the purpose of and in the nature of receipts which is foreign exchange receipts received from guests of the hotel who are foreigners and not citizens of this country.
For such purpose Sri. Vohra, learned counsel would make a comparison between the provisions of Section 80HHC of the Act analogous with the provisions of Section 80HHD of the Act and would submit that the interpretation as placed on the provisions of Section 80HHC by the Madras High Court in the case of (2002) 257 ITR 60 commends for acceptance for the purpose of understanding the scope of provisions of Section 80HHD of the Act also and in this decision the Madras High Court had expressed an opinion fully endorsing and accepting the contention as raised in the present appeal on behalf of the respondent - assessee and submits that while clause (a) of sub-section (1) of Section 80HHD of the Act provides for a positive qualification and it is indicated that 50% of the profits derived from the service provided to foreign tourists, is allowed as a deduction from out of the total income of the assessee, which is a taxable income under clause (b) of sub-section (1) of Section 80HHD of the Act provided that the amount has been transferred to a separate account known as reserve account and the amount for utilizing the funds for putting up new construction in the same line of activity viz., hotel business and for providing services to foreign tourists and with a further rider as stipulated in sub-section (4) indicating the need for application of the funds from the reserve account for the purpose of construction to provide additional facilities to foreign tourists or to increase the capacity of the assessee for providing such hotel services to foreign tourists and if the said amount is not so utilized before the expiry of a period of five years next, following the previous year in which the amount had been credited to the reserve account then the amount to be treated as such amount falling short of utilization and to be treated as the income of the year in which the period of five years expires and clause (b) enabling the further deduction from out of the remaining profits, if to that extent the amount from the reserve account is utilized for the purposes of the assessee as provided in sub-section (4) of Section 80HHD of the Act, actually invested for the developmental activity as indicated in clauses (a) to (e) of sub-section (4) of Section 80HHD of the Act and it is submitted that such was the view taken by the MADRAS MOTORS'' case (supra) while interpreting the provisions of Section 80HHC and it should be equally made applicable to the same interpretation for understanding the provisions particularly, as the two provisions are almost in pari materia though not identical and with no other binding authority holding the field, the understanding of the provisions of section 80HHC of the Act and the view taken by the Madras High Court commends for acceptance. It is virtually an authority even in understanding the provisions of Section 80HHD of the Act and therefore, the present appeal on applying the present test should only be dismissed. It is further elaborated that sub-section (3) being only for the purpose of sub-section (1) the phrase and expressions as they occur in sub-section (3) of Section 80HHD of the Act should necessarily take their colour from sub-section (1) and should be confined to the extent of the business or the activities of the assessee which qualify for the benefit under sub-section (1) and therefore, there is no question of taking the business turnover or receipts of all hotels managed by the assessee whether approved for the benefit u/s 80HHD of the Act or not and such lumping together of all hotels managed by the assessee whether or not certified by the competent authority for the purpose of working out the provisions of Section 80HHD would virtually dilute the very benefit which was said to be extended by the legislature and if the logic of the judgment in MADRAS MOTORS'' case [supra] is to be accepted, it is inevitable that the denominator portion of the formula for arriving at the profits of the assessee attributable to the profits derived from the assessee for the services provided to foreign tourists and so, much of the amount gets into the remaining profits as is provided under the clause, it should be to the extent of the turnover of the assessee in respect of the certified hotels only and not inclusive of non-certified hotels.
It is in the background of such grounds raised in the memorandum of appeal the substantial questions of law and in the wake of the submissions made and the arguments addressed at the Bar, we are required to answer the questions posed for our answer in this appeal.
Though the number of questions as framed and as indicated in the memorandum of appeal are as many as three, the real questions, with the permission of the Court, having been re-framed by the learned counsel for the appellant-revenue and to which Sri. Vikram has no objection are as under :-
Whether the Tribunal was correct in holding that the issue of deduction u/s. 80HHD of the Act has merged with the order of CIT (A) and the order passed u/s. 154 of the Act by the Assessing Officer is without jurisdiction?
Whether the Tribunal was correct in holding that the computation of deduction u/s. 80HHD of the Act as to whether it is to be allowed based on all the branches of hotels of the assessee by taking into account the profit and losses or individual branch hotels by considering only the profit is a debatable issue and therefore order u/s. 154 of the Act is without jurisdiction ?
Whether the Tribunal was correct in holding that the powers u/s. 154 of the Act is co-terminus with the scope of powers u/s. 143(1)(a) of the Act, as computation of deduction could not have been exercised u/s. 143(1)(a) of the Act and the rectification could not have been done u/s. 154 of the Act?
Whether the Tribunal was correct in holding that the profits of individual branches of hotels should be taken into account and not the entire profits (including losses) of the assessee for the purpose of computation of deduction u/s. 80HHD of the Act ?
The first three questions even if re-framed, the questions is relating to the finding of the Tribunal to hold that the assessing authority was denuded of jurisdiction to exercise rectification jurisdiction u/s 154 of the Income Tax Act, 1961 for the reason that the order in respect of which the assessing authority sought to invoke the jurisdiction, in reality was an order which was subject matter of the appeal before the First Appellate Authority in the first round of appeal at the instance of the assessee and if so, on the application of the principle of merger, the original assessment order in its entirety having got merged with the order passed by the appellate authority, the assessing authority had no jurisdiction to independently invoke the revocation jurisdiction in respect of a part of the original assessment order on the reasoning, that part of the assessment order had not been made subject matter of appeal for adjudication and an answer before the First Appellate Authority.
It is only in this context Sri. Seshachala, learned Sr. Standing counsel for the Revenue has placed reliance on the judgment of our High Court in Additional Commissioner of Income Tax Vs. India Tin Industries (P) Ltd., and which in turn follows the judgment of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co.,
On this aspect of the matter, the law is quite well settled by now and while it is true that an order of a lower forum or authority gets merged with the appellate order, when the order of the lower authority is made subject matter of appeal, it is also clear by now that the principle of merger is attracted only in so far as it relates to the subject matter of appeal and merger principle does not get extended to matters not examined by the appellate forum.
In this regard, reliance placed by Sri. Seshachala, learned senior standing counsel appearing for the revenue on the Judgment of the division Bench of this court in INDIA TIN INDUSTRIES case [supra] is quite apt and is squarely attracted and we can profitably extract the observation made by this court which reads as under:
The doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior tribunal, and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of the two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute as laid down by the Supreme Court in State of Madras Vs. Madurai Mills Co., Ltd., relied on by Sri Sarangan. In Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., the income tax Officer made a composite order granting registration to the firm and also an order of assessment on the basis of registration. The assessee filed an appeal before the Appellate Assistant Commissioner against the composite order. The court held that the order of registration made by the income tax Officer did not merge in the appellate order of the Appellate Assistant Commissioner, because the order of registration made by the income tax Officer was not the subject-matter of the Appeal before the Appellate Assistant Commissioner and did not, therefore, merge with the order in appeal.
Whether there is merger of the order of assessment in the appellate order of the Appellate Assistant Commissioner and if there is, to what extent, came up for consideration before the Gujarat High Court in Karsandas Bhagwandas Patel Vs. G.V. Shah, Income Tax Officer, Rajkot and Others, The court held that it depends upon the subject-matter of the appellate order. The order of assessment made by the income tax Officer merges in the order of the Appellate Assistant Commissioner, only in so far as it relates to items considered and decided by the Appellate Assistant Commissioner. That part of the order of assessment which relates to items not forming the subject-matter of the appellate order left untouched does not merge in the order of the Appellate Assistant Commissioner. Even after an appeal from an order of assessment is decided by the Appellate Assistant Commissioner, a mistake in that part of the order of assessment which was not the subject-matter of the appeal and was left untouched by the Appellate Assistant Commissioner can be rectified by the income tax Officer u/s 35 of the Indian income tax Act, 1922, because the mistake would be his own mistake, which he can always correct u/s 35(1). The power to rectify a mistake is conferred on the authorities specified therein by section 154 of the 1961 Act.
The principle enunciated in the above two cases is given statutory recognition by section 154(1A). It, therefore, follows that part of the order of the income tax Officer, allowing a development rebate of Rs. 11,011 was not the subject-matter of the appeal before the Appellate Assistant Commissioner, and was left untouched by his order and, therefore, does not merge in the order of the Appellate Assistant Commissioner. This mistake in that part of the order of assessment by the income tax Officer, which was not the subject-matter of the appeal, can be rectified u/s 154 because the mistake would be the mistake of the income tax Officer, and he has always the competence to rectify is mistake u/s 154 of the Act.
Further significance of the Judgment is that it was also within the scope of jurisdiction u/s 154 of the Act and the manner of exercise of the jurisdiction for rectification by the assessing authority.
As explained, while on a legal principle, the merger doctrine operates only in respect of the subject matter of the appeal and not on an aspect which was not made subject matter, the legal position has also found statutory expression u/s 154A of the Act which is also discussed above.
In this view of the matter, we reject the argument on behalf of the assessee that in view of the principle of merger, the assessing authority could not have exercised the jurisdiction of rectification in any way rectifying the original assessment order even in respect of such aspects which were not made subject matter of appeal before the first appellate authority.
Even the contention urged on behalf of the assessee that apart from the merger principle, the order made subject matter of rectification involving questions which were capable of more than one answer and being in the nature of a debatable question if either view was possible and if earlier the assessing officer having taken one view, cannot later on change his view on the question to modify the original assessment order invoking the rectification jurisdiction for the reason that what can be set right u/s 154 jurisdiction is only errors apparent on the face of the record and not an order of this nature wherein the question as to whether the benefit that can enure to an assessee in terms of section 80HHD of the Act, particularly, for the purpose of quantifying the benefit even as had developed in the context of the present case itself, two views being possible, in the sense, whereas the assessing authority in the earlier instance, had taken the view in one way, later on, the very assessing authority purporting to exercise rectification jurisdiction understood in a different way, but at any rate, the tribunal having accepted the interpretation as was sought to be placed on behalf of the assessee in contradiction to the view taken by the assessing authority and the first appellate authority, the order could never have been modified or varied in the jurisdiction for rectifying the orders suffering from errors apparent on the face of the record and therefore the assessing authority lacked jurisdiction to invoke section 154 of the Act and modify the order and so far as this agreement is concerned, we find that in the first instance, the argument of the question being a debatable point proceeds on the premise that the assessing authority in the first instance had applied his mind for the purpose of consciously extending a particular benefit in respect of claim u/s 80HHD of the Act by the assessee and later on that benefit was sought to be varied or altered by invoking rectification jurisdiction.
We find the very premise is not available to the assessee for the simple reason that a perusal of the original assessment order dated 31.03.1999 and the computation as indicated at the end of the assessment order obviously does not show any application of mind on the part of the assessing authority to the intricacies of working out the benefit available to an assessee doing the hotel business or such other business mentioned in the section, getting foreign exchange receipts as part of its business and for qualifying all that, the manner of arriving at the figure.
In fact, what the assessment order and the computation therein indicates is that the assessing authority had applied his mind only to the aspect of the eligibility criteria for an assessee to claim the benefit of section 80HHD of the Act as to whether particular unit wherein the assessee was in receipt of foreign exchange from foreign tourists was a unit which would qualify for claiming the benefit or otherwise as to whether it was certified by the competent authority in terms of the provisions of sub-section [1] of section 80HHD of the Act "xxx xxxx approved by the prescribed authority in this behalf etc.," and the assessing authority had only noticed that the unit in Port Blair under the name and style of ''Bay Island Hotel'' had not been so certified by the competent authority by the end of the accounting period i.e., 31.03.1996.
Therefore, the argument of the question being a debatable point does not even arise, as obviously the requirement of qualifying the amount qualifying for the benefit in terms of sub-section [3] of section 80HHD of the Act for the purpose of sub-section [1] of section 80HHD of the Act had totally been missed by the assessing officer in the first instance when the assessment order dated 31.03.1999 was passed.
While it is true that if the order is one involving a debatable question as indeed the question of qualification of benefits under the terms of section 80HHD of the Act can be a possible debating issue, such stage had not been reached when the assessing authority passed the original assessment order. It is therefore the argument is not attracted to the present set of facts in so far as it relates to the original assessment order.
Therefore, the questions 1, 2 and 3 are all answered in the negative against the assessee and in favour of the revenue.
That leaves us with the question No. 4. In answering the question of this nature which had arisen before the Tribunal and the Tribunal also essentially following the decision of the Supreme Court in the case of Commissioner of Income Tax (Central), Madras Vs. Canara Workshops (P) Ltd., Kodialball, Mangalore, interpreting the provisions of section 80E of the Act and purporting to apply the ratio and also further following the other decisions, has simply jumped to the conclusion that as a deduction is not admissible in respect of a unit not approved or certified by the prescribed authority as a corollary, the losses incurred by such units as had been indicated by the assessee cannot also be added in the computation of the overall receipts of the assessee carrying on the business in the hotel industry and therefore opined that the assessee''s claim for including receipts from non recognized or non-certified units of the assessee is to be excluded in arriving at the sum which goes into the denominator part of the formula.
It is only because, the manner in which the tribunal had examined the question and had arrived at the answer was not either satisfactory or very convincing, Sri. Ajay Vohra, learned counsel appearing for the assessee has sought to sustain the view taken by the tribunal with the support of the ruling of the Madras High Court in MADRAS MOTORS'' case [supra] by indicating that an interpretation placed by the Madras High Court on the provisions of section 80HHC of the Act, an analogous provision should be accepted and applied for the present purpose of understanding the working of section 80HHD[3] of the Act.
Submission of Sri. Seshachala, learned standing counsel appearing for the revenue on this aspect of the matter is that while it is no doubt true that the entitlement or benefit u/s 80HHD[1] of the Act is to be worked out in terms of section 80HHD[3] of the Act, the comparison stops at that and what is not provided for in section 80HHD[3] of the Act cannot be read into that section with reference to the provisions of sub-section [1] of section 80HHD of the Act.
By pointing out to sub-section[3] of section 80HHD of the Act, learned standing counsel would submit that the words used in sub-section [3] of section 80HHD of the Act such as "the amount which bears to the profits of the business [as computed under the head "Profits and gains of business or profession"] the same proportion as the receipts specified in sub-section[2]" is indicative of the fact that the phrases such as business should be necessarily understood only in the manner of the word as defined in the Act and as is found in sub-section [13] of section 2 of the Act which says "business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture" and the phrase "Profits and gains of business or profession" is an expression which is the heading in sub-chapter ''D'' of Chapter IV which is "D-Profits and gains of business or profession" and submits that the words used in sub-section [3] of section 80HHD of the Act is only in this context and in this background and they cannot be attributed any restrictive meaning so as to restrict it to the activity of business confined to only certified or recognized units of the assessee.
Submission is that the total receipts of all the units of the assessee having the business of hotel industry should necessarily be added up for achieving the purpose of sub-section [3] of section 80HHD of the Act and not as suggested by learned counsel for the assessee and that the receipts attributable to non-recognized units of the assessee should be excluded.
Learned senior standing counsel for the revenue would submit that if such a course of action is to be adopted, then the computation as had been arrived at by the assessing authority and as affirmed by the first appellate authority as right and proper computation and proper understanding of provisions of section 80HHD of the Act and the tribunal''s view that it should be as suggested by the assessee is one without any basis, reasoning or logic and calls for correction in this appeal.
On the other hand, submission on behalf of the assessee is that the provisions of section 80HHD of the Act being beneficial provision occurring in chapter - VIA of the Act, it should be given full effect and the benefit under sub-section [1] of section 80HHD of the Act being computed in terms of sub-section [3] of the Act, it should not be understood in any different manner than subsection[1] of section 80HHD of the Act and it is for this purpose reliance was placed by Mr. Vohra, learned counsel for the assessee on the division Bench decision of the Madras High Court in MADRAS MOTORS'' case [supra].
In answering the question, we are quite conscious that the provision occurs in chapter VIA of the Act which is a provision providing for various situations in which an assessee can put forth a claim for deduction of the identified amount or an amount as provided in the respective section from out of total income of the assessee in which event taxable income conies down and the liability for payment of tax also comes down. At the same time, we cannot lose sight of the fact that even chapter VIA of the Act is part of the Income Tax Act whose basic object is to raise revenue for the State. In interpreting any statutory provision, the first rule is that one should have a look at the enactment, the purpose for which the enactment is made by the legislature and the object that is sought to be achieved and any interpretation can only be in the light of and in the background of the object of the enactment. If that is so, the Income Tax Act being a legislation for raising revenue and augmenting the coffers of the State, cannot be disputed and that basic fact and purpose looms large like a brooding omnipotent in all further interpretations of various sections of the Act.
While understand the beneficial provision the section 80HHD of the Act, it should be so interpreted as to extend the benefit meant for the assessee in terms of section 80HHD of the Act and not to understand it so as to deny the benefit is also settled principle of interpretation, at the same time, in so understanding the limits of such benefit should be confined within the letters of law and cannot by a process of interpretation extended beyond what is actually permitted by the statutory provision is also an equally recognized and accepted mode of interpretation if an exemption provision in a taxing statute. It is therefore that while sub-section [3] of section 80HHD of the Act is meant for the purpose of sub-section [1] of section 80HHD of the Act and should not be so understood as to totally defeat the very object and purpose of effectuation of sub-section [1] of section 80HHD of the Act at the same time no question of enlargement of the scope by a process of interpretation!
If we look at the scheme of sub-sections of section 80HHD of the Act, it is obvious that the legislature did not want to extend the benefit merely based on the gross foreign exchange receipts but consciously restricted the benefit to only profit portion of the receipts and in arriving at the profit portion has devised a formula in terms of subsection [3] of section 80HHD of the Act which on working will produce the profits attributable to the foreign exchange receipts of the assessee as part of its business of running hotels.
Here again, as already noticed, the expressions used in sub-section [3] of section 80HHD of the Act such as ''business'' and ''profits and gains of business or profession'' are expressions as used in a larger context and not a limited context. Therefore, all receipts from the business activity of running a hotel necessarily gets into constituting the total receipts which is in the denominator portion of the formula and in so far as the present question is concerned, that is the only area of dispute.
The endeavour on the part of the assessee obviously is to reduce the figure in the denominator portion of the formula and while it cannot be characterized that revenue is trying to in any way increase it, the revenue''s attempt appears to be to peg it down to the permitted level and not to unduly expand it or enlarge it by a process of referential interpretation such as sub-section [3] of section 80HHD of the Act being interpreted in the context of sub-section [1] of section 80HHD of the Act.
If we bear these principles in mind, we notice that the basic requirement of a unit which is in receipt of foreign exchange from foreign tourists being certified or recognized by the prescribed authority acts as an eligibility criteria without which the benefit u/s 80HHD of the Act cannot be claimed at all. When once the assessee crosses this threshold bar and enters into the arena of section 80HHD of the Act, then comes second stage of the computation of benefits which the assessee can claim in terms of section 80HHB of the Act. Here again the benefit is qualified in terms of sub-section [3] of section 80HHD of the Act and by applying the formula as discussed above.
It is in this context, Sri. Seshachala, learned senior standing counsel appearing for the revenue has drawn our attention to the particulars furnished by the assessee itself indicating the total receipts from business in the prescribed form, namely, form No. 10 CCAD which is envisaged in terms of Rule 18BBA (4) of the Income Tax Rules for the purpose of section 80HHD of the Act and a copy of which forms part of the assessment records which indicated that even the assessee itself had revealed as per this statement that the total income of the assessee from all the units of hotel industries etc., was a sum of Rs. 146,66,65,995/-. These figures are available in the return filed by the assessee in the prescribed form 10CCAD which is extracted as under:
ITC HOTELS LIMITED - CONSOLIDATED 80 HHD CALCULATION WORKING
WINDSOR
RPS
CHOLA
MUGHAL
UKP
VADODARA
LALLGARH
BAY ISLAND
UMED BHA.
SUBTOTAL
CHO
TOTAL
PROFIT BEFORE TAX
114,139,343
59,508,527
61,865,563
73,621,277
5,764,574
32,535,642
4,602,386
3,938,152
(1,522,443)
354,453,021
(36,471,671)
317,981,350
ADD:BOOK DEPRECIATION
20,217,199
12,442,042
871,377
445,631
177,547
1,072,014
809,306
322,766
1,525,143
37,683,025
1,896,341
,_ 39,779,366
LESS TAX DEPRECIATION
36,410,&05
32,022,254
3,253,780
2,597,058
46,267
2,333,539
1,581,629
637,825
1,989,579
80,872,736
3,661,518
84,534,254
97,945,737
39,928,315
59,463,160
71,469,850
5,895,854
31,274,117
3,830,063
3,623,093
(1,986,879)
311,463,310
(38,236,848)
273,226,462
ADD:(PROFIT) LOSS ON SALE OF FIXED ASSETS
2,100,915
0
0
0
0
0
0
0
2,100,915
0
2,100,915
TRADING RECEIPTS
0
0
0
ENTERTAINMENT EXPENSES
104,049
67,375
91,504
1,126,231
360,780
187,157
0
52,861
1,989,957
207,06)
2,197,018
GUEST HOUSE EXPENSES
0
1,229,412
1,229,412
DONATIONS ADDBACK
0
0
DISALLOWANCE u/r 6D
1,926
41
8,897
17,823
744
4,778
3,602
37,811
139,275
177,086
UNPAID BONUS & INTEREST
231,541
405,961
202,677
390,000
161,766
1,391,945
105,944
1,497,889
UNPAID TAXES/DUTIES ETC
125,932
213,631
339,563
339,563
CONTRIBUTION TO STAFF
0
0
WELFARE FUND
23,220
23,220
23,220
100,407,388
40,527,624
59,786,238
73,217,535
6,257,378
31,466,052
3,995,431
3,675,954
(1,986,879)
317,346,721
(36,555,156)
280,791,566
LESS:
Sec 43B PAYMENTS
- TAXES/DUTIES ETC
270
91,336
131,566
223,172
223,172
-BONUS/INTEREST
313,382
500,000
166,268
330,000
845,88
1,394,238
246,761
1,640,999
TRADING RECEIPTS
0
0
PAYMENTS DURING THE YEAR
0
0
0
PROVISION REVERSED
0
0
DURING THE YEAR
0
0
313,652
591,336
166,268
330,000
0
131,566
84,588
0
0
1,617,410
246,761
1.664.171
INCOME FROM BUSINESS
100,093,736
39,936,288
59,619,970
72,887,535
6,257,378
31,334,486
3,910,843
3,675,954
(1,986,879)
315,729,311
(36,801,917)
278,927,394
Submission is that the assessing officer has based the computation as found in the assessment order on the very facts and figures for arriving at the amount in respect of which the assessee can claim deduction for the purpose of section 80HHD of the Act.
But, as we have already noticed, the area of difference is only as to what should be the figure in the denominator portion, namely, the total receipts from the business of the assessee which is in the nature of hotel industry. The limited area of dispute is whereas the assessee wanted that figure to be a sum total of receipts which were part of the receipts of all recognized certified units of the assessee, the revenue''s stand is that the sum total of the receipts should be necessarily inclusive of all units of the assessee carrying on the business of hotel industry and not confined to the certified hotels as certified by the prescribed authority.
While this court had an occasion to examine the application of the formula as it arises in the context of section 80HHC of the Act in the case of Maini Precision Products Private Limited vs. The Joint Commissioner of Income Tax in ITA Nos. 52 of 2009, 182-185 of 2009 disposed of on 18.08.2009, we indicated the manner of understanding the concept of export turnover vis-a-vis total turnover and the comparison in the present case is the receipts attributable to the foreign exchange receipts and the total receipts of the assessee with all hotel industries put together and the decision may have some indirect bearing as in that case we have taken the view for the purpose of computation of the total turnover of the assessee should necessarily include even the turnover relating to machining activity for which the assessee was collecting separate charges and was not necessarily the manufacture of a product which was being exported by the assessee, in the present case, on an analogy though a unit is not recognized for the purpose of computing the benefit u/s 80HHD of the Act, it can nevertheless form part of the entire business activity in the hotel industry and therefore it should necessarily be part of the total receipts from all such units which figure in the denominator portion of the formula.
In so far as the reliance placed by the learned counsel for the assessee on the ruling of the Madras High Court in MADRAS MOTORS'' case [supra] is concerned, the Judgment can definitely have persuasive value and is not of binding nature, being a Judgment on the interpretation of the provisions of section 80HHC of the Act and as we are directly involved in interpreting the provisions of section 80HHD of the Act in the present case, we do not think it necessary to further examine that ratio as discussed therein, particularly, as the interpretation of the provisions of section 80HHC of the Act if not very apt to the situation and as is required u/s 80HHD of the Act may not have even persuasive value. It is therefore that we refrain from examining the reasoning employed by the Madras High Court for arriving at the conclusion in MADRAS MOTORS'' case [supra] but proceed to examine the question independent of it as the said Judgment is not even of persuasive value for the purpose of interpreting section 80HHD of the Act.
The formula in terms of sub-section [3] of section 80HHD of the Act which has to be worked out, based on the language of sub-section [3] of section 80HHD of the Act and the profits which can claim benefit in section 80HHD[1] of the Act being such profits attributable to the earnings from services provided by the assessee to foreign tourists and being the amount which bears to the profits of the business same proportion as receipts specified in sub-section[2] of section 80HHD of the Act etc., we cannot either give a restrictive meaning or understand the words ''profits of the business'' of the assessee as such profits attributable to only the recognized units of the assessee in the hotel business. It has to be understood in the precise manner in which it is so provided and not by reading in further words or trying to understand that as one indicating to be confined to the recognized units certified by the prescribed authority and as only profits of the recognized units. It is for this reason we are unable to accept the arguments on behalf of the assessee contending that in arriving at the profits of the business of the assessee the profits is only the profits attributable to the recognized units of the assessee earning foreign exchange.
Submission on behalf of the assessee that the profits unit wise should be ascertained first in respect of all recognized or certified units and the proportionate profits of the foreign exchange receipts should be arrived at by keeping that as a base and determine the admissible benefit for sub-section [1] of section 80HHD of the Act in respect of each unit and add up the figure for arriving at the over all benefit u/s 80HHD of the Act is not an acceptable argument for the reason that the scheme of the Act does not provide for assessment of the income of the individual units of the assessee and even in terms of the particulars furnished in the prescribed form 10CCAD the assessee itself has furnished figures treating all units as one for the purpose of computation of total income etc., which is the proper method even as envisaged under the scheme of the Income Tax Act, particularly, for arriving at the total income of the assessee after arriving at the income under the respective heads and as we are in this case concerned only with the income under the head "Profits and gains of business or profession", we do not think it is possible to accept the contention that the unit wise profit should be ascertained first and proportionate profit of the unit attributable to the foreign exchange should be ascertained thereafter by applying the formula and thereafter on the basis of the profits of all units, to arrive at the total benefit of profit is prudent method of working out the profits for the purpose of computation u/s 80HHD of the Act.
We are of the clear view that over all profits of the assessee, computation of which is provided in sub chapter [D] of Chapter - IV of the Act is only one of computing the total income of the assessee under this head as a whole and as one unit and not on any unit wise method etc.
Even in section 80HHD of the Act the reference is to the business of the assessee which is the business as a whole and as one unit and not by sub-dividing the total income of the business into unit wise total income and then arriving at the unit wise overall profit proportionate profit and then adding up the same for arriving at the benefit u/s 80HHD of the Act. In our view, that is neither envisaged under the statutory scheme or as is indicated in the language of the section. It is therefore question No. 4 is also answered in the negative against the assessee and in favour of the revenue. Consequently, this appeal is allowed.
The order under appeal of the Tribunal is set aside and the order passed by the assessing authority as affirmed by the first appellate authority is restored. However, the parties are left to bear their respective costs.