Case Law Details

Case Name : M/s. Kumarakom Lake Resort Pvt. Ltd. Vs ACIT (ITAT Cochin)
Appeal Number : I.T.A. No. 240-242/Coch/2015
Date of Judgement/Order : 01/03/2016
Related Assessment Year : 2007-08,2008-09 & 2010-11
Courts : All ITAT (1730) ITAT Cochin (27)

Brief of the case:

  • The ITAT Bench Cochin held that the assessee would be entitled to deduction u/s 80 IB(7) if its incomes are derived from eligible business irrespective of the manner in which the entries in the books of account are maintained.
  • Further , in the present case the “other income “ mentioned in books of assessee is not earned from any other commercial activity carried on by the assessee and the source of the same continues to be the business profits from the hotel business.

Facts of the case:

  • The assessee is a private limited company which is engaged in the business of running hotel by the name and style of ‘Kumarakom Lake Resort’. For AY 2007-08, the assessment was completed u/s. 143(3) of the Act on 22/12/2009 making certain disallowances. Subsequently, the Assessing Officer issued notice u/s. 148 and re-assessment u/s. 143(3) r.w.s. 147 of the Act was completed vide order dated 29/07/2013.
  • In reassessment , AO excluded ‘other income’ earned by the assessee amounting to Rs.9,85,097/- from the purview of business profits for the purpose of calculating deduction u/s. 80IB(7)(a) of the Act stating that the same is not derived from the business of the Hotel.
  • CIT(A) also confirmed the assessment order The CIT(A) held that though “other income” appears to have arisen from business and its related activities of the assessee, it cannot be said to have been “derived from” business of Hotel.
  • Aggrieved assessee is in appeal before ITAT.

Contention of the Revenue:

  • It was submitted by revenue that the income is mentioned as ‘other income’ does not have direct nexus with the running of the hotel. It was submitted that in view of the judgment of the Apex Court in the case of CIT vs. Sterling Foods reported in 104 Taxman 204, the assessee is not entitled to the benefit of 80IB(7)(a) of the Act in respect of various receipts mentioned as “other income”.

Held by ITAT Cochin:

  • Section 80-IB of the Act provides for deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. As per the provisions of section 80-IB of the Act, deduction is available to profits and gains “derived from” the specific business.
  • Further, sub-section (7) to section 80IB reads as that the amount of deduction in the case of any hotel shall be 50% of the profits and gains derived from the business of such hotel for a period of ten consecutive years.
  • As per the Institute of Chartered Accountants of India (ICAI) guide there are some major revenue generating streams in a hotel industry viz. Room Rentals , Food and beverages , Other operated departments , Rentals and Other Income ,
  • Rent received by the assessee from Heritage Shop which represents rental income from Curio Shop and for the space and amenities will fall within the key revenue generation category of ‘Space Rentals’ and ‘Arcade revenue’ and ‘Housekeeping bill’ for a hotel industry whose broad category is Rentals and Other Income , Communication revenue , Club use revenue , Disposal of empties/sale of scrap etc.
  • Revenue from staff mess will fall within the key revenue generation category of ‘Food and Beverages’ for a hotel industry. Revenue from staff telephone of R.90,048/- will fall within the key revenue category of Communication revenue (both telephone & internet)’ as per ICAI guidelines. Income from club cultural program/DJ of Rs.475,216/- will fall within the key revenue generation category of Club use revenue. Further the sale of used packing materials, recovery of material damage from staff etc. will fall within the key revenue category of ‘Disposal of empties/sale of scrap’ as per the ICAI guidelines.
  • Thus it can be seen that the other income earned by the assessee company would fall within the ambit of key revenue generating activity in case of a hotel industry and, accordingly, has a direct nexus with the hotel business of the undertaking.
  • AO made disallowance on the contention that, the assessee in the books of account has termed such incomes as “Other Income” which as per AO cannot be said to have been derived from the business of the assessee.
  • In the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT Hon’ble Supreme Court made it very clear that the assessee would be entitled to eligible deduction, irrespective of the manner in which the entries in the books of account are maintained.
  • Therefore, the “other income “ mentioned in books of assessee is not earned from any other commercial activity carried on by the assessee and the source of the same continues to be the business profits from the hotel business.
  • Accordingly, the assessee’s appeal was allowed.

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Posted Under

Category : Income Tax (20862)
Type : Judiciary (8910)