ACIT Vs Claridge Hotels Pvt. Ltd. (ITAT Delhi)
Provisions of section 2(22)(e) of the Act are not applicable as the assessee was not a registered shareholder of the company
Facts-
During assessment proceedings, AO observed that the gross profit of the assessee has significantly dropped for the year under consideration in comparison to the earlier AY of 28.59% gross profit and net profit of 7.96%. The gross profit for the current year was 15.24% and the net profit of 1.74%. AO held that on deduction of income from other sources of Rs.14.46 Cr. the net profit would have been further steeped down.
AO made protective additions amounting to Rs. 12.50 Crores in the hands of the assessee and substantive additions to be made in the hands of M/s Universal Business Solutions Limited (M/s UBSL), a 100% holding company of the Respondent on the ground that the transactions constituted deemed dividend in the hands of M/s UBSL as per the provisions of section 2(22)(e) of the Act.
CIT(A) deleted the addition and held that since the assessee is not a registered shareholder either in M/s AIPL or M/s GSL, the deeming provisions of section 2(22)(e) of the Act were not applicable.
Conclusion-
Held that the provisions of section 2(22)(e) of the Act are not applicable as the assessee was not a registered shareholder of the company from which the advance has been received.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the Revenue gainst the order of the ld. CIT(A)-23, New Delhi, dated 04.05.2017.
2. Following grounds have been raised by the Revenue:
“1. The order of Ld. CIT (A) is not correct in law and on facts.
2. On the facts and circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs.6,24,37,375/- made by AO on account of addition on gross profit.
3. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 12,50,00,000/- made by AO on account of Deemed Dividend.
4. On the facts and Circumstances of the case, the Ld. CIT(A) has erred in holding that the rejection of the books of account u/s 145(3) of the Act by the AO is not based on facts relevant to determination of income brought out succinctly from the audited accounts.”
Gross Profit:
3. During the course of assessment proceedings, the AO observed that the gross profit of the assessee has been significantly dropped for the year under consideration in comparison to the earlier Assessment Year’s (2013-14) of 28.59% gross profit and net profit of 7.96%. The gross profit for the current year was 15.24% and net profit of 1.74%. The AO held that on deduction of income from other sources of Rs.14.46 Cr. the net profit would have been further steeped down. Before the AO, it was submitted that the fall in the profits was due to renovation that has been undertaken by the assessee during the year. Further, the AO observed that the complementary expenses was not shown in the P&L account but only reduced from the closing stock. The AO also observed that the service charges received are not shown in the P&L account. The AO observed that while the decrease in the turnover was 18.82%, the gross profit has fallen down to 46.69% which is not justifiable. After comparing the gross profit ratios of the Lalit Hotel, the Le Meridian, Shangri-la Eros and Taj Vivanta, the AO concluded that returned GP of the assessee of 15.24% is quite low compared to the average GP of the four above mentioned hotels of 28.25% and estimated the GP @ 28% and made an addition of Rs.6.24 Cr. to the income of the assessee.
4. Aggrieved the assessee filed appeal before the ld. CIT(A) who deleted the addition. Afflicted the revenue filed appeal before us.
5. Heard the arguments of both the parties and perused the material available on record.
6. As per letters dated 23.12.2016, 28.12.2016 and 29.12.2016, the reduction in the gross profit is primarily due to reduction in room revenue. During the assessment year, 29 rooms from the Cabana division were shut down for repair and renovation and 8 rooms from the other wing were also taken up for renovation. The spa was also under renovation. There were only 93 rooms in the inventory out of the total number of 130 rooms available. The room revenue has come down from Rs. 29.54 crores to Rs. 22.33 crores in the current assessment year. Spa, Pool and the star restaurant namely Sevilla was also under renovation. Revenue from food and beverages had also went down. A property which is older will require greater maintenance and will necessarily have to price itself a little below than the newer properties. It was further submitted that unlike other hotel chains, whenever there is a temporary stoppage due to repair and renovation in any one of the hotel in the chain, the staff can be moved to other hotels in the said chain. Claridges being a stand-alone hotel the staff has to be maintained irrespective of the number of rooms available for being let out. Hence, the fixed cost of running Claridges is higher and static. Also there are other fixed costs as well which have to be incurred irrespective of the occupancy.
7. With regard to allegation of the AO that the assessee was repeatedly asked to produce the bill and the internal audit report, but assessee failed to produce Internal Audit Report and proof of payment for internal audit, we find that same has been replied Vide letter dated 29.12.2016, details of provision made for internal audit fees were submitted to the AO.
8. With regard to the service charges, we agree with the Ld. CIT(A) that Service charge is collected from the customers and paid directly to the staff. The hotel is merely a trustee of the service charges collected from the customers for and on behalf of the employees and this is fully passed on to them. Accounting treatment of service charges in books of accounts is as under:
a. A memoranda account is prepared and a very strict and rigid control is exercised on the receipt and payment of service charge.
b. Service charge is not routed through profit and loss account but entry is passed in books of accounts.
c. Following entry is passed when service charges are collected:
d. Service charge collected from guests is credited to service charge payable account which is a liability account. On a monthly basis, the amount collected is used to disburse salaries of banquet FTCs, banquet casuals and to the Event Manager who provides casual banquet service staff and KST. Therefore, while making payment, the account is debited with salary and wages and Event Manager.
e. At the end of the year, the closing balance of the account is reported under other current liabilities (employee related payables) in the balance sheet and is utilized for payment in the subsequent financial year.
f. Even, if the entire service charges were to be made part of the profit and loss account, the effect thereof would be revenue neutral in as much as the entire service charges have been paid off to the employees and to others.
9. With regard to the service charges received from customers & claimed to be paid to staff ledger accounts of service charges, salary sheets of staff, IDS certificates, salary sheets of casual staff, bills of event manager etc. were filed during assessment proceedings. The service charge is recovered from the customers in respect of banquets and restaurants. The total service charge collected during the year was Rs. 1,27,95,272/-. The breakup of payment made is as under:
