No deduction denial for mere non approval from Prescribed Authority: HC

6. M/s Shrikar Hotels Pvt. Ltd. (hereinafter referred to as the “Assessee”) has set up a Hotel at 6, Shahnajaf Road, Lucknow after getting approval of project of Hotel from Department of Tourism, Government of India vide letter dated 12.02.1999. The Hotel unit of Assessee commenced operation on 03.07.2000. Government of India has also granted recognition to said Hotel as a three star hotel vide letter dated 08.11.2001. Under Section 80 IB of Income Tax Act, 1961 (hereinafter referred to as the “Act, 1961”) provision has been made for deduction in respect of profits and gains to certain industrial undertakings other than infrastructure development undertakings. Sub-section (7) thereof deals with the amount of deduction in case of hotels. There are two level of deduction. One is 50% which is within the ambit of Clause (a) of Section 80 IB(7) and second is 30% which is within the ambit of Clause (b) of Section 80 IB(7). However, Clause (c) of Section 80 IB(7) specifically provides that deduction under Clauses (a) and (b) shall be available only if conditions set out in sub­clauses (i), (ii) and (iii) of Clause (c) are satisfied. In the present case we are concerned with sub­clause (iii), which reads as under:

“(iii) the hotels is for the time being approved the prescribed authority:

Provided that any hotel approved by the prescribed authority before the 1st day of April, 1999 shall be deemed to have been approved under this sub­section.”

7. Under Rule 18 BBC of Income Tax Rules, 1962 (hereinafter referred to as the “Rules, 1962”), Prescribed Authority is identified as Director General, Income Tax (Exemptions) and he has to grant approval on concurrence of Director General in the Directorate General of Tourism, Government of India in respect of hotels which qualified for 50% deduction under Section 80 IB(7)(a); and, hotels covered by Clause (b) on Section 80 IB(7), there, prescribed authority competent for granting approval is Director General in the Directorate General of Tourism, Government of India.

8. Assessee’s hotel in Lucknow comes within the Buddhist Circuit which is a tourist place notified by Department of Tourism, Government of India vide notification dated 01.07.1997. Lucknow also falls in Buddhist Circuit as notified by State Government in its notification dated 31.03.1999. Assessee, therefore, in order to claim exemption under Section 80 IB(7)(a) of Act, 1961 submitted application on 08.2002 before Director General, Income Tax (Exemptions). Since no decision was communicated to Assessee, it continued to request Prescribed Authority to pass order on its application and first representation referred to in memo of appeal is dated 11.11.2014. In the meantime assessment order was passed on 24.12.2009 against Assessee by competent Assessing Authority. Matter went up to Tribunal who vide order dated 13.12.2011 remanded matter to Assessing Authority. Claim for deduction under Section 80 IB(7)(a) was rejected by Assessing Authority on the ground that Assessee was not granted approval by Prescribed Authority and hence no deduction was admissible in view of Section 80 IB(7)(c) of Act, 1961.

9. In the appeal preferred by Assessee, Commissioner of Income Tax (Appeals)­II (hereinafter referred to as the “CIT(A)”), Assessing Authority’s order rejecting claim for deduction under Section 80 IB(7) (a) has been upheld but CIT(A) has allowed exemption under Section 80 IB(7)(b).

10. Both parties felt aggrieved by order of CIT(A) and preferred appeal before Tribunal. Since no order was passed by Prescribed Authority on Assessee’s application seeking approval, it filed an application before Tribunal on 27.11.2014 requesting to defer hearing of appeal. Said application was rejected by Tribunal and thereafter it has dismissed appeals of Assessee as well as Revenue both. Assessee’s claim for exemption under Section 80 IB(7)(a) which has been denied on the ground of lack of approval by Competent Authority has been Deduction, however, granted under Section 80 IB(7)(b) has been upheld on the ground that there was an approval granted by Competent Authority.

11. With regard to deduction under Section 80 IB (7) (a), Tribunal has observed that Assessee did not pursue matter diligently before Competent Authority and, therefore, cannot get any advantage if it has not been able to obtain approval from Competent Authority. In our view, approach of Tribunal in this regard is neither justified nor sustainable in law.

12. Under the statute, i.e., Section 80 IB(7)(c) deduction under Clause (a) or (b), as the case may be, would be applicable only if hotel is for the time being approved by Prescribed Authority. Authority has been prescribed under Rule 18 BBC. For attracting deduction under Clause (b) it is only one authority, namely, Director General in the Directorate of Tourism, Government of India but for attracting deduction under Clause (a), Competent Authority is Director General, Income Tax (Exemptions), who has to act upon with concurrence of Director General in the Directorate of Tourism, Government of India. The Director General in the Directorate of Tourism, Government of India, admittedly had granted approval and for that reason benefit of deduction under Clause (b) has been allowed by Revenue Authorities to Assessee. In order to attract Clause (a), no decision has been taken by Director General, Income Tax (Exemptions) though application has been filed by Assessee in this regard in 2002. Competent Authority for granting approval is an officer of Income Tax Department itself. Assessee has neither any administrative control nor otherwise can compel said authority to act within a particular time and in a particular manner. It is the authority of Revenue itself, who has to grant approval. For own lethargy or inaction on the part of an officer of Income Tax Department, a deduction which otherwise may be available to Assessee, cannot be denied since it is not a case where Assessee is disqualified being ineligible for such deduction but question of approval is pending before Competent Authority, who is a senior officer of Income Tax Department and has not been able to get enough time to take a decision on the application filed by Assessee on 28.08.2002. Observations of Tribunal that Assessee did not pursue matter are unwarranted for the reason that whatever could have been done by Assessee, it has done by submitting application and rest is the job of departmental authority, specified in Rule 18 BBC.

13. Even otherwise, where a power has been conferred upon a holder of public office, it has to exercise such power within a reasonable time and in accordance with relevant considerations of law. Such authority cannot sit over matter for time immemorial and the person who suffers on account of inaction of authority cannot be denied a benefit which would have been admissible if approval is granted, by keeping matter pending for a long time and failing to take a decision. In our view, it is a fit case where Tribunal ought to have required Director General, Income Tax (Exemptions) to take a decision on Assessee’s application within a particular time and thereafter it ought to have decided matter but that has not been done.

14. We, therefore, answer the substantial question of law involved in Assessee’s appeals in its favour and hold that it was inappropriate and illegal on the part of Director General, Income Tax (Exemptions) not to take a decision on Assessee’s application filed for seeking approval as required under Section 80 IB(7)(c). Tribunal in upholding denial of deduction to Assessee ignoring the fact that application seeking approval submitted by Assessee is still pending for consideration before Competent Authority, has committed manifest error.