Business expenditure – Deduction u/s. 35AD – Specified business – Hotel Business – Commencement of new business not disputed by Department and income offered to tax accepted – Certification of hotel as three-star category hotel in subsequent year – Time taken by competent authority for certification beyond control of assesse – Assessee not to be denied deduction u/s. 35AD on the ground that the certification was in the later year

43.  CIT vs.
Ceebros Hotels Pvt. Ltd.; 409 ITR 423 (Mad) Date of order: 13^th November, 2018 A Y. 2011-12 Section 35AD of ITA 1961

Business expenditure – Deduction u/s. 35AD – Specified
business – Hotel Business – Commencement of new business not disputed by
Department and income offered to tax accepted – Certification of hotel as
three-star category hotel in subsequent year – Time taken by competent authority
for certification beyond control of assesse – Assessee not to be denied
deduction u/s. 35AD on the ground that the certification was in the later year

The assessee was in the hotel business running a three-star hotel. The
assessee commenced the business in the A. Y. 2011-12 but the certification of
the three-star was received only in the subsequent year. For the A. Y. 2011-12,
the Assessing Officer denied the benefit of deduction u/s. 35AD(5)(aa) of the
Act on the ground that the assesse obtained classification as three-star
category hotel only during the subsequent year, i.e., A. Y. 2012-13.

The Tribunal allowed the assessee’s claim and held that once the
Department had accepted the income of the assessee offered to tax from the
hotel business, which was newly established and became fully operational in the
year 2010, the assessee was eligible for the investment allowance, that once
the application for star category classification was not rejected and after
inspection no discrepancy was found and the assessee was recommended for
classification under the three-star category the assessee could not be
penalised for the delay on the part of the Hotel and Restaurant Approval and
Classification Committee to inspect the Hotel before the end of the financial
year.

On appeal by the Revenue, the Madras High Court upheld the decision of
the Tribunal and held as under:

“i)   The reasons assigned by the
Tribunal for grant of deduction to the assessee u/s. 35AD(5)(aa) were just and
proper and the findings rendered by it were right.

ii)   The application filed by the
assesse for classification was made on 19/04/2010 and thereafter certain
procedures were to be followed and an inspection was required to be conducted
for such purpose. The manner in which the inspection was conducted and the time
frame taken by the competent authority were beyond the control of the assessee.
The Department had not disputed the operation of the new hotel from the F. Y.
2010-11 as it had accepted the income, which was offered to tax from the newly
established hotel which became fully operational in the year 2010.

iii)  Nowhere in the clause (aa) of
sub-section (5) of section 35AD was it mandated that the date of the
certificate was to be with effect from a particular date. Therefore, the
provision which was to encourage the establishment of hotels of a particular
category, should be read as a beneficial provision and therefore, the
interpretation given by the Tribunal were valid and justified. Therefore, the
Tribunal was right in concluding that the assesse is entitled to claim
deduction u/s. 35AD(5)(aa) for the A. Y. 2011-12.”