Commissioner of Income Tax vs UP. Hotels (P) Ltd.

Ram Surat Ram (Maurya), JJ.—At the instance of the CIT (Central), Kanpur, the income tax Appellate Tribunal, Allahabad Bench, Allahabad (hereinafter referred to as the Tribunal) has referred the following question, for opinion to this Court, under s. 256 of the IT Act, 1961 (hereinafter referred to as the Act):

Whether on the facts and circumstances of the case, the Tribunal was justified in directing the AO to work out the disallowance under s. 43B, on account of outstanding luxury tax liability, on the basis of actual realisation of the luxury tax and not on the basis of unrealised luxury tax although the assessee was maintaining its accounts under mercantile system ?

The facts giving rise to this reference are that M/s. U.P. Hotels (P) Ltd., 10/252, Maqbool Alam Road, Varanasi (the respondent) is a public limited company, and engaged in the hotel business. The respondent owned (i) Hotel Clarks Shiraz, Agra, (ii) Hotel Clarks Avadh, Lucknow and (iii) Hotel Clarks Amer, Jaipur. In the present reference, the question relates to addition of the amount of "luxury tax" payable by the respondent for the asst. yrs. 1987-88 and 1988-89 under U.P. Taxation and Land Revenue Laws Act, 1975 as such facts in relation to luxury tax alone are noticed in the judgment.

The respondent filed its IT return for the asst. yr. 1987-88 on 26th June, 1987 showing profit of Rs. 64,20,868. This profit was adjusted against unabsorbed carried forward loss and depreciation of Rs. 1,00,32,618. Thus total loss of Rs. 36,11,750 was shown. The AO, on scrutiny of balance sheet, noticed that luxury tax of Rs. 5,24,980 was payable on the total gross income @ 7 per cent. There was no luxury tax at Jaipur, while outstanding luxury tax of Agra Unit was worked out to Rs. 4,31,759 and Lucknow Unit was worked out to Rs. 93,221 total Rs. 5,24,980. The AO required the respondent to explain as to why this amount be not added in the gross income of the respondent. The respondent stated that luxury tax was not actually collected by the respondent as such there was no receipt of this amount, so as to form its income. The AO, by order dt. 28th March, 1990, held that luxury tax was payable by the respondent under the law and as no actual payment of luxury tax was made as such this amount was liable to be added in the income of the respondent under s. 43B of the Act. The respondent filed an appeal (registered as Appeal No. 32/CC-I/VNS/1990-91) from the aforesaid order. The appeal was heard by the CIT(A)-II, Varanasi who by order dt. 20th Aug., 1990 found that total payment of luxury tax during the year exceeded total collection of the luxury tax. The amount which was not collected cannot be treated as income of the respondent and no addition can be made in this head. On these findings the appeal was allowed in part and the addition made in this head was deleted.

The respondent filed its IT return for the asst. yr. 1988-89 on 28th June, 1988 showing income of Rs. 17,30,187. This income was adjusted against unabsorbed carried forward loss and depreciation. The AO on scrutiny of balance sheet, noticed that luxury tax of Rs. 6,85,057 was payable on the total gross income @ 7 per cent. Similarly credit balance of Rs. 1,95,295 was payable by Lucknow Unit and there was debit of luxury tax of Rs. 2,28,426. Thus total credit balance of Rs. 6,51,926 is payable on the account of luxury tax. The AO required the respondent to explain as to why this amount be not added in the gross income of the respondent. The respondent stated that luxury tax was not actually collected by the respondent as such there was no receipt of this amount, so as to form his income and has not been debited in P&L a/c. The AO by order dt. 20th March, 1991 held that luxury tax was part and parcel of total receipt which should have been credited along with the hotel receipt. Since responsibility to pay luxury tax was on the respondent under the law and as no actual payment was made in this head as such this amount was liable to be added in the income of the respondent under s. 43B of the Act. The respondent filed an appeal (registered as Appeal No. 52/CC-I/VNS/1991-92) from the aforesaid order. The appeal was heard by the CIT(A), Varanasi, who by order dt. 24th Aug., 1992, relying upon his previous year order, allowed the appeal and deleted the additions made in this head.

The Revenue filed an appeal (registered as ITA No. 2597/A11/1990) from the order dt. 20th Aug., 1990 and another appeal (registered as ITA No. 2311/All/1992) from the order dt. 24th Aug., 1992. The respondent also filed cross-objection. Both these appeals and cross-objection were consolidated and heard by the Tribunal, who by order dt. 22nd Sept., 1998 dismissed the appeals of the Revenue in respect of luxury tax. Later on at the instance of the CIT, Kanpur, this reference was made.

Heard Sri. R.K. Upadhyay, senior standing counsel for the Revenue and Ashish Kumar Bansal for the respondent. Sri. Upadhyay submitted that s. 43B of the Act provides that deduction shall be allowed only on actual payment of any sum payable by way of tax. Luxury tax is payable by the respondent under s. 4 of U.P. Taxation and Land Revenue Laws Act, 1975 r/w r. 3 of U.P. Luxuries (In Hotel) Tax Rules, 1975. As the respondent has not made actual payment in this head as such the amount of luxury tax which was payable by the respondent was liable to be added in his gross income. He, relying upon the judgments of Supreme Court in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, and Sundaram Finance Ltd. Vs. Assistant Commissioner of Income Tax, Chennai, submitted that the amount of tax collected but not deposited by the assessee is liable to be counted in his gross income. The order of CIT(A) allowing the appeal of the respondent and order of the Tribunal dismissing the appeal of the Revenue are illegal.

We have considered the arguments of the senior standing counsel. The Act imposes tax on income. The word ''income'' has been defined under s. 2(24) of the Act. Scope of total income has been provided under s. 5 of the Act as subject to the provision of this Act, total income of any previous year of a person, who is resident includes all income from whatever source derived which (a) is received or is deemed to be received in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year or (c) accrues or arises to him outside India during such year. Thus in order to form income of a person, the person must receive or deemed to receive any sum. The amount of luxury tax which was not received cannot form part of the income of any person.

The Act further gives relief, deduction and exemption from payment of income tax to the person on various incomes. Sec. 28 provides profits and gains of business or profession. Sec. 29 provides that income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 43B provides a right to the assessee to claim deduction of any sum payable by the assessee by way of tax, duty, cess or fee etc. This section imposes a condition that such deduction be allowed only in case of actual payment of the liabilities mentioned therein by the assessee. Sec. 43B of the Act is concerned with deduction claimed by the assessee. Thus the scope of inquiry by the AO under s. 43B of the Act is as to whether the assessee can be allowed deduction which can only be allowed to the assessee when it has liability to pay under the law and has actually paid that amount. The question of addition will arise only when the assessee has claimed deduction and the AO finds that condition mentioned in this section has not been satisfied. In this case the respondent has not claimed any deduction in respect of its liability for payment of luxury tax as such no question of addition will arise.

Sec. 43B does not cast duty on the assessee to realize the various amounts mentioned in it. In case, where a person has not realized luxury tax from the customers then under the law he being liable to pay it and it will be realized from him under the relevant law irrespective of the fact that he has collected or not. But it does not give the AO any jurisdiction to add it in the gross income of the assessee. CIT(A) as well as the Tribunal have concurrently found that the respondent has not realized the amount of luxury tax, which was added in his gross income.

The case laws relied upon by the counsel for the Revenue are not applicable in this case as in those cases the assessee had actually collected the amount of sales-tax and had not paid to the Department. Accordingly it was held that such receipts would form part of the income of the assessee. Relevant portion of Sundaram Finance Ltd. vs. CIT (supra), is quoted below:

It is now well-settled that in determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt. The taxing authorities are bound to determine the true legal character of the transaction. In the present case, the assessee received Rs. 36.47,585 in asst. yr. 1998-99. As per the statement made by the learned counsel for the assessee in Court on 6th Sept., 2012 (which statement is ordered to be taken on record and marked "X"), the said sum of Rs. 36,47,585 was not kept in a separate interest-bearing bank account but it formed part of the business turnover. In view of the said statement, we see no reason to interfere with the impugned judgment. Applying the substance over form test, we are satisfied that in the present case the said sum of Rs. 36,47,585 constituted income. The said amount was part of the turnover. The said amount was collected from the customers. The said amount was collected towards sales-tax liability. The said amount formed part of the turnover.

In view of the aforesaid discussions, the question referred to in this reference is answered in the affirmative i.e. against the Department and in favour of the respondent.