Excessive expenses on Magazine and Journals by 5-Star hotel. High Court remands the issue to Tribunal for fresh findings on nature of publications, their use per rooms etc.
ABCAUS Case Law Citation:
ABCAUS 2210 (2018) (02) HC
The Challenge/Grievance:
The present judgment involves the appeal filed by the Income Tax Department (Revenue) against the order of the Income Tax Appellate Tribunal (ITAT/Tribunal) setting aside the order of the CIT (Appeals) which upheld the addition made by the Assessing Officer (AO) on account of excessive expenditure in purchase of magazines and periodicals.
Brief Facts of the Case:
The respondent assessee was running a 5-star hotel. The AO observed that the assessee had debited an expenditure of approx Rs. 6 crores under the head ‘Magazine & Journals” which had been paid to its sister concern. The AO confronted the assessee with the fact that a large number of magazines had been purchased at very short intervals which was quite excessive in comparison with the number of rooms operated by the assessee company and hence was in excess of the requisite need on this account.
It was also observed by the Assessing Officer that since the purchases had been affected from the sister concern there was a possibility of booking excessive expenses on this account which needed to be considered by disallowance u/s 40A(2)(b) of the Act. Not satisfied with the reply of the assessee, the AO disallowed 10 per cent of the same.
CIT-A acknowledged that that purchases of magazines and journals was a business necessity of the assessee company being in the business of running of a five star hotel particularly in view of the fact that the assessee company was new in this line of business and therefore, expected to be aggressive in marketing itself and could also to be expected to be going substantially over the top in incurring such expenses. However, considering that the purchases had effected from a sister concern who was in a lower tax rate u/s 80IB CIT-A upheld the disallowance made by the AO as being a reasonable estimate.
The Tribunal observed that the AO did not bring anything on record to support his conclusion that the expenditure was excessive. Moreover it was found that similar expenditure in the earlier year had not been subjected to disallowance.
The Tribunal in view of the fact that the books maintained by the assessee were audited and no defects were found therein held that the disallowance made amounted to an ad-hoc disallowance, which was impermissible in law
Aggrieved by the order of the Tribunal, the Revenue filed an appeal with the Hon’ble High Court.
Observations made by the High Court:
The Hon’ble High Court observed that neither the Assessing Officer nor the CIT-A nor the Tribunal had considered any relevant facts.
The Hon’ble High Court opined that prima facie, the amount did seem excessive. However, a certain amount of excess had been accepted by the Revenue itself on the ground that the assessee in the hotel industry, was bound to be aggressive in its campaign for promoting the 5-star hotel it runs.
The Hon’ble High Court opined that though the amount of expenditure was enormous considering that there were only a 120 rooms on the hotel operated by the company, that by itself, however, would not be a ground for the reduction. None of the authorities have considered the nature of the publications purchased and made available. Nor have they considered the manner in which the publications have been used.
The Hon’ble High Court pointed out that there are 120 rooms in the hotel. Assuming that there were another 30 offices. Therefore, each room/office was supplied the publications worth Rs. 34,000/- per month. Such an expense must require consideration based on the facts.
Decision/ Conclusion/Held:
The order of the ITAT was set aside and the matter was remanded to the Tribunal for a fresh decision.
