- (1.) THIS appeal of the assesses is directed against the order dt. 16th Feb., 1994, recorded by CIT, Delhi-III, New Delhi, under Section 263 of IT Act, 1961 (hereinafter referred to as Act), by which the AO was directed to withdraw the deduction under Section 80HHD of the Act to the extent it relates to the amount of Rs. 4,03,09,863 representing the receipt in Indian rupees from the tour operator of foreign tourists and the amount of Rs. 5,27,22,837 being equivalent to foreign exchange converted by the assessee as restricted money changer.
(2.) The relevant facts are that the assessee was found running a hotel in Delhi in the name of M/s Hyatt Regency during asst. yr. 1989-90, the year under consideration and the assessee filed return declaring income under Section 115J of the Act. It appears that assessment order purporting to be under Section 143(3) of the Act was framed on 23rd March, 1992, in which income was assessed at Rs. 47,74,667 under Section 115J of the Act. The CIT Delhi-III, New Delhi, after going through the assessment record for the year under consideration came to the conclusion that assessment order under Section 143(3) of the Act is erroneous in so far as it was prejudicial to the interest of Revenue. He proceeded to take actionunder Section 263 of the Act and issued the following notice to the assessee on 5thMarch, 1993 : "Assessment in your case for asst. yr. 1989-90 was completed under Section 143(3) on 22nd March, 1992, on total income of Rs. 47,72,667 i.e., 30 per cent of the book profit of Rs. 1,59,15,556. A perusal of records shows that the above said order under Section 143(3) is erroneous in sofaras it is prejudicial to the interest of Revenue for the reasons mentioned below : You have claimed deduction of Rs. 4,07,35,775 under Section 80HHD of the Act from your book profit of Rs. 5,66,51,332. This deduction under Section 80HHD has been claimed on the basis of foreign exchange receipts shown at Rs. 28,63,38,220 which also included the following amounts : JUDGEMENT_3127_TLIT0_20020.htm The deduction under Section 80HHD is available to the first receipts of convertible foreign exchange whether it is the hotal or the travel agent or the tour operator. Upto the asst. yr. 1991-92, there is no provision in Section 80HHD for apportioning the benefit between the travel agents, hotels, tour operators etc. The receipts from agents of foreign tourists in Indian currency is therefore, cannot be deemed as a receipts in convertible foreign exchange. The deduction under Section 80HHD is, therefore, cannot be allowed in respect of these receipts. As regards the amount of Rs. 5,27,22,837 received on "account of foreign exchange converted as an authorised money changer, there seems to be no services rendered except for converting the foreign exchange into Indian currency and no profit is earned on services by the hotel to the foreign tourists. As per provisions of Section 80HHD of the Act, the deduction is admissible only on profits derived from services provided to foreign tourists. The deduction under Section 80HHD has, therefore, been allowed erroneously, I, therefore, propose to revise the order passed for asst. yr. 1989-90 in your case. You, are, therefore, required to. show-cause on 9th May, 1993 in person or by authorised representative to explain why the deduction under Section 80HHD should not be disallowed for the asst. yr. 1989-90," The assessee put in appearance before the GIT, Delhi-III, New Delhi, and submitted written submissions with averment that assessment order allowing deduction under Section 80HHD at Rs. 4,07,35,775 had rightly been completed. It was submitted further that previsions of Section 80HHD of the Act applied to the services provided to foreign tourists and receipt in relation thereto in convertible foreign exchange. The term 'convertible foreign exchange' was explained in Expln. (b) to the Section 80HHD to the effect that foreign exchange being so treated by the Reserve Bank of India (RBI) under Foreign Exchange Regulation Act (hereinafter referred to as FERA Act) 1973. The attention of the learned GIT was also invited to the definition of convertible foreign exchange as given out in Section 2(b) of FERA 1973, and contended that the receipt of convertible foreign exchange has to be in lieu of services provided to foreign tourists and that also includes amount received by the assessee from travel agents for services rendered to foreign tourists and further includes amount received consequent to foreign exchange being converted by the hotel. It was the case of the assessee that every foreign tourist is expected to make payment to a hotel in foreign exchange as per Government's Notification No. F-1/64/EC/80, dt. 20th Aug., 1981, and in case any foreign national on visit to India had paid foreign exchange to an airline or to a travel agent holding licence granted by the RBI under Section 32 of the Act and made payment in Indian currency accompanied with certificate by airline or travel agent confirming that payment made out of rupee funds obtained out of the conversion of foreign exchange by airline or travel agent then such payment are to be deemed as payment in convertible foreign exchange. The assessee further relied upon Section 5 of the Expenditure Tax Act, 1987, r/w Rule 4 of the Expenditure Tax Rules, 1987, and claimed that foreign exchange includes any payment made in Indian currency obtained by conversion of foreign exchange into Indian currency and any expenditure out of that shall be "deemed to have been incurred in foreign exchange." The plea of the assessee was that rupee payments made by the travel agents for, services rendered by the hotel to the foreign tourists are to be treated as receipt in foreign exchange. 2.1 About the amount of Rs. 5,27,22,837 foreign exchange converted by the assessee as restricted money changer, the assessee submitted that the Reserve Bank of India under Section 7 of FERA Act, 1973, grants restricted money changer's licence and assessee was granted such licence. The assessee is expected to obtain such licence to claim the status of 5 star hotel. The services so rendered by the assessee to the foreign tourist is not a profitable service rather hotel has to incur cost by way of interest on rupee floating and had to maintain an office with certain employees but in Section 80HHD all services of whatever kind, except sale of articles through shop, should be covered by term services provided by foreign exchange. The assessee claimed that service to foreign tourist as authorised money changers are not to be excluded from the definition of services provided to foreign tourist under Section 80HHD. It appears that the learned GIT, New Delhi, considered the submissions of the assessee and noted that provisions of Section 80HHD are a sort of concession extended to assessees with a purpose to boost earnings in foreign exchange but these concession can be extended to assessee if that assessee fulfils the requisite conditions laid down under the provisions of that section. It was the view of the CIT that section applies to the receipts received by the assessee in convertible foreign exchange and there was no provision for 'deeming receipt' as argued by the assessee for rupee payments received by the assessee even if the same is out of convertible foreign exchange given by foreign tourist to any travel agent or airline. The plea, of the assessee about deeming provisions of Expenditure Tax Act, 1973, and exemption vide Notification No. F-1/64/EC/8, dt. 28th Aug., 1981, under FERA 1973. was found of no avail as those provisions are exemption allowed to the foreign nationals to make payments in Indian rupees received out of convertible foreign exchange and do not grant any concession or exemption to the Indian recipients. He further observed that AO was not justified in accepting the explanation of the assessee on that point in utter disregard to the Circular No. 621, dt. 19th Dec., 1991. (published at (1991) 101 OTR (St) 1] issued by CBDT which clarifies the situation for the period prior to 1st April, 1992. The learned CIT reproduced the relevant paras of that circular and observed that in the year under consideration, the benefit of Explanation added to Sub-Section (2) of Section 80HHD cannot be given to assessee as intention of legislature was to extend the benefit from asst. yr. 1992-93 onwards as clarified by CBDT in that circular. He further noted that before the addition of Explanation to Section 80HHD (2) the benefit was available to first recipient of foreign exchange.
(3.) SO far as the amount of foreign exchange converted by the assessee as restricted money changer, the learned CIT noted that assessee had admitted not to have earned any profit out of this service allegedly rendered to foreign tourist. The activity of money changing was not part of business of the assessee but it was statutory requirement under FERA 1973, and for getting recognition as 5 star hotels. The CIT further concluded that assessee had not shown the amount of foreign exchange converted by it to the P&L a/c. The provisions of Section 80AB of the Act requires that income out of which any deduction under Chapter VI-A of the Act is being claimed, should be included in the gross total income of the assessee but admittedly the amount for which foreign exchange was converted by the assessee does not form part of gross total income of the assessee. According to the learned CIT, the assessee is not having money changing as its real business but he is only acting as a sub-agent of State Bank of India (SBI) for money changing purposes. He deposits the foreign exchange receipt with the main dealer viz., SBI at the same rate on which it was received by him. Such receipts of foreign exchange does not form part of the hotel business by any stretch of arguments. This activity which can be termed as 'a facility' being extended to foreign tourists is to attain the status of five star hotels. On the basis of all these, the learned CIT concluded that no profit was being earned by the assessee from this activity nor any element of profit can be attributed to this activity nor it is a service but a statutory necessity under FERA and for recognisation as a five star hotel and thus the foreign exchange so received cannot be included for claiming the deduction under Section 80HHD. In this context, he has also taken into consideration the Note No, 4 of Annexure I of assessee's own auditors M/s Atul Rajendra and Associates in which auditors have opined that assessee had not rendered any service against foreign exchange of Rs. 5,27,22,837 earned by the assessee for conversion thereof to Indian currency and thus no claim of the assessee under Section 80HD was allowable in that context. On the aforesaid reasoning, the AO was directed by the learned CIT to withdraw the deduction under Section 80HHD to the extent it relates to above referred to amount of Rs. 4,03,09,863 representing the receipt in Indian rupees from the tour operator/agents of foreign tourists and in respect of Rs. 5,27,22,837 being equivalent to foreign exchange converted by the assessee as restricted money changer. This order is subject-matter of appeal preferred by the assessee.;