My hotel started operating in the year and I claimed the s.35AD deduction, but the three-star certificate was issued two years later. The Assessing Officer has withdrawn the deduction. Can he?
No, on this decision. The Ahmedabad Bench held that clause (iv)(c) of s.35AD(8) requires the building and operating of a hotel of two-star or above category as classified by the Central Government, and prescribes no time limit for obtaining the star classification certificate. Where the assessee applied in due time, the department inspected and the certificate was issued, the deduction on the capital expenditure could not be withdrawn and the Revenue's appeal was dismissed.
Decided by the ITAT (Shri N.K. Billaiya, Accountant Member and Ms. Madhumita Roy, Judicial Member) on 2018-06-06, reported as ITA No. 1799/Ahd/2016 (ITAT Ahmedabad 'D' Bench); assessment year 2012-13. It bears on section 35AD, section 35AD(8) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
Section 35AD gives a deduction for the whole of the capital expenditure of a specified business in the year of commencement, including expenditure incurred before commencement and capitalised on that date, so the amounts are large and the Assessing Officer looks hard for a condition to fail. The classification timing is the commonest one for a hotel, and the answer is that the statute imposes no deadline; what matters is that the hotel built and operated is of the qualifying category. Keep the rest of the section in view when advising: no deduction under any other section is available for the same expenditure by reason of s.35AD(4); a loss of a specified business can be set off only against the profits of another specified business under s.73A, which is why a s.35AD claim in an early year usually produces a loss that cannot be absorbed against other income; and s.35AD(7A) claws the deduction back as business income if the asset is put to a use other than the specified business within eight years.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee firm commenced its hotel business on 17 November 2011, returning a turnover of Rs. 52,81,068 and a business loss of Rs. 3,02,96,276 for AY 2012-13, and claimed a deduction of Rs. 6,30,72,180 under s.35AD in respect of the capital expenditure incurred. It applied for three-star classification on 7 June 2013; the Tourism Department inspected the hotel on 16 August 2013 and issued the certificate, valid for five years, with effect from 11 September 2013. The Assessing Officer withdrew the deduction on the ground that the certificate was issued beyond AY 2012-13 and that to qualify the assessee had to be classified as a three-star hotel in the year of operation. The CIT(A) allowed the claim and the Revenue appealed.
The Revenue's appeal on this ground was dismissed and the disallowance deleted. Clause (iv)(c) of s.35AD(8) prescribes no time limit for obtaining the star classification certificate; the only requirement is the building and operating of a hotel of two-star or above category as classified by the Central Government, and the assessee, having applied in due time and obtained the certificate, fulfilled the statutory criterion and was entitled to the deduction on the capital expenditure incurred before the commencement of operations.
The Tribunal read the clause and found that the Assessing Officer had misconstrued it by reading into it a requirement that the classification exist in the year of operation. It noted that there is no procedure for issuing a star rating certificate retrospectively from the date of application — it issues from the date of signing — but that this does not mean the hotel was operated at a lower category between the application and the certificate; to obtain the certificate the assessee must have designed the rooms and amenities to the three-star specification. On the facts there was no fault on the part of the assessee in applying for or obtaining the certificate, and no time limit for obtaining it is specified in the statute, so the criterion was met.
There is no such time limit of obtaining star certificate is prescribed in the above clause. The only requirement is to build an operation of two or more star hotel classified by Central Government.
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Handle my notice → Ask a CA on WhatsAppNo, on this decision. The Ahmedabad Bench held that clause (iv)(c) of s.35AD(8) requires the building and operating of a hotel of two-star or above category as classified by the Central Government, and prescribes no time limit for obtaining the star classification certificate. Where the assessee applied in due time, the department inspected and the certificate was issued, the deduction on the capital expenditure could not be withdrawn and the Revenue's appeal was dismissed. This was decided by the ITAT (Shri N.K. Billaiya, Accountant Member and Ms. Madhumita Roy, Judicial Member) and bears on section 35AD, section 35AD(8) of the Income Tax Act 1961. It is reported as ITA No. 1799/Ahd/2016 (ITAT Ahmedabad 'D' Bench); assessment year 2012-13. Section 35AD gives a deduction for the whole of the capital expenditure of a specified business in the year of commencement, including expenditure incurred before commencement and capitalised on that date, so the amounts are large and the Assessing Officer looks hard for a condition to fail. The classification timing is the commonest one for a hotel, and the answer is that the statute imposes no deadline; what matters is that the hotel built and operated is of the qualifying category. Keep the rest of the section in view when advising: no deduction under any other section is available for the same expenditure by reason of s.35AD(4); a loss of a specified business can be set off only against the profits of another specified business under s.73A, which is why a s.35AD claim in an early year usually produces a loss that cannot be absorbed against other income; and s.35AD(7A) claws the deduction back as business income if the asset is put to a use other than the specified business within eight years. If it applies to you, the first step is this: Apply for the classification as early as the department will accept the application and keep the correspondence, the inspection record and the certificate — the delay must be shown to be the department's, not yours.
The assessee firm commenced its hotel business on 17 November 2011, returning a turnover of Rs. 52,81,068 and a business loss of Rs. 3,02,96,276 for AY 2012-13, and claimed a deduction of Rs. 6,30,72,180 under s.35AD in respect of the capital expenditure incurred. It applied for three-star classification on 7 June 2013; the Tourism Department inspected the hotel on 16 August 2013 and issued the certificate, valid for five years, with effect from 11 September 2013. The Assessing Officer withdrew the deduction on the ground that the certificate was issued beyond AY 2012-13 and that to qualify the assessee had to be classified as a three-star hotel in the year of operation. The CIT(A) allowed the claim and the Revenue appealed. The matter was decided on 2018-06-06 by the ITAT (Shri N.K. Billaiya, Accountant Member and Ms. Madhumita Roy, Judicial Member). On those facts the ITAT held as follows. The Revenue's appeal on this ground was dismissed and the disallowance deleted. Clause (iv)(c) of s.35AD(8) prescribes no time limit for obtaining the star classification certificate; the only requirement is the building and operating of a hotel of two-star or above category as classified by the Central Government, and the assessee, having applied in due time and obtained the certificate, fulfilled the statutory criterion and was entitled to the deduction on the capital expenditure incurred before the commencement of operations.
The Tribunal read the clause and found that the Assessing Officer had misconstrued it by reading into it a requirement that the classification exist in the year of operation. It noted that there is no procedure for issuing a star rating certificate retrospectively from the date of application — it issues from the date of signing — but that this does not mean the hotel was operated at a lower category between the application and the certificate; to obtain the certificate the assessee must have designed the rooms and amenities to the three-star specification. On the facts there was no fault on the part of the assessee in applying for or obtaining the certificate, and no time limit for obtaining it is specified in the statute, so the criterion was met. In the words reproduced by the source cited on this page: "There is no such time limit of obtaining star certificate is prescribed in the above clause. The only requirement is to build an operation of two or more star hotel classified by Central Government."
It was decided by the ITAT on 2018-06-06 and is reported as ITA No. 1799/Ahd/2016 (ITAT Ahmedabad 'D' Bench); assessment year 2012-13. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 35AD, section 35AD(8), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal on this ground was dismissed and the disallowance deleted. Clause (iv)(c) of s.35AD(8) prescribes no time limit for obtaining the star classification certificate; the only requirement is the building and operating of a hotel of two-star or above category as classified by the Central Government, and the assessee, having applied in due time and obtained the certificate, fulfilled the statutory criterion and was entitled to the deduction on the capital expenditure incurred before the commencement of operations. It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 35AD, section 35AD(8) of the Income Tax Act 1961, and was decided by Shri N.K. Billaiya, Accountant Member and Ms. Madhumita Roy, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the hotel as built and operated met the qualifying standard from commencement, through the room specification and amenities, and not merely from the date of the certificate. Check s.35AD(4) before claiming: the same expenditure cannot also be claimed under any other provision, and depreciation on the same asset is not available. Plan for s.73A: the loss thrown up by the deduction can be set off only against the profits of another specified business, so quantify what will actually be absorbed before treating the deduction as a cash saving. Diarise the eight-year restriction in s.35AD(7A) — a change of use within that period brings the deduction back as business income.
Validity check could not be completed. Later treatment was not checked and it was not established whether the Revenue took the matter further. The clause construed is clause (iv)(c) of s.35AD(8) as it stood for AY 2012-13; the sub-clause lettering of s.35AD(8) has been amended more than once and should be checked against the section as it stands for the year in issue. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The paragraph carrying the operative reasoning could not be numbered: the raw fragments show paras 4 and 8 (both recording the Assessing Officer's ground) but the conclusion was returned without a number, so the quote is attributed without a locator. Note a date conflict inside the order as read: para 4 gives the date of the star certificate as 24 September 2013 and para 8 as 21 September 2013, while the narrative passage says it was granted on 24 September 2013 with effect from 11 September 2013 and valid to 10 September 2018; the discrepancy is in the report. The statements in this entry about s.35AD(4), s.73A and s.35AD(7A) are not part of this decision and were not verified from a live departmental page on this pass — they are flagged for the reader to check against the section for the year in question. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal on this ground was dismissed and the disallowance deleted. Clause (iv)(c) of s.35AD(8) prescribes no time limit for obtaining the star classification certificate; the only requirement is the building and operating of a hotel of two-star or above category as classified by the Central Government, and the assessee, having applied in due time and obtained the certificate, fulfilled the statutory criterion and was entitled to the deduction on the capital expenditure incurred before the commencement of operations.
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