We run hotels out of leased buildings and one unit is loss-making. The AO says only a newly constructed hotel is a specified business, so there is nothing to set off under s.73A. Is he right?
No, on this Tribunal's reading. 'Building and operating' a hotel in s.35AD(8)(c) means creating a facility and operating it, and creating the facility includes occupying an existing building on lease and making suitable modifications to run the hotel - so a leased-building hotel is a specified business and its loss can be set off under s.73A against the profits of another specified business. But a unit where the assessee only manages hospitality services for someone else's institution, without control of the facility, is not a specified business.
Decided by the ITAT (Shri S. Rifaur Rahman, Accountant Member and Shri Ramlal Negi, Judicial Member ('E' Bench, Mumbai)) on 2019-12-20, reported as ITA Nos. 7348/Mum/2016 (AY 2011-12) and 2384/Mum/2017 (AY 2012-13); companion order on M.A. Nos. 169 and 170/Mum/2020 dated 4 January 2021. It bears on section 73A, section 35AD of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
The library has had nothing on s.73A, and this is a reasoned Tribunal order that actually works the section. It is worth having for three separate points. First, the width of 'building and operating' after the Finance Act 2011 dropped the word 'new' from the hotel limb. Second, the boundary: managing lodging and boarding for an institute's own guest facility, with no control over who comes, is not a specified business - so the deduction and the s.73A set-off both fail for that unit. Third, in the companion order on the rectification applications the Bench held, on the Finance Bill 2011 clarification, that a specified business loss can be set off against the profits of another specified business even where that other unit is not itself eligible for the s.35AD deduction because it was set up before the cut-off date. Remember the hard edge of s.73A(1) throughout: the loss goes only against another specified business, never against ordinary business income, and s.73A(2) then carries it forward with no time limit.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee managed hotel operations at Mumbai, Chandigarh and Indore, and provided hospitality services to the Indian Institute of Management at Ahmedabad and the Indian School of Business at Hyderabad. It claimed that all these were specified businesses within s.35AD(8)(c)(iv) - building and operating a hotel of two star or above category - and sought to set off a loss of Rs.35,94,62,610 from the Chandigarh unit against the profits of the other units under s.73A. The Assessing Officer took the view that the units did not qualify, principally because the assessee had not constructed new hotel buildings. Before the Tribunal the assessee's representative stated that no deduction was being claimed for the Indore hotel and that s.35AD, being an incentive provision, should not be construed narrowly. The Bench later recalled the order on the assessee's rectification applications so far as the Indore unit was concerned.
The appeals were partly allowed. The units operated at Mumbai and Chandigarh fall within the definition of specified business in s.35AD(8)(c)(iv) even though the buildings were occupied on lease rather than newly constructed, and the assessee is allowed to set off the loss of the Chandigarh branch against the profit earned in the Mumbai branch, and to set off and carry forward those losses under s.73A. The facilities at Ahmedabad and Hyderabad, where the assessee only provided lodging and boarding services to visitors to those institutions and had no control over the facility or over who visited it, do not fall within the definition of specified business, and the disallowance of the s.35AD deduction for those two branches was sustained (paras 20 to 22). By the later order of 4 January 2021 on the rectification applications the Bench added that the Indore unit, though established before the cut-off date in s.35AD and so unable to claim the deduction, is a specified business, and directed the Assessing Officer to allow set-off of the brought forward Chandigarh loss against the profits of the Mumbai and Indore units.
The Bench read s.35AD(8)(c)(iv) and noted that the Finance Act 2011 substituted 'hotel' for 'new hotel' in the definition, which it took as an indication that the legislature intended the benefit to reach existing hotels and existing owners, the policy object being to increase infrastructure facilities in the country and the availability of affordable hotels (para 19). It reasoned that to commence a hotel business it is not necessary to build a new facility: a prospective investor may occupy an existing building on ownership or on lease, which itself needs large capital and considerable modification, so 'building and operating' means creating a facility and operating it, and creating the facility includes constructing a new hotel building or occupying an existing building and modifying it suitably (para 20). Applying that, the Mumbai and Chandigarh units qualified. For the Ahmedabad and Hyderabad arrangements the Bench looked at the hospitality agreements with the two institutions and found that the assessee was only managing the facilities and not controlling them, and had no control over the kind of visitors who came, so those facilities fell outside the definition (para 21). It then directed the Assessing Officer to treat the Mumbai and Chandigarh businesses as specified business, allow the set-off of the Chandigarh loss against the Mumbai profit, and permit set-off and carry forward under s.73A (para 22).
Therefore, the word 'building and operating' means creating a facility and operating the same. The creation of facility will include construction of a new hotel building or occupying a existing building and making suitable modification to run the hotel business.
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Handle my notice → Ask a CA on WhatsAppNo, on this Tribunal's reading. 'Building and operating' a hotel in s.35AD(8)(c) means creating a facility and operating it, and creating the facility includes occupying an existing building on lease and making suitable modifications to run the hotel - so a leased-building hotel is a specified business and its loss can be set off under s.73A against the profits of another specified business. But a unit where the assessee only manages hospitality services for someone else's institution, without control of the facility, is not a specified business. This was decided by the ITAT (Shri S. Rifaur Rahman, Accountant Member and Shri Ramlal Negi, Judicial Member ('E' Bench, Mumbai)) and bears on section 73A, section 35AD of the Income Tax Act 1961. It is reported as ITA Nos. 7348/Mum/2016 (AY 2011-12) and 2384/Mum/2017 (AY 2012-13); companion order on M.A. Nos. 169 and 170/Mum/2020 dated 4 January 2021. The library has had nothing on s.73A, and this is a reasoned Tribunal order that actually works the section. It is worth having for three separate points. First, the width of 'building and operating' after the Finance Act 2011 dropped the word 'new' from the hotel limb. Second, the boundary: managing lodging and boarding for an institute's own guest facility, with no control over who comes, is not a specified business - so the deduction and the s.73A set-off both fail for that unit. Third, in the companion order on the rectification applications the Bench held, on the Finance Bill 2011 clarification, that a specified business loss can be set off against the profits of another specified business even where that other unit is not itself eligible for the s.35AD deduction because it was set up before the cut-off date. Remember the hard edge of s.73A(1) throughout: the loss goes only against another specified business, never against ordinary business income, and s.73A(2) then carries it forward with no time limit. If it applies to you, the first step is this: Map every unit against s.35AD(8)(c) separately. The question is whether the assessee creates and operates the facility, not whether it built it, and a lease with substantial fit-out will do.
The assessee managed hotel operations at Mumbai, Chandigarh and Indore, and provided hospitality services to the Indian Institute of Management at Ahmedabad and the Indian School of Business at Hyderabad. It claimed that all these were specified businesses within s.35AD(8)(c)(iv) - building and operating a hotel of two star or above category - and sought to set off a loss of Rs.35,94,62,610 from the Chandigarh unit against the profits of the other units under s.73A. The Assessing Officer took the view that the units did not qualify, principally because the assessee had not constructed new hotel buildings. Before the Tribunal the assessee's representative stated that no deduction was being claimed for the Indore hotel and that s.35AD, being an incentive provision, should not be construed narrowly. The Bench later recalled the order on the assessee's rectification applications so far as the Indore unit was concerned. The matter was decided on 2019-12-20 by the ITAT (Shri S. Rifaur Rahman, Accountant Member and Shri Ramlal Negi, Judicial Member ('E' Bench, Mumbai)). On those facts the ITAT held as follows. The appeals were partly allowed. The units operated at Mumbai and Chandigarh fall within the definition of specified business in s.35AD(8)(c)(iv) even though the buildings were occupied on lease rather than newly constructed, and the assessee is allowed to set off the loss of the Chandigarh branch against the profit earned in the Mumbai branch, and to set off and carry forward those losses under s.73A. The facilities at Ahmedabad and Hyderabad, where the assessee only provided lodging and boarding services to visitors to those institutions and had no control over the facility or over who visited it, do not fall within the definition of specified business, and the disallowance of the s.35AD deduction for those two branches was sustained (paras 20 to 22). By the later order of 4 January 2021 on the rectification applications the Bench added that the Indore unit, though established before the cut-off date in s.35AD and so unable to claim the deduction, is a specified business, and directed the Assessing Officer to allow set-off of the brought forward Chandigarh loss against the profits of the Mumbai and Indore units.
The Bench read s.35AD(8)(c)(iv) and noted that the Finance Act 2011 substituted 'hotel' for 'new hotel' in the definition, which it took as an indication that the legislature intended the benefit to reach existing hotels and existing owners, the policy object being to increase infrastructure facilities in the country and the availability of affordable hotels (para 19). It reasoned that to commence a hotel business it is not necessary to build a new facility: a prospective investor may occupy an existing building on ownership or on lease, which itself needs large capital and considerable modification, so 'building and operating' means creating a facility and operating it, and creating the facility includes constructing a new hotel building or occupying an existing building and modifying it suitably (para 20). Applying that, the Mumbai and Chandigarh units qualified. For the Ahmedabad and Hyderabad arrangements the Bench looked at the hospitality agreements with the two institutions and found that the assessee was only managing the facilities and not controlling them, and had no control over the kind of visitors who came, so those facilities fell outside the definition (para 21). It then directed the Assessing Officer to treat the Mumbai and Chandigarh businesses as specified business, allow the set-off of the Chandigarh loss against the Mumbai profit, and permit set-off and carry forward under s.73A (para 22). In the words reproduced by the source cited on this page: "Therefore, the word 'building and operating' means creating a facility and operating the same. The creation of facility will include construction of a new hotel building or occupying a existing building and making suitable modification to run the hotel business."
It was decided by the ITAT on 2019-12-20 and is reported as ITA Nos. 7348/Mum/2016 (AY 2011-12) and 2384/Mum/2017 (AY 2012-13); companion order on M.A. Nos. 169 and 170/Mum/2020 dated 4 January 2021. 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 73A, section 35AD, 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 appeals were partly allowed. The units operated at Mumbai and Chandigarh fall within the definition of specified business in s.35AD(8)(c)(iv) even though the buildings were occupied on lease rather than newly constructed, and the assessee is allowed to set off the loss of the Chandigarh branch against the profit earned in the Mumbai branch, and to set off and carry forward those losses under s.73A. The facilities at Ahmedabad and Hyderabad, where the assessee only provided lodging and boarding services to visitors to those institutions and had no control over the facility or over who visited it, do not fall within the definition of specified business, and the disallowance of the s.35AD deduction for those two branches was sustained (paras 20 to 22). By the later order of 4 January 2021 on the rectification applications the Bench added that the Indore unit, though established before the cut-off date in s.35AD and so unable to claim the deduction, is a specified business, and directed the Assessing Officer to allow set-off of the brought forward Chandigarh loss against the profits of the Mumbai and Indore units. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 73A, section 35AD of the Income Tax Act 1961, and was decided by Shri S. Rifaur Rahman, Accountant Member and Shri Ramlal Negi, Judicial Member ('E' Bench, Mumbai). 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. Where the arrangement is a management or hospitality-services contract for a third party's premises, expect the unit to fall outside; the Bench's test was control of the facility and of who occupies it, not the label on the agreement. For the set-off, put the specified-business units on one schedule and everything else on another. Section 73A(1) allows the loss only against another specified business - never against ordinary business income - and s.73A(2) carries the balance forward indefinitely. If the profit-making unit was set up before the s.35AD cut-off date and so cannot claim the deduction, still claim the set-off: on this Bench's reading of the Finance Bill 2011 clarification, eligibility for the deduction and availability as a set-off target are different questions. Check the s.35AD(8)(c) cut-off dates and the star classification for the year in question before relying on any of this.
Validity check could not be completed. This is an order of a Division Bench of the Tribunal. It persuades other Tribunal benches; it binds nobody, and no High Court decision on the meaning of 'building and operating a hotel' in s.35AD(8)(c)(iv) was located. I did not find any decision applying, following or doubting it, and I did not establish whether the Revenue appealed under s.260A. A later order of the Mumbai Tribunal in the same assessee's case for assessment year 2013-14 - DCIT v. Sarovar Hotels Pvt. Ltd., ITA No. 1043/Mum/2023, decided 28 June 2023 - set aside a Commissioner (Appeals) order that had allowed set-off of the Chandigarh brought forward loss against the profits of all three units, on the procedural ground that the Commissioner had decided an issue the assessee had not raised, and restored that appeal for fresh adjudication; that order does not disturb the reasoning here but shows the same set-off remained contested in a later year. 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.
This entry rests on two orders of the same Bench. The substantive order is dated 20 December 2019 in ITA Nos. 7348/Mum/2016 and 2384/Mum/2017, from which paragraphs 18 to 22 are transcribed verbatim. The point about the Indore unit - that it is a specified business but cannot claim the s.35AD deduction, and can still be a set-off target - comes from the order of 4 January 2021 on M.A. Nos. 169 and 170/Mum/2020, which I read in condensed transcription only; the words attributed to the Finance Bill 2011 clarification in that order are not reproduced here as a quotation because I could not confirm them character for character. In the 2019 order the Indore claim was eliminated at the assessee's own request (para 20), which is why the rectification applications were made. Section 73A itself carries no Explanation - I checked the section text - so the proposition about ineligible units rests on the Finance Bill 2011 clarification note and the Bench's reading of it, not on statutory words. 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 appeals were partly allowed. The units operated at Mumbai and Chandigarh fall within the definition of specified business in s.35AD(8)(c)(iv) even though the buildings were occupied on lease rather than newly constructed, and the assessee is allowed to set off the loss of the Chandigarh branch against the profit earned in the Mumbai branch, and to set off and carry forward those losses under s.73A. The facilities at Ahmedabad and Hyderabad, where the assessee only provided lodging and boarding services to visitors to those institutions and had no control over the facility or over who visited it, do not fall within the definition of specified business, and the disallowance of the s.35AD deduction for those two branches was sustained (paras 20 to 22). By the later order of 4 January 2021 on the rectification applications the Bench added that the Indore unit, though established before the cut-off date in s.35AD and so unable to claim the deduction, is a specified business, and directed the Assessing Officer to allow set-off of the brought forward Chandigarh loss against the profits of the Mumbai and Indore units.
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CPC has refused to let me carry forward my s.35AD specified-business loss because the return went in late. Can the officer of the loss year decide that at all?
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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?
My section 35AD deduction was examined and allowed in scrutiny. Four years later the department wants to reopen and treat part of it as revenue expenditure so the loss runs under section 72 for eight years instead of indefinitely under section 73A. Can it?