Partial Relief Granted to Palmshore Hotels: ITAT Directs Reassessment on Business Income Classification and Section 43B Disallowance [Read Order]

The Cochin Bench of the Income Tax Appellate Tribunal (ITAT) granted partial relief to Palmshore Hotels Pvt. Ltd. by directing a reassessment of key issues, including the classification of licence fee income and disallowance under Section 43B of the Income Tax Act, 1961.

The assessee had appealed against the order passed by the Commissioner of Income-tax (Appeals) [CIT(A)] for the assessment year (AY) 2017-18, which had upheld the Assessing Officer’s (AO) additions to the company’s income.

Coming t o the facts of the case, the assessing officer (AO) on receiving information that Palmshore Hotels had not filed a regular income tax return for AY 2017-18, initiated proceedings under Section 148 of the Income Tax Act. The AO noted that the company had reported a turnover of Rs. 34,17,888 in its Service Tax Return, along with interest income and rental income on which Tax Deducted atSource (TDS) was applied.

Even after issuing notices under Sections 148 and 142(1)(ii), the company failed to respond, leading the AO to complete the assessment ex parte under Section 147 read with Section 144B of the Income Tax Act. The AO estimated the business income at 8% of the turnover (Rs. 2,73,430) and added interest income of Rs. 29,186, rental income of Rs. 68,75,670, and an unpaid loan liability of Rs. 18,04,290. Additionally, a disallowance of Rs. 10,31,630 was made under Section 43B for unpaid service tax liabilities.

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Although the assessee appealed before the CIT(A), there were no favourable results.

The company’s counsel argued that the licence fee of Rs. 68,75,670 received from Somatheeram Ayurvedic Beach Resorts should be classified as ‘business income’ rather than ‘income from other sources,’ by relying on a precedent from the jurisdictional Kerala High Court in the company’s own case for AY 2005-06.

The counsel also contested the double inclusion of the Service Tax turnover of Rs. 34,17,888, which was already part of the Rs. 68,75,670 credited in the Profit and Loss Account. Further, the addition of the unpaid loan liability of Rs. 18,04,290 was challenged on the grounds that the outstanding amount had been confirmed by Somatheeram Ayurvedic Beach Resorts Pvt. Ltd. It was also contended by the counsel that the disallowance under Section 43B for unpaid service tax was disputed, as the audited accounts showed no such unpaid liabilities.

The ITAT bench comprising George George K. (Vice President) and Inturi Rama Rao (Accountant Member) restored the matter to the AO for fresh adjudication. The tribunal directed the AO to re-examine the classification of the licence fee income, verify the double inclusion of turnover, reassess the unpaid loan liability, and scrutinise the Section 43B disallowance, ensuring the company is given a reasonable opportunity to present its case.

The ITAT restored the matter for fresh adjudication before the AO, and the assessee’s appeal was partly allowed.

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