By TIOL News Service

CHENNAI, APRIL 26, 2017: THE issue is - Whether composite charges collected by a hotel can be quantified only upon conclusion of the stay of the guests, though a day to day account may have been maintained thereof. YES is the verdict.

Facts of the case:

The assessee is in the business of running Hotels. During the subject year, the returns of Expenditure Tax were filed and orders of Assessment in terms of Section 9(2) of Expenditure Tax Act 1987 were issued by the AO in respect of A.Ys 1995-96 and 1997-98 respectively. In the course of Assessment, the AO noted that the Assessee had offered to tax chargeable expenditure of an amount of Rs.31,35,18,224/- as against which a sum of Rs.3,28,82,659/- had been paid leaving a sum of Rs.26,02,331/- outstanding. A stand was taken by the assessee at the time of assessment to the effect that the outstanding amount represented expenditure that was yet to be 'incurred' by the guests who had stayed at the hotels and that, upon such incurrence by the guests and collection by the hotel, the same would be paid over to the Government. In advancing this argument, the Assessee interpreted the provisions of Section 5 that defines 'Chargeable Expenditure' to mean such expenditure incurred that had been paid by the guests and duly received by the hotel. The stand of the Assessee was rejected by the AO who was of the view that the mercantile system of accounting followed by the Assessee, necessitated all expenditure that had accrued, to be offered to tax. The AO was of the view that the Assessee was bound to pay tax on the entire expenditure, irrespective of whether the same had been collected from the customers. On appeal, the Tribunal was of the view that the incurrence of expenditure for the purpose of chargeability thereof, would arise as and when the amount due by the guests were quantified by the hotel and an invoice raised in that regard. The Tribunal observed that in the case of those guests that were in occupation of rooms/use of hotel services as on the closing day of the year, the incurrence of expenditure could not be quantified midstay and till the actual raising of the bill.

On appeal, the HC held that,

++ it is to be noted that Sub-section (1) of Section 5 addresses two situations, and refers to the 'incurrence of expenditure' or the 'payments made' in or to a hotel. The two references are akin to the mercantile and cash system of accounting respectively. There is no difficulty with respect to the second component, that is, payments actually made. The first component presents some scope for debate in so far as the expenditure can be incurred either on a day to day basis over the period of stay, which is the view of the Revenue, or upon conclusion of stay, at the time of check-out, which is the view of the assessee. The normal practice adopted by hotels in this regard would be of some relevance and bearing upon the issue. The expenditure incurred in a hotel is composite feature that takes into account the charges payable for accommodation, food, drink and other services that are offered along with the use of the room. Such composite charges can be quantified only upon conclusion of the stay of the guests though a day to day account may have been maintained thereof. We have noted earlier that the object of Section 5 r/w/s 3 would not extend to individual services provided at a hotel but a composite charge only. Thus, in a situation where at the close of the year a guest is still in occupation of a room in the hotel, the expenditure would not have been incurred and such event will only be triggered at the time of closure of stay by the guests in the hotel. In other words, it is the quantification of the expenditure at the time of raising of the composite bill that crystallizes and constitutes chargeable expenditure incurred for the levy of tax thereupon.

(See 2017-TIOL-797-HC-MAD-IT)