A.D. Jain, Judicial Member. -

1. Department has raised the following grounds :

"1.On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the expenditure incurred on replacement of carpet in the case of Hotel business is revenue expenditure and further erred in not following theAT, Mumbai decision in assessee’s own case, on similar issue in ITA No. 8106 dated 6-3-1999 in assessment year 1992-93 and has ignored that :

(a)the expenditure on substantial replacement of capital assets necessarily constitutes capital expenditure as held in the case of M/s. Assam Bengal Cement Co. Ltd. v. CIT (27 ITR 34) [LQ/SC/1954/160] (SC)

(b)the substance of expenditure would remain unaffected by the form of accounting treatment which cannot circumvent the ratio of the Hon’ble Supreme Court (supra).

2.On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the expenditure on replacement of linen in the case of hotel business is revenue expenditure, ignoring that :

(a)the initial outlay on linens having been treated as a capital expenditure by the assessee, expenditure on its replacement should also be capital as held in the case of CIT(A) v. Indian Metal and Metallurgical Corporation (141 ITR 40, Mad.)

(b)the linens used in the rooms in a hotel are nothing but furnishing used for convenience of decoration and hence partake the character of furniture

(c)the linen forming an integral part of income earning apparatus, their substantial replacement augments the fixed capital of the assessee

(d)the expenditure on substantial replacement of a capital asset necessarily constitutes capital expenditure, as held in the case of Assam and Bengal Cement Co. Ltd. v. CIT (27 ITR 34, 35, SC)

(e)the substance of the expenditure would remain unaffected by the form of accounting treatment which cannot circumvent the ratio of the Hon’ble Supreme Court.

3.On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to compute the deduction under section 80HHD after excluding pure encashment from both, numerator and denominator without appreciating the inpost of Explanation (c) to sub-section (6) of section 80HHD of the."

2. The first issue pertains to expenditure incurred on replacement of carpet in the case of Hotel business. The assessee contends that it is revenue expenditure. The department says that it is a capital expenditure. The learned CIT(A) held in favour of the assessee and therefore, the department is in appeal.

3. The stand of the department is that the CIT(A) should have followed the Tribunal decision in the assessee’s own case for the assessment year 1992-93. It is also submitted that carpets are capital asset, substantial replacement necessarily constitutes capital expenditure, irrespective of the accounting terms.

4. The learned counsel for the assessee, on the other hand, sought to place reliance on the decisions in the assessee’s own case for the assessment years 1986-87 to 1995-96, copies whereof have been placed on record, besides the decisions of the Tribunal in other cases as well as the decision of the Hon’ble Supreme Court and various High Courts decisions, on the point.

5. Having considered the matter, we find the issue to be covered in favour of the assessee by the aforesaid decisions. The Tribunal decision for the assessment year 1995-96, in the assessee’s case, was authored by one of us (JM). The assessee has also placed on record a copy of the Tribunal order dated 27-12-2000, in RA No. 291/M/97, arising out of ITA No. 8106/M/89, in the assessee’s case for assessment year 1992-93, where the Reference Application against the Tribunal order deciding the issue against the assessee, has been admitted. So, reliance placed by the department, on the decision of the Tribunal in ITA No. 8106/B/89 for assessment year 1992-93 is of no avail to it. We respectfully agree with the judgment of the Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34. [LQ/SC/1954/160] However, the same is not applicable. Carpets, in the hotel business, requires frequent replacement. They are not capital assets. Expenditure incurred for replacement of carpets is, thus, revenue expenditure.

5A. In view of the above, ground No. 1 raised by the department is rejected.

6. Similar is the fate of ground No. 2, which relates to the expenditure on replacement of linen in the case of hotel business. "Linen" here includes napkins, towels, etc. it cannot be denied that in the hotel business, such linen articles need to be replaced very frequently. The department is not right in contending that linen used in hotels is nothing but furnishing used for decoration and hence such linen partakes characteristics of furniture. The stand of the assessee is that the Tribunal has decided this issue in favour of the assessee for the assessment years 1986-87, 1987-88, 1989-90 to 1995-96. Copies of the said orders have been placed on the record. The Tribunal order for assessment year 1995-96 was authored by one of us (JM). The Departmental Reference Application, in this matter, for assessment year 1992-93, stands rejected. Therefore, ground No. 2, is rejected.

7. Ground No. 3 pertains to exclusion of pure encashment from numerator and denominator for calculating deduction under section 80HHD.

8. The assessee holds a restricted Moneychanger’s Licence. It has an exchange counter in the lobby of the hotel, which gives it an edge over the other hotels, who do not offer such facilities within this precincts. The facility offered is that of foreign exchange in Indian currency over the counter for the assessee’s foreign clients. This is a pure encashment. It does not earn profit from the activity. Hence, the amount does not enter the profit and loss account. Hence also since currency is not held back by the assessee, no addition is taken by it from the deficiency currency rate. A comparative statement for computation of ratio for foreign exchange receipts to total receipts of the business, has been filed. Reliance has been placed on the following decisions :

(i)CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 7691 (Bom.)

(ii)CIT v. Chloride India Ltd. [2002] 256 ITR 6252 (Cal.)

(iii)IFB Agro Industries Ltd. v. Dy. CIT [2003] 261 ITR 173 (Cal.)(AT)(SB)

9. On the other hand, the learned Departmental Representative has sought to place reliance on the provisions of section 80HHD(3), which provides that for the purposes of sub-section (1), profits derived from services provided to foreign tourists shall be the amount which bears to the profits of the business, the same proportion, as the receipts specified in sub-section (2), as reduced by any payment, referred to in sub-section (2A), made by the assessee bear to the total receipts of the business carried on by the assessee.

10. The learned Departmental Representative submits that these are the assessee’s receipts and, therefore, need to be included under section 80HHD(3).

11. The facts submitted on behalf of the assessee have not been denied. It cannot, therefore, be concluded that the assessee is earning any profit from the activity of money change. The decision in the case of Sudarshan Chemicals Industries Ltd. (supra), though it relates to section 80HHC, is squarely applicable to section 80HHD(3) also, both the provisions being similarly, worded. The decision in the case of Sudarshan Chemicals Industries Ltd. (supra), followed by the Calcutta Tribunal in the case of Chloride India Ltd. (supra), both of which were followed by the Special Bench of the Tribunal in IFB Agro Industries Ltd.’s case (supra). The learned CIT(A), while deciding the matter in favour of the assessee, has placed reliance on the first appellate orders in the case of India Hotel Co. Ltd. for the assessment years 1992-93 and 1993-94. It has also been noted that in the assessee’s own case, in the past, upto assessment year 1995-96, the Assessing Officer had suo motu, computed the deduction under section 80HHD after excluding the amount of pure encashment from both numerator and denominator. Hence, the grievance of the department is not justified.

12. The department also seeks to contend that the learned CIT(A) has not appreciated the import of Explanation (c) to section 80HHD(6). The said Explanation states that "services provided to foreign tourists" shall not include services by way of sale in any shop owned or managed by the person who carries on the business of a hotel or of a tour operator or of a travel agent. However, it has not been made out as to how the money changing activity provided by the assessee to its foreign customers, is covered in the said Explanation. As observed hereinabove, undisputedly, the assessee is not making any profit from providing such facility. This facility is provided as an added facility to the foreign customers. Due to provision of such facility, the foreign customers do not have to go to bank to get their foreign exchange in Indian currency. This facility is available to them in the hotel premises itself. This facility cannot, therefore, be said to be a "sale in any shop owned or managed by the person who carries on the business of a hotel". There is no element of sale. The Explanation (c) to section 80HHD(6), hence, does not have any bearing whatsoever to the said facilities.

13. In view of the above, ground No. 3 is also rejected.

14. Resultantly, the appeal is dismissed.