M/s.Mfar Hotels & Resorts P. Ltd, Cochin V. The ACIT, Cochin

CO 13/COCH/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2632 (ITAT-COCHIN)
• Duration Of Justice: 3 year(s) 3 month(s) 5 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 26-10-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 13-08-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 21-07-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Business expenditure; Rule of consistency; Earning of tax free income; Proportionate interest; Retrospective amendment; Capital receipt; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 37(1)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM I .T . A. NO S . 42 TO 44/ C OCH/ 201 5 ASSESSMENT YEAR S : 2008 - 09 - 2010 - 11 M/S. MFAR HOTELS AND RESORTS LTD., N.H. BYEPASS, KUNDANOOR JN. MARADU P.O., KOCHI-682 304 [PAN:AABCM 9267F] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-1(2), KOCHI. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) I .T.A. NOS. 334/COCH/2015 ASSESSMENT YEAR : 211 - 12 M/S. MFAR HOTELS AND RESORTS LTD., N.H. BYEPASS, KUNDANOOR JN. MARADU P.O., KOCHI-682 304 [PAN:AABCM 9267F] V S. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE- 1(2), KOCHI. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) I .T.A. NOS. 335/COCH/2015 ASSESSMENT YEAR : 2011 - 12 THE ASSISTANT COMMISSIONER O F INCOME-TAX, CORPORATE CIRCLE- 1(2), KOCHI. VS. M/S. MFAR HOTELS AND RESORTS LTD., N.H. BYEPASS, KUNDANOOR JN. MARADU P.O., KOCHI-682 304 [PAN:AABCM 9267F] (REVENUE - APPELLANT) (ASSESSEE - RESPONDENT) I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 2 C.O. NO. 13/COCH/201 5 (ARSG. OUT OF I.T.A. NO. 335/COCH/2015) ASSESSMENT YEAR : 2011 - 12 M/S. MFAR HOTELS AND RESORTS LTD., N.H. BYEPASS, KUNDANOOR JN. MARADU P.O., KOCHI-682 304 [PAN:AABCM 9267F] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE- 1(2), KOCHI. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) A SSESSEE BY SHRI RAJA KANNAN, ADV. REVENUE BY S HRI SHANTHAM BOSE, CIT(DR) D ATE OF HEARING 14 /08/2018 DATE OF PRONOUNCEMENT 26 / 10 /2018 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE DIRECTED AGAINST THE DIFFERENT ORDERS OF THE CIT(A), KOCHI FOR THE ABOVE ASSESSMENT YEARS. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION AGAINST THE REVENUES APPEAL IN ITA NO.335/COCH/2015 FOR THE ASSESSMENT YEAR 2011-12. SINCE THE ISSUES INVOLVED IN THESE APPEALS ARE COMMON IN NATURE, HENCE, THEY WERE CLUBBED TOGETHER, HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 3 2. THE FIRST GROUND IN ITA NOS. 43 TO 44/COCH/2015 IS WITH REGARD TO DISALLOWANCE OF INTEREST ON LOANS BORROWED FOR THE PURPOSE OF ACQUISITION OF LAND WHICH IS FOR THE EXPANSION OF THE EXISTING HOTEL BUSINESS BY SETTING UP ANOTHER HOTEL PROJECT IN CHENNAI. 3. THE FACTS OF THE CASE AS NARRATED IN ITA NO. 42/COCH/2015 ARE AS FOLLOWS: THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RUNNING HOTEL AND CONVENTION CENTRE AT KOCHI. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-09 ON 29/09/2008 DECLARING AN INCOME OF RS.7,17,53,478/-. THE ASSESSMENT WAS COMPLETED U/S. 143(3) ON 13/12/2010 AT AN INCOME OF RS.9,08,94,054/-. THE ASSESSING OFFICER NOTICED THAT DURING THE SAID YEAR THE ASSESSEE HAD PAID INTEREST ON THIS LOAN AMOUNTING TO RS. 1,07,82,831/- WHICH WAS CLAIMED AS DEDUCTION U/S. 36(1)(III) IN THE COMPUTATION OF INCOME STATEMENT SEPARATELY, BUT NOT DEBITED TO P&L ACCOUNT. THE ASSESSEE STATED THAT THE LAND WAS PUT TO USE BY STARTING OF THE CONSTRUCTION OF THE HOTEL BUILDING AND THUS, THE INTEREST PAID WAS ELIGIBLE FOR DEDUCTION. ACCORDING TO THE ASSESSING OFFICER, SECTION 36(1)(III) OF THE ACT CLARIFIES THAT ANY AMOUNT OF THE INTEREST PAID IN RESPECT OF THE CAPITAL BORROWED FOR THE ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZED IN THE BOOKS OF ACCOUNT OR NOT) FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSESSEE TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. HOWEVER, IN THIS CASE, THE ASSESSING I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 4 OFFICER NOTICED THAT THE ASSESSEE WAS RUNNING HOTEL BUSINESS AND NOT CONSTRUCTION BUSINESS. IT WAS NOTICED THAT THE ASSESSEE HAD ONLY STARTED CONSTRUCTION OF THE BUILDING IN THE SAID LAND WITHOUT STARTING RUNNING OF HOTEL BUSINESS. THE ASSESSING OFFICER STATED THAT THE ASSET PUT TO USE FOR THE PURPOSE OF THE BUSINESS WILL BE CONSIDERED ONLY WHEN THE HOTEL STARTS FUNCTIONING. ACCORDING TO THE ASSESSING OFFICER, THE VERY FACT THAT THE BUILDING CONSTRUCTION WAS GOING ON SHOWED THAT THE ASSET WAS NOT READY FOR USE OF HOTEL BUSINESS AND AS A CONSEQUENCE, NO INCOME WAS GENERATED FROM THE ASSET. IT WAS OBSERVED THAT THE ASSESSEE ITSELF CAPITALIZED THE AMOUNT AND ONLY IN THE COMPUTATION STATEMENT OF INCOME CLAIMED IT AS DEDUCTION. HENCE, THE ASSESSING OFFICER DISALLOWED THE INTEREST EXPENDITURE OF RS.1,07,82,831/- AS REVENUE EXPENDITURE AND TREATED IT AS CAPITAL EXPENDITURE. FOR THIS PROPOSITION, THE ASSESSING OFFICER RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD. (98 ITR 167). 4. ON APPEAL, THE CIT(A) OBSERVED THAT THE ASSESSEE HAD NOT COMPLETED THE CONSTRUCTION OF THE HOTEL DURING THE RELEVANT ASSESSMENT YEAR, THEREFORE, IN TERMS OF SECTION 36(1)(III) IF THE CAPITAL WAS BORROWED FOR THE ACQUISITION OF ASSET, THIS ASSET WAS NOT PUT TO USE AS THE COMPLETION CERTIFICATE OF THE HOTEL WAS DATED 10/02/2013, THE ASSESSEE WAS NOT ELIGIBLE FOR THE INTEREST PAID. THE CIT(A) REJECTED THE CONTENTION OF THE ASSESSEE THAT UTILIZING THE AMOUNT FOR THE ACQUISITION OF LAND WOULD AMOUNT TO PUTTING THE ASSET TO USE BECAUSE TILL THE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 5 OPERATIONS OF THE HOTEL STARTS, IT CANNOT BE SAID THAT THIS ASSET WAS PUT TO USE. ACCORDING TO THE CIT(A), THE CONSTRUCTION PERIOD OF THE HOTEL WOULD AMOUNT TO PREPARING THE ASSET TO BE USED IN FUTURE AND THEREFORE, THE PRE-ACQUISITIONAL INTEREST WAS RIGHTLY DISALLOWED BY THE ASSESSING OFFICER AND HENCE, CONFIRMED THE ADDITION OF RS.1,07,82,831/-. 5. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER MISINTERPRETED SEC. 36(1)(III) OF THE ACT, STATING THAT THE SAID PROVISION WAS APPLICABLE TO ONLY CONSTRUCTION BUSINESS AND ACCORDINGLY, DISALLOWED INTEREST ON A LOAN AVAILED AND UTILIZED FOR COMPLETING THE MAIN HOTEL BUILDING AND INSTALLING VARIOUS MOVABLE ASSETS REQUIRED IN A HOTEL. THE LD. AR SUBMITTED THAT SECTION 36(1)(III) CLEARLY SPECIFIES COMPLIANCE OF TWO CONDITIONS FOR CLAIMING INTEREST ON THE LOAN AS AN EXPENDITURE FOR TAX COMPUTATION, NAMELY: I) LOAN IS UTILIZED FOR ACQUIRING OR CREATING AN ASSET REQUIRED FOR THE EXPANSION OF BUSINESS; II) SAID ASSET IS PUT TO USE. ACCORDING TO THE LD. AR BALANCE SHEET OF A COMPANY IS TO BE PREPARED AS PER THE REQUIREMENTS UNDER THE COMPANIES ACT, 1956 WHEREAS FOR TAX COMPUTATION, ASSESSEE SHALL FOLLOW REQUIREMENTS UNDER THE INCOME TAX ACT, 1961, FOR INSTANCE, DEPRECIATION IS PROVIDED IN THE ACCOUNTS AS PER SCHEDULE 13 OF THE COMPANIES ACT WHEREAS FOR I.T. COMPUTATION, RATES PROVIDED BY THE I.T. ACT ARE TO BE FOLLOWED. THE LD. AR SUBMITTED THAT THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD.(SUPRA) RELIED ON BY THE ASSESSING OFFICER HAS NO I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 6 RELEVANCE IN THIS CASE SINCE THE FACTS IN THE CITED CASE ARE TOTALLY DIFFERENT. HENCE, THE LD. AR SUBMITTED THAT THE DISALLOWANCE OF INTEREST U/S. 36(1)(III) MAY BE SET ASIDE SINCE THE ASSESSEE HAD ACTED STRICTLY IN ACCORDANCE WITH SECTION 36(1)(III), I.E., TERM LOAN OF RS. 30 CRORES FORM THE BANK WAS UTILIZED IN FULL FOR ACQUIRING LAND FOR THE HOTEL EXPANSION AND THE LAND WAS UTILIZED FOR CONSTRUCTING NEW HOTEL BUILDING WHICH AMOUNTS TO LAND UTILIZATION. 6. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDER OF THE CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. WE HAVE ALSO GONE THROUGH THE CASE LAW CITED BEFORE US. SECTION 36(1)(III) READS AS FOLLOWS: THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSE SHALL BE ALLOWED IN RESPECT OF THE MATTER DEALT WITH THEREIN, IN COMPUTING REFERRED TO IN SECTION 28; (III) THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION. 7.1 WITH EFFECT FROM 1/4/2003, THE PROVISO WAS INSERTED BY FINANCE ACT, 2003,WHICH READS AS FOLLOWS: PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWINGS FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZED IN THE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. 7.2 AS PER THE NEW PROVISO, THE INTEREST WOULD NOT BE ALLOWABLE TILL THE NEW ASSET IS BROUGHT TO USE. SUCH INTEREST IS TO BE CAPITALIZED. IN OTHER WORDS, DUE TO I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 7 THE ABOVE PROVISO U/S.36(1)(III) INSERTED WITH EFFECT FROM 1/4/2004, APPLICABLE FROM THE ASSESSMENT YEAR 2004-05, INTEREST IS TO BE DISALLOWED ON MONEY BORROWED FOR ACQUIRING CAPITAL ASSET TILL THE DATE ON WHICH THE ASSET IS BROUGHT TO USE, EVEN IF IT IS FOR EXPANSION OF THE EXISTING BUSINESS. IN THE PRESENT CASE, THE ASSESSEE CLAIMED INTEREST ON BORROWINGS RECEIVED FOR THE PURPOSE OF ACQUIRING LAND FOR CONSTRUCTION OF HOTEL BUILDING AT CHENNAI. THE CONTENTION OF THE ASSESSEE IS THAT SINCE THE LAND WAS PUT TO USE FOR CONSTRUCTION OF HOTEL BUILDING, THE INTEREST PAYABLE WAS LIABLE FOR DEDUCTION. THIS WAS REJECTED BY THE ASSESSING OFFICER BY HOLDING THAT THE LAND WAS NOT PUT TO USE FOR BUSINESS PURPOSE, THEREFORE, INTEREST CANNOT BE ALLOWED AS REVENUE EXPENDITURE AS THE EXPENDITURE WAS INCURRED FOR EXPANSION OF THE EXISTING BUSINESS OF THE ASSESSEE FOR ACQUISITION OF LAND FOR HOTEL BUILDING, THE CONSTRUCTION OF WHICH HAD COMMENCED. WITHOUT COMMENCEMENT OF HOTEL ON THE IMPUGNED LAND, IT CANNOT BE TREATED AS COMMENCEMENT OF BUSINESS OF THE ASSESSEE. IT IS ONLY THE FIRST STAGE OF COMMENCEMENT OF HOTEL BUSINESS. STARTING OF THE CONSTRUCTION ACTIVITIES CANNOT BE EQUATED WITH COMMENCEMENT OF THE HOTEL BUSINESS OF THE ASSESSEE. THE UNIT AT CHENNAI HAD NOT YET COME INTO COMMERCIAL PRODUCTION. NOW THE QUESTION FOR CONSIDERATION IN THE PRESENT CASE IS WHETHER INTEREST PAYABLE ON BORROWED CAPITAL FOR SETTING UP OF NEW UNIT TILL SUCH TIME IT COMES INTO COMMERCIAL PRODUCTION IS ALLOWABLE AS REVENUE EXPENDITURE U/S. 36(1)(III) OF THE ACT WHILE COMPUTING THE INCOME OF THE ASSESSEE OR TO BE TREATED AS CAPITAL EXPENDITURE TO BE ADDED TO THE COST OF ASSET. SECTION 43 OF THE ACT DEFINES CERTAIN TERMS RELEVANT TO I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 8 DETERMINATION OF INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION. SUB- SECTION 1 OF SECTION 43 PROVIDES FOR FIXING OF ACTUAL COST OF ASSET. EXPLANATION 8 TO SECTION 43 WAS ADDED BY FINANCE ACT, 1986 W.E.F. 1/4/1974. THE OBJECT OF THE SAID AMENDMENT AS CONTAINED IN THE FINANCE BILL, 1986 AS IT APPEARS IN 158 ITR (ST.) 88 READS AS UNDER: UNDER THE EXISTING PROVISIONS OF CLAUSE (1) OF THAT SECTION, ACTUAL COST MEANS THE ACTUAL COST OF THE ASSET TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY PERSON OR AUTHORITY. THE PROPOSED AMENDMENT SEEKS TO CLARIFY THAT ANY AMOUNT PAID OR PAYABLE AS INTEREST IN CONNECTION WITH ACQUISITION OF AN ASSET AND RELATABLE TO A PERIOD AFTER THE ASSET IS FIRST PUT TO USE SHALL NOT FORM PART AND SHALL DEEMED NEVER TO HAVE BEEN FORMED PART OF THE ACTUAL COST OF THE ASSET. 7.3 A PERUSAL OF EXPLANATION 8 OF SECTION 43(1) OF THE ACT AND THE OBJECT FOR WHICH THE SAME WAS INSERTED WITH RETROSPECTIVE EFFECT SHOWS THAT NO INTEREST PAID OR PAYABLE BY THE ASSESSEE IN CONNECTION WITH THE ACQUISITION OF THE ASSET FOR ANY PERIOD AFTER THE ASSET IS FIRST PUT TO USE SHALL NOT FORM PART OF THE ACTUAL COST OF THE ASSET. THE PROPOSITION IN THE PRESENT CASE IS JUST REVERSE. THE NATURAL CONSEQUENCES OF EXPLANATION 8 WOULD BE THAT IN CASE OF ANY EXPANSION, INTEREST PAID OR PAYABLE ON LOANS RAISED IN CONNECTION WITH THE ACQUISITION OF AN ASSET BEFORE THE SAME IS FIRST PUT TO USE SHALL FORM PART OF THE ACTUAL COST OF THE ASSET. MEANING THEREBY THAT IT WILL BE CAPITALIZED TO BE ADDED TO THE COST OF THE ASSET. EXPLANATION 8 TO SECTION 43(1) OF THE ACT WAS ADDED WITH RETROSPECTIVE EFFECT FROM 1/4/1974. WE FIND THAT SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD. VS. CIT REPORTED IN 98 ITR 167 OBSERVED THAT THE EXPRESSION ACTUAL COST UNDER THE INCOME-TAX ACT, 1922WAS UNDER CONSIDERATION, WHICH HAD NOT I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 9 BEEN DEFINED THEREIN. AN IDENTICAL ISSUE THEREIN WAS AS TO WHETHER INTEREST PAID BEFORE COMMENCEMENT OF PRODUCTION ON THE AMOUNT BORROWED FOR THE ACQUISITION AND INSTALLATION OF PLANT AND MACHINERY HAS TO BE CONSIDERED AS PART OF THE ACTUAL COST OF THE ASSETS. WHILE REFERRING TO AND RELYING ON VARIOUS PRINCIPLES AND RULES ON ACCOUNTANCY PREVAILING IN COMMERCE AND INDUSTRIES, THE SUPREME COURT HELD THAT CORRECT METHOD FOR DETERMINATION OF THE COST OF CAPITAL ASSET IS TO INCLUDE ALL EXPENDITURE NECESSARY TO BRING SUCH ASSET INTO EXISTENCE AND TO PUT THEM IN WORKING CONDITION. IN CASE MONEY WAS BORROWED BY A NEWLY STARTED COMPANY IN THE PROCESS OF CONSTRUCTION AND ERECTING ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMENT OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALIZED AND ADDED TO THE TOTAL COST OF FIXED ASSETS WHICH HAVE BEEN CREATED AS A RESULT OF SUCH EXPENDITURE AND SUCH RULE OF ACCOUNTANCY SHOULD BE ADOPTED FOR DETERMINING THE ACTUAL COST OF THE ASSETS IN THE ABSENCE OF ANY STATUTORY DEFINITION OR OTHER INDICATION TO THE CONTRARY. A PERUSAL OF EXPLANATION 8 TO SECTION 43(1) OF THE ACT, REFERRED TO ABOVE, CLEARLY SHOWS THAT THE SAME IS NOTHING BUT REITERATION OF THE PRINCIPLES LAID DOWN IN M/S. CHALLAPALLI SUGARS LTD. (SUPRA). THE EXPRESSION DOES NOT MAKE ANY DISTINCTION WHETHER THE ASSET IS ACQUIRED FOR SETTING UP OF AN ENTIRELY NEW BUSINESS OR IN THE PROCESS OF EXPANSION OF ITS EXISTING BUSINESS. IT MERELY PROVIDES FOR DETERMINATION OF ACTUAL COST OF ASSET ON A DATE WHEN THE ASSET FIRST IS PUT TO USE. UNLESS AN ASSET, WHICH IS BEING ACQUIRED, STARTS GENERATING INCOME, IT CANNOT BE SAID THAT THE SAME IS BEING USED FOR THE PURPOSE OF BUSINESS. ONCE IT IS ESTABLISHED THAT INTEREST PAID AFTER ASSET I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 10 IS PUT TO USE IS NOT TO BE INCLUDED IN THE ACTUAL COST OF AN ASSET. THERE WOULD BE NO ALTERNATE BUT TO HOLD THAT THE INTEREST PAID BEFORE THE ASSET WAS FIRST PUT TO USE WOULD BE INCLUDED IN THE ACTUAL COST THEREOF AND IS TO BE TREATED AS CAPITAL EXPENDITURE AND NOT REVENUE IN NATURE. 7.4 IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT THE INTEREST PAID BY THE ASSESSEE ON BORROWINGS USED FOR ACQUISITION OF LAND TO SET UP PROJECT AT CHENNAI CANNOT BE CONSIDERED AS REVENUE EXPENDITURE SO AS TO CLAIM DEDUCTION U/S. 36(1)(III) OF THE I.T. ACT. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE FOR ALL THE ASSESSMENT YEARS IS REJECTED. 8. THE NEXT GROUND IN ITA NOS. 43/COCH/2015 & 334/COCH/2015 IS WITH REGARD TO CONFIRMATION OF DISALLOWANCE OF CLAIM OF LOSS OF EXCHANGE RATE FLUCTUATION ON ACCOUNT OF REINSTATEMENT OF FOREIGN CURRENCY LOAN ON THE DATE OF BALANCE SHEET ON THE PRETEXT THAT THIS CLAIM WAS HAVING THE SAME FOOTING AS THE INTEREST ON LOAN CONSIDERED FOR SECTION 36(1)(III) OF THE ACT EVEN THOUGH SUCH ITEMS NEED TO BE ALLOWED U/S. 37(1) OF THE ACT. 9. THE FACTS OF THE CASE AS NARRATED IN ITA NO. 43/COCH/2015 ARE THAT THE ASSESSEE HAD CLAIMED THE ABOVE AMOUNT AS EXCHANGE FLUCTUATION (EXCHANGE LOSS) ON LOAN FOR CHENNAI PROJECT WHICH HAD NOT BECOME OPERATIONAL. ACCORDING TO THE ASSESSING OFFICER, ONLY WHEN THE CHENNAI PROJECT IS COMPLETED AND BUSINESS I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 11 OPERATIONS ARE COMMENCED, THEN ALONE EXCHANGE FLUCTUATION COST RELATING TO LOAN FOR THE CHENNAI PROJECT CAN BE CLAIMED AS REVENUE EXPENDITURE, OTHERWISE, IT WILL BE TREATED AS CAPITAL EXPENDITURE. ACCORDING TO THE ASSESSING OFFICER, THOUGH SECTION 36(1)(III) SPECIFICALLY TALKS ABOUT INTEREST ON ASSET NOT PUT TO USE, EXTENDING THE SAME LOGIC EXCHANGE FLUCTUATION LOSS RELATING TO THE ASSET CAN ALSO NOT BE CLAIMED AS REVENUE EXPENDITURE. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE HAS ALREADY DISALLOWED EXCHANGE FLUCTUATION LOSS RELATABLE TO BORROWING COST IN ACCORDANCE WITH AS-16, THE DETAILS OF WHICH ARE GIVEN BELOW: EXCHANGE FLUCTUATION ON LOAN FOR CHENNAI PROJECT RS.8,09,71,220/- LESS. RELATABLE TO BORROWING COST IN ACCORDANCE RS.1,02,85,870/ - WITH AS-16 BALANCE CLAIMED AS EXPENSE BEING EXCHANGE FLUCTUATION CLAIMED AS REVENUE EXPENDITURE RS.7,06,85,350/- HENCE THE ASSESSING OFFICER DISALLOWED THE AMOUNT OF RS.7,06,85,350/- SINCE IT RELATED TO EXCHANGE FLUCTUATION (LOSS) ON LOAN FOR CHENNAI PROJECT WHICH WAS NOT MATERIALIZED. 10. ON APPEAL, THE CIT(A) OBSERVED THAT SINCE THE FOREIGN EXCHANGE FLUCTUATION IS ON ACCOUNT OF THE LOAN FOR CHENNAI PROJECT, THE ASSESSING OFFICER WAS RIGHT IN HOLDING THAT THIS LOSS WOULD BE COVERED UNDER THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. ACCORDING TO THE CIT(A), SINCE THE PROJECT HAD NOT STARTED AND THE ASSET HAD NOT BEEN PUT TO USE, THEREFORE, THE LOSS OF EXCHANGE FLUCTUATION ON I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 12 THE LOAN FOR THE CHENNAI PROJECT WOULD HAVE TO BE CAPITALIZED AND CAN ONLY GO TO INCREASE THE COST OF THE ASSET AND THE SAME CANNOT BE ALLOWED AS REVENUE EXPENDITURE. HENCE, THE CIT(A) CONFIRMED THE DISALLOWANCE MADE U/S. 36(1)(III) OF THE ACT. 11. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. (2009) 179 TAXMAN 326 WHEREIN IT WAS HELD THAT THE LOSS SUFFERED BY THE ASSESSEE MAINTAINING ACCOUNTS REGULARLY ON MERCANTILE SYSTEMS AND FOLLOWING ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, ON ACCOUNT OF FLUCTUATIONS IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE SHEET, WAS AN ITEM OF EXPENDITURE UNDER SECTION 37(1), NOTWITHSTANDING THAT THE LIABILITY HAD NOT BEEN DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATIONS IN THE RATE OF FOREIGN EXCHANGE OCCURRED. THUS, ACCORDING TO THE LD. AR, THE CLAIM OF LOSS ON EXCHANGE RATE FLUCTUATION IS TO BE ALLOWED AS A DEDUCTION U/S. 37(1) OF THE ACT. FURTHER, THE LD. AR SUBMITTED THAT THE ABOVE JUDGMENT HAD LAID DOWN THE FOLLOWING FACTORS WHICH SHALL BE TAKEN INTO ACCOUNT IN ORDER TO FIND OUT WHETHER EXPENDITURE ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY RATES IS DEDUCTIBLE OR NOT IN A CASE WHERE AN ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. A) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS THE MERCANTILE SYSTEM,, WHICH BRINGS IN THE DEBITS OF THE AMOUNT OF EXPENDITURE FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED EVEN BEFORE IT IS ACTUALLY DISPERSED AND CREDITS WHAT IS DUE IMMEDIATELY IT BECOMES DUE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 13 EVEN AFTER IT IS ACTUALLY RECEIVED. WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING. B) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO THE LOSSES CLAIMED TO HAVE ACCRUED AND GAINS THAT HAS ACCRUED OR MAY ACCRUE. C) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARD. D) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. HENCE, IT WAS SUBMITTED THAT THE ASSESSING OFFICER HAD DISALLOWED THE ENTIRE CLAIM ON THE BASIS OF FOREX RATE FLUCTUATION AT PAR WITH INTEREST U/S. 36(1)(VII) OF THE ACT. 12. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDER OF THE CIT(A). 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE QUESTION THAT ARISES FOR OUR CONSIDERATION IS THAT WHETHER LOSS OF FOREIGN EXCHANGE FLUCTUATION ON ACCOUNT OF REINSTATEMENT OF FOREIGN CURRENCY ON THE DATE OF BALANCE SHEET CAN BE CLAIMED AS REVENUE LOSS. AS PER THE PROVISIONS OF SECTION 43(1) OF THE ACT, ACTUAL COST MEANS ACTUAL COST OF THE CAPITAL ASSETS OF THE ASSESSEE REDUCED BY THAT PORTION OF THE COST OF THE CAPITAL ASSETS AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY. THE SECTION ALSO HAS EXPLANATIONS. HOWEVER, THE SECTION NOWHERE SPECIFIES THAT ANY GAIN OR LOSS ON I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 14 FOREIGN CURRENCY LOANS ACQUIRED FOR PURCHASE OF INDIGENOUS ASSETS WILL HAVE TO BE REDUCED OR ADDED TO THE COST OF ASSETS. 13.1 IN THE CASE OF CIT VS. TATA IRON AND STEEL CO. LTD. (1998) 231 ITR 285 (SC) WHERE IT WAS HELD THAT COST OF AN ASSET AND COST OF RAISING MONEY FOR PURCHASE OF ASSET ARE TWO DIFFERENT AND INDEPENDENT TRANSACTIONS AND EVENTS SUBSEQUENT TO ACQUISITION OF ASSETS CANNOT CHANGE PRICE PAID FOR IT. THEREFORE, FLUCTUATIONS IN FOREIGN EXCHANGE RATE WHILE REPAYING INSTALLMENTS OF FOREIGN LOAN RAISED TO ACQUIRE ASSET CANNOT ALTER ACTUAL COST OF ASSETS FOR COMPUTING DEPRECIATION. HENCE, IT RESTRICTED ASSESSEE'S RIGHT TO ADD SUCH LOSS INCURRED ON ACCOUNT OF CURRENCY FLUCTUATIONS TO THE COST OF ASSET. THEREBY, THE DECISION GIVEN BY SUTLEJ AND TATA IRON AND STEEL (SUPRA) ARE CONTRARY IN VIEW. IN FORMER MENTIONED CASE IT RESTRICTED THE ASSESSEE'S RIGHT TO CLAIM SUCH LOSS ON CURRENCY FLUCTUATIONS CONSIDERING THE SAME AS ATTRIBUTABLE TO CAPITAL ACCOUNT TRANSACTIONS AND AT THE SAME TIME DOES NOT ALLOW TO ADD THE SAME TO COST OF THE ASSET BY FOLLOWING PRINCIPLE LAID DOWN IN TATA IRON AND STEEL (SUPRA).. 13.2 SCHEDULE VI OF COMPANIES ACT, SUGGESTS TREATMENT OF THE 'GAIN/LOSS' AS CAPITAL IN NATURE AND SHOULD BE ADJUSTED TO THE COST OF RELEVANT ASSET, WHEREAS ACCOUNTING STANDARDS 11 SUGGESTS THAT TREATMENT OF 'GAIN/LOSS' ATTRIBUTABLE TO FOREIGN BORROWINGS SHOULD BE REFLECTED IN PROFIT AND LOSS ACCOUNT. HOWEVER, SAID CONFLICT WAS RESOLVED BY MCA CIRCULAR IT WAS CLARIFIED BY MCA THAT ACCOUNTING I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 15 TREATMENT OF EXCHANGE DIFFERENCES WILL BE MADE AS PER AS 11 AND FURTHER CATEGORICALLY MENTIONED THAT PROVISIONS OF AS-11 IS REQUIRED TO BE FOLLOWED IRRESPECTIVE OF THE RELEVANT PROVISION OF SCHEDULE-VI TO THE COMPANIES ACT, 1956. THEREFORE IN VIEW OF THE SAME, THE EXCHANGE DIFFERENCE IS REQUIRED TO BE RECOGNIZED IN PROFIT AND LOSS ACCOUNT. HENCE, ANY LOSS ARISING OUT OF FOREIGN CURRENCY FLUCTUATION IS ALLOWED TO BE DEDUCTED FROM COMPUTATION OF TOTAL INCOME. THE COMPANIES ACT 2013 MANDATES THE FINANCIAL STATEMENTS OF COMPANIES TO BE COMPLIANT WITH APPLICABLE ACCOUNTING STANDARDS (INCLUDING AS-11). THUS, EXCHANGE GAIN/LOSS IS RECOGNIZED IN THE FINANCIAL STATEMENTS IN ACCORDANCE WITH AS - 11 AND REFERENCE MAY BE HAD TO GENERALLY ACCEPTED PRINCIPLES OF ACCOUNTING AS PROVIDED BY VARIOUS ACCOUNTING STANDARDS ISSUED BY ICAI IN ABSENCE OF SPECIFIC PROVISIONS IN THE INCOME TAX ACT IN RELATION TO TREATMENT OF EXCHANGE FLUCTUATION GAIN OR LOSS. THE ABOVE PRINCIPLE IS FOLLOWED IN CASE OF PRAKASH LEASING LTD. [2012] 23 TAXMANN.COM 3 (KAR.), IT WAS HELD THAT: 'IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE ACT DEALING ON THE SUBJECT, WHEN THE ACCOUNTING STANDARD IS NOW MADE THE BASIS OF MAINTAINING THE ACCOUNTS FOR THE PURPOSE OF INCOME-TAX, EVEN IF THE CENTRAL GOVERNMENT HAS NOT NOTIFIED IN THE OFFICIAL GAZETTE THE ACCOUNTING STANDARDS, CERTAINLY THE ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS HAVE TO BE FOLLOWED. THEREFORE, THE REASONING OF THE AUTHORITIES, THOUGH THE CLAIM OF THE ASSESSEE IS BASED ON SUCH ACCOUNTING STANDARDS OF THE ICAI WHILE DECIDING WHETHER RECEIPT OF MONEY IS TAXABLE OR NOT, THAT IT HAS TO BE DECIDED IN ACCORDANCE WITH THE PROVISIONS OF LAW AND NOT IN ACCORDANCE WITH THE ACCOUNTING PRACTICE, HAS NO SUBSTANCE AS THERE IS NO INCONSISTENCY BETWEEN THE SAID ACCOUNTING PRACTICE AND ANY PROVISIONS OF THE ACT.' I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 16 13.3 FURTHER, THE NATURE OF EXPENDITURE BEING CAPITAL OR REVENUE DOES NOT DEPEND ON THE PURPOSE FOR WHICH FOREIGN CURRENCY LOAN WAS OBTAINED OR ON NATURE OF ULTIMATE UTILIZATION OF LOAN AMOUNT. THE SAME WAS ALSO AFFIRMED BY APEX COURT IN CASE OF INDIA CEMENTS LIMITED VS. CIT (1966) (SC) 60 ITR 52. 13.4 IT IS TO BE NOTED THAT LIABILITY TO PAY OR TO PROVIDE FOR LOSS ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATION DOES NOT ARISES AT THE TIME OF OBTAINING/RAISING FOREIGN CURRENCY LOAN BUT THE SAME WAS INCURRED SUBSEQUENTLY ON DEVALUATION OF CURRENCY WHICH IS AN INDEPENDENT EVENT HAVING NO CONTROL OVER IT BY THE ASSESSEE. THE SAME CURRENCY FLUCTUATION MAY RESULT INTO GAIN OR LOSS WHICH IS NOT ASCERTAINABLE AT THE TIME OF TAKING FUNDS. HENCE IT CANNOT BE SAID AS CAPITAL EXPENDITURE. THE LIABILITY TO PAY OR TO PROVIDE FOR FOREIGN CURRENCY FLUCTUATION ARISES ONLY ON DEVALUATION OF CURRENCY AND THERE MAY NOT BE ANY LIABILITY TO PAY FOR LOSS ON CURRENCY FLUCTUATION IF CURRENCY VALUE IS INFLATED SUBSEQUENTLY. 13.5 ONE OF THE ISSUE INVOLVED IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. 312 ITR 254 (SC) WAS: 'WHETHER THE ASSESSEE IS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE AT EACH BALANCE SHEET DATE, PENDING ACTUAL PAYMENT OF THE VARIED LIABILITY?' THE ABOVE MENTIONED DECISION HAD CONSIDERED THE IMPLICATION OF PARA 10 OF AS- 11 ALONG WITH SECTION 43A OF THE ACT. WHILE DECIDING THE ISSUE, IT WAS OBSERVED BY HON'BLE APEX COURT AT PARA 17: I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 17 HAVING COME TO THE CONCLUSION THAT VALUATION IS A PART OF THE ACCOUNTING SYSTEM AND HAVING COME TO THE CONCLUSION THAT BUSINESS LOSSES ARE DEDUCTIBLE UNDER SECTION 37(1) ON THE BASIS OF ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING AND HAVING COME TO THE CONCLUSION THAT THE CENTRAL GOVERNMENT HAS MADE ACCOUNTING STANDARD MANDATORY, WE ARE NOW REQUIRED TO EXAMINE THE SAID ACCOUNTING STANDARD (AS). DECIDED IN ABOVE MATTER TO TREAT FOREIGN EXCHANGE GAIN OR LOSS ARISING ON ACQUISITION OF FIXED ASSETS IN FOREIGN CURRENCY AS LAID DOWN IN AS-11 (REVISED 1994). PARA 10 OF AS-11 (REVISED 1994) PROVIDES AS UNDER: EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH CARRIED IN TERMS OF HISTORICAL COST, SHOULD BE ADJUSTED IN THE CARRYING AMOUNT OF THE RESPECTIVE FIXED ASSETS. THE CARRYING AMOUNT OF SUCH FIXED ASSETS SHOULD TO THE EXTENT NOT ALREADY SO ADJUSTED OR OTHERWISE ACCOUNTED FOR ALSO BE ADJUSTED TO ACCOUNT FOR ANY INCREASE OR DECREASE IN THE LIABILITY OF THE ENTERPRISE, AS EXPRESSED IN THE REPORTING CURRENCY BY APPLYING THE CLOSING RATE, FOR MAKING PAYMENT TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSETS OR FOR REPAYMENT OF THE WHOLE OR A PART OF THE MONIES BORROWED BY THE ENTERPRISE FROM ANY PERSON, DIRECTLY OR INDIRECTLY, IN FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF ACQUIRING THOSE ASSETS. 13.6 AS-11 (REVISED 1994) PROVIDES FOR ADJUSTMENT IN THE CARRYING COST OF FIXED ASSETS ACQUIRED IN FOREIGN CURRENCY, DUE TO FOREIGN EXCHANGE BALANCE SHEET DATE WHICH ALSO CORRESPOND TO TREATMENT GIVEN IN SECTION 43A. THE ISSUE ACCORDINGLY DECIDED BY APEX COURT IN THE MANNER LAID DOWN IN AS-11 (REVISED 1994) AT PARA- 10. 13.7 THE REVISED TREATMENT PROVIDED AT PARA 13 OF AS-11 (REVISED 2003) IS GIVEN BELOW: EXCHANGE DIFFERENCES ARISING ON THE SETTLEMENT OF MONETARY ITEMS OR ON REPORTING AN ENTERPRISE'S MONETARY ITEMS AT RATES DIFFERENT FROM THOSE AT I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 18 WHICH THEY WERE INITIALLY RECORDED DURING THE PERIOD, OR REPORTED IN PREVIOUS FINANCIAL STATEMENTS, SHOULD BE RECOGNIZED AS INCOME OR AS EXPENSES IN THE PERIOD IN WHICH THEY ARISE, WITH THE EXCEPTION OF EXCHANGE DIFFERENCES DEALT WITH IN ACCORDANCE WITH PARAGRAPH 15.' 13.8 IN VIEW OF THE REVISION MADE IN AS-11 IN 2003, IT CAN BE SAID THAT TREATMENT OF FOREIGN EXCHANGE LOSS ARISING OUT OF FOREIGN CURRENCY FLUCTUATIONS IN RESPECT OF FIXED ASSETS ACQUIRED THROUGH LOAN IN FOREIGN CURRENCY SHALL REQUIRED TO BE GIVEN IN PROFIT AND LOSS ACCOUNT. SAID EXCHANGE LOSS SHOULD BE ALLOWED AS REVENUE EXPENDITURE IN VIEW OF AMENDED AS-11 (2003). IT MAY BE NOTED THAT APEX COURT HAD FOLLOWED TREATMENT OF EXCHANGE LOSS OR GAIN AS PER AS-11 (1994). IN VIEW OF REVISION MADE IN AS-11, NOW TREATMENT SHALL BE AS PER REVISED AS-11 (2003). EXCHANGE GAIN OR LOSS ON FOREIGN CURRENCY FLUCTUATIONS IN RESPECT OF FOREIGN CURRENCY LOAN ACQUIRED FOR ACQUISITION OF FIXED ASSET SHOULD BE ALLOWED AS REVENUE EXPENDITURE. HOWEVER, IN THE PREAMBLE OF AS-11 (REVISED 2003), IT WAS STATED THAT THE REVISED STANDARD SUPERSEDES AS-11 (1994) EXCEPT THAT IN RESPECT OF ACCOUNTING FOR TRANSACTIONS IN FOREIGN CURRENCIES ENTERED INTO BY THE REPORTING ENTERPRISE BEFORE THE DATE OF AS-11 (2004) COMES INTO EFFECT, AS 11 (1994) WILL CONTINUE TO BE APPLICABLE. 13.9 HOWEVER, IN THE PRESENT CASE, AS-11 CANNOT BE APPLIED AS THE PROJECT IS NOT AT ALL COMMENCED AND EXCHANGE RATE FLUCTUATION WOULD BE IN CAPITAL FIELD. HENCE, AS-16 IS APPLICABLE AND LOSS ON ACCOUNT OF REINSTATEMENT OF FOREIGN CURRENCY ON THE BALANCE SHEET DATE IS TO BE TREATED ON THE SAME FOOTING AS THE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 19 INTEREST ON LOANS CONSIDERED U/S. 36(1)(III) OF THE ACT AS DISCUSSED IN PARA 7 OF THIS ORDER. THIS GROUND OF APPEALS OF THE ASSESSEE IS REJECTED. 14. THE NEXT GROUND IN ITA NOS. 44 & 334/COCH/2015 IS WITH REGARD TO DISALLOWANCE OF EXPENSES U/S 14A R.W. RULE 8D FOR THE INVESTMENTS MADE BY THE ASSESSEE REPRESENTING THE CONTRIBUTION MADE TOWARDS THE EQUITY AND PREFERENCE SHARES OF THE GROUP COMPANIES OUT OF THE EQUITY CAPITAL BROUGHT INTO THE COMPANY BY THE CHIEF PROMOTER AS PART OF ITS CORPORATE STRATEGY FOR CROSS HOLDING, EQUATING THE SAME WITH INVESTMENTS MADE FOR EARNING TAX FREE INCOME. 15. THE FACTS OF THE CASE AS NARRATED IN ITA NO.334/COCH/2015 ARE THAT DURING THE YEAR UNDER CONSIDERATION, AS PER THE BALANCE SHEET OF THE COMPANY, THE COMPANY HAD INVESTMENT OF RS.9,13,25,050/- AS ON 31/03/2011 IN THE SHARES OF THE GROUP COMPANY MFAR ENTERPRISES (P) LTD. IT WAS NOTICED THAT THE INCOME FROM THIS INVESTMENT WAS ONLY IN THE FORM OF DIVIDEND AND THE DIVIDEND DECLARED BY THE DOMESTIC COMPANIES IS EXEMPT IN THE HANDS OF THE RECIPIENT U/S. 10(34) OF THE ACT. IT WAS OBSERVED THAT THE ASSESSEE HAD FINANCE COST OF RS.1,82,42,553/- AND THE ASSESSEE HAD NOT APPORTIONED ANY EXPENDITURE TO THIS INVESTMENT FROM WHICH INCOME WILL BE EXEMPT. THE ASSESSEES CONTENTION THAT THE INTEREST BEARING SECURED LOANS AVAILED BY THE COMPANY FROM BANKS AND THE UNSECURED LOANS BY WAY OF BORROWINGS SPECIFICALLY INTENDED FOR THE SETTING UP AND FOR OPERATION OF HOTEL PROJECT OF THE COMPANY AND WERE IN NO WAY RELATED TO THE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 20 INVESTMENTS MADE FOR EARNING EXEMPT INCOME WAS REJECTED BY THE ASSESSING OFFICER. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE COULD NOT PRODUCE THE EVIDENCES TO SHOW THAT THE INVESTMENT HAD BEEN MADE FROM THEIR OWN FUNDS AND NOT FROM INTEREST BEARING FUNDS. IT WAS OBSERVED THAT MERELY BECAUSE THE COMPANY HAD MORE INTEREST FREE FUNDS DOES NOT ESTABLISH THAT THE INVESTMENT IS MADE OUT OF OWN FUNDS. ACCORDING TO THE ASSESSING OFFICER, IF IT IS NOT POSSIBLE TO ESTABLISH THAT INVESTMENT WAS MADE WHETHER FROM INTEREST FREE FUNDS OR FROM INTEREST BEARING FUNDS, ONLY IN THAT SITUATION RULE 8D(2)(II) IS INVOKED TO CALCULATE INTEREST DIVERSION ON PROPORTIONATE BASIS. ACCORDING TO THE ASSESSING OFFICER, UNDER THE PROVISIONS OF SECTION 14A OF THE ACT, NO EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING AN EXEMPT INCOME SHALL BE ALLOWED AGAINST THE TAXABLE PROFITS. THE ASSESSEE HAD NOT ATTRIBUTED ANY PORTION OF THE EXPENDITURE DEBITED TO THE P&L ACCOUNT TOWARDS INVESTMENTS. IT WAS NOTICED THAT THE ASSESSEE INCURRED ROUTINE EXPENDITURE TO MAINTAIN ITS ESTABLISHMENT AND TOWARDS ADMINISTRATION, A PORTION OF WHICH CAN BE ATTRIBUTED TOWARDS INVESTMENTS. THE ASSESSEE ALSO INCURRED MANAGERIAL REMUNERATION AND CLAIMED THE WHOLE OF THE SAME AS EXPENDITURE. THE MANAGERIAL STAFF AND THE DIRECTORS ARE INVOLVED IN MAKING DECISIONS ON INVESTMENTS. SUCH BEING THE CASE, A PORTION OF THIS MANAGERIAL REMUNERATION AND DIRECTORS REMUNERATION SHOULD ALSO BE ATTRIBUTED TOWARDS THE INVESTMENTS, THE RETURN ON WHICH IS EXEMPT U/S. 10 OF THE ACT. I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 21 15.1 FURTHER, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF INTEREST ON FIXED LOANS OF RS.L,27,90,909/- AND INTEREST ON OTHER LOANS OF RS.53,63,575/- TOTALING RS.1,81,54,484/-. HOWEVER, THE ASSESSEE HAD INVESTED RS.2,89,74,686/- IN SHARES OF CERTAIN GROUP COMPANIES. BUT THE ASSESSEE HAD NOT ATTRIBUTED ANY EXPENDITURE TOWARDS THESE INVESTMENTS. WHEN IT WAS ASKED THE A.R. REPLIED AS UNDER:- ' WE ALSO OBJECT TO YOUR OBSERVATION THAT PROPORTIONATE INTEREST ATTRIBUTABLE TO THE INVESTMENT TO THE SHARES IN GROUP/SUBSIDIARY COMPANIES SHOULD HAVE BEEN DISALLOWED U/S. 14A IS ALSO NOT CORRECT. THE COMPANIES IN THE GROUP ALSO ARE ENGAGED IN THE SAME BUSINESS, HOTELS AND RESORTS. THOUGH DIFFERENT UNITS AT STRATEGIC PAINTS HAVE BEEN ESTABLISHED UNDER DIFFERENT COMPANIES, THE UNITS ARE SUPPLEMENTING AND COMPLIMENTING EACH OTHER. IT IS ESSENTIAL TO ATTRACT FOREIGN TOURIST THAT GROUP HAS HOTEL UNITS IN IMPORTANT TOURIST CENTERS. THE ACTIVITIES OF THE OTHER COMPANIES CANNOT BE VIEWED IN ISOLATION WITH THAT OF THE ASSESSEE COMPANY. WE HAVE PROMOTED THE OTHER COMPANIES WITH THE MOTIVE OF INCREASING OUR BUSINESS. THEREFORE, INVESTMENT IN SUBSIDIARY OR GROUP COMPANIES CANNOT BE TREATED AS A DIVERSION OF FUNDS. THE UNITS HAVE BORROWED FUNDS FOR SPECIFIC PURPOSE, EITHER FOR EXPANSION, RENOVATION OR LIQUIDATION OR HIGH INTEREST BEARING LOANS. THE COMPANY HAS SUFFICIENT RESOURCES WHICH ARE NOT INTEREST BEARING. THE INVESTMENT OF SHAREHOLDERS FUNDS FOR DEVELOPMENT ACTIVITIES THROUGH OTHER UNITS OR ENTITIES CANNOT BE CONSIDERED AS DIVERSION OF FUNDS ATTRACTING THE DISALLOWANCE ENVISAGED IN SECTION 14A OF THE INCOME TAX ACT.' 15.2 THE LD. AR'S ARGUMENT WAS REJECTED BY THE ASSESSING OFFICER. ACCORDING TO THE ASSESSING OFFICER, TO TIDE OVER THIS DIFFICULTY IN DETERMINING THE EXPENSES ATTRIBUTABLE TO EARNING THE EXEMPT INCOME AND TO BRING IN UNIFORMITY IN THE DIFFERENT APPROACHES ADOPTED BY THE ASSESSING OFFICERS, THE FINANCE ACT, 2006 HAD INTRODUCED THE PROVISIONS OF SECTION 14A WHICH REQUIRES THE ASSESSING OFFICER TO DETERMINE THE EXPENSES INCURRED RELATING TO AN EXEMPT INCOME IN ACCORDANCE WITH RULE 8D. THE ASSESSING OFFICER RELIED ON THE DECISION OF THE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 22 THE ITAT SPECIAL BENCH, DELHI VIDE ITS ORDER DATED 20-10-2008 IN THE CASES OF CIT VS. DAGA CAPITAL MANAGEMENT PRIVATE LIMITED (ITA NO.1372/DEL/2005), MAXOPP INVESTMENTS LIMITED VS. ACIT (ITA NO. 183/DEL/2005 AND M/S. CHEMINVEST LIMITED VS. DCIT (ITA NO. 2048/DEL/2005) WHEREIN IT WAS HELD THAT THE PROVISIONS OF SECTION 14A(2) AND (3) ARE PROCEDURAL IN NATURE AND HENCE WOULD TAKE EFFECT RETROSPECTIVELY. THE ASSESSING OFFICER ALSO RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF CHEMINVEST LTD. VS. ITO (124 TTJ 577), DELHI. [SB] WHEREIN IT WAS HELD THAT IF THE EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARNED BY THE ASSESSEE OR NOT. ACCORDING TO THE ASSESSING OFFICER, SECTION 14A DOES NOT ENVISAGE ANY SUCH EXCEPTION AND WHEN PRIOR TO INTRODUCTION OF SEC. 14A, AN EXPENDITURE BOTH UNDER SECTIONS 36 AND 57 WAS ALLOWABLE TO AN ASSESSEE WITHOUT SUCH REQUIREMENT OF EARNING OR RECEIPT OF INCOME, SUCH CONDITION CANNOT BE IMPORTED WHEN IT COMES FOR DISALLOWANCE OF THE SAME EXPENDITURE U/S. I4A. THE SAME VIEW WAS TAKEN BY THE SUPREME COURT IN THE CASE OF CIT VS. RAJENDRA PRASAD MOODY (115 ITR 5I9). ACCORDINGLY, THE DISALLOWANCE U/S. I4A READ WITH RULE 8D WAS WORKED OUT AND HENCE, THE ASSESSING OFFICER ADDED THE AMOUNT OF RS. 12,61,890/- TO THE TOTAL INCOME. 16. ON APPEAL, THE CIT(A) FOUND THAT THE DISALLOWANCE U/S.14A, FOR A SUM OF RS.54,01,327/- WAS ALSO MADE FOR THE A.Y.2010-11, WHEREIN THE CIT(A) HAD ELABORATED UPON THE ISSUE AT LENGTH, AND OBSERVED THAT THE INVESTMENT WAS MADE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 23 IN SHARES OF UNLISTED ASSOCIATED COMPANY AS A CORPORATE STRATEGY AND AS A CHIEF PROMOTER. SINCE EACH COMPANY IN THE GROUP IS AN INDEPENDENT BUSINESS ENTITY AND THE ASSESSEE, AT THE SAME TIME, HAD FAILED TO HIGHLIGHT ANY COMMERCIAL EXPEDIENCY IN MAKING SUCH INVESTMENT, THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. FURTHER, ACCORDING TO THE CIT(A), THE DISALLOWANCE UNDER RULE 8D WAS JUSTIFIED IN VIEW OF THE CBDT CIRCULAR NO.5/2014 DATED 11-2-2014. 16.1 THE CIT(A) OBSERVED THAT THE ISSUE OF INVESTMENT AND THE NATURE THEREOF, REMAINED THE SAME AS THAT OF FOR THE A.Y. 2010-11, HENCE THE DECISION OF HIS PREDECESSOR WAS FOLLOWED BECAUSE OF THE FACT THAT THE ISSUE HAD BEEN DEALT WITH QUITE AT A LENGTH AND HAD BEEN CONCLUDED AGAINST THE ASSESSEE. IN VIEW OF THIS, THE CIT(A) UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 17. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT SECTION 14A WAS INSERTED UNDER CHAPTER IV OF THE INCOME TAX ACT, 1961 BY THE FINANCE ACT, 2001 WHICH PROVIDES FOR DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WHICH WAS INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. ACCORDING TO THE LD. AR, IT AIMS TO PREVENT MISUSE OF CLAIMING EXPENDITURE IN RELATION TO EXEMPT INCOME BY CERTAIN ASSESSES TO REDUCE THE TAX PAYABLE ON TAXABLE INCOME BY ADJUSTING THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE LD. AR SUBMITTED THAT SECTION 14A WAS INTRODUCED TO ENSURE THAT NO DEDUCTION SHALL BE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 24 MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE LD. AR RELIED ON THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT (TS668) HC 201 I/DELHI WHEREIN IT WAS OBSERVED THAT WHILE WE AGREE WITH THE EXPRESSION 'EXPENDITURE INCURRED' REFERS TO ACTUAL EXPENDITURE AND NOT TO SOME IMAGINED EXPENDITURE, WE WOULD LIKE TO MAKE IT CLEAR THAT THE ACTUAL EXPENDITURE I.E. IN CONTEMPLATION UNDER SECTION 14A(1) OF THE ACT, IS AN ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTION WITH OR PERTAINING TO EXEMPT INCOME. THE COROLLARY OF THIS IS THAT IF NO EXPENDITURE IS INCURRED IN RELATION TO THE EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE SAID ACT. IT WAS SUBMITTED THAT AS PER SECTION 14A NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT SIMPLY MEANS THAT 'IN CONNECTION WITH' OR 'PERTAINING TO' AND ACCORDINGLY, IF THE EXPENDITURE IN QUESTION IS HAVING RELATION OR IN CONNECTION WITH OR PERTAINS TO EXEMPT INCOME IT CANNOT BE ALLOWED AS A DEDUCTION EVEN IF IT IS OTHERWISE QUALIFIED UNDER OTHER PROVISIONS OF THE ACT. THE LD. AR SUBMITTED THAT AS PER SUB-SECTION (2) OF SECTION 14A, THE ASSESSING OFFICER HAS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IF HE IS NOT SATISFIED WITH THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE AND SUCH COMPUTATION SHOULD BE IN ACCORDANCE WITH RULE 8D AND AS PER RULE 8D, THE PRESUMPTIVE COMPUTATION OF THE EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME CONTAINS THREE COMPONENTS: I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 25 A) AMOUNT OF EXPENDITURE DIRECTLY RELATABLE TO EXEMPT INCOME. B) INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. ONLY A FORMULA IS PRESCRIBED FOR APPORTIONING THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN AMOUNT OF INTEREST ATTRIBUTABLE TO ANY PARTICULAR INCOME. SUCH GENERAL INTEREST HAS TO BE APPORTIONED BETWEEN TAXABLE INCOME AND INCOME NOT LIABLE TO TAX. C) THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE VIZ. A HALF PERCENTAGE OF THE AVERAGE VALUE OF THE INVESTMENT. 17.1 IN THE CASE OF THE ASSESSEE, IT WAS SUBMITTED THAT THE INVESTMENT REPRESENTED THE CONTRIBUTION MADE TOWARDS THE EQUITY AND PREFERENCE SHARES OF ONE OF THE GROUP COMPANIES AND THE SAME WAS MADE OUT OF THE EQUITY CAPITAL BROUGHT INTO THE COMPANY BY THE CHIEF PROMOTER. SINCE THE INVESTMENT WAS MADE AS CORPORATE STRATEGY FOR CROSS HOLDING, THE LD. AR SUBMITTED THAT IT CANNOT BE EQUATED IN LINE WITH INVESTMENTS MADE FOR EARNING TAX FREE INCOME AND ACCORDINGLY, THERE WAS NO APPLICABILITY OF SECTION 14A IN THE INSTANT CASE. ACCORDING TO THE LD. AR, THESE INVESTMENTS WERE MADE IN EARLIER YEARS AND NO INVESTMENT WAS MADE DURING THE CURRENT YEAR. SINCE THIS BEING AN INVESTMENT IN THE NATURE OF CAPITAL CONTRIBUTION TO A GROUP COMPANY, IT WAS SUBMITTED THAT THERE WAS NO EXPENDITURE RELATABLE TO SUCH INVESTMENT. FURTHER, IT WAS SUBMITTED THAT THE INTEREST BEARING SECURED LOANS AVAILED BY THE COMPANY FROM BANKS AND THE UNSECURED LOANS BY WAY OF BORROWINGS WERE SPECIFICALLY INTENDED FOR THE SETTING UP OF AND FOR OPERATION OF HOTEL PROJECTS OF THE COMPANY WHICH ARE IN NO WAY RELATED TO THE INVESTMENTS MADE FOR EARNING EXEMPT INCOME. THEREFORE, THERE WAS NO INTEREST EXPENSES REQUIRED TO BE ALLOCATED BETWEEN THE TAXABLE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 26 INCOME AND EXEMPT INCOME. WITH REFERENCE TO RULE 8D, THE LD. AR RELIED ON THE FOLLOWING CASE LAWS: I) AS PER THE DECISION OF INCOME TAX APPELLATE TRIBUNAL, CALCUTTA IN THE CASE OF JT. COMMISSION OF INCOME TAX (OSD) VS, PILANI INVESTMENT AND INDUSTRIES CORPORATION LTD. IT WAS DECIDED THAT ONCE EXPENDITURE IS SPECIFICALLY RELATABLE TO TAXABLE INCOME, NO PORTION OF SUCH EXPENSES CAN BE DISALLOWED UNDER SECTION 14A. THE ALLOCATION OF EXPENSES BETWEEN TAX EXEMPT INCOME AND TAXABLE INCOME CAN BE MADE ONLY IN RESPECT OF EXPENDITURE WHICH CANNOT BE EITHER BE WHOLLY ALLOCATED TO TAXABLE INCOME OR WHICH CANNOT BE WHOLLY ALLOCATED TO TAX EXEMPT INCOME. THE ALLOCATION CAN BE MADE EVEN ON THE BASIS OF A FORMULA SET OUT IN RULE 6D(III) IN RESPECT OF SUCH EXPENSES WHICH DO NOT FALL IN ANY OF THESE CATEGORIES. THUS, IF THERE ARE GENERAL EXPENSES WHICH CAN BE PARTLY ALLOCATED TO EXEMPT INCOME AND TAXABLE INCOME A PORTION OF THE EXPENSES ABOVE CAN BE APPORTIONED. II) IN ORDER TO DISALLOW EXPENDITURE UNDER SECTION 14A, THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND INCOME NOT FORMING PART OF TOTAL INCOME. YATISH TRADING CO. LTD. VS. AC1T GUJARAT HIGH COURT IN THE CASE OF C1T VS. GUJARAT POWER CORPORATION LTD. DECIDED THAT THE ASSESSEE HAS SUFFICIENTLY EXPLAINED THAT MAJORITY OF THE INVESTMENTS IN THE TAX FREE SECURITY WAS MADE BEFORE THE BORROWING. AS BORROWED FUNDS WERE NOT USED FOR EARNING TAX FREE INCOME, APPLYING OF SECTION 14A IS NOT JUSTIFIED. IV) CIT VS. HERO CYCLES LTD. (323 ITR 518 (P&H) WHEREIN IT WAS HELD THAT WHETHER BORROWED FUNDS WERE USED FOR BUSINESS PURPOSE AND INVESTMENT IN SHARES WAS MADE OUT OF OWN FUNDS, THEN DISALLOWANCE UNDER SECTION 14A OF INTEREST ON BORROWED FUNDS WAS NOT PERMISSIBLE. V) IN THE CASE OF CIT VS. RAHEJA CORPORATION, IT WAS HELD THAT NO SECTION 14A DISALLOWANCE OF INTEREST ON BORROWED FUNDS IS POSSIBLE IF ASSESSING OFFICER DOES NOT SHOW NEXUS BETWEEN BORROWED AND TAX FREE INVESTMENT. VI) IN THE CASE OF GD METSTEEL PVT. LTD. VS. ASST. CIT (47 SOT 62), IT WAS HELD THAT INVESTMENTS IN SHARES WERE MADE BY THE ASSESSEE FROM OWN FUNDS, NO DISALLOWANCES WERE MADE IN EARLIER YEARS, SO NO DISALLOWANCE CAN BE MADE FOR THE RELEVANT YEAR. I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 27 VII) IN THE CASE OF CIT VS. RELIANCE INDUSTRIES LTD. (339 ITR 632), IT WAS HELD THAT NO EXPENDITURE IN FACT WAS INCURRED IN EARNING DIVIDEND INCOME AND HENCE NO DISALLOWANCE UNDER SECTION 14A IS PERMISSIBLE. VIII) IN THE CASE OF HERO CYCLES LTD., IT WAS HELD THAT THE EXPRESSION 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO ACTUAL EXPENDITURE AND NOT SOME IMAGINED EXPENDITURE. IF NO EXPENDITURE IS INCURRED IN RELATION TO EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A. IX) THE ITAT, MUMBAI IN THE CASE OF BUNGE AGRI BUSINESS INDIA PVT. LTD. VS. DCIT (64 DTR 201) HELD THAT IF THERE WERE FUNDS AVAILABLE, BOTH INTEREST FREE AND INTEREST BEARING, THEN A PRESUMPTION WOULD ARISE THAT INTEREST FREE FUNDS HAVE BEEN GENERATED FOR INVESTMENT AD NO DISALLOWANCE OF INTEREST CAN BE MADE UNDER SECTION 14A. 17.3 CONSIDERING THE ABOVE FACTS OF THE CASE, IT WAS PRAYED THAT THE DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT MAY BE DELETED. 18. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDER OF THE CIT(A). 19. AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT (402 ITR 640) HAS OBSERVED THAT THE DOMINANT PURPOSE FOR WHICH INVESTMENT WAS MADE IN SHARES BY THE ASSESSEE IS NOT A RELEVANT FACTOR. THE ONLY FACTOR IS THAT DIVIDEND INCOME IS NOT TAXABLE. IN SUCH CIRCUMSTANCES, IF EXPENDITURE IS INCURRED FOR EARNING DIVIDEND INCOME, THAT MUCH OF EXPENDITURE PROPORTIONATE TO THE DIVIDEND INCOME IS TO BE DISALLOWED AND CANNOT BE TREATED AS BUSINESS EXPENDITURE. WE ALSO REFER TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD. (326 ITR 1), WHEREIN IT WAS HELD THAT THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 28 NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE AND ON THE SAME ANOLOGY GROSS INCOME WOULD NOT FORM PART OF THE TOTAL INCOME, ITS ASSOCIATED OR RELATED EXPENDITURE WOULD ALSO NOT BE PERMITTED TO BE DEBITED AGAINST OTHER TAXABLE INCOME. BEING SO, IN OUR OPINION, EXPENDITURE INCURRED BY THE ASSESSEE FOR INVESTMENT IN SHARES IN GROUP COMPANIES CANNOT BE ALLOWED AS DEDUCTION AND PROVISO TO SECTION 14A R.W. RULE 8D IS APPLICABLE. HENCE, THIS GROUND OF THE ASSESSEE FOR ALL THE ASSESSMENT YEARS IS REJECTED. 20. THE NEXT GROUND IN ITA NOS. 44/COCH/2015 AND 334/COCH/2015 IS WITH REGARD TO TREATMENT OF GAIN OF REINSTATEMENT OF FOREIGN EXCHANGE LOAN AS INCOME, EVEN THOUGH THE PROJECT WORK IS IN PROGRESS. 21. THE FACTS OF THE CASE AS IN ITA NO. 44/COCH/2015 ARE THAT THE ASSESSING OFFICER FOUND THAT DURING THE YEAR UNDER CONSIDERATION, THE COMPANY HAD COMPUTED THE UNREALIZED FOREIGN EXCHANGE GAIN ON FOREIGN CURRENCY LOAN FOR THE PROJECT UNDER IMPLEMENTATION OF CHENNAI PROJECT AMOUNTING TO RS.17,76,070/-. IT WAS CONSISTENTLY FOLLOWING THE POLICY OF TREATING THE EXCHANGE RATE FLUCTUATIONS AS A REVENUE ITEM FOR THE PURPOSE OF THE COMPUTATION OF TOTAL INCOME. THE ASSESSING OFFICER NOTICED THAT T HOUGH THE PRINCIPLE OF CONSISTENCY REQUIRES THAT SINCE THE UNREALIZED FOREIGN EXCHANGE LOSS WAS NOT ALLOWED AS A REVENUE LOSS IN THE A.Y.2009-10, THE UNREALIZED FOREIGN EXCHANGE GAIN IN THE ASSESSMENT YEAR 2011-12 SHOULD NOT BE TREATED AS REVENUE RECEIPT, BUT IN THIS CASE, THE ASSESSEE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 29 HAD NOT ACCEPTED THE DISALLOWANCE MADE IN THE ASSESSMENT ORDER FOR A.Y.2009- 10 AND THE MATTER IS STILL PENDING BEFORE THE CIT(A). THEREFORE, THE ASSESSING OFFICER REJECTED THE ASSESSEE'S REQUEST IN THIS REGARD. ACCORDING TO THE ASSESSING OFFICER, THE SAME FIGURE WAS OFFERED AS INCOME IN THE COMPUTATION OF INCOME FOR THE ORIGINAL RETURN. THEREFORE, THE ASSESSING OFFICER ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 22. ON APPEAL, THE CIT(A) OBSERVED THAT THE ASSESSEE HAD FILED REVISED RETURN AND HAD TREATED THE SUM OF RS. 17,76,070/-, AS GAIN ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE RATE, AND HAD REDUCED FROM WORK-IN-PROGRESS OF THE PROJECT, BY TREATING IT AS A CAPITAL RECEIPT. HOWEVER, ACCORDING TO THE CIT(A), THE ASSESSEE IS REQUIRED TO MAINTAIN CONSISTENCY AND SINCE, FOR THE A.Y.2009-10, THE ASSESSEE WAS ALREADY IN APPEAL BEFORE THE ITAT, IT WAS HELD THAT THE GAIN ON ACCOUNT OF EXCHANGE RATE FLUCTUATION SHOULD BE TREATED AS INCOME. IN VIEW OF THIS, THE CIT(A) CONFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER ON THIS ISSUE. 23. THE LD. AR SUBMITTED THAT DURING THE A.Y. 2009-10 THE LOSS OF RS.7,06,85,350/- ON EXCHANGE RATE FLUCTUATION CLAIMED BY THE ASSESSEE ON ACCOUNT OF REINSTATEMENT OF FOREIGN CURRENCY LOAN AVAILED FOR THE CHENNAI PROJECT HAD BEEN DISALLOWED TREATING THE SAME AT PAR WITH INTEREST U/S 36(1)(III) OF THE ACT. THE LD. AR SUBMITTED THAT DURING THE A.Y. 2010-11, THE ASSESSEE CONTINUED WITH THE SAME POLICY OF TREATING THE EXCHANGE RATE FLUCTUATION AS I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 30 REVENUE ITEM AND CONSIDERED THE GAIN ON REINSTATEMENT OF FOREIGN EXCHANGE LOAN AVAILED FOR THE NEW PROJECT AS INCOME LIABLE TO TAX. IT WAS SUBMITTED THAT WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER HAD DEVIATED FROM THE DEPARTMENT STAND OF NOT CONSIDERING THE FOREIGN EXCHANGE RATE FLUCTUATION AS REVENUE ITEM AND HAD CONSIDERED THE FOREIGN EXCHANGE GAIN AS INCOME, EVEN THOUGH THE RESULTANT LOSS OF LAST YEAR HAD BEEN DISALLOWED WHICH RESULTED IN THE SAME-AMOUNT GETTING TAXED TWICE. THE LD. AR CONTENDED THAT THE DEPARTMENT'S VIEW ON THIS ISSUE IS NOT CONSISTENT BECAUSE THE INCOME WAS ACCEPTED IN RESPECT OF GAIN IN EXCHANGE FLUCTUATION, BY EXTENDING THE SAME LOGIC, THE LOSS INCURRED ON EXCHANGE FLUCTUATION SHOULD HAVE BEEN ALLOWED AS AN EXPENDITURE. IT WAS SUBMITTED THAT THE COMPANY HAD NOT OFFERED THE GAIN ON REINSTATEMENT OF FOREIGN CURRENCY LOAN AS INCOME DURING THE A.Y.20I1-12 EVEN THOUGH THE EXCHANGE LOSS ON REINSTATEMENT OF FOREIGN CURRENCY LOAN AS EXPENSES WAS CLAIMED DURING THE A.Y.2009-10. THE LD. AR SUBMITTED THAT SINCE THE DEPARTMENT HAD NOT ALLOWED THE LOSS IN THE ASSESSMENT ORDER FOR A.Y.2009-10, THE DEPARTMENT SHOULD NOT TAX THE UNREALIZED FOREIGN EXCHANGE GAIN. IT WAS SUBMITTED THAT SINCE THE ASSESSEE HAD NOT SHOWN THE SAME AS INCOME IN THE STATEMENT OF COMPUTATION OR IN THE BOOKS OF ACCOUNTS, THERE WAS NO REASON TO TREAT THE AMOUNT AS INCOME. 24. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDER OF THE CIT(A). I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 31 25. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. AS DISCUSSED IN PARA 13 OF THIS ORDER, THIS GROUND OF APPEALS OF THE ASSESSEE IS ALLOWED AND IT IS TO BE TREATED AS CAPITAL RECEIPT. 26. THE ONLY GROUND IN REVENUES APPEAL IN ITA NO. 335/COCH/2015 IS WITH REGARD TO DELETION OF DISALLOWANCE OF THE CLAIM OF THE EXPENDITURE BY WAY OF REPAIRS & RENOVATION EXPENDITURE OF THE INTERNATIONAL CONVENTION CENTRE AMOUNTING TO RS.7,13,89,L07/-. 27. THE FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER FOUND THAT DURING THE F.Y.2010-11, ASSESSEE HAD INCURRED EXPENSES OF RS.7,13,89,107/- FOR RENOVATION AND REFURBISHMENT AND SINCE THIS WAS A MARKED HIKE FROM THE CORRESPONDING HEAD FOR F.Y.2009-10, THE ASSESSEE WAS ASKED TO FURNISH DETAILED SPLIT-UP OF EXPENSES. THE CORRESPONDING EXPENSES FOR PRECEDING F.YS. IS PRESENTED BELOW: HEAD OF EXPENDITURE F.Y. 2008 - 09 F.Y.2009 - 10 F.Y.2010 - I1 RENOVATION & REFURBISHMENT NIL RS. 1,16,66,961/ - RS.7,13,89,107/ - IT WAS NOTICED THAT THE ASSESSEE HAD CLAIMED THE EXPENDITURE OF RS.7.13 CRORES AS REVENUE EXPENDITURE. THE ASSESSING OFFICER NOTICED THAT THE COMPANY'S FACILITY CONSISTED OF A 5-STAR HOTEL AND AN INTERNATIONAL CONVENTION CENTRE (ICC) AND THE EXPENDITURE OF RS.7.13 CRORES PERTAINED SOLELY FOR RENOVATION AND I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 32 REFURBISHMENT OF ICC. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE HAD GROUPED REPAIRS & MAINTENANCE IN SEPARATION FROM RENOVATION & REFURBISHMENT. THE ASSESSING OFFICER FOUND THAT NO SUCH LINE ITEM FOUND PLACE IN THE SCHEDULE TO P&L ACCOUNT TILL F.Y.2009-10 AND THIS GROUPING OF THE EXPENDITURE UNDER RENOVATION AND REFURBISHMENT INSTEAD OF REPAIRS & MAINTENANCE REVEALS THE MOTIVE AND PURPOSE OF THE EXPENDITURE. IT WAS NOTICED THAT INCOME FROM BANQUET SALES HAD DROPPED FROM RS.160 LAKHS IN F.Y.2009-10 TO RS.12.36 LAKHS IN F.Y.2010-11. IN THE REASONS FOR PRECIPITOUS DROP IN BANQUET SALES COMPARED TO PREVIOUS YEAR, THE ASSESSEE VIDE LETTER DATED 5-2-2014 GAVE THE FOLLOWING REPLY: 'DURING THE PREVIOUS YEAR 2009-10, THERE WERE TWO MAJOR INTERNATIONAL CONFERENCES HELD IN LE MERIDIEN CONVENTION CENTRE. FOR SUCH A BIG EVENT THEY USED THE ENTIRE HOTEL AND CONVENTION CENTRE AREA. THERE WERE TEMPORARY PANDAL CREATED OUTSIDE CONVENTION CENTRE AND LAWN AREA. THE AMOUNT CHARGED TOWARDS THE TWO FUNCTIONS WERE RS.39,02,052/- ON 21-11- 2009 AND RS.83,94,750/- ON 24-12-2009. THE MAJOR IMPACT OF THESE TWO SALES RESULTED IN TOTAL COLLECTION OF RS. 1,59,12,954/-. THERE WERE NO SUCH MAJOR CONFERENCES DURING THE F.Y.2010-11. APART FROM THAT RENOVATION WORK WAS GOING ON THE INTERNATIONAL CONVENTION CENTRE DURING THE PREVIOUS YEAR 2010-11, THAT ALSO GOT A MAJOR IMPACT.' 27.1 ACCORDING TO THE ASSESSING OFFICER, IT MAY BE TRUE THAT NO MAJOR EVENTS COULD HAVE HAPPENED IN ICC IN F.Y.2010-11 BUT IT IS ALSO TRUE THAT EVEN IF SUCH EVENTS WOULD HAVE TAKEN PLACE IN F.Y.2010-11, THE ASSESSEE WOULD HAVE NOT BEEN IN A POSITION TO HOST THEM AS THE ICC WAS UNDERGOING MASSIVE RENOVATION. FURTHER, THE REVENUE OF RS. 123 LAKHS (RS.83.94 LAKHS & RS.39.02 LAKHS) CANNOT BE ATTRIBUTED TO THE CONVENTION CENTRE AS THE ASSESSEE MENTIONED FOR SUCH A BIG I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 33 EVENT THEY USED THE ENTIRE HOTEL AND CONVENTION CENTRE AREA. ACCORDING TO THE ASSESSING OFFICER, THE HOTEL IS A MUCH BIGGER AREA WITH A MUCH BIGGER FOOTPRINT IN THE GROSS BLOCK OF ASSETS AS WELL AS GROSS RECEIPTS. THEREFORE, ACCORDING TO THE ASSESSING OFFICER, ICC WAS NOT AVAILABLE FOR REVENUE GENERATION DURING F.Y.2010-11. ACCORDING TO THE ASSESSING OFFICER, THE TOTAL COST OF THE ORIGINAL ASSET AS FURNISHED BY THE ASSESSEE WAS RS.9.58 CRORES. THE ASSESSING OFFICER NOTICED THAT THE TOTAL RENOVATION EXPENDITURE INCURRED AMOUNTS TO RS.8.30 CRORES WHICH SHOWED THAT THE ASSESSEE WANTED TO BRING OUT A THOROUGHLY DIFFERENT LOOK AND FEEL FOR THE CONVENTION CENTRE WHICH WILL DEFINITELY RESULT INTO AN ADDED ADVANTAGE. ACCORDING TO THE ASSESSING OFFICER IF THE QUANTUM OF EXPENDITURE INCURRED FOR RENOVATION AND REFURBISHMENT IS COMPARABLE TO THE TOTAL SIZE OF THE GROSS BLOCK, THEN IT WOULD ALSO FORM A MAJOR FACTOR IN DECIDING THE NATURE OF EXPENDITURE AS HELD BY THE SUPREME COURT IN THE CASE OF M/S. BALLIMAL NAVAL KISHORE (1997) (224 ITR 414). ACCORDING TO THE ASSESSING OFFICER, AS PER THE SPLIT-UP FURNISHED BY THE ASSESSEE, THERE WAS EXTENSIVE RENOVATION AND REPLACEMENT OF EXISTING HOTEL. EVEN THOUGH THE ASSESSEE SUBMITTED THAT BEING A DECADE OLD 5-STAR HOTEL, THE EXTENSIVE RENOVATION WAS REQUIRED TO MAINTAIN CURRENT LEVEL OF BUSINESS, BUT ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE'S CLAIM THAT NO NEW ADVANTAGE WAS GAINED BY THE EXERCISE IS NOT CORRECT AND THE ASSESSEE'S CLAIM THAT IT IS FOR UPKEEP AND MAINTENANCE OF THE EXISTING ASSET ASSSET IS ALSO INCORRECT. IT WAS FOUND THAT THERE WAS OVERALL REVAMPING OF THE CONVENTION CENTRE, VIZ., FLOORING, WIT H MARBLES AND GRANITE, SOUND PROOF SYSTEM, I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 34 CERAMIC WALL PANELING, ETC. THE ASSESSING OFFICER RELIED ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF M/S. NEW SHORROCK SPG. & MFG (30 ITR 338, THE RATIO OF THE SUPREME COURT IN THE CASE OF M/S, BALLIMAL NAVAL KISHORE (SUPRA) AND M/S. SARAVANA SPG. MILLS PVT. LTD. (2007) (293 ITR 201) AND OBSERVED THAT AS PER THE ASSESSEE'S SUBMISSION IT IS BECAUSE OF THESE MODIFICATIONS, THE CONVENTION CENTRE COULD BE BROUGHT BACK TO ITS ORIGINAL STANDARD. IT WAS STATED THAT THE BOMBAY HIGH COURT IN THE CASE OF M/S. NEW SHORROCK SPG. & MFG. (SUPRA) HAD RULED THAT RENEWAL OR RESTORATION IS NOT COVERED UNDER CURRENT REPAIRS. THE ASSESSING OFFICER WAS OF THE OPINION THAT WHAT THE ASSESSEE HAS DONE IS SUBSTANTIAL REFURBISHMENT, RENOVATION AND REPLACEMENT AND UNLIKE A MACHINE, THERE IS NO QUESTION OF BRINGING THE CONVENTION CENTRE BACK TO THE ORIGINAL STATE BECAUSE OF DIFFERENT MATERIALS USED. ACCORDING TO THE ASSESSING OFFICER, WHAT HAS HAPPENED IS A TOTAL RENOVATION AND REVAMP OF THE EXISTING STRUCTURE TO DERIVE AN EXTRA ADVANTAGE AND THEREFORE, IT CANNOT BE SAID THAT THE SAID EXPENDITURE QUALIFIES AS REVENUE EXPENDITURE. SINCE THE ASSESSEE HAS DONE EXTENSIVE REPAIRS AND RENOVATION WHICH IS NOT IN THE NATURE OF REPAIRS, THE ASSESSING OFFICER TREATED THE SAME AS CAPITAL ASSET AND DISALLOWED AS REVENUE EXPENDITURE. SINCE THERE WAS NO PROOF THAT THE CAPITALIZATION WAS COMPLETED BY THE END OF THE F.Y., THE ASSESSING OFFICER HELD THAT NO DEPRECIATION WAS WARRANTED. I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 35 28. ON APPEAL, THE CIT(A) OBSERVED THAT THE ASSESSEE HAD RENOVATED THE INTERNATIONAL CONVENTION CENTRE BY WAY OF REPAIRS AS WELL AS ADDING CERTAIN NEW AREA UNDER CONSTRUCTION. ACCORDING TO THE CIT(A), THE CONVENTION CENTRE WAS ESTABLISHED IN THE YEAR 1997 AND THE REPAIRS INCLUDED CHANGING THE FLOORING, CEILING, PANELING, TOILET RENOVATION, CHANGING DISCOLOURED FLOOR TILES ETC. FOR WHICH TOTAL EXPENDITURE INCURRED DURING THE YEAR WAS RS.9,65,40,415/-; OUT OF WHICH RS.7,13,89,107/- WAS CLAIMED AS REVENUE EXPENDITURE AND RS.2,51,51,3087- WAS CAPITALIZED ON ACCOUNT OF EXTENSION OF LOBBY, WALK AREA AND FURNITURE, WHICH WAS THE PART OF NEW CONSTRUCTION. THE CIT(A) NOTICED THAT THE T OTAL AREA OF CONVENTION CENTRE WAS 56000 SQ.FT. AND IF THE ENTIRE REPAIRS COST OF RS.7,13,89,107/- IS CONSIDERED, THE COST PER SQUARE FEET WORKS OUT TO RS.1,274/-. IT WAS FURTHER SEEN THAT THE TOTAL EXPENSES INCURRED ON RENOVATION IS AS UNDER:- FINANCIAL YEAR AMOUNT 2009-10 RS.1,16,66,961/- 2010-11 RS.7,13,89,107/- 2011-12 RS.1,70,51,054/- FOR THE F.Y.2009-10 AND 2010-11, THE CIT(A) OBSERVED THAT THE TOTAL AMOUNT SPENT WAS RS.8,30,56,068/- AND FOR THE A.Y. 2010-11 WHICH IS RELEVANT TO F.Y 2009-10, THE AMOUNT SPENT FOR A SUM OF RS. 1,16,66,961 /- WAS ALLOWED AS REVENUE EXPENDITURE, BUT FOR THE A.Y. 2011-12, THE AMOUNT OF RS.7,13,89,107/- WAS DISALLOWED. BEFORE THE CIT(A), THE ASSESSEE COUNTERED BOTH THE LOGIC OF THE ASSESSING OFFICER THAT THE TOTAL COST OF ORIGINAL ASSET WAS RS.9.58 CRORES AND NOW THE TOTAL COST OF RENOVATION WAS RS. 8.30 CRORES BY RELYING ON THE JUDGMENT OF I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 36 THE KARNATAKA HIGH COURT IN THE CASE OF CIT & ORS. VS. MAC CHARLES (INDIA) LTD. (2015) (113 DTR 253). 28.1 BEFORE THE CIT(A), THE ASSESSEE EXPLAINED THAT WHILE THE INTERNATIONAL STANDARD FOR THE COST OF RENOVATION IS OF THE ORDER OF RS.4500 TO RS.5000, BUT THE ASSESSEE HAS INCURRED ONLY RS.1274 PER SQ. FT. THE CIT(A) AGREED WITH THE CONTENTION OF THE ASSESSEE THAT THE COST ON RENOVATION WAS INCURRED AFTER 12 YEARS BECAUSE THERE HAS BEEN SUBSTANTIAL LAPSE OF TIME AND THERE WAS SUBSTANTIAL INCREASE IN PRICE OF CIVIL CONSTRUCTION AND THE COST OF MATERIALS ETC. HENCE, ACCORDING TO THE CIT(A), TAKING THIS YARDSTICK BY THE ASSESSING OFFICER ON REPAIRS AND RENOVATION COST IS APPROXIMATELY AS MUCH AS THE COST OF ORIGINAL ASSET, HAS GOT NO RELEVANCE IN TREATING THIS EXPENSES AS CAPITAL EXPENDITURE. 28.2 AS REGARDS THE NATURE OF EXPENDITURE ON REPAIRS AND MAINTENANCE WHETHER THE SAME SHOULD BE TREATED AS CAPITAL EXPENDITURE OR REVENUE EXPENDITURE, THE CIT(A) RELIED ON THE JUDGMENT OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT & ORS. VS. MAC CHARLES (INDIA) LTD. (2015) (113 DTR 253) WHEREIN IT WAS HELD THAT 'IT IS CATEGORICALLY STATED IN THE ASSESSMENT ORDER, THAT THE ASSESSEE-COMPANY THOUGH NOT CREATED ANY EXTRA ROOM CAPACITY OR ANY EXTRA FLOOR SPACE BUT, THE VOLUME OF EXPENDITURE INCURRED WHEN CONSIDERED TO PROPORTION OF THE TOTAL COST OF THE BUILDINGS, IT WILL HAVE TO BE TREATED ONLY AS A CAPITAL EXPENDITURE GIVING ENDURING BENEFIT TO THE ASSESSEE. FURTHER, THE ASSESSEE THOUGH NOT CREATED ANY I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 37 EXTRA SPACE BUT BY REPLACING THE FLOORING, THE FALSE ROOFING, FURNITURE, CARPETS, THE REFURBISHING OF THE ROOMS IN TUNE WITH THE INTERNATIONAL STANDARDS OF 'MERIDIAN SA', THE ASSESSEE-COMPANY DEFINITELY DERIVED AN ENDURING BENEFIT BY AN UPWARD REVISION OF THE EXISTING TARIFFS FOR THE HOTEL ROOMS AND THE UPWARD REVISION OF THE CHARGES FOR VARIOUS OTHER SERVICES RENDERED AND ATTRACTING MORE NUMBER OF INTERNATIONAL CUSTOMERS. MERELY BECAUSE THE INCOME OF THE HOTEL HAS INCREASED, IT DOES NOT NECESSARILY FOLLOW IT IS BECAUSE OF THE REFURNISHING OR REPAIR WORK DONE TO THE HOTEL ROOMS. THAT MAY BE ONE OF THE FACTOR. THE REAL TEST IS WHETHER ALL THOSE ACTS CONSTITUTE REPLACING THE EXISTING ASSET. THE EXISTING ASSET IS THE HOTEL BUILDING AND ITS ROOMS. WHEN NO EXTRA FLOORING SPACE OR EXTRA ROOM CAPACITY IS ADDED ON ACCOUNT OF SUCH REPAIRS, IT CANNOT BE SAID THAT A NEW ASSET HAS COME INTO EXISTENCE. ALL THESE REPAIRS ARE DONE TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET IN THE COURSE OF REPAIRS. IF THEY HAVE UPGRADED THE FACILITIES TO INTERNATIONAL STANDARDS, THEN THAT WOULD NOT CONSTITUTE A NEW ASSET. THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE EXPENDITURE INCURRED TOWARDS REPAIRS AND REPLACEMENT OF OLD PARTS WOULD BE IN THE NATURE OF REVENUE EXPENDITURE AND NOT CAPITAL EXPENDITURE.' 28.3 ACCORDING TO THE CIT(A), THE KARNAT AKA HIGH COURT HAS DISCUSSED BOTH JUDGMENTS OF THE APEX COURT WHICH HAVE BEEN RELIED UPON BY THE A.O. I.E. THE CASE OF BALLIMAL NAVAL KISHORE VS. CIT(1997) 138 CTR (SC) 284 AS WELL AS CIT VS. SARAVANA SPG. MILLS PVT. LTD. (2007) 293 ITR 201 (SC). IT HAS BEEN ELABORATED I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 38 THAT IN BALLIMAL NAVAL KISHORE CASE WHAT THE ASSESSEE DID WAS NOT ONLY MERE REPAIRS, BUT RENOVATION OF THE ASSET BY INSTALLING NEW MACHINERY, NEW FURNITURE, NEW SANITARY FITTINGS AND NEW ELECTRICAL WIRING BESIDES EXTENSIBLE REPAIRING THE STRUCTURE OF THE BUILDING. IN THAT CONTEXT, IT WAS HELD THAT BY NO STRETCH OF IMAGINATION, CAN IT BE SAID THAT THE SAID REPAIRS QUALIFIERS 'CURRENT REPAIRS'. IT WAS A CASE OF TOTAL RENOVATION AND THUS, IT WAS TREATED AS CAPITAL IN NATURE. 28.4 IN THE CASE OF SARAVANA SPINNING MILLS' CASE - IN THE BALANCE SHEET OF THE ASSESSEE, THE EXPENDITURE WAS SHOWN TO HAVE BEEN INCURRED FOR PURCHASE OF A NEW ASSET. IN THAT CONTEXT, IT WAS HELD THAT EACH MACHINE IN SEGMENT HAS AN INDEPENDENT ROLE TO PLAY IN THE MILL AND THE OUT PUT OF EACH DIVISION IS DIFFERENT FROM THE OTHER. 'REPAIRS' IMPLIES THE EXISTENCE OF A PART OF THE MACHINE WHICH HAS MALFUNCTION. THE TEXTILE PLANT CONSISTS OF 25 MACHINES. ONE OF SUCH MACHINES IS THE RING FRAME AND THIS MACHINERY IS REPLACED BY A NEW MACHINES. THEREFORE, IT WAS REVENUE EXPENDITURE INCURRED FOR REPLACEMENT OF THE NEW MACHINE WOULD NOT COME WITHIN THE MEANING OF THE WORD 'CURRENT REPAIRS'. FURTHER, ACCORDING TO THE CIT(A), THE BASIC TEST TO FIND OUT AS PRESCRIBED BY THE HON'BLE APEX COURT, AS TO WHAT WOULD CONSTITUTE 'CURRENT REPAIRS' IS THAT THE EXPENDITURE MUST HAVE BEEN INCURRED TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET AND THE OBJECT OF THE EXPENDITURE MUST NOT TO BRING A NEW ASSET INTO EXISTENCE NOR TO OBTAIN A NEW ADVANTAGE. HOWEVER, IN THIS CASE, ACCORDING TO THE CIT(A), IT IS AMPLY CLEAR THAT THE ASSESSEE DOES NOT CREATE ANY EXTRA FLOOR SPACE AND THE EXISTING ASSET IS I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 39 THE TOTAL BUILDING AND ITS ROOMS INCLUDING THE CONVENTION HALL ETC. AND, WHEN NO EXTRA FLOORING SPACE OR EXTRA ROOM CAPACITY IS ADDED ON ACCOUNT OF SUCH REPAIRS, IT CANNOT BE HELD THAT A NEW ASSET HAS COME INTO EXISTENCE. THE ANALYSIS MADE BY THE A.O. THAT THE EXPENSES INCURRED WOULD NOT FALL UNDER THE CATEGORY OF 'CURRENT REPAIRS' BY PLACING RELIANCE ON THE AFORESAID TWO RATIOS PRONOUNCED BY THE APEX COURT SINCE HAS BEEN DISCUSSED ON THE SETS OF FACTS BY THE HON'BLE KARNATAKA HIGH COURT AND HAS FOUND THE RATIO OF THE APEX COURT AS NOT APPLICABLE. SINCE THE INSTANT TACT OF THIS CASE IS IDENTICAL, THE RATIO PRONOUNCED BY THE HON'BLE KARNATAKA HIGH COURT (SUPRA) IS SQUARELY APPLICABLE TO THIS CASE. THUS THE CIT(A) HELD THAT THE EXPENSES INCURRED BY THE ASSESSEE ON REPAIRS ETC. FALLS UNDER THE HEAD OF 'CURRENT REPAIRS', AND AS SUCH, ALLOWABLE AS REVENUE EXPENDITURE. THUS, THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER ON THIS GROUND. 29. THE LD. DR SUBMITTED THAT THE ASSESSEE INCURRED AN EXPENDITURE OF RS.7,13,89,107/- TO CARRY ON THE MASSIVE RENOVATION OF 5 STAR HOTEL. THE LD. DR ALSO SUBMITTED THAT THE ASSESSEE HAS GROUPED REPAIRS AND MAINTENANCE FOR SEPARATION FROM RENOVATION AND REFURBISHMENT. ACCORDING TO THE LD. DR, THE ASSESSEE ENTIRELY RENOVATED THE INTERNATIONAL CONVENTION CENTRE AND IT WAS CLOSED DURING THE PERIOD. THE TOTAL ORIGINAL COST INCURRED FOR ICC WAS RS. 9.58 CRORES AND THE TOTAL RENOVATION EXPENSES INCURRED FOR ICC WAS RS. 8.30 CRORES. HENCE, THERE WAS A CHANGE OF TOTAL LOOK OF THE ICC WHICH RESULTED IN ADDED I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 40 ADVANTAGE. ACCORDING TO THE LD. DR, SECTION 31(A)(II) OF THE I.T. ACT IN RESPECT OF REPAIRS IN THE PREMISES USED FOR THE PURPOSE OF BUSINESS OR PROFESSION, THE AMOUNT PAID BY THE ASSESSEE ON ACCOUNT OF CURRENT REPAIRS TO THE PREMISES IS TO BE ALLOWED AS REVENUE EXPENDITURE. EXPLANATION TO SECTION 31 CLARIFIES THAT THE AMOUNT PAID ON ACCOUNT OF CURRENT REPAIRS REFERRED TO IN SUB-CLAUSE (II) OF CLAUSE (A) OF SECTION 31 SHALL NOT INCLUDE ANY EXPENDITURE IN THE NATURE OF CAPITAL EXPENDITURE. THE PROVISIONS OF SECTION 31 WILL BE APPLICABLE ONLY WHEN THE PREMISES ARE USED FOR THE PURPOSE OF BUSINESS OR PROFESSION. ACCORDING TO THE LD. DR, THE ASSESSEE HAS INCURRED EXPENDITURE ON MODIFICATION AND RENOVATION OF ICC IN A BIG WAY. THE EXPENDITURE WAS INCURRED BY THE ASSESSEE NOT FOR THE PURPOSE OF PRESERVATION OR MAINTENANCE OF ALREADY EXISTING ASSET BUT IT WAS INCURRED FOR THE PURPOSE OF RENOVATION, REFURBISHMENT AND IMPROVEMENT OF ICC. HENCE, IT CANNOT BE CONSIDERED AS CURRENT REPAIRS U/S. 31 OF THE ACT. 30. THE LD. AR RELIED ON A CATENA OF CASE LAWS TO BUTTRESS THE ASSESSEE'S STAND. HE ALSO SINGLED OUT THE DECISION OF THE HON'BLE HIGH COURT OF MADRAS IN THE CASE OF M/S. OOTY DASAPRAKASH (237 ITR 902] AS IT PERTAINS TO A HOTEL WHEREIN RENOVATIONS AND REPLACEMENT OF FITTINGS WAS MADE. THE A.R. ARGUED THAT THE FACTS AND THIS CASE ARE SQUARELY COVERED BY THE SAID DECISION. THE LD. AR SUBMITTED THAT THE EXPENDITURE INCURRED WAS FOR PRESERVING AND MAINTAINING AN ALREADY EXISTING ASSET . THE LD. AR FILED A STATEMENT SHOWING THE VARIOUS EXPENDITURE INCURRED WHICH CONFIRM THAT THE MAJOR PORTION OF THE EXPENDITURE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 41 WAS FOR REPLACING THE FADED TILES, WORN OUT GRANITE FLOORINGS, FLOOR TILES, BATHROOM TILES, PANELS, ECHO SYSTEM, SOUND PROOFING PLACE, FADED AND DISCOLOURED BATHROOM FITTINGS, CHANGING THE DAMAGED AND LEAKING ELECTRICAL CABLES ETC. THE LD. AR SUBMITTED THAT ALL THESE WORKS DOES NOT BRING ANY ADDITIONAL ADVANTAGE EXCEPT FOR BRINGING THE ASSET INTO ITS ORIGINAL CONDITION AND TO MAKE IT ACCEPTABLE TO THE CUSTOMERS. THUS, IT WAS SUBMITTED THAT ALL THESE FACTS CONFIRM THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR THE RENOVATION AND REPAIR EXPENSES ARE REVENUE EXPENDITURE. 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. REGARDING THE ISSUE OF 'CURRENT REPAIRS' UNDER SECTION 31 OF THE ACT, THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS (P) LTD. (2007) 293 ITR 201HAD LAID DOWN THAT IN ORDER TO DETERMINE WHETHER A PARTICULAR EXPENDITURE AMOUNTS TO 'CURRENT REPAIRS' THE TEST IS 'WHETHER THE EXPENDITURE IS INCURRED TO 'PRESERVE AND MAINTAIN' AN ALREADY EXISTING ASSET AND NOT TO BRING A NEW ASSET INTO EXISTENCE OR TO OBTAIN A NEW ADVANTAGE. FOR 'CURRENT REPAIRS' DETERMINATION, WHETHER EXPENDITURE IS REVENUE OR CAPITAL IS NOT THE PROPER TEST. IT WAS HELD THAT THE ENTIRE TEXTILE MILL MACHINERY CANNOT BE REGARDED AS A SINGLE ASSET, REPLACEMENT OF PARTS OF WHICH CAN BE CONSIDERED TO BE FOR MERE PURPOSE OF 'PRESERVING OR MAINTAINING' OF ASSET. IT WAS HELD THAT ALL MACHINES PUT TOGETHER CONSTITUTE THE PRODUCTION PROCESS AND EACH SEPARATE MACHINE IS AN INDEPENDENT ENTITY AND REPLACEMENT OF SUCH AN OLD MACHINE WITH A NEW ONE I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 42 WOULD CONSTITUTE BRINGING INTO EXISTENCE OF A NEW ASSET IN PLACE OF THE OLD ONE AND NOT REPAIR OF THE OLD AND EXISTING MACHINE. ALSO, A NEW ASSET IN A TEXTILE MILL IS NOT ONLY FOR TEMPORARY USE. RATHER IT GIVES THE PURCHASER AN ENDURING BENEFIT OF BETTER AND MORE EFFICIENT PRODUCTION OVER A PERIOD OF TIME. THUS, REPLACEMENT OF ASSETS IN THE INSTANT CASE CANNOT AMOUNT TO 'CURRENT REPAIRS'. THE DECISION IN SARAVANA MILLS (SUPRA) CASE CLEARLY MENTIONED THAT REPLACEMENT OF A DERELICT RING FRAME BY A NEW ONE DOES NOT AMOUNT TO 'CURRENT REPAIRS'. FURTHER IN THE CASE OF BALLIMAL NAVAL KISHORE VS. CIT (224 ITR 414), THE SUPREME COURT HELD THAT A NEW ASSET OR NEW/DIFFERENT ADVANTAGE CANNOT AMOUNT TO 'CURRENT REPAIRS', WHICH WAS SUBSEQUENTLY APPROVED IN THE CASE OF SARAVANA MILLS (SUPRA) CASE. FOR THESE REASONS, THE EXPENDITURE MADE BY THE ASSESSEE CANNOT BE ALLOWED AS A DEDUCTION UNDER SECTION 31 OF THE ACT. THE JUDGMENT IN THE CASE OF SARAVANA MILLS (SUPRA) CASE MENTIONED TWO EXCEPTIONS IN WHICH REPLACEMENT COULD AMOUNT TO CURRENT REPAIRS, NAMELY: 'WHERE OLD PARTS ARE NOT AVAILABLE IN THE MARKET AS IN THE CASE OF CIT V. MAHALAKSHMI TEXTILE MILLS AIR 1968 SC 101), OR WHERE OLD PARTS HAVE WORKED FOR 50-60 YEARS.' 31.1 IN THE INSTANT CASE, THE ASSESSEE HAS NOT CLAIMED ANY OF THE ABOVE STATED EXCEPTIONS. THE SARAVANA MILLS CASE ALSO RESTRICTS THE SCOPE OF 'CURRENT REPAIRS' TO REPAIRS MADE TO MACHINERY, PLANT AND/OR FURNITURE. IN THE PRESENT CASE, THE ASSESSEE FULLY RENOVATED INTERNATIONAL CONVENTION CENTRE. IF SUCH RENOVATION I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 43 WORK IS HELD TO BE TREATED AS CURRENT REPAIRS, SECTION 31(I) WILL BE COMPLETEDLY REDUNDANT AND ABSURDITY WILL CREEP IN BECAUSE REPAIR IMPLIES EXISTENCE OF A PART OF THE MACHINE OR BUILDING WHICH HAS MALFUNCTIONED OR DAMAGED WHICH IS IMPOSSIBLE IN THE CASE OF SUCH REPLACEMENT. HENCE, THIS REPLACEMENT EXPENDITURE CANNOT BE SAID TO BE 'CURRENT REPAIRS'. 31.2 GIVEN THAT SECTION 31 OF THE ACT IS NOT APPLICABLE TO THE SAID EXPENDITURE OF THE ASSESSEE, THE NEXT ISSUE IS WHETHER IT CAN BE CONSIDERED 'REVENUE EXPENDITURE' OF THE NATURE ENVISAGED UNDER SECTION 37 OF THE ACT. THE SARAVANA MILLS (SUPRA ) CASE HOLDS THAT EXPENDITURE IS DEDUCTIBLE UNDER SECTION 37 ONLY IF IT (A) IS NOT DEDUCTIBLE UNDER SECTIONS 30-36, (B) IS OF A REVENUE NATURE, (C) IS INCURRED DURING THE CURRENT ACCOUNTING YEAR AND (D) IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. WE ARE SATISFIED THAT THE ASSESSEES' EXPENDITURE SATISFIES REQUIREMENTS (A), (C) AND (D) AS STATED ABOVE. THE DISPUTE IS WITH RESPECT TO THE NATURE OF EXPENDITURE, THAT IS, WHETHER IT IS REVENUE OR CAPITAL IN NATURE. 31.3 WE ARE OF THE OPINION THAT THE EXPENDITURE OF THE ASSESSEE IN THIS CASE IS CAPITAL IN NATURE AND THERE IS SUFFICIENT JUDICIAL PRECEDENT TO SUPPORT THIS VIEW. IN THE CASE OF TRAVANCORE COCHIN CHEMICALS LTD. VS . CIT (2 SCC 20), THE COURT HELD THAT EXPENDITURE IS OF A CAPITAL NATURE WHEN IT AMOUNTS TO AN ENDURING ADVANTAGE FOR THE BUSINESS AND REPAIR IS DIFFERENT FROM BRINGING A NEW ASSET FOR I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 44 THE BUSINESS. FURTHER, IN LAKSHMIJI SUGAR MILLS (P) CO. VS. CIT (AIR 1972 SC 159) IT HAS BEEN HELD BY THE COURT THAT BRINGING INTO EXISTENCE A NEW ASSET OR AN ENDURING BENEFIT FOR THE ASSESSEE AMOUNTS TO CAPITAL EXPENDITURE. WE HAVE ALREADY EXPLAINED WHY REPLACEMENT, IN THIS CASE, AMOUNTS TO BRINGING INTO EXISTENCE A NEW ASSET AND ALSO AN ENDURING BENEFIT FOR THE ASSESSEE. IT IS CLEARLY SEEN THAT EXPENDITURE OF THE ASSESSEE IS NOT OF A REVENUE NATURE AND THUS, CANNOT BE CLAIMED AS A DEDUCTION UNDER SECTION 37 OF THE ACT. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS REJECTED. 32. THE CROSS OBJECTION RAISED BY THE ASSESSEE IN C.O. NO.13/COCH/2015 IS ONLY SUPPORTIVE OF THE ORDER OF THE CIT(A). SINCE WE HAVE ALLOWED THE APPEAL OF THE REVENUE, THE CROSS OBJECTION FILED BY THE ASSESSEE HAS BECOME INFRUCTUOUS AND IS DISMISSED AS INFRUCTUOUS. 33. IN THE RESULT, THE APPEALS IN ITA NOS. 42-43/COCH/2015 FILED BY THE ASSESSEE ARE DISMISSED. THE APPEAL FILED BY THE ASSESSEE IN ITA NO.44/COCH/2015 AND 334/COCH/2015 ARE PARTLY ALLOWED. THE APPEAL OF THE REVENUE IN ITA NO. 335/COCH/2015 IS ALLOWED. THE CROSS OBJECTION FILED BY THE ASSESSEE IN C.O. NO.13/COCH/2015 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 26 TH OCTOBER, 2018. SD/- SD/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 26 TH OCTOBER, 2018 GJ I.T.A. NOS.42 TO 44/C/2015 & 334&335/COCH/2015 & C.O. NO. 13/COCH/2015 45 COPY TO: 1. M/S. MFAR HOTELS AND RESORTS LTD., N.H. BYEPASS, KUNDANOOR JN. MARADU P.O., KOCHI-682 304 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-1(2), KOCHI. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-I, KOCHI. 4. THE COMMISSIONER OF INCOME-TAX(APPEALS-II, KOCHI. 5. THE PR. COMMISSIONER OF INCOME-TAX, KOCHI. 6. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 7. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN