M/s. Ceebros Hotels (P) Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1859/CHNY/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90571 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 17-10-2012
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTHJCIT
• Assessee Lawyers: A S SRIRAMAN
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 147

Judgement Text

, C , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . , . !' , # $ BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NO.1859/MDS/2012 ( / ASSESSMENT YEAR : 2007-08) M/S.CEEBROS HOTELS (P) LTD ., NO.19/1,3 RD CROSS STREET, R.A.PURAM, CHENNAI 600 028. V. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), CHENNAI-34. PAN AAACC 3051 E (PETITIONER) ( %&'( / RESPONDENT ) / PETITIONER BY : SHRI A.S.SRIRAMAN, ADVOCATE / RESPONDENT BY : SHRI A.V.SREEKANTH,JCIT D.R / DATE OF HEARING : 19.05.2015 /DATE OF PRONOUNCEMENT : 03.07.2015 ) / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED B Y THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-III DATED 30.08.2012 IN ITA. NO.1859/MDS/2012 2 ITA NO.478/11-12/A.III PASSED U/S 143(3) READ WITH SECTIONS 147 & 250 OF THE ACT. 2.1 THE ASSESSEE HAS RAISED FOUR CONCISED GROUNDS I N ITS APPEAL AND THEY ARE EXTRACTED HEREIN BELOW FOR ADJUDICATIO N:- 1) THE LD. CIT (A) ERRED IN SUSTAINING THE REASSES SMENT FRAMED U/S.143(3) R.W.S. 147 OF THE ACT ON THE REJECTION O F THE GROUNDS CHALLENGING THE VALIDITY OF THE SAID REASSESSMENT W ITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. 2) THE LD. CIT (A) ERRED IN SUSTAINING THE DISALLO WANCE OF ` 1,79,600/- BEING THE EXPENSES NOTIONALLY QUANTIFIED ON THE APPLICATION OF SECTION 14A OF THE ACT IN THE COMPUT ATION OF TAXABLE TOTAL INCOME WITHOUT ASSIGNING PROPER REASO NS AND JUSTIFICATION. 3) THE LD. CIT (A) ERRED IN SUSTAINING THE DISALLOW ANCE OF ` 4,81,971/- BEING THE ANNUAL MAINTENANCE CHARGES INC URRED AND CLAIMED AS DEDUCTION IN THE COMPUTATION OF TAXABLE TOTAL INCOME WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. ITA. NO.1859/MDS/2012 3 4) THE LD. CIT (A) ERRED IN PARTLY SUSTAINING THE DISALLOWANCE OF EXPENSES INCURRED ON REPLACEMENT OF GENERAL ITEMS, KITCHEN UTENSILS AS WELL AS REPAIRS TO BUILDINGS, PLANT & M ACHINERY, ELECTRICAL AND OFFICE EQUIPMENTS TO THE EXTENT OF ` 11,40,748/- OUT OF ` 17,78,686/- AS CAPITAL EXPENDITURE IN THE COMPUTATI ON OF TAXABLE TOTAL INCOME WITHOUT ASSIGNING PROPER REASO NS AND JUSTIFICATION. 2.2. THE LD. A.R. DID NOT PRESS THE FIRST AND THIRD GROUND; THEREFORE THOSE GROUNDS ARE DISMISSED AS SUCH. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CON STRUCTION & HOTEL INDUSTRY, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007-08 ON 31.10.2007 DECLARING ITS INCOME AS ` 3,96,55,366/-. INITIALLY THE RETURNED WAS PROCESSED U/S. 143(1) OF THE ACT AND SUBSEQUENTLY THE CASE WAS TAKEN UP FOR SCRUTINY AND ORDER WAS PASSED U/S.143(3) R.W.S 147 ON 30.12.2011 WHEREIN T HE LD. ASSESSING OFFICER ALONG WITH CERTAIN ADDITIONS MADE DISALLOWANCE ITA. NO.1859/MDS/2012 4 U/S.14A OF THE ACT FOR ` 1,79,600/- AND TREATED CERTAIN REVENUE EXPENDITURE AS CAPITAL IN NATURE FOR ` 17,78,686/-. 4.1. GROUND NO.1. DISALLOWANCE U/S.14A FOR ` 1,79,600/- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD. ASSESSING OFFICER OBSERVED THAT THE ASSESSEE COMPAN Y HAD MADE INVESTMENTS FOR AN AMOUNT OF ` 2,16,03,300/-, THE INCOME RESULTING FROM THE SAME BEING NON-TAXABLE. THE LD. ASSESSING OFFICER WAS FURTHER OF THE VIEW THAT THERE WERE MINOR EXPENDITU RES INCURRED BY THE ASSESSEE FOR MAINTAINING THESE INVESTMENTS WHICH OU GHT TO BE DISALLOWED. THEREAFTER THE LD. ASSESSING OFFICER AR RIVED AT THE AMOUNT TO BE DISALLOWED IN THE FOLLOWING MANNER:- FROM THE P&L A/C, IT COULD BE VERIFIABLE THAT THERE ARE NO EXPENDITURE DIRECTLY ATTRIBUTABLE TO THE INVESTMENTS. INTEREST OUTGO FOR THE YEAR EXCLUDING BANK CHARGES AND COMMISSION IS RS.43,78,7 46/-. BASED ON THE VALUES PROVIDED, THE DISALLOWANCE U/S.14A IS COMPUT ED APPLYING THE FORMULA BY WHICH THE INTEREST COST BEARS TO THE INV ESTMENTS IN PROPORTION TO THE TOTAL ASSETS. THE INTEREST OUTO FOR THE YEAR I S RS.43,78,746/-, THE AVERAGE VALUE OF INVESTMENTS IS RS.2,16,03,500/- A ND THE AVERAGE VALUE OF TOTAL ASSETS IS RS.52,67,03,244/- ACCORDINGLY, THE QUANTUM OF DISALLOWANCE RS.1,79,600/-. SINCE THE INVESTMENT I N RELATED ENTERPRISES IS DORMANT, IT IS CLEAR THAT THERE CANNOT BE ANY MANAG ERIAL OR ADMINISTRATIVE ITA. NO.1859/MDS/2012 5 COST ENTANGLED TO THIS INVESTMENT ACTIVITY. THEREF ORE, THE DISALLOWANCE IS RESTRICTED TO RS.1,79,600/- ONLY. 4.2 ON APPEAL, LD. CIT (A) CONFIRMED THE ORDER OF THE LD. ASSESSING OFFICER BY OBSERVING AS UNDER:- 5.2. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE THE SUBMISSIONS OF THE LD. A.R. I HAVE ALSO GONE THROUGH THE DECISION S RELIED ON BY THE LD. A.R. THE A.O HAS CLEARLY DISCUSSED THE FACTS OF THE CASE BEFORE DISALLOWING RS.1,79,600/- U/S.14A. HE FOUND THAT AVERAGE INVES TMENT OF RS.2,16,03,500/- WAS IN TAX-FREE TERRITORY. THE AP PELLANT ALSO DEBITED RS.43,78,746/- TO THE PROFIT AND LOSS ACCOUNT. THE APPELLANT HAS NOT DISPUTED THE FACTS. IT HAS ALSO NOT ESTABLISHED THAT NO INT EREST-BEARING FUND WAS UTILIZED FOR MAKING TAX-FREE INVESTMENTS. HENCE, TH E A.O HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 14A. THE HONBLE BOMBAY H IGH COURT IN M/S.GODREJ BOYCE MANUFACTURING CO. LTD VS. DCIT 328 ITR 81 (B OM.) HAS HELD RULE 8D IS APPLICABLE FROM A.Y.2008-09 ONWARDS. BUT FOR AS SESSMENT YEARS WHERE RULE 8D WAS NOT APPLICABLE, THE A.O CAN APPLY SECTI ON.14A ON A REASONABLE BASIS. IN VIEW OF THE FACTUAL AND LEGAL POSITIONS, HE HAS RIGHTLY DISALLOWED INTEREST OF RS.1,79,600/- ON PROPORTIONATE BASIS. T HE GROUND IS THEREFORE, DISMISSED. ITA. NO.1859/MDS/2012 6 4.3 THE LD. A.R. ARGUED BEFORE US BY STATING THAT DURING THE RELEVANT ASSESSMENT YEAR THE ASSESSEE HAD NOT EARNE D ANY INCOME THAT IS EXEMPT FROM TAX AND THEREFORE PROVISIONS OF SECTION 14A HAVE NO APPLICATION DURING THE RELEVANT ASSESSMENT YEAR. HE RELIED UPON THE DECISION OF THE CO-ORDINATE BENCH OF THE CHENNA I TRIBUNAL IN ITA NO.1717/MDS./2013 VIDE ORDER DATE 31.07.2014. THE L D. D.R ON THE OTHER HAND ARGUED IN SUPPORT OF THE ORDERS OF THE R EVENUE. 4.4 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. ON PERUSING THE BAL ANCE SHEET OF THE ASSESSEE COMPANY, WE FIND THAT THE ASSESSEE HAS EQU ITY SHARE CAPITAL OF ` 2,25,00,000/- AND RESERVES OF ` 33,81,93,560/-. FROM THIS IT IS OBVIOUS THAT THE ASSESSEE HAS OWN FUNDS FROM WHI CH SUCH INVESTMENTS ARE MADE BECAUSE INVESTMENTS MADE BY TH E ASSESSEE COMPANY IS ONLY ` 2,16,03,300/-. THEREFORE, IT CANNOT BE PRESUMED THAT THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE FOR MAKING SUCH INVESTMENTS AS HELD BY THE LD. ASSESSING OFFICER BE CAUSE NO MATERIAL ITA. NO.1859/MDS/2012 7 EVIDENCE IS BROUGHT TO OUR KNOWLEDGE TO ESTABLISH T HAT THE ASSESSEE COMPANY HAD MADE THE INVESTMENTS WHEN IT DID NOT HA VE SUFFICIENT SHARE CAPITAL AND RESERVES TO COVER UP THE INVESTME NTS MADE. IN THIS SITUATION, WE ARE OF THE VIEW THAT THE PROVISIONS O F SECTION 14A CANNOT BE INVOKED. ACCORDINGLY, WE HEREBY DIRECT THE LD. ASSESSING OFFICER TO DELETE THE ADDITION OF ` 1,79,600/- MADE BY THE REVENUE INVOKING THE PROVISIONS OF SECTION14A OF THE ACT. 5.1. GROUND NO.2 DISALLOWANCE OF EXPENDITURE BEING CAPITAL IN NATURE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT W AS NOTICED BY THE LD. ASSESSING OFFICER THAT THE ASSESSEE HAD TREATED CERTAIN EXPENDITURE AS REVENUE, THOUGH IT WAS CAPITAL IN NA TURE AS DETAILED BELOW SL. NO PARTICULARS AMOUNT 1 GENERAL ITEMS 2,11,020 2. REPLACEMENT OF KITCHEN UTENSILS 1,40,666 3 FURNITURE 11,40,748 4 BUILDING REPAIRS 1,65,238 5 REPAIRS OF PLANT AND MACHINERY 1,46,800 6 REPAIRS OF ELECTIRCALS 1,12,297 7 OFFICE MAINTENANCE 33,672 TOTAL 19,49,841 ITA. NO.1859/MDS/2012 8 THEREFORE THE LD. ASSESSING OFFICER DISALLOWED THE AFORESAID EXPENDITURE AS DEDUCTION HOLDING IT TO BE IN THE FI ELD OF CAPITAL EXPENDITURE, HOWEVER HE ALLOWED DEPRECIATION ON THE SAME AMOUNTING TO ` 1,71,155/- AND THUS DISALLOWED THE NET AMOUNT OF ` 17,78,686/- AS DEDUCTION. 5.2 ON APPEAL THE LD. CIT (A) TREATED THE EXPEND ITURE DISALLOWED BY THE LD. ASSESSING OFFICER AS REVENUE EXPENDITURE, E XCEPT FURNITURE AND TEAK WOOD, VALUE OF WHICH AGGREGATED TO RS.11,4 0,748/- BY HOLDING IT TO BE CAPITAL EXPENDITURE. THE RELEVANT PARA OF THE ORDER IS REPRODUCED HEREIN BELOW FOR REFERENCE:- 7. THE NEXT ISSUE IS DISALLOWANCE OF CERTAIN EXPE NSES AMOUNTING TO RS.17,78,686/- AS CAPITAL IN NATURE. THE A.O DISAL LOWED THE EXPENSES INCURRED ON REPLACEMENT OF GENERAL ITEMS, KITCHEN U TENSILS AS WELL AS REPAIRS TO BUILDINGS, REPAIRS TO PLANT AND MACHINERY, REPAI RS TO ELECTRICAL AND OFFICE MAINTENANCE AS CAPITAL EXPENDITURE. THE LD. A.R. C ONTENDED THAT HAVING NOT ESTABLISHED THE ENDURING BENEFIT ACHIEVED ON TH E INCURRING OF SUCH EXPENDITURE AS WELL AS HAVING NOT ESTABLISHED CREAT ION OF ANY ASSET ON THE FACTS OF THE CASE, REJECTION OF THE CLAIM OF REVENU E EXPENSES WAS ERRONEOUS ITA. NO.1859/MDS/2012 9 AND INVALID. RELIANCE IS PLACED ON THE DECISION OF MADRAS HIGH COURT IN THE CASE REPORTED IN 114 ITR 210 AND 237 ITR 902. 7.1 I HAVE GONE THROUGH THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE LD. A.R. I HAVE ALSO GONE THROUGH THE DECISIONS REL IED ON BY THE LD. A.R. I HAVE ALSO GONE THROUGH THE TABLE AT PARA 5.1 OF THE ASSESSMENT ORDER WHERE THE ASSESSING OFFICER HAS GIVEN THE PARTICULARS OF THE ITEMS, THE EXPENDITURE ON WHICH WAS CLAIMED AS REVENUE EXPENDITURE. THE S AME PERTAINS TO ITS HOTELS RUN UNDER THE NAME RAINTREE. IT IS SEEN FR OM THE DETAILS THAT THEY PERTAIN TO GENERAL REPLACEMENT OF KITCHEN UTENSILS, FURNITURE AND REPAIRS OF PLANT AND MACHINERY, BUILDING, ELECTRICAL TIMES AND OFFICE MAINTENANCE. APART FROM TEAKWOOD AND LOBBY CHAIR INVOLVING EXPEN SES OF RS.11,40,748/-, THE OTHER EXPENSES TOTALING TO RS.8,09,093/- ARE OF REGULAR NATURE INCURRED IN THE NORMAL COURSE OF RUNNING HOTEL BUSINESS. TH EY HAVE NOT BROUGHT INTO EXISTENCE ANY ASSET OF ENDURING NATURE. THE SAID E XPENSES WERE INCURRED TO CARRY OUT THE HOTEL BUSINESS IN AN EFFICIENT AND SMOOTH MANNER. HENCE, THEY ARE ALLOWABLE AS REVENUE EXPENDITURE. HOWEVER, EXPENDITURE ON TEAKWOOD AND LOBBY CHAIR OF RS.11,40,748/- WOULD DE FINITELY COME UNDER THE HEAD II FURNITURE AND FITTINGS APPEARING IN NEW APPENDIX-I UNDER RULE 5 OF I.T.RULES, 1962 EFFECTIVE FROM A.Y 2006-07 ONWARDS. THE A.O IS DIRECTED TO CAPITALIZE THEM AND ALLOW DEPRECIATION @ 10% ON THE SE ITEMS. THE GROUND IS PARTLY ALLOWED. ITA. NO.1859/MDS/2012 10 5.3 THE LD. A.R. SUBMITTED BEFORE US THAT THE LO BBY CHAIRS UTILIZED IN THE HOTEL ARE REPLACED IN SHORT DURATION AND THE REFORE, IT CANNOT BE TREATED AS A CAPITAL ASSET OF THE ASSESSEE. HE FURT HER SUBMITTED THAT THE TEAK WOOD PURCHASED BY THE ASSESSEE ARE EITHER CONVERTED AS PETTY FURNITURE OR UTILIZED FOR REPAIR WORK IN THE HOTEL. HE THEREFORE PLEADED THAT THE SAME MAY BE TREATED AS REVENUE EXP ENDITURE. THE LD. D.R ON THE OTHER VEHEMENTLY ARGUED IN SUPPORT O F THE ORDERS OF THE REVENUE. 5.4 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY P ERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND MERIT IN THE CONTENTION OF THE LD. A.R. IN HOTEL INDUSTRY, THE FURNITURES THAT ARE KEPT IN THE LOBBY ARE REPLACED OCCASIONALLY IN ORDER TO CHANGE THE FACE L IFT OF THE LOBBY. THEREFORE, IT CANNOT BE CONSIDERED AS AN ASSET HELD BY THE ASSESSEE OVER A PERIOD OF TIME GIVING ENDURING BENEFIT. THE LIFE OF THE ASSET IS SHORT AND THEREFORE, IN OUR VIEW IT WOULD BE APPROP RIATE TO TREAT SUCH EXPENDITURE AS REVENUE EXPENDITURE. FURTHER, THE TE AK WOOD PURCHASED BY THE ASSESSEE ARE USED AND CONSUMED FOR VARIOUS REQUIREMENTS OF THE ASSESSEE AND THEREFORE THE SAME CANNOT BE ITA. NO.1859/MDS/2012 11 CONSIDERED AS A CAPITAL ASSET OF THE ASSESSEE. THER EFORE, WE ARE OF THE CONSIDERED VIEW THAT THIS EXPENDITURES IS IN TH E NATURE OF REVENUE EXPENDITURE AND NOT CAPITAL EXPENDITURE. ACCORDING LY, WE HEREBY DIRECT THE LD. ASSESSING OFFICER TO DELETE THE ADDI TION OF ` 11,40,748/- SUSTAINED BY THE LD. CIT (A) BY HOLDING IT AS REVEN UE EXPENDITURE. 6. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED . ORDER PRONOUNCED ON 3 RD JULY,2015. SD/- SD/- (V. DURGA RAO) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 3 RD JULY,2015. K S SUNDARAM !'#$ %$ /COPY TO: 1. PETITIONER 2. /RESPONDENT 3. &' ( /CIT(A) 4. & /CIT 5. $)* + /DR 6. *,- /GF