DCIT CEN CIR 6, MUMBAI V. B D & P HOTELS (I) P. LTD, MUMBAI

ITA 3342/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0887 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 20-07-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 20-05-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUMEET KUMAR SR
• Assessee Lawyers: B V JHAVERI
• Keywords: Depreciation; Business expenditure; Commercial expediency
• Section: 143(3)

Judgement Text

1 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI R S PADVEKAR, JM & SHRI RAJENDRA SINGH, AM ITA NOS. 3254 & 3342/MUM/2009 (ASST YEARS 2004-05 & 2005-06) THE DY COMMR OF INCOME CENTRAL CIR. 6 MUMBAI VS M/S B D & P HOTELS I P LTD LE ROYAL MERIDIEN ASCOT CENTRE NEAR HAHAR INTERNATIONAL AIRPORT ANDHERI (E) MUMBAI 99 (APPELLANT) (RESPONDENT) PAN AABCB4615J ASSESSEE BY: SHRI B V JHAVERI REVENUE BY: SHRI SUMEET KUMAR, SR AR O R D E R PER R S PADVEKAR: THESE TWO APPEALS ARE FILED BY THE REVENUE, CHALLE NGING THE IMPUGNED ORDER OF THE LD CIT(A)-IX, MUMBAI FOR THE ASSESSMEN T YEARS 2004-05 & 2005- 06 DATED 26.22.2009. AS THE ISSUE IS IDENTICAL IN B OTH THESE APPEALS, HENCE, FOR THE SAKE OF CONVENIENCE, THESE APPEALS ARE DISP OSED OFF BY THIS COMMON ORDER. 2. FIRST, WE TAKE THE APPEAL FOR THE ASSESSMENT YEA R 2004-05 IN ITA NO.3254/MUM/2009. 3. THE MAIN ISSUE IS IN RESPECT OF DELETION OF ADDI TION OF RS.13,55,855/- MADE U/S 36(I)(III) OF THE I T ACT. 2 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 4. THE FACTUAL MATRIX PERTAINING TO THE ISSUE, WHIC H REVEALES FROM THE RECORDS, ARE THAT THE ASSESSEE IS IN THE BUSINESS O F HOTELS. THE ASSESSEES CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT W AS COMPLETED U/S 143(3) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE A.O THAT THE ASSESSEE HAS GIVEN INTE REST FREE ADVANCES TO SOME OF ITS SISTER CONCERNS. THE A.O HAS NOTED THAT THE ASSESSEE HAS BORROWED FUNDS FROM ONE M/S DYNAMIX DAIRY INDUSTRIE S LTD (HEREIN AFTER REFERRED TO AS DDIL) ON WHICH INTEREST OF RS.37,81, 938/- HAS BEEN PAID AT AN AVERAGE RATE OF 9.45%. THE A.O FURTHER NOTED THA T THE FUNDS TAKEN FROM DDIL HAVE BEEN DIVERTED TO GIVE INTEREST FREE ADVAN CES OF RS.11,5,958/-. THE A.O HAS GIVEN REFERENCE TO THE SCHEUDLE-10 (ANNEX ER) TO THE BALANCE SHEET OF THE ASSESSEE AND HAS NOTED THAT THERE IS AN INCR EASE IN THE ADVANCES FROM RS. 8,11,94,306/- TO RS. 8,23,45,264/-. 4.1 THE A.O HAS FURTHER NOTED THAT THE ASSESSEE HAD MADE REPAYMENT OF INTEREST FREE LOANS OF RS. 1,31,96,718/- BY GIVING REFERENCE TO SCHEUDLE-4 OF THE BALANCE SHEET; MORE PARTICULARLY ON THE FACTS THAT CLOSING BALANCE OF UNSECURED LOANS HAS COME DOWN FROM RS. 7,24,7,359/- TO RS.5,92,10,641/-. THE A.O, THEREFORE, COME TO THE CONCLUSION THAT THE ASSESSEE HAS UTILIZED THE INTEREST BEARING FUNDS EITHER FOR MAKING INTEREST F REE ADVANCES OR REPAYMENT OF INTEREST FREE LOANS AND ACCORDINGLY DECIDED TO M AKE THE DISALLOWANCE OF INTEREST @ 9.45% ON RS. 1,43,47,676/- ( RS.11,50,95 8/- + 1,31,96,718/-) WHICH WAS WORKED OUT TO RS.13,55,855/- AND BY DISAL LOWING THE SAME, MADE AN ADDITION TO THE TOTAL INCOME OF THE ASSESSE E. THE ASSESSEE CHALLENGED THE SAID ADDITION BEFORE THE LD CIT(A) A ND FOUND FAVOUR. 4.2 THE LD CIT(A) DELETED THE ADDITION MADE BY THE A.O. NOW, THE REVENUE IS IN APPEAL HERE BEFORE US. 3 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERU SED THE RELEVANT RECORDS BEFORE US. THE ASSESSEE HAS FILED PAPER BO OK IN WHICH COPY OF THE AUDITED STATEMENT OF ACCOUNTS IS PLACED AT PAGE NOS . 1 TO 23 OF THE P/B AND COPY OF THE PROFIT & LOSS ACCOUNT FOR THE YEAR ENDE D 31.3.2004 AT PAGE NO. 11 OF THE P/B. THE LD COUNSEL FOR THE ASSESSEE AL SO RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES & POWER LTD (313 ITR 340 (BOM) TO SUPPORT THE PROPOSI TION THAT WHEN THE INVESTMENTS ARE MADE FROM THE INTEREST FREE FUNDS A VAILABLE WITH THE ASSESSEE THEN, NO DISALLOWANCE CAN BE MADE. 6 IT IS SEEN THAT THE ASSESSEE HAS DISCLOSED NET PR OFIT AFTER DEPRECIATION AT RS. 5,92,60,014/- AS COMPARED TO IMMEDIATE PRECE DING YEAR, WHICH WAS RS.47,72,283/-. IT IS ALSO SEEN THAT THE ASSESSEE H AS ALSO CLAIMED DEPRECIATION TO THE EXTENT OF RS.3,51,14,325/-. IF THE AMOUNT OF DEPRECIATION IS INCLUDED IN THE NET PROFIT SHOWN BEFORE TAXATION , THEN N. P. WORKS OUT TO RS.9,43,74,339/. 6.1 ON THE PERUSAL OF THE BALANCE SHEET FOR THE YE AR ENDING 31.3.2004 (P-B 9), IT IS SEEN THAT UNDER THE HEAD LOAN FUNDS , OUTSTANDING UNSECURED LOANS AS SHOWN HAS COME DOWN FROM RS.72,407,359/- A S ON 31.3.2003 TO RS.59,210,641/-. AS PER SCHEDULE-10 WHICH WAS ANNEX ED TO THE BALANCE SHEET (P/B-7), THE ADVANCES RECOVERABLE ARE SHOWN A S RS.82,345,264/- AS ON 31.3.2004 AS AGAINST RS. 81,194,306/- AS ON 31.3 .2003. THOUGH THE A.O HAS OBSERVED THAT THE ASSESSEE HAS DIVERTED BORROWE D FUNDS TAKEN FROM DDIL BUT THERE IS NO FURTHER DISCUSSION IN THE ASSE SSMENT ORDER EXCEPT GIVING REFERENCE OF SCHEDULE-10 TO THE BALANCE SHEE T (P/B-17) IN WHICH THERE IS NO REFERENCE OF DDIL. ONLY BECAUSE THERE WAS RE DUCTION IN THE OUTSTANDING BALANCES AS AT THE END OF THE YEAR; HEN CE, THE A.O HAS PRESUMED THAT THE ASSESSEE HAS DIVERTED INTEREST BE ARING FUNDS FOR 4 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 REPAYMENT OF UNSECURED LOANS AND ADVANCES. APART F ROM THE SAID PRESUMPTION, NO CATEGORICAL FINDING IS GIVEN BY THE A.O TO SUPPORT HIS DISALLOWANCE AS DISCUSSED HEREIN ABOVE. THIS YEAR, THE ASSESSEE HAD DISCLOSED SUBSTANTIAL PROFITS BEFORE DEPRECIATION I .E. RS.9,43,74,339/- AND EVEN IF IT IS PRESUMED THAT THE ASSESSEE HAS DIVER TED RS. 1,43,47,676/-, THE SAID AMOUNT HAS MUCH LESSER THAN THE PROFIT DECLARE D BY THE ASSESSEE. IT IS WELL SETTLED PRINCIPLE THAT MERELY ON PRESUMPTION, NO DISALLOWANCE OR ADDITION SHOULD BE MADE BY THE A.O AND THE A.O HAS TO BRING SOME EVIDENCE TO JUSTIFY HIS ACTION IN DISALLOWING THE EXPENDITUR E CLAIMED BY THE ASSESSEE IN OUR OPINION, THERE IS NO JUSTIFICATION ON THE PA RT OF THE A.O TO MAKE THE DISALLOWANCE IN RESPECT OF THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE; ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD CIT(A) O N THIS ISSUE FOR THE A.Y. 2004-05. 7 NOW, WE WILL TAKE THE APPEAL FOR THE ASSESSMENT Y EAR 2005-06 IN ITA NO.3342/MUM/2009. 8 IN THIS YEAR ALSO THE A.O MADE DISALLOWANCE OF RS .10,72,603/- OUT OF THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE BU T THE FACTS ARE DIFFERENT FOR DISALLOWANCE THAN THE ASSESSMENT YEAR 2004-05. THE FACTS, WHICH REVEAL FROM THE RECORDS, ARE THAT THE ASSESSEE IS R UNNING FIVE STAR DELUXE CATEGORY HOTEL, IN THE NAME AND STYLE OF LE ROYAL MERIDIEN. THE ASSESSEE COMPANY PAID RS. 15 CRORES TO SIDDHIVINAYAK REALIT IES PVT LTD (HEREINAFTER REFERRED TO AS SRPL) TOWARDS SHARE APPLICATION MONE Y FOR ACQUIRING THE SHARES OF SAID COMPANY. THE ASSESSEE HAD DEBITED TO TAL INTEREST OF RS.4,39,42,815/- TO P&L ACCOUNT. THE A.O SOUGHT EX PLANATION OF THE ASSESSEE AS TO WHY THE INTEREST CLAIMED BY THE ASSE SSEE SHOULD NOT BE DISALLOWED. THE ASSESSEE CONTENDED THAT THE MAIN OB JECT FOR INVESTING IN SRPL WAS TO ACQUIRE TULIP STAR HOSPITALITY SERVICES LTD, WHO WAS THE OWNER 5 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 OF TULIP STAR HOTEL. IT WAS FURTHER EXPLAINED BY T HE ASSESSEE THAT IT WAS NOT VIABLE FOR THE ASSESSEE TO TAKE OVER THE TULIP STAR HOTEL AND HENCE, WITH THE HELP OF OTHER PERSONS/GROUP, NEW COMPANY WAS INCO RPORATED IN THE NAME OF SRPL AND SRPL PURCHASED THE TULIP STAR HOTEL. I T WAS FURTHER CONTENDED THAT THE ASSESSEE WAS IN THE HOTEL BUSINESS AND HEN CE, INVESTMENT MADE IN SRPL WAS FOR EXPANSION OF THE ASSESSEES BUSINESS. 8.1 THE LD COUNSEL FOR THE ASSESSEE ALSO RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF S A BUILDERS VS CIT (2 88 ITR 1) FOR THE PROPOSITION THAT INVESTMENT MADE IN SRPL WAS FOR CO MMERCIAL EXPEDIENCY. THE A.O WAS NOT CONVINCED WITH THE EXPLANATION OF T HE ASSESSEE. THE A.O WAS OF THE OPINION THAT THE INVESTMENT OF RS. 15 CR ORES MADE BY THE ASSESSEE WITH THE HELP OF INTEREST BEARING FUNDS WA S IN THE NATURE OF CAPITAL ACCOUNT AND IT CANNOT BE CALLED IT AS FOR COMMERCIA L EXPEDIENCY. THE A.O, THEREFORE, DISALLOWED THE ENTIRE INTEREST TO EXTENT OF RS. 10,72,603/- PAID TO THE BANK ON RS.15 CRORES, WHICH WAS INVESTED FOR P AYMENT OF SHARE APPLICATION MONEY IN SRPL AND MADE THE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD CIT(A) AND FOUND FAVOUR. THE LD CIT(A) DELETED THE ADDITION MADE BY THE A.O. THE OPERATIVE PART OF THE FINDINGS OF THE LD CIT(A) GIVEN IN PAR A 7 OF HIS ORDER ARE AS UNDER: I HAVE CAREFULLY CONSIDERED THE ABOVE FACTS OF THE CASE, APPELLANTS SUBMISSION AS WELL AS THE A.OS CONTENTION. IT IS U NDISPUTED FACT THAT THE CONTRIBUTION TOWARDS SHARE APPLICATION MONEY WA S MADE BY THE APPELLANT COMP ANY FOR EXPANDING ITS BUSINESS OPERA TIONS AND BOTH THE INVESTORS AND THE COMPANY WHERE INVESTMENT HAS BEEN MADE IN THE FORM OF SHARE APPLICATION MONEY ARE IN THE SAME BUS INESS I.E. HOSPITALITY LINE. IN SUPPORT OF IT CONTENTION, THE APPELLANT HAS FURNISHED DOCUMENTARY EVIDENCE LIKE BALANCE SHEET OF SIDDHIVI NAYAK REALITIES PVT LTD, EXTRACT OF BOARD OF DIRECTORS MEETING, BANK S TATEMENT OF SIDDHIVINAYAK REALITIES PVT LTD. REFLECTING THE APP LICATION MONEY RECEIVED FROM THE ASSESSEE AND THE PAYMENT MADE BY THE SAID 6 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 COMPANY TO TULIP HOSPITALITY SERVICES LTD. THUS, IT CAN BE SEEN THAT THE CONTRIBUTION WAS MADE AS A MEASURE OF COMMERCIAL EX PEDIENCY. THE NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF TH E BUSINESS IS QUITE VISIBLE. THUS, CONSIDERING THE TOTALITY OF THE FACT S AND RELYING ON THE HONBLE APEX COURT JUDGMENT IN THE CASE OF S A BUIL DERS LTD VS CIT (288 ITR 1) WHEREIN THE HONBLE COURT HAS HELD THAT THE EXPENDITURE INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY IS ALLOWABLE AS BUSINESS EXPENDITURE, THE APPELLANTS CLAIM FOR BOTH THE YEA RS ARE ALLOWED U/S 36(1)(III) OF THE I T ACT. THE A.O IS THEREFORE DIR ECTED TO DELETE THE ADDITION IN BOTH THE YEARS I.E. 04-05 & 05-06. 9 THE LD DR VEHEMENTLY ARGUES THAT ADMITTEDLY THE B ORROWED MONEY WAS USED FOR THE INVESTMENT IN THE SHARE APPLICATIO N MONEY IN SRPL AND SRPL IS AN INDEPENDENT LEGAL ENTITY OR COMPANY WHIC H HAS NOTHING TO DO WITH THE MANAGEMENT OR CONTROL OF THE ASSESSEE COMP ANY. HE FURTHER ARGUES THAT THERE IS NO FORCE ALSO TO SAY THAT FOR ACQUIRI NG THE MANAGEMENT AND CONTROL OF THE SRPL, THE ASSESSEE MADE THE INVESTME NT AS ASSESSEES TOTAL EQUITY WOULD BE TO THE EXTENT OF 25%. HE FURTHER AR GUES THAT THOUGH THE SRPL HAD PROPOSED TO ACQUIRE THE TULIP STAR HOTEL; BUT THE SAID HOTEL HAS NOTHING TO DO WITH THE BUSINESS OF THE ASSESSEE. H E, THEREFORE, PLEADED THAT EVEN THE DECISION OF THE S. A. BUILDERS (SUPRA) IS NOT HELPFUL TO THE ASSESSEE AND THE DISALLOWANCE MADE BY THE A.O WAS ABSOLUTELY JUSTIFIED. 9.1 PER CONTRA, THE LD COUNSEL FOR THE ASSESSEE VE HEMENTLY ARGUES THAT IT WAS A BUSINESS EXPEDIENCY AS THE ASSESSEE MADE THE INVESTMENT WITH THE OBJECT TO EXPAND ITS EXISTING BUSINESS OF HOTEL. I T IS FURTHER ARGUED THAT IT WAS NOT VIABLE FOR THE ASSESSEE ALONE TO PURCHASE T HE TULIP STAR HOTEL INDEPENDENTLY AND HENCE, A NEW COMPANY WAS INCORPOR ATED AND THE ASSESSEE HAD MADE THE INVESTMENT TO THE EXTENT OF 2 5% OF THE CAPITAL OF SRPL AND THE SAID COMPANY TOOK OVER THE TULIP STAR HOTEL AT JUHU, MUMBAI. THE LD COUNSEL FOR THE ASSESSEE REFERRED T HE PAPER BOOK; MORE 7 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 PARTICULARLY PAGE 40 ONWARDS WHERE THE COPY OF THE MASTER AGREEMENT IS PLACED. HE, THEREFORE, PLEADED THAT IT WAS FOR THE BUSINESS EXPEDIENCY AND HENCE, THE A.O WAS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE TREATING THE SAME AS FOR NON-BUSINESS PURPOSES. 10 WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT MATERIAL ON RECORD. WE FIND FORCE IN THE ARGUMENTS OF THE LD DR. THERE IS NO DISPUTE ABOUT THE FACTS THAT THE ASSESSEE HAS UTILI SED THE INTEREST BEARING FUNDS FOR THE PURPOSES OF PAYMENT ON SHARE APPLIC ATION MONEY TO SRPL FOR ACQUIRING ITS SHARES, IN WHICH THE ASSESSEE HAS ONL Y 25% OF EQUITY STAKE, AS SUBMITTED BY THE LD COUNSEL FOR THE ASSESSEE. THERE WERE NO COMPELLING CIRCUMSTANCES FOR THE ASSESSEE, CONSIDERING THE EXI STING BUSINESS TO MAKE THE INVESTMENT IN SRPL TO SAY THAT IT WAS DUE TO TH E BUSINESS OR COMMERCIAL EXPEDIENCY, THE ASSESSEE WAS FORCED TO MAKE THE SAI D INVESTMENT. 11. THE ANOTHER ASPECT TO BE CONSIDERED HERE IS THO UGH THE SRPL HAS TAKEN OVER THE TULIP STAR HOTEL; BUT THE ASSESSEE I S NOT HAVING MAJOR STAKE IN THE SAID COMPANY; HENCE, IN OUR OPINION, THE PRI NCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF S A BUILDERS ( SUPRA) ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. 12. NEXT QUESTION WHETHER THE INTEREST PAID BY THE ASSESSEE ON THE BORROWED MONEY, WHICH WAS UNDISPUTEDLY USED FOR PAY MENT OF THE SHARE APPLICATION MONEY TO SRPL, CAN IT BE SAID AN INTE REST INCURRED FOR THE PURPOSE OF BUSINESS AS CONTEMPLATED U/S 36(1)(III) OF THE ACT? IN OUR OPINION, THE ANSWER WILL BE NO AND AGAINST THE AS SESSEE. IT IS AN INVESTMENT MADE BY THE ASSESSEE IN SRPL AND THE SAI D INVESTMENT HAS NOTHING TO DO WITH THE BUSINESS OF THE ASSESSEE. A S PER PROVISIONS OF SEC. 8 B D & P HOTELS I P LTD ITA NOS. 3254 & 3342/MUM/2009 36(1)(III), ONLY THAT INTEREST CAN BE CLAIMED AS DE DUCTION IN RESPECT OF THE CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. EVEN, AS PER PROVISO TO SEC. 36(1)(III, NO BENEFIT OF CAPITALIZA TION ALSO CAN BE GIVEN TO THE ASSESSEE AS WE HAVE ALREADY HELD THAT INVESTMENT MA DE IN SRPL IS TOTALLY A INDEPENDENT INVESTMENT AND ULTIMATELY FROM THE SAID INVESTMENT, THE ASSESSEE WILL BE GETTING RETURNS IN THE NATURE OF D IVIDEND. WE, ACCORDINGLY, ALLOW THE GROUND TAKEN BY THE REVENUE AND RESTORE T HE ORDER OF THE A.O ON THIS ISSUE. 13. IN THE RESULT, THE APPEAL FILED BY THE REVENUE FOR AY 2004-05 IS DISMISSED WHEREAS THE APPEAL FOR AY 2005-06 IS ALLO WED . ORDER PRONOUNCED ON THE 30 TH , DAY OF JULY 2010. SD/- SD/- (RAJENDRA SINGH ) ACCOUNTANT MEMBER (R S PADVEKAR) JUDICIAL MEMBER PLACE: MUMBAI : DATED:30 TH ,JULY 2010 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI