ACIT, New Delhi V. M/s. Lodhi Property Company Ltd., New Delhi

ITA 4970/DEL/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3257 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 21-06-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 08-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVIKANT GUPTA
• Keywords: Business income; Depreciation; Business expenditure; Wholly owned subsidiary; Revenue expenditure; Capital expenditure
• Section: 37(1); 37

Judgement Text

ITA NOS. 4851 & 4970/DEL/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D NEW DELHI BEFORE SHRI G.D. AGRAWAL, HONBLE PRESIDEN T & SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER ITA NO.4851/DEL/2011 ( ASSESSMENT YEAR: 2007-08) LODHI PROPERTY COMPANY LTD. C/O AUTHORIZED REPRESENTATIVE SR BATLIBOI & CO., GOLF VIEW CORPORATE TOWER-B, SECTOR 42, SECTOR ROAD, GURGAON. AABCH0299N VS DCIT CIRCLE 4(1) NEW DELHI. & ITA NO.4970/DEL/2011 ( ASSESSMENT YEAR: 2007-08) DCIT CIRCLE 4(1) NEW DELHI. VS LODHI PROPERTY COMPANY LTD. C/O AUTHORIZED REPRESENTATIVE SR BATLIBOI & CO., GOLF VIEW CORPORATE TOWER-B, SECTOR 42, SECTOR ROAD, GURGAON. AABCH0299N ASSESSEE BY SH. R.S. SINGHVI, CA SH. SATYAJEET GOEL, CA REVENUE BY SH. RAVI KANT GUPTA, SR. DR ORDER PER K.NARASIMHA CHARY, JUDICIAL MEMBER CHALLENGING THE ORDER DATED 23.08.2011 IN APPEAL N O.152/2010- 11 OF LD. COMMISSIONER OF INCOME TAX(APPEAL)-VII [I N SHORT CIT(A)] FOR AY 2007-08, THE ASSESSEE AND THE REVENUE FILED THES E APPEALS. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, E ARLIER KNOWN AS 'HOTEL SCOPEVISTA LIMITED', WAS INCORPORATED ON 23 AUGUST 2001 WITH AN OBJECT TO CARRY ON THE BUSINESS OF ACQUIRING, PR OMOTING, MANAGING, DATE OF HEARING 26.12.2017 DATE OF PRONOUNCEMENT 26.02.2018 ITA NOS. 4851 & 4970/DEL/2011 2 OWNING, OPERATING AND DEVELOPING HOTELS, RESTAURANT ETC IN INDIA AND ELSEWHERE. DURING THE AY 2007-08, THE ASSESSEE ACQU IRED A HOTEL PROPERTY BY THE NAME OF 'LODHI HOTEL' IN NEW DELHI. UNDER A SCHEME OF ARRANGEMENT OF INDIA TOURISM DEVELOPMENT CORPORA TION (ITDC) ALL THE ASSETS, LIABILITIES, PROFITS, LOSSES AND BUSINE SS OF THE LODHI HOTEL UNIT WERE DEMERGED FROM ITDC AND TRANSFERRED TO THE ASSESSEE ON A GOING CONCERN BASIS. THE SCHEME WAS APPROVED BY THE CENTRAL GOVERNMENT VIDE ITS ORDER DATED 22 FEBRUARY, 2002. PURSUANT TO THE SCHEME OF ARRANGEMENT PHYSICAL POSSESSION AND OPERA TION OF LODHI HOTEL WAS GIVEN ON 11 MARCH 2002 TO THE ASSESSEE. H OTEL WAS OPERATIONAL FOR SOME PERIOD OF TIME TILL 31 OCTOBER 2002. 3. SINCE THE HOTEL BUILDING WAS IN A DILAPIDATED CO NDITION, THE MANAGEMENT DECIDED TO DEMOLISH THE EXISTING SUPER S TRUCTURE AND RECONSTRUCT THE HOTEL BUILDING. FOR SUCH PURPOSE, THE MANAGEMENT OF THE ASSESSEE DECIDED TO TEMPORARILY SUSPEND THE OPERATIONS OF LODHI HOTEL. A VOLUNTARY RETIREMENT SCHEME FOR THE HOTEL EMPLOYEES WAS ALSO FRAMED FOR RETIREMENT OF STAFF OF THE HOTEL. THE DA TE FIXED FOR VOLUNTARY RETIREMENT OF EMPLOYEES WAS 20 MAY 2002. DURING THE AY 2007-08 THE CONSTRUCTION OF THE BUILDING WAS UNDER PROGRESS . NAME OF THE ASSESSEE COMPANY WAS CHANGED FROM 'HOTEL SCOPEVISTA LIMITED' TO 'LODHI PROPERTY COMPANY LIMITED' WITH EFFECT FROM 1 0 JANUARY 2007. 4. FOR ASSESSMENT YEAR 2007-08, ASSESSEE FILED ITS RETURN OF INCOME 31ST OCTOBER 2007 DECLARING TOTAL BUSINESS L OSS OF RS. 9,08,84,894/-. HOWEVER, ON FINDING CERTAIN INADVERT ENT OMISSIONS/ MISTAKES IN THE ORIGINAL RETURN, ASSESSEE VOLUNTARI LY REVISED ITS RETURN OF INCOME ON 26 MARCH 2009 DECLARING A TOTAL LOSS O F RS.7,70,05,921/- WELL WITHIN THE TIME LIMIT. NET IN TEREST INCOME FROM ADVANCES MADE TO THE GROUP COMPANIES AMOUNTING TO R S.1,68,355/- ITA NOS. 4851 & 4970/DEL/2011 3 WAS OFFERED TO TAX. AN AMOUNT OF RS.6,85,114/- WAS ALSO OFFERED TO TAX BEING SHORT TERM CAPITAL GAIN ON SALE OF LIQUID MUTUAL FUNDS. 5. AS THE ASSESSEE HAS TEMPORARILY SUSPENDED LOD HI HOTEL OPERATIONS IN VIEW OF EXTENSIVE RENOVATION OF THE H OTEL BUILDING (WHICH WAS UNDER RENOVATION/RECONSTRUCTION DURING THE PREV IOUS YEAR RELEVANT TO THE SUBJECT ASSESSMENT YEAR) NO INCOME WAS EARNED BY THE ASSESSEE FROM THE BUSINESS FOR THE SUBJECT ASSESSME NT YEAR. THE ASSESSEE HAD CAPITALIZED EXPENSES IN CONNECTION WIT H THE RENOVATION/RECONSTRUCTION ACTIVITY UNDER THE HEAD ' CAPITAL WORK-IN- PROGRESS' (CWIP). HOWEVER OPERATING AND OTHER EXPEN SES RELATING TO DAY TO DAY ADMINISTRATION OF THE BUSINESS WERE CHAR GED TO PROFIT AND LOSS ACCOUNT AND THE SAME, EXCEPT PREOPERATIONAL PE RIOD EXPENSE, WERE CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOM E UNDER SECTION 37(1) OF THE ACT BEING REVENUE EXPENDITURE INCURRED FOR THE PURPOSES OF BUSINESS. 6. HOWEVER, THE LEARNED ASSESSING OFFICER (LD. AO) IN HIS ASSESSMENT ORDER DATED 23 DECEMBER 2010 ASSESSED TH E INCOME OF THE APPELLANT AS RS.7,29,36,102/- AS AGAINST THE RE TURNED LOSS OF RS.77,005,921/-, BY MAKING THE FOLLOWING ADDITIONS/ DISALLOWANCES: EXPENSES DISALLOWED PREOPERATIVE EXPENSES 7,38,96,181 DISALLOWANCE UNDER SECTION 35 DDA OF 1,56,21,450 DISALLOWANCE UNDER SECTION 36(L)(III) OF 6.04,24,392 TOTAL DISALLOWANCE 7,29,36,102 7. AGGRIEVED BY SUCH ADDITION, ASSESSEE PREFERRED A PPEAL BEFORE THE LD. CIT(A). BY WAY OF IMPUGNED ORDER, LD. CIT(A) O BSERVED THAT THE AMOUNT OF EXPENDITURE RELATING TO THE PERIOD OF THE SUSPENSION OF THE BUSINESS ACTIVITIES IS CAPITAL IN NATURE, AND HE D IRECTED THE LD.AO TO ITA NOS. 4851 & 4970/DEL/2011 4 ALLOW THE EXPENSES IN RESPECT OF RS.7,38,96,181/- B Y WAY OF DEPRECATION AT THE RATE ALLOWABLE ON BUILDINGS. 8. HOWEVER, SUBSEQUENTLY BY ORDER DATED 10.03.2011, LD.AO OBSERVED THAT INASMUCH AS THE ASSESSEE CLAIMED DEDU CTION OF ONLY RS.3,55,63,725/- AS REVENUE EXPENDITURE IN THE RELE VANT YEAR, ONLY A SUM OF RS.3,55,63,725/- WAS ADDED BACK IN THE PALAC E OF RS.7,38,96,181/-. ASSESSEE CHALLENGED THE CATEGORI ZATION OF EXPENSE AS CAPITAL BY THE LD. CIT(A) AND THE CONSEQUENT DIS ALLOWANCE THEREOF IN ITA NO.4851/DEL/2011, WHEREAS THE REVENUE CHALLE NGED THE DIRECTION OF THE LD.CIT(A) TO ALLOW DEPRECATION IN RESPECT OF THE SAME, HOLDING TO BE CAPITALIZED ON BUILDING ACCOUNT, THOU GH NO BUSINESS ACTIVITY WAS CARRIED OUT DURING THE YEAR IN ITA NO. 4970/DEL/2011. 9. LD. CIT(A) FURTHER OBSERVED THAT THE ASSESSEE BO RROWED A SUM OF RS.23 CRORES TO PURCHASES OF SHARES IN GOLDEN GREEN GOLF RESORTS LTD. (GGGRL), AND INCURRED AN INTEREST EXPENDITURE OF RS.2,77,70,375/- ON THE SAID LOAN DURING THIS ASSESSMENT YEAR. ASSE SSEE FURTHER BORROWED RS.36 CRORES FOR GIVING LOANS TO GGGRL AND INCURRED AN INTEREST EXPENSES OF RS.3,26,54,017/- DURING THIS A SSESSMENT YEAR. LD.CIT(A) CONCLUDED THAT THE LOANS BORROWED BY THE ASSESSEE WERE USED FOR THE PURPOSE OF ACQUISITION OF SHARES OF GG GRL AS SUCH IT CANNOT BE SAID THAT THE BORROWED CAPITAL WAS USED F OR BUSINESS PURPOSE AND CONSEQUENTLY INTEREST ON THE BORROWED A MOUNT IS NOT DEDUCTIBLE U/S 36(1)(III) OF THE ACT. 10. LEARNED CIT(A) PLACED RELIANCE ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF SARABHAI SONS P. LTD. VS CIT (1993) 201 ITR 464 WHEREIN IT WAS HELD THAT WHEN THE SHARE S WHICH ARE ACQUIRED NOT FOR THE PURPOSE OF EARNING OF INCOME B UT ONLY FOR THE ITA NOS. 4851 & 4970/DEL/2011 5 PURPOSE OF ACQUIRING THE CONTROLLING RIGHTS OVER AN OTHER COMPANY, THE INTEREST ON THE BORROWED FUNDS CANNOT BE TREATED AS BUSINESS PURPOSE OF THE ASSESSEE AND WAS NOT ALLOWABLE. LD.CIT(A) T URNED DOWN THE ALTERNATIVE PLEA OF THE ASSESSEE THAT THE INTEREST EXPENSE OF RS.6,04,24,392/- SHOULD BE ALLOWED AS PART OF COST OF SHARES IN THE YEAR OF SALE OF SHARES OF GGGRL BY THE ASSESSEE ON THE GROUND THAT INASMUCH AS THE SHARES OF GGGRL WERE NOT SOLD BY TH E ASSESSEE IN THE RELEVANT ASSESSMENT YEAR, SUCH A PLEA IS A PRE- MATURED ONE. ASSESSEE CHALLENGED THIS IN ITA NO.4851/DEL/2011. 11. IN RESPECT OF THE OBSERVATIONS OF THE LEARNED C IT(A) THAT THE ALLEGED EXPENSES CLAIMED BY THE ASSESSEE AS REVENUE IN NATURE BE TREATED AS CAPITAL EXPENDITURE AND THE LEARNED AO T O ALLOW DEPRECIATION THEREON AT THE RATES ALLOWABLE ON BUIL DINGS, IT IS THE ARGUMENT OF THE LEARNED AR THAT THE ASSESSEE PURCHA SED A RUNNING HOTEL AND ADMITTEDLY CONDUCTED OPERATIONS TILL OCTO BER 2002, AS SUCH IT CANNOT BE SAID THAT THE BUSINESS OF THE ASSESSEE WAS NOT SET UP. HE PLACED RELIANCE ON THE DECISIONS REPORTED IN CIT VS DHUMKETU BUILDERS & DEVELOPMENT PVT. LTD. [2014] 368 ITR 680 (DEL.); CIT VS SAMSUNG INDIA ELECTRONICS LTD. [2013] 356 ITR 354 ( DEL.); CAREFOUR WC & C INDIA P. LTD. VS DCIT [2014] 368 ITR 692 (DE L.); CIT VS ESPN SOFTWARE INDIA PVT. LTD. [2009] 184 TAXMANN 452 (DE L.); CIT VS ARCANE DEVELOPERS (P.) LTD. [2014] 42 TAXMANN.COM 10 (DEL. ); AND M/S MULTI ACT REALTY ENTERPRISES PVT. LTD. VS ITO [ITA NO.727 4/MUM/2011] (MUMBAI TRIBUNAL) IN SUPPORT OF HIS CONTENTION THAT THE BUSINESS SHALL BE DEEMED TO HAVE BEEN COMMENCED WHEN ITS FIR ST ACTIVITY IS STARTED. 12. HE SUBMITTED THAT FOR THE PURPOSE OF RENOVATION AND BETTER BUSINESS PROFITS THEY DEMOLISHED THE OLD BUILDING A ND CONSTRUCTED A ITA NOS. 4851 & 4970/DEL/2011 6 NEW BUILDING SUBSEQUENT TO OCTOBER 2002 AND THE CON STRUCTION WAS COMPLETE BY 2006-07. SOME REPAIRS AND CHANGES WERE COMPLETE BY JUNE 2007, APPLICATION TO THE MCD FOR COMPLETION CE RTIFICATE WAS MADE IN JULY 2007. DELHI POLLUTION CONTROL COMMITTE E AND ENVIRONMENTAL CLEARANCE BOARD GAVE THE CONSENT ORDE R ON 21.2.2008. IN THE JANUARY 2009 THE COMPLETION CERTIFICATE WAS RECEIVED BY THE ASSESSEE AND THE HOTEL RESUMED ITS COMMERCIAL OPERA TION IN APRIL, 2009. BASING ON ALL THIS HE SUBMITS THAT AS A BUSI NESS ENTITY THE ASSESSEE NEVER CEASED TO EXIST BUT FOR A TOTAL RENO VATION THE HOTEL BUSINESS WAS SUSPENDED BETWEEN THE PERIOD OCTOBER 2 002 AND APRIL 2009, DURING WHICH PERIOD THE ASSESSEE CONTINUED WI TH THEIR BUSINESS OPERATIONS IN THE MANAGEMENT OF GOLDEN GREEN AND GO LF RESORTS LTD. (GGGRL). THE HOTEL BUSINESS RESUMED ITS COMMERCIAL OPERATION IN APRIL 2009. IN THE CIRCUMSTANCES, AS IS THE ROUT INE PRACTICE IN HOTEL BUSINESS, REOPENING OPERATIONS WERE TAKEN BEFORE CO MMENCEMENT OF HOTEL ACTIVITY AND IN THAT PROCESS THE EXPENSE OF R S.3,55,63,725/- WAS INCURRED TOWARDS SALARY OF THE COMPANY SECRETARY, M EMBERSHIP AND SUBSCRIPTION TO THE NORTHERN INDIA REGIONAL CIRCLE FOR CORPORATE MEMBERSHIP FEE OF ICI, BOARD MEETING FEES, RATES AN D TAXES PAID TO MUNICIPALITY, LEASE RENT TO THE GOVT. OF INDIA. IN RESPECT OF LEASE RENT, THE ASSESSEE CLAIMS THE EXPENSE RELATING TO AY 2007 -08 AND CHARGED IT OFF TO THE PROFIT AND LOSS ACCOUNT. 13. BASING ON ALL THESE THINGS, IT THE ARGUMENT OF THE LEARNED AR THAT THE HOTEL BUILDING IS ONLY A DEVISE IN THE BUS INESS OF THE ASSESSEE AND THE TEMPORARY SUSPENSION OF SUCH BUSINESS DURIN G THE RECONSTRUCTION OF THE BUILDING, AT NO POINT OF TIME , BROUGHT THE BUSINESS OF THE ASSESSEE TO AN END. EVEN DURING TH IS PERIOD ALSO THE ASSESSEE ACTIVELY ENGAGED IN THE BUSINESS IN MANAGI NG THE GGGRL. ITA NOS. 4851 & 4970/DEL/2011 7 LEARNED AR, THEREFORE, SUBMITTED THAT THE OPERATING EXPENSES INCURRED IN THE COURSE OF RESUMPTIONS OF HOTEL OPER ATIONS SHOULD BE ALLOWED FOR TAX PURPOSES, INASMUCH AS THE RENOVATIO N OF THE BUILDING WAS ESSENTIAL FOR THE ASSESSEE TO CONTINUE THEIR BU SINESS AND IN FACT, IMMEDIATELY AFTER THE RENOVATION ASSESSEE RESUMED T HE HOTEL BUSINESS. 14. IN SUPPORT OF HIS CONTENTION THAT THE SUSPENSIO N OR DISCONTINUANCE OF BUSINESS HAS TO BE DECIDED BASED ON THE FACTS AND CIRCUMSTANCES PREVAILING AT THE TIME OF SUSPENSION/ DISCONTINUANCE AND THE INTENTION OF THE MANAGEMENT IRRESPECTIVE OF THE PERIOD OF SUSPENSION, LEARNED AR PLACED RELIANCE ON THE DECIS ION REPORTED IN CIT VS VIKRAM COTTON MILLS LTD. (1988) 36 TAXMAN 1 (SC). IN THAT CASE THE ASSESSEE SUSPENDED ITS BUSINESS ACTIVITIES FOR THE PURPOSE OF RECONSTRUCTION OF THE BUILDING AND LEASED OUT THE M ACHINERY FOR 10 - 19 YEARS TO EXPLOIT THEM COMMERCIALLY AFTER WHICH T HEY WERE RETURNED TO THE ASSESSEE. HONBLE APEX COURT HELD THAT IT W AS ONLY TEMPORARY IN NATURE AND THE BUSINESS WAS NOT CONSIDERED TO HA VE BEEN STOPPED OR DISCONTINUED. 15. IN CIT VS MASS PRODUCTS LTD. 221 ITR 456, THE A SSESSEE COMPANY SUSPENDED ITS MANUFACTURING ACTIVITY IN 196 5 AND RESUMED IT IN 1971 AFTER HAVING TAKEN OVER BY THE NEW MANAG EMENT. SUSPENDED PERIOD OF 6 YEARS WAS CONSIDERED A TEMPOR ARY SUSPENSION OF THE BUSINESS. 16. FOR A SIMILAR PRINCIPLE, ON SIMILAR FACTS, LEAR NED AR RELIED UPON THE DECISION REPORTED IN M/S KALYANJI MAVJI & CO.,( 1980) 122 ITR 49 (SC) WHEREIN IT IS HELD THAT THE ASSESSEE IS ENTITL ED TO CLAIM THE ITA NOS. 4851 & 4970/DEL/2011 8 EXPENDITURE INCURRED DURING THE PERIOD OF TEMPORARY SUSPENSION OF BUSINESS. 17. PER CONTRA, IT IS THE SUBMISSION OF THE LD. DR THAT IN THIS MATTER, NO SORT OF BUSINESS WAS CONDUCTED BY THE ASSESSEE I N THE ENTIRE YEAR AS SUCH IT CANNOT BE SAID THAT THERE IS TEMPORARY S USPENSION OF BUSINESS. HE SUBMITTED THAT DHUMKETU BUILDERS & DE VELOPERS PVT. LTD.(SUPRA) AND ARCANE DEVELOPERS PVT.LTD. (SUPRA) RELATE TO THE REAL ESTATE BUSINESS AND IN SUCH CASE IT WAS HELD THAT W HEN THE LOAN WAS TAKEN FOR THE PURPOSE OF DEVELOPMENT OF REAL ESTATE , THEY ARE IN A POSITION TO PERFORM CERTAIN ACTS TOWARDS THE ACQUIS ITION OF LAND THAT WOULD CLEARLY SHOW THAT IT IS READY TO COMMENCE BUS INESS. HOWEVER, IT IS NOT SO IN THIS CASE BECAUSE THE ASSESSEE IS N OT READY TO CATER THE CUSTOMERS INASMUCH AS THE CONSTRUCTION ACTIVITY WEN T ON TILL 2009. HE ALSO SUBMITTED THAT IN SAMSUNG INDIA (SUPRA) ALS O, THE HONBLE HIGH COURT HELD THAT IN MANUFACTURING ACTIVITY WHEN THE FIRST ACTIVITY TOWARDS THE PRODUCTION TAKES PLACE, THE BUSINESS IS SAID TO BE COMMENCED. IN CAREFOUR WC & C INDIA P. LTD. CASE ( SUPRA) WHEN THE PREMISES WAS RENTED OUT, BANK ACCOUNT WAS OPENED, E MPLOYEES ARE APPOINTED, THE BUSINESS IS SAID TO HAVE COMMENCED. IN ESPN SOFTWARE CASE (SUPRA), IT WAS HELD THAT AS SOON AS THE ESSENTIAL ACTIVITY OF BUSINESS IS STARTED, IT IS SAID THAT BU SINESS IS COMMENCED. IN M/S MULTI ACT REALTY CASE, THE MUMBAI TRIBUNAL H ELD THAT IF THE ASSESSEE HAS DONE REQUISITE PREPARATION AND IF THE ASSESSEE CAN BE SAID TO BE IN A POSITION TO CATER ITS CUSTOMERS, IT CAN BE SAID THAT THE BUSINESS IS SET UP. HE SUBMITTED THAT THE GOLDEN T HREAD THAT RUNS THROUGH THESE DECISIONS IS THAT WHETHER OR NOT THE ASSESSEE WAS EARNING FROM THE BUSINESS, BUT WHAT IS ESSENTIAL TO SAY THAT THE BUSINESS HAS SET UP IS THAT THE ASSESSEE MUST BE IN A POSITION TO CATER ITA NOS. 4851 & 4970/DEL/2011 9 THE CUSTOMERS. IN REAL ESTATE BUSINESS, THE MOMENT LAND IS PURCHASED AND STEPS FOR DEVELOPMENT ARE TAKEN, THE BUSINESSMAN WOULD BE IN A POSITION TO CATER TO ITS CUSTOMERS. SO ALSO IN MANUFACTURING ACTIVITY WHEN ONE OF THE SEVERAL STEP S IN THAT DIRECTION IS TAKEN IRRESPECTIVE OF THE FIRST SALE, THE BUSINE SS IS SAID TO HAVE BEEN COMMENCED. 18. INSOFAR AS THE FACT PLEADED BY THE ASSESSEE THA T AS ON THE DATE OF ACQUISITION OF THE LODHI HOTEL BY THE ASSESSEE AND THE RUNNING OF THE HOTEL TILL OCTOBER 2002 IS CONCERNED, ABSOLUTELY TH ERE IS NO DISPUTE BY THE REVENUE. THE ORDER OF THE ITAT IN ITA 2515/DEL /2007 IN RESPECT OF THE ASSTT. YEAR 2003-04, REFERRED TO BY THE LEAR NED CIT(A) IN HIS ORDER ALSO SHOWS THAT THE ASSESSEE CONDUCTED HOTEL BUSINESS UP TO 31 ST OCTOBER 2002 THEREIN. THE QUESTION - WHETHER THE ASSESSEE COMMENCED BUSINESS OR NOT IS, THEREFORE, NOT RELE VANT FOR THE ADJUDICATION OF THE CLAIM NOW PREFERRED BY THE ASSE SSEE. WHAT IS TO BE SEEN IS WHETHER THERE WAS ANY CLOSURE OF BUSINES S NECESSITATING THE ASSESSEE TO SET UP THE BUSINESS AGAIN? AND WHET HER THE ASSESSEE IS ENTITLED TO CLAIM THE EXPENSES TO THE TUNE OF RS .3,55,63,725/- COULD BE ALLOWED AS DEDUCTION UNDER SECTION 37 OF THE ACT OR NOT? 19. ACCORDING TO THE ASSESSEE, THERE IS TEMPORARY S USPENSION OF THE BUSINESS BETWEEN NOVEMBER 2002 AND IT ACTUALLY RESU MED COMMERCIAL OPERATIONS IN APRIL 2009. ADMITTEDLY, A SSESSEE RESUMED BUSINESS IN APRIL 2009. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS NOW BEEN DOING A DIFFERENT BUSINESS AN D THEY HAD ABANDONED THE HOTEL BUSINESS. THE ASSESSEE IS ACCO UNTING THE PERIOD OF SUSPENSION BY STATING THAT THE CONTRACT FOR THE BUILDING WORK WAS GIVEN TO THE CONTRACTOR ON 1.7.2005, CONSTRUCTION W AS COMPLETED DURING THE FY 2006-07, SMALL CHANGES TOOK PLACE TIL L JUNE 2007, HOTEL ITA NOS. 4851 & 4970/DEL/2011 10 PROPERTY WAS OPERATIONAL IN JUNE 2007, APPLICATION FOR COMPLETION CERTIFICATE WAS MADE IN JULY2007, COMPLETION CERTIF ICATE WAS ISSUED IN JANUARY 2009 AND ULTIMATELY COMMERCIAL OPERATIONS O F THE HOTEL RESUMED IN APRIL 2009. FURTHER, LEARNED CIT(A) ALS O, VIDE PARA 5.2 OF HIS ORDER, CLEARLY HELD THAT THERE IS NO DISPUTE OV ER THE FACT THAT THE HOTEL ACTIVITY WAS TEMPORARILY IN SUSPENSION. IT, THEREFORE, MAKES THE THINGS AMPLY CLEAR THAT THE INTENTION OF THE ASSESS EE WAS TO TEMPORARILY SUSPEND THE BUSINESS AND NOT TO BRING T HE BUSINESS TO A CLOSE. 20. IN THESE CIRCUMSTANCES, WE FIND IT DIFFICULT TO AGR EE WITH THE FINDINGS OF THE LEARNED AO THAT INASMUCH AS DURING THE FINANCIAL YEAR 2006-07 THE ASSESSEE WAS UNABLE TO CATER THE NEEDS OF THE CUSTOMERS, THE BUSINESS WAS NOT YET COMMENCED. WE ALSO DO NOT AGREE WITH THE THEORY OF ESTOPPEL PROPOSED BY THE LEARNED CIT(A) T HAT SINCE THE ASSESSEE DID NOT CLAIM THE EXPENSES RELATABLE TO AS STT. YEAR 2002-03 FOR THE PERIOD SUBSEQUENT TO 31.10.2002, BY THEIR O WN CONDUCT THEY ARE ESTOPPED FROM CLAIMING THE SAME FOR ANY PERIOD SUBSEQUENT THERETO. AS A MATTER OF FACT, THE ASSESSEE PURCHAS ED THE BUSINESS THAT HAD ALREADY BEEN COMMENCED AND CONDUCTED BUSIN ESS OPERATIONS TILL 31.10.2002, FROM WHICH DATE THE ASS ESSEE SUSPENDED THE BUSINESS OPERATIONS TILL APRIL 2009 FOR RENOVAT ION OF THE HOTEL BUILDING. THE PERIOD BETWEEN NOVEMBER 2002 AND A PRIL 2009 IS ONLY THE TEMPORARY SUSPENSION OF THE LODHI HOTEL BUSINES S OF THE ASSESSEE, BUT AS A MATTER OF FACT, AS A BUSINESS ENTITY, THE ASSESSEE DID NOT CEASE TO EXIST OR PERMANENTLY SHUT DOWN THE BUSINES S. 21. RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE APEX COURT IN VIKRAM COTTON MILLS CASE (SUPRA), WE FIND THAT MERE LY BECAUSE THERE WAS A TEMPORARY LULL IN THE BUSINESS FOR SOME PERIO D, IT CANNOT BE ITA NOS. 4851 & 4970/DEL/2011 11 SAID THAT THE ASSESSEE ABANDONED THE BUSINESS REQUI RING THEM TO RE- SETUP IT AGAIN. NO SET UP IS REQUIRED IN THIS CASE . WHILE RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE APEX COURT IN M/S KALYANJI MAVJI (SUPRA) WE FURTHER HOLD THAT THE ASSESSEES CLAIM O F EXPENDITURE INCURRED DURING THE PERIOD OF TEMPORARY SUSPENSION OF BUSINESS HAS TO BE ALLOWED. HOWEVER, THE QUANTUM OF EXPENDITURE NEEDS TO BE VERIFIED AT THE END OF THE AO. FOR THIS PURPOSE OF VERIFICATION OF THE QUANTUM, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION THAT AFTER VERIFICATION AND IF THE CLAIM IS FOUND T O BE GENUINE, THE AO WILL ALLOW THE SAME. CONSEQUENTLY WE FIND THAT THE ORDER OF THE LD. CIT(A) ON THIS ASPECT CANNOT BE SUSTAINED. REVENUE GROUNDS ARE DISMISSED AND THE ASSESSEES GROUNDS ARE ALLOWED. 22. NOW COMING TO THE INTEREST EXPENSE, IT IS THE C ASE OF THE ASSESSEE THAT IN ORDER TO EXPAND THEIR BUSINESS IN HOSPITALI TY IN NCR REGION, IT WAS NECESSARY FOR THEM TO INVEST IN GGGRL, WHICH WA S OWNING AND OPERATING A PREMIUM 18 HOLE GOLF COURSE, THAT IN TH AT PURSUIT ON 2.5.2005 THEY HAVE ACQUIRED 51% STAKE FOR A CONSIDE RATION OF 24.25 CRORES AND AS A CONDITION PRECEDENT FOR SUCH ACQUIS ITION THEY HAD TO LEND SOME AMOUNTS TO ENABLE THEM TO REPAY THE LOANS TAKEN FROM THE EXISTING SHAREHOLDERS. FUNDS WERE BORROWED FROM HD FC AND IDFC. TOTAL INTEREST EXPENDITURE INCURRED DURING THE YEAR WAS RS.6,04,24,392/- WHEREAS INTEREST EARNED WAS RS.3,3 7,50,177/-. THOUGH THE INTEREST EARNED RS. 3,37,50,177/- WAS BR OUGHT TO TAX, LEARNED AO REFUSED TO TREAT THE INTEREST PAID AS BU SINESS EXPENDITURE. 23. IT IS SUBMITTED BY THE LEARNED AR THAT WHEN THE INTEREST EARNED FROM GGGRL IS BUSINESS INCOME, THEN THE INTEREST PA ID ON THE AMOUNTS BORROWED FOR ACQUISITION OF SHARES OF GGGRL FOR ACQUIRING CONTROLLING INTEREST AND ON THE AMOUNTS LENT FOR BU SINESS EXIGENCIES ITA NOS. 4851 & 4970/DEL/2011 12 OF GGGRL WILL ALSO BE THE BUSINESS EXPENSES. ACCOR DING TO THE ASSESSEE BOTH THE ACTIVITIES I.E. ACQUIRING CONTROL LING INTEREST IN AND LENDING THE AMOUNTS TO GGGRL ARE IN FURTHERANCE OF THE BUSINESS INTEREST OF THE ASSESSEE. ON THIS ASPECT ABSOLUTEL Y THERE IS NO DISPUTE BY THE AUTHORITIES BELOW. 24. LEARNED DR ARGUED THAT SINCE NO BUSINESS WAS CO NDUCTED DURING THE FY 2006-07, THE QUESTION OF BUSINESS EXP ENDITURE DOES NOT ARISE. LEARNED CIT(A) WHILE NOT DISPUTING THE BORR OWING OF AMOUNTS FOR THE PURPOSE OF ACQUIRING THE CONTROLLING SHARE IN GGGRL AND FOR THE PURPOSE OF GIVING LOAN TO GGGRL, OBSERVED THAT THE BORROWED AMOUNT WAS NOT SPENT FOR THE PURPOSE OF BUSINESS AS SUCH THE INTEREST IS NOT DEDUCTIBLE UNDER SECTION 36(1)(III) OF THE ACT. HE PLACED RELIANCE ON THE DECISION REPORTED IN SARABHAI SONS P. LTD. VS CIT (1993) 201 ITR 464 (GUJ) FOR THE PRINCIPLE THAT WHE N THE SHARES WHICH WERE ACQUIRED FOR THE PURPOSE OF ACQUIRING THE CONT ROLLING RIGHTS OF ANOTHER COMPANY, THE INTEREST ON THE BORROWED FUNDS CANNOT BE TREATED AS PER THE BUSINESS PURPOSE OF THE ASSESSEE AND WAS NOT ALLOWABLE. 25. IN CIT VS. TULIP STAR HOTELS LTD. (2011) 16 TAX MAN.COM 335 (DEL) IT WAS NOTICED THAT THE ASSESSEE WAS IN THE BUSINES S OF OWNING, RUNNING AND MANAGING HOTELS AND FOR AFFECTIVE CONTR OL OF NEW HOTEL ACQUIRED BY THE ASSESSEE UNDER ITS MANAGEMENT IT HA D INVESTED IN A WHOLLY OWNED SUBSIDIARY. THE HONBLE JURISDICTION AL HIGH COURT HELD THAT UNDER SUCH CIRCUMSTANCES, INTEREST BORROWED ON CAPITAL SHOULD BE TREATED AS EXPENDITURE INCURRED FOR BUSINESS PUR POSE AND ALLOWABLE UNDER SECTION376(1)(III) OF THE ACT. ITA NOS. 4851 & 4970/DEL/2011 13 26. IN CIT VS RELIANCE COMMUNICATIONS INFRASTRUCTUR E LTD. (2012) 21 TAXMAN.COM 118 (BOM), THE AUTHORITIES FOUND THAT THE INVESTMENTS WERE MADE IN SUBSIDIARY COMPANY AND MON IES WERE ADVANCED TO RELATED COMPANIES FOR FURTHERING BUSINE SS OF THE ASSESSEE. THE HONBLE BOMBAY HIGH COURT HELD THAT NO DISALLOWANCE OF INTEREST CHARGES CAN BE MADE. 27. IN CIT VS RPG TRANSMISSIONS LTD. (2014) 48 TAX MAN.COM 57 (MAD), IT IS HELD THAT WHEN AN INVESTMENT IS MADE B Y THE ASSESSEE IN SHARES OF THE GROUP COMPANY FOR STRATEGIC BUSINESS PURPOSES, BECAUSE COMPANIES WERE PROMOTED AS SPECIAL PURPOSE COMPANIE S TO STRENGTHEN AND PROMOTE ITS EXISTING BUSINESS BY COM BINING DIFFERENT BUSINESS SEGMENTS, INTEREST ON BORROWED CAPITAL CAN NOT BE DISALLOWED. 28. IN HERO CYCLES P. LTD. VS CIT (2015) 63 TAXMAN. COM 308 (SC) THE HONBLE APEX COURT HELD THAT WHEN THE ASSESSEE HAD USED THE BORROWED FUNDS FOR GIVING INTEREST FREE LOANS TO IT S SUBSIDIARY COMPANIES, AND WHEN IT WAS IMPERATIVE FOR THE ASSES SEE TO ADVANCE SUCH LOANS IN THE BUSINESS EXPEDIENCY, THE INTEREST EXPENSE ON THE BORROWED CAPITAL CANNOT BE DISALLOWED. 29. NOW COMING BACK TO THE FACTS OF THE CASE, THE REASONS FOR DISALLOWANCE OF THE EXPENSE BY THE LEARNED AO IS TH AT DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE DID NOT CARRY O N ANY BUSINESS AND THAT IS THE REASON WHY SUCH AN EXPENSE CANNOT ALLOW ED. HOWEVER, LD. SUSTAINED THE DISALLOWANCE ON THE GROUND THAT THE B ORROWED FUNDS WERE INVESTED IN GGGRL AND NOT USED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. ITA NOS. 4851 & 4970/DEL/2011 14 30. IN THE PRECEDING PARAGRAPHS WE HELD THAT THE AS SESSEE ACQUIRED THE BUSINESS WHICH HAD ALREADY BEEN SET UP AND COND UCTED IT FOR SOME TIME, BUT THERE WAS A TEMPORARY LULL BETWEEN T HE PERIOD OF DEMOLITION OF THE HOTEL BUILDING AND RESUMING THE S AME IN APRIL 2009. LEARNED CIT(A) ALSO VIDE PARA 5.2 OF HIS ORDER CLEA RLY HELD THAT THERE IS NO DISPUTE OVER THE FACT THAT THE HOTEL ACTIVITY WA S TEMPORARILY IN SUSPENSION. IT IS, THEREFORE, CLEAR THAT THE BUSIN ESS ACTIVITIES OF THE ASSESSEE WERE SUSPENDED FOR SOME TIME AND FOLLOWING THE DECISION OF THE HONBLE APEX COURT REPORTED IN VIKRAM COTTON MI LLS (SUPRA), MASS PRODUCTS LTD. (SUPRA), SYLVANIA & LAXAMAN P. LTD. ( SUPRA) AND M/S KALYANJI MAVJI & CO. (SUPRA), WE HELD THAT THE ASSE SSEES CLAIM OF EXPENDITURE DURING THE PERIOD OF TEMPORARY SUSPENSI ON OF BUSINESS IS ALLOWABLE. 31. ON THE SAME FOOTING, IN VIEW OF THE DECISIONS I N TULIP STAR HOTELS LTD.(SUPRA), RPG TRANSMISSIONS LTD.(SUPRA), RELIANC E COMMUNI- CATIONS INFRASTRUCTURE LTD. (SUPRA) AND HERO CYCLES (SUPRA), LAYING DOWN THE LAW THAT WHERE THERE IS NEXUS BETWEEN EXPE NDITURE AND PURPOSE OF BUSINESS, INTEREST ON BORROWED CAPITAL W HETHER IT IS FOR INVESTMENT OF ACQUIRE CONTROLLING INTEREST IN A SUB SIDIARY OR TOWARDS LOAN IN VIEW OF THE BUSINESS EXPEDIENCY, INTEREST O N THE BORROWED CAPITAL CANNOT BE DISALLOWED, WE HOLD THAT THE INVE STMENT IN GGGRL AND TO LEND AMOUNTS TO THEM FOR THE PURPOSE OF STRE NGTHENING THE HOSPITALITY BUSINESS, MERE NON CONDUCT OF HOTEL BUS INESS IN THE PREVIOUS YEAR DUE TO THE TEMPORARY SUSPENSION THERE OF BY THE ASSESSEE CANNOT BE A GROUND TO DENY THE DEDUCTION O F THE INTEREST EXPENSE ON THE BORROWED CAPITAL. REASONING GIVEN B Y LEARNED CIT(A) DOES NOT STAND TO JUDICIAL SCRUTINY. ITA NOS. 4851 & 4970/DEL/2011 15 32. FOR THESE REASONS, WE FIND IT DIFFICULT TO SUST AIN THE ADDITIONS MADE BY THE LEARNED AO EITHER IN RESPECT OF THE EXP ENSES INCURRED DURING THE RELEVANT PREVIOUS YEAR I.E. PRIOR TO THE RESUMPTION OF THE HOTEL BUSINESS AND ALSO IN RESPECT OF THE INTEREST ON THE BORROWED CAPITAL, CANNOT BE SUSTAINED. 33. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 26.02.2018. SD/- SD/- (G.D. AGRAWAL) (K.NARASIMH A CHARY) PRESIDENT JUDICIAL MEMBER DATED: 26 .02.2018 VJ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT TRUE COPY ASSISTANT REGISTRAR ITAT NEW DELHI DRAFT DICTATED ON 27.12.2017 DRAFT PLACED BEFORE AUTHOR DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS KEPT FOR PRONOUNCEMENT ON FILE SENT TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.