ACIT, New Delhi v. M/s Connaught Plaza Restaurants Private Limited,, New Delhi

ITA 1985/DEL/2009 | misc
Pronouncement Date: 25-01-2010 | Result: Dismissed

Appeal Details

RSA Number 198520114 RSA 2009
Bench Delhi
Appeal Number ITA 1985/DEL/2009
Duration Of Justice 8 month(s) 13 day(s)
Appellant ACIT, New Delhi
Respondent M/s Connaught Plaza Restaurants Private Limited,, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 25-01-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 25-01-2010
Date Of Final Hearing 25-01-2010
Next Hearing Date 25-01-2010
Assessment Year misc
Appeal Filed On 12-05-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B : NEW DELHI BEFORE SHRI G.S.PANNU AM AND SHRI RAJPAL YADAV JM ITA NO.1985/DEL/2009 ASSESSMENT YEAR : 1998-99 ASSTT.COMMISSIONER OF INCOME TAX CIRCLE-3(1) NEW DELHI. VS. M/S CONNAUGHT PLAZA RESTAURANTS PRIVATE LIMITED 13-A JOR BAGH MARKET NEW DELHI 110 003. PAN/GIR NO.C-34. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MANISH GUPTA DR. RESPONDENT BY : SHRI AJAY VOHRA ADVOCATE. ORDER PER G.S.PANNU AM : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(APPEALS) DATED 26.2.2009 PERTAINING TO THE ASSESSMENT YEAR 1 998-99. 2. THE SOLITARY ISSUE RAISED BY THE REVENUE RELATES TO THE ACTION OF CIT(APPEALS) IN DELETING AN ADDITION OF RS.21 60 00 0/- MADE BY THE ASSESSING OFFICER U/S 36(1)(III) OF THE INCOME TAX ACT 1961 (IN SHORT THE ACT). 3. BRIEFLY STATED THE FACTS RELEVANT TO THE IMPUGN ED DISPUTE CAN BE UNDERSTOOD AS FOLLOWS. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT 1956 AND IS INTER ALIA ENGAGED IN RUNNING OF FAST FOOD RESTAURANTS UNDER THE NAME OF MC DONALD AS FRANCHISEE. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE A SSESSEE HAD GIVEN A SECURITY DEPOSIT OF RS.2.70 CRORES TO M/S CRESCENT PRINTING WORKS PVT.LTD. (IN SHORT THE OTHER COMPANY) ON WHICH NO INTEREST WAS BEING CHAR GED. THE ASSESSING OFFICER ALSO NOTED THAT THE OTHER COMPANY WAS A SISTER CONC ERN INASMUCH AS THE PROMOTER DIRECTOR OF THE ASSESSEE COMPANY WAS A DIRECTOR IN THE OTHER COMPANY. THE ASSESSEE WAS FOUND TO HAVE INCURRED EXPENDITURE BY WAY OF INTEREST ON BORROWED ITA-1985/DEL/2009 2 FUNDS. ACCORDINGLY THE ASSESSEE WAS ASKED TO JUST IFY ADVANCING OF A SUBSTANTIAL AMOUNT TO A SISTER CONCERN FREE OF INTEREST. IN RE PLY THE ASSESSEE SUBMITTED THAT IT HAD TAKEN PREMISES SITUATED AT P-14 CONNAUGHT CIRC US NEW DELHI ON RENT FROM THE OTHER COMPANY AND THE STATED AMOUNT WAS ADVANCE D AS INTEREST FREE SECURITY DEPOSIT AGAINST LEASE OF SUCH PREMISES. THE ASSESS EE STATED THAT IT WAS A NORMAL BUSINESS PRACTICE TO ADVANCE INTEREST FREE DEPOSIT AGAINST LEASE OF PREMISES. TO SUBSTANTIATE THE SAME THE ASSESSEE SUBMITTED A LEA SE DEED BY VIRTUE OF WHICH ANOTHER CONCERN HAD TAKEN LEASE OF THE PREMISES AT CONNAUGHT PLACE BY PAYING REFUNDABLE SECURITY DEPOSIT. IN ADDITION THE ASSE SSEE ALSO FURNISHED A COMMUNICATION FROM A CONCERN M/S BANSAL PROPERTIES ENUMERATING RENTAL DETAILS OF ANOTHER PROPERTY IN CONNAUGHT PLACE WHICH ALSO INCLUDED PAYING OF A REFUNDABLE SECURITY DEPOSIT. THE ASSESSING OFFICER CONSIDERED THE SUBMISSIONS OF THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT EVE N AS PER THE TWO DOCUMENTS SUBMITTED BY THE ASSESSEE THE SECURITY DEPOSIT GIV EN BY THE ASSESSEE TO THE OTHER COMPANY WAS ON A HIGHER SIDE. AS PER THE ASSESSING OFFICER CONSIDERING THE RENTALS QUOTED BY M/S BANSAL PROPERTIES THE DEPOSI T OF RS.2.70 CRORES GIVEN BY THE ASSESSEE WAS IN EXCESS BY AT LEAST RS.1.20 CRORES. BY APPLYING INTEREST RATE OF 18% ON SUCH EXCESS DEPOSIT A SUM OF RS.21 60 000/- WAS WORKED OUT AND THE SAME HAS BEEN DISALLOWED U/S 36(1)(III) OF THE ACT. THE ASS ESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(APPEALS). 4. IN APPEAL THE ASSESSEE ASSAILED THE ORDER OF CI T(APPEALS) ON VARIOUS POINTS. FIRSTLY IT WAS CONTENDED THAT THE ASSESSE E HAD ADVANCED THE IMPUGNED SUM TO THE OTHER COMPANY ON THE GROUND OF COMMERCIAL EX PEDIENCY AND FOR THE PURPOSES OF BUSINESS AND ACCORDINGLY NO DISALLOWAN CE WAS CALLED FOR U/S 36(1)(III) OF THE ACT FOLLOWING THE RATIO OF THE DECISION OF H ON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS LTD. VS. CIT - 288 ITR 1 (SC). SECONDLY IT WAS SUBMITTED THAT THE TRANSACTION WAS ON ARMS LENGTH AND WAS SUBSTANTIAT ED WITH THE HELP OF COMPARABLES WHEREIN THE EXPENDITURE INCURRED BY THE ASSESSEE WAS MUCH LESS THAN SIMILAR EXPENDITURE INCURRED IN ANOTHER CASE IN THE SAME LOCALITY. THIRDLY THE ITA-1985/DEL/2009 3 ASSESSEE CONTENDED THAT THE COMMERCIAL EXPEDIENCY I N A TRANSACTION IS TO BE SEEN FROM THE BUSINESSMANS POINT OF VIEW AND NOT FROM T HE REVENUES PERSPECTIVE. FOURTHLY IT WAS CONTENDED THAT THE ASSESSING OFFIC ER HAD NOT BROUGHT ANY EVIDENCE ON RECORD TO SHOW THAT THE INTEREST FREE S ECURITY DEPOSIT MADE BY THE ASSESSEE WAS EXCESSIVE HAVING REGARD TO THE LEGITIM ATE NEEDS OF THE ASSESSEES BUSINESS. THE CIT(APPEALS) HAS CONSIDERED THE VARI ED SUBMISSIONS OF THE ASSESSEE AND HAS DELETED THE ADDITION. AS PER THE CIT(APPEA LS) THE ADVANCE OF RS.2.70 CRORES GIVEN BY THE ASSESSEE TO THE OTHER COMPANY W AS FOR THE COMMERCIAL EXPEDIENCY AND IT COULD NOT BE CONSIDERED AS DIVERS ION OF BORROWED FUNDS FOR NON- BUSINESS PURPOSES. ACCORDING TO CIT(APPEALS) THE INTEREST EXPENSES TO THE EXTENT OF INTEREST CHARGEABLE ON THE BORROWING OF RS.1.20 CRORES WAS NOT LIABLE TO BE DISALLOWED U/S 36(1)(III) OF THE ACT INASMUCH AS TH E ASPECT OF COMMERCIAL EXPEDIENCY IN RELATION TO THE STATED TRANSACTION HA S NOT BEEN DISPROVED BY THE ASSESSING OFFICER. IN COMING TO HIS CONCLUSION TH E CIT(APPEALS) HAS RELIED UPON THE REASONING GIVEN BY HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS LTD. (SUPRA). AGAINST SUCH DELETION BY THE CIT(APPEALS) THE REVENUE IS IN APPEAL BEFORE US. 5. BEFORE US LEARNED DR APPEARING FOR THE REVENUE HAS TAKEN US THROUGH THE ORDER OF ASSESSMENT IN SUPPORT OF THE GROUND OF APP EAL RAISED BY THE REVENUE. THE LEARNED DR POINTED OUT TO PARAGRAPH 9 OF THE AS SESSMENT ORDER TO SUBMIT THAT THE ASSESSEE COMPANY HAD ADVANCED INTEREST FREE REF UNDABLE SECURITY DEPOSIT TO THE OTHER COMPANY AGAINST LEASE OF PREMISES. THE ASSES SING OFFICER HAD FOUND ON THE BASIS OF TWO CASES POINTED OUT BY THE ASSESSEE THA T THE ASSESSEE HAD GIVEN EXCESS SECURITY DEPOSIT. IT WAS POINTED OUT THAT ONLY IN RELATION TO THE EXCESS DEPOSIT ADVANCED AMOUNTING TO RS.1.20 CRORES THE RELATABLE INTEREST EXPENDITURE HAS BEEN SUBJECT TO DISALLOWANCE BY THE ASSESSING OFFICER U/ S 36(1)(III) OF THE ACT. 6. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE R ESPONDENT HAS REITERATED THE SUBMISSIONS PUT FORTH BEFORE THE CIT(APPEALS) AND H AS ALSO RELIED ON THE FINDINGS ITA-1985/DEL/2009 4 OF THE CIT(APPEALS). AS PER THE LEARNED COUNSEL T HOUGH THE CIT(APPEALS) HAS CONCLUDED THAT THE TWO CASES WERE NOT COMPARABLE BU T EVEN IF THE COMPARISON IS MADE IT CAN BE SEEN THE ASSESSEE HAS INCURRED LOWE R RENTALS AND THEREFORE IT COULD NOT BE SAID THAT THE ASSESSEE HAD INCURRED ANY UNRE ASONABLE OR EXCESSIVE EXPENDITURE BY WAY OF PAYING INTEREST FREE SECURITY DEPOSIT TO THE OTHER COMPANY AGAINST LEASE OF PREMISES. THE LEARNED COUNSEL ALS O POINTED OUT THAT THE AMOUNT WAS ADVANCED AS A PART OF THE LEASE AGREEMENT WHERE BY THE PREMISES WERE TAKEN ON LEASE FOR RUNNING A RESTAURANT. IT WAS POINTED OUT THAT THE ASSESSEE WAS TO PAY AT THE RATE OF 8.5% OF THE SALES IN THE SHAPE OF COMMI SSION FOR THE FIRST FOUR YEARS AND 7% THEREAFTER FOR THE FIFTH TO TWENTIETH YEAR. IN CONTRAST THE AGREEMENT OF THE OTHER CONCERN M/S PIZZA HUT NOTED BY THE ASSESSING OFFICER CONTAINED A FIXED PAYMENT OF RENT IN ADDITION TO PLACING OF SECURITY DEPOSIT AND ADVANCE RENTALS. THE COMPARATIVE COSTS HAVE BEEN WORKED OUT AND NOTED BY THE CIT(APPEALS) IN PARAGRAPH 7.3(IV) OF HIS ORDER WHICH SHOWS THAT THE COST INCURRED BY THE ASSESSEE IN TAKING THE IMPUGNED PREMISES ON LEASE IS MUCH LO WER THAN IN THE CASE OF M/S PIZZA HUT. IT WAS THEREFORE CONTENDED THAT THERE W AS NO JUSTIFICATION WITH THE REVENUE TO SUPPORT ITS GROUND OF APPEAL. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. SECTION 36(1)(III) OF THE ACT WHICH IS PRESENTLY IN DISPUTE PERMITS DED UCTION OF THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS. IN THIS CASE THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HA S ADVANCED CERTAIN SUMS TO A SISTER CONCERN FREE OF INTEREST. ACCORDING TO THE ASSESSING OFFICER IN TERMS OF SUCH ADVANCE THE ASSESSEE HAS PASSED ON FUNDS TO A SISTER CONCERN FREE OF INTEREST WHEREAS THE ASSESSEE IS PAYING INTEREST ON FUNDS BO RROWED BY IT. ACCORDINGLY PROPORTIONATE INTEREST ON SUCH ADVANCE HAS BEEN DIS ALLOWED U/S 36(1)(III) OF THE ACT. 8. UNDOUBTEDLY SECTION 36(1)(III) OF THE ACT PERMI TS DEDUCTION FOR INTEREST EXPENDITURE ONLY ON SUCH BORROWED FUNDS WHICH HAVE BEEN BORROWED FOR THE ITA-1985/DEL/2009 5 PURPOSES OF THE BUSINESS. IN THIS CASE THE ASSESS EE IS ADMITTEDLY ENGAGED IN THE BUSINESS OF RUNNING OF RESTAURANTS. FOR THE STATED PURPOSE IT TOOK ON LEASE THE PREMISES SITUATED AT P-14 CONNAUGHT CIRCUS NEW DE LHI AND IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HAS PUT THE PREMISES FOR USE IN ITS BUSINESS OPERATIONS. IT IS ALSO EMERGING FROM THE ORDERS OF THE LOWER AUTHO RITIES THAT AS PER THE TERMS OF THE LEASE AGREEMENT THE ASSESSEE HAD PLACED INTERE ST FREE REFUNDABLE SECURITY DEPOSIT OF RS.2.70 CRORES AND IT WAS TO PAY 8.5% OF THE TURNOVER AS LEASE RENTALS FOR THE FIRST FOUR YEARS AND THEREAFTER 7%. THE AFORES AID UNDISPUTED FACTS ITSELF LEAD TO ONE PREMISE THAT THE LEASE AGREEMENT IN QUESTION HA S BEEN ENTERED FOR THE PURPOSE OF BUSINESS. IN FACT THE VERY FACTUM OF THE ASSES SEE PAYING RENTALS AS A PERCENTAGE OF THE TURNOVER POINTS TO THE FACT THAT THE LEASED PROPERTY IS BEING UTILIZED FOR THE BUSINESS. THE ONLY POINT RAISED BY THE REVENUE IS THAT THE INTEREST FREE REFUNDABLE SECURITY DEPOSIT OF RS.2.70 CRORES IS EXCESSIVE. F OR THIS PURPOSE THE ASSESSING OFFICER HAS REFERRED TO TWO CASES ONE WHEREBY M/S PIZZA HUT (ANOTHER RESTAURANT CHAIN) HAD TAKEN PREMISES ON LEASE IN CONNAUGHT PLA CE AND SECONDLY AS PER LETTER OF M/S BANSAL PROPERTIES WHEREBY THE SECURITY DEPOS IT IS STATED TO BE EQUIVALENT TO 18 MONTHS' RENTAL. FROM THE AMOUNTS STATED IN THE AFORESAID TWO CASES WHICH WERE CANVASSED BY THE ASSESSEE THE ASSESSING OFFICER HA S WORKED OUT THAT EXCESS DEPOSIT OF RS.1.20 CRORES HAS BEEN GIVEN BY THE ASS ESSEE. WE HAVE CAREFULLY EXAMINED THIS ASPECT OF THE MATTER. FIRSTLY ON THI S ASPECT WE FIND THAT THE CIT(APPEALS) HAS NOTED THAT THE TWO CASES WERE FURN ISHED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER TO MERELY SUBSTANTIATE ITS CL AIM THAT ADVANCING OF INTEREST FREE SECURITY DEPOSIT AGAINST LEASE OF PREMISES IS A NORMAL BUSINESS PRACTICE. WE FIND AMPLE FORCE IN THE SAID REASONING TAKEN BY THE CIT(APPEALS) AND IT IS NOTICEABLE THAT THERE IS NO NEGATION BY THE ASSESSI NG OFFICER TO THE PLEA THAT IT IS A NORMAL BUSINESS PRACTICE TO GIVE REFUNDABLE SECURIT Y DEPOSIT FOR HIRING A PROPERTY ON LEASE. IN ANY CASE THE CIT(APPEALS) WAS MADE A WARE OF THE FOLLOWING DIFFERENCES BETWEEN THE LEASE AGREEMENT ENTERED INT O BY THE ASSESSEE AND THAT OF M/S PIZZA HUT:- ITA-1985/DEL/2009 6 (I) THE APPELLANT WAS LIABLE TO PAY LEASE RENT BAS ED ON A PERCENTAGE OF TURNOVER WHEREAS PIZZA HUT PAID FIXED MONTHLY RENT. (II) THAT PERCENTAGE OF SALES BASED ON WHICH LEASE RENT WAS PAYABLE BY THE APPELLANT WAS TO COME DOWN FROM 8.5 % TO 7% AFTER FOUR YEARS; WHEREAS THE RENT PAYABLE BY PIZZA HUT W AS TO INCREASE BY 20% EVERY THREE YEARS. (III) THE INTEREST FREE ADVANCE GIVEN BY THE APPELL ANT WAS REPAID BY M/S CRESCENT PRINTING WORKS PVT.LTD. (RS.20 00 000/ - IN MAY 1998 AND AT THE RATE RS.1 00 000 PER MONTH FROM APRIL 1 999 ONWARDS) WHEREAS THE SECURITY DEPOSIT PAID BY PIZZA HUT REMA INS WITH THE LESSOR FOR THE TENURE OF THE LEASE. (IV) THAT PIZZA HUT PAID ADVANCE RENT OF RS.48 00 0 00 WHEREAS THE APPELLANT PAID NO ADVANCE RENT. IN FACT THE APPELL ANT PAID NO RENT FOR ONE AND A HALF YEARS (FROM JUNE 1997 TO NOVEMBE R 1998). (V) THAT FOR THE PERIOD APRIL 1998 TO MARCH 2000 THE EXPENSES OF PIZZA HUT (INCLUDING NOTIONAL INTEREST) CAME TO RS. 9 87 500/- PER MONTH AGGREGATING TO RS.2 37 00 000 WHEREAS IN THE APPELLANTS CASE THE EXPENDITURE (INCLUDING NOTIONAL INTEREST) RANGED FROM RS.3 73 716/- PER MONTH TO RS.5 72 573/- PER MONTH AGGREGATING TO ONLY RS.1 09 67 134 FOR THE SAME PERIOD. 9. THE CIT(APPEALS) HAS FURTHER NOTED THE COMPARATI VE CHART OF EXPENDITURE INCURRED IN TERMS OF THE IMPUGNED LEASE AGREEMENT B Y THE ASSESSEE OVER A PERIOD OF TIME AND THAT BY M/S PIZZA HUT. WE HAVE CAREFULLY EXAMINED THE FACT POSITION NOTED BY THE CIT(APPEALS). EVIDENTLY THE ENTIRE L EASE AGREEMENT HAS TO BE VIEWED AS A WHOLE. THE ASSESSEE HAD ADVANCED INTER EST FREE REFUNDABLE SECURITY DEPOSIT AND IT HAS FURTHER INCURRED AN EXPENDITURE FOR THE USE OF THE PREMISES BY PAYING A PERCENTAGE OF THE GROSS SALES OF THE RESTA URANT. ON THE OTHER HAND THE OTHER CONCERN M/S PIZZA HUT HAS PAID INTEREST FREE DEPOSIT AND A FIXED RENTAL PER MONTH. QUITE CLEARLY THE MECHANICS OF THE ARRANGE MENT BY WAY OF WHICH THE ASSESSEE HAS TAKEN ON LEASE THE PREMISES AND THOSE DONE BY M/S PIZZA HUT IS ON A DIFFERENT FOOTING. IN THIS CONTEXT THE CIT(APPEAL S) HAS CORRECTLY NOTED THAT WHEREAS THE COMPENSATION BEING PAID BY THE ASSESSEE FOR THE USE OF THE PREMISES IS DYNAMIC INASMUCH AS IT IS RELATED TO THE SALES MAD E WHEREAS THE ARRANGEMENT ITA-1985/DEL/2009 7 ENTERED BY M/S PIZZA HUT ENSURES A STATIC MONTHLY P AYMENT IRRESPECTIVE OF THE SALES ACHIEVED. THIS ASPECT IN OUR VIEW HAS BEEN RIGHTLY NOTED BY THE CIT(APPEALS) TO BE SHOWING A BUSINESS APPROACH AND CANNOT BE TREATED TO BE UNREASONABLE ON THE PART OF THE ASSESSEE. EVEN WIT H REGARD TO THE OTHER CASE OF M/S BANSAL PROPERTIES IN OUR VIEW THE CIT(APPEALS ) CORRECTLY NOTED THAT THE EXPENSE INCURRED IS ALSO NOT DYNAMIC AND IS SIMILAR TO THE CASE OF M/S PIZZA HUT. CONSIDERING THE AFORESAID FIRSTLY THE COMPARISON M ADE BY THE ASSESSING OFFICER WITH THE TWO ABOVE CASES IS NOT JUSTIFIED TO CONCL UDE THAT THE ASSESSEE HAD ENTERED INTO ANY UNREASONABLE ARRANGEMENT SO AS TO SHOW EXC ESS ADVANCING OF INTEREST FREE REFUNDABLE SECURITY DEPOSIT TO THE OTHER CONCERN FO R TAKING ON LEASE THE IMPUGNED PREMISES. SECONDLY IN ANY CASE HAVING REGARD TO THE FACT THAT THE LEASE AGREEMENT IN QUESTION HAS BEEN ENTERED FOR THE PURPOSE OF BUS INESS AND QUALIFIES THE TEST OF COMMERCIAL EXPEDIENCY THE REVENUE IS NOT JUSTIFI ED TO TINKER WITH THE REASONABLENESS OF THE QUANTUM OF THE DEPOSIT SO AS TO JUSTIFY THE DISALLOWANCE OF RELATABLE INTEREST EXPENDITURE U/S 36(1)(III) OF TH E ACT. 10. IN THE RESULT CONSIDERING THE ENTIRE GAMUT OF FACTS AND CIRCUMSTANCES OF THE CASE WE HEREBY AFFIRM THE ORDER OF CIT(APPEALS) IN DELETING THE ADDITION OF RS.21 60 000/- MADE BY THE ASSESSING OFFICER U/S 36 (1)(III) OF THE ACT. ACCORDINGLY THE APPEAL OF THE REVENUE IS DISMISSED . DECISION PRONOUNCED IN THE OPEN COURT AT THE CONCL USION OF HEARING IN THE PRESENCE OF BOTH THE PARTIES ON 25 TH JANUARY 2010. SD/- SD/- (RAJPAL YADAV) (G.S.PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 25.01.2010. VK. ITA-1985/DEL/2009 8 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT DEPUTY REGISTRAR