DCIT 8(2), MUMBAI v. PLAZA HOTELS P. LTD, MUMBAI

ITA 2676/MUM/2009 | 2005-2006
Pronouncement Date: 29-03-2011 | Result: Dismissed

Appeal Details

RSA Number 267619914 RSA 2009
Assessee PAN AAACP2117N
Bench Mumbai
Appeal Number ITA 2676/MUM/2009
Duration Of Justice 1 year(s) 11 month(s) 2 day(s)
Appellant DCIT 8(2), MUMBAI
Respondent PLAZA HOTELS P. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 29-03-2011
Date Of Final Hearing 01-02-2011
Next Hearing Date 01-02-2011
Assessment Year 2005-2006
Appeal Filed On 27-04-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C MUMBAI BEFORE SHRI R V EASWAR PRESIDENT AND SHRI R K PANDA ACCOUNTANT MEMBER I T A NO: 2676/MUM/2009 (ASSESSMENT YEAR: 2005-06) DEPUTY COMMISSIONER OF INCOME TAX APPELLANT RANGE 8(2) MUMBAI VS M/S PLAZA HOTELS PRIVATE LIMITED MUMBAI RESPONDE NT (PAN: AAACP2117N) I T A NO: 3238/MUM/2009 (ASSESSMENT YEAR: 2005-06) M/S PLAZA HOTELS PRIVATE LIMITED MUMBAI APPELLAN T VS DEPUTY COMMISSIONER OF INCOME TAX RESPONDENT RANGE 8(2) MUMBAI ASSESSEE BY: SHRI R C JAIN REVENUE BY: SHRI P N DEVDASAN O R D E R R V EASWAR PRESIDENT: THESE ARE CROSS APPEALS RELATING TO THE ASSESSMENT YEAR 2005-06. THE ASSESSEE IS A DOMESTIC COMPANY ENGAGE D IN POWER GENERATION AND INVESTMENT BUSINESS. THE APPEALS AR ISE OUT OF THE ASSESSMENT ORDER PASSED ON 20.12.2007 UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961. 2. IN THE ASSESSEES APPEAL THE FIRST DISPUTE RELAT ES TO THE DISALLOWANCE MADE UNDER SECTION 14A READ WITH RULE 8D OF THE ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 2 INCOME TAX RULES. THE SECOND DISPUTE RELATES TO TH E DISALLOWANCE OF INTEREST UNDER SECTION 14A WHILE COMPUTING THE B OOK PROFIT FOR THE PURPOSES OF SECTION 115JB OF THE ACT. SINCE BOTH T HE ISSUES ARE INTERCONNECTED THEY ARE DEALT WITH IN A CONSOLIDAT ED MANNER. THE BRIEF FACTS IN THIS CONNECTION ARE THAT THE ASSESSE E DEBITED INTEREST OF ` 43 58 464/- IN THE PROFIT AND LOSS ACCOUNT. THE AS SESSING OFFICER WHILE COMPLETING THE ASSESSMENT NOTICED THA T THE ASSESSEES INVESTMENT IN THE PARTNERSHIP FIRM IN WH ICH THE ASSESSEE WAS A PARTNER AMOUNTED TO ` 5 52 46 045/- AS ON 31.03.2005 AND THE ASSESSEES 70% SHARE OF LOSS WAS ` 28 58 955/-. IN THE BACKGROUND OF THESE FACTS THE ASSESSING OFFICER CA LLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE INTEREST SHOUL D NOT BE DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT. TH E ASSESSEE POINTED OUT THAT IT BECAME A PARTNER IN THE FIRM M/S SPORTS FIELD AMUSEMENTS DURING THE RELEVANT PREVIOUS YEAR CONTRIBUTING ` 5.81CRORES AS CAPITAL AND THAT THE CAPITAL CAME OUT OF INTEREST FREE FUND S. IT WAS ALSO SUBMITTED THAT THE INVESTMENT WAS MADE OUT OF RECOV ERY OF THE LOANS GIVEN IN THE EARLIER YEARS INCOME TAX REFUND S AND INTERNAL ACCRUALS AND THEREFORE THERE WAS NO JUSTIFICATION F OR DISALLOWING THE INTEREST. THE ASSESSING OFFICER DID NOT ACCEPT THE SUBMISSION OF THE ASSESSEE. ACCORDING TO HIM THE SHARE CAPITAL FREE RESERVES AND OTHER INTERNAL ACCRUALS WHICH SWELL THE ASSESSE ES COFFERS ARE MEANT TO BE USED FOR ITS OWN BUSINESS AND THAT TO T HAT EXTENT THERE WAS NO NEED TO RAISE LOANS. HE ALSO OBSERVED THAT IF THE ASSESSEE HAD NOT INVESTED CAPITAL IN THE PARTNERSHIP FIRM T HE INTEREST PAID COULD HAVE BEEN SAVED. HE THUS HELD THAT ON THE ON E HAND THE ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 3 ASSESSEE HAS INVESTED ITS INTEREST FREE FUNDS IN TH E PARTNERSHIP FIRM AND ON THE OTHER HAND IT HAD BORROWED FUNDS FOR ITS OWN EXPANSION BY PAYING INTEREST ON THE BORROWINGS. ACCORDING TO HIM THIS CANNOT BE ACCEPTED AND THE INTEREST CANNOT BE ALLOWED AS A DEDUCTION. HE REFERRED TO THE JUDGMENT OF THE PUNJAB & HARYANA HI GH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LIMITED (2006) 286 ITR 1 (P & H). 3. WITHOUT PREJUDICE TO THE DISALLOWANCE MADE ON TH E ABOVE BASIS THE ASSESSING OFFICER ALSO INVOKED SECTION 1 4A IN SUPPORT OF THE DISALLOWANCE. HE NOTED THAT THE ASSESSEES MAI N SOURCES OF INCOME WERE AS UNDER: - (1) HOTEL ACTIVITIES FEES FROM KAMAT HOTELS (INDIA) LTD. ` 51 69 209/- (2) WIND POWER ACTIVITIES ` 50 04 918/- (3) FINANCING ACTIVITIES (INCLUDING ` 1 72 43 939/- DIVIDEND OF ` 1 04 38 584/-) HE FURTHER NOTED THAT THERE WAS PRACTICALLY NO HOTE L ACTIVITY BECAUSE THE ONLY EXPENDITURE CLAIMED WAS DEPRECIATION ON FU RNITURE AND FIXTURES AND VEHICLE EXPENSES. ACCORDING TO HIM E XCEPT FOR POWER GENERATION THERE WAS NO OTHER BUSINESS ACTIVITY WHI CH REQUIRED FINANCE FOR WHICH INTEREST WAS PAYABLE. THE DIVIDE ND WAS EXEMPT FROM TAX. EVEN THE SHARE OF PROFIT FROM THE PARTNE RSHIP FIRM WAS EXEMPT UNDER SECTION 10(2A) OF THE ACT. ON THE BAS IS OF THIS REASONING THE ASSESSING OFFICER HELD THAT THE INTER EST EXPENSES WERE MAINLY TOWARDS INVESTMENT IN THE PARTNERSHIP F IRM AND COMPANIES GENERATING INCOME WHICH WERE EXEMPT UNDE R CHAPTER III OF THE INCOME TAX ACT 1961. HE THEREFORE DISA LLOWED THE ENTIRE ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 4 INTEREST EXPENDITURE OF ` 43 58 464/- AS HAVING BEEN INCURRED FOR THE PURPOSE OF EARNING DIVIDENDS AND THE SHARE OF PROFI T WHICH ARE EXEMPT. IN OTHER WORDS HE INVOKED SECTION 14A TO DISALLOW THE INTEREST. 4. THUS THE ASSESSING OFFICER ADOPTED TWO DIFFERENT APPROACHES TO DISALLOW THE INTEREST. 5. THE DISALLOWANCE HAVING BEEN CONFIRMED BY THE CI T(A) THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE CONSIDERED THE FACTS AND THE CONTENTIONS OF BOTH THE SIDES. THE BORROWINGS AND THE INTEREST PAID IN RESPECT OF EACH OF THEM CAN BE SHOWN IN THE FORM OF THE FOLLOWING T ABLE: - NAME OF THE LENDER OPENING BALANCE FURTHER TAKEN REPAID CLOSING BALANCE INTEREST PAID FROM SHARE- HOLDERS 12 30 000 NIL 12 30 000 NIL 1 06 510 SECURED LOAN FROM SATARA CO-OP. BANK 1 81 54 090 2 50 00 000 44 38 200 3 87 15 890 23 51 667 SECURED LOAN FROM ALLAHA- BAD BANK 1 60 00 000 NIL 5 00 000 1 10 00 000 18 88 083 ABN AMRO BANK NIL 2 90 532 44 604 2 45 928 12 204 TOTAL 43 58 464 SO FAR AS THE INTEREST PAID TO ALLAHABAD BANK IS CO NCERNED OUR ATTENTION WAS DRAWN TO PAGE 9 OF THE PAPER BOOK. U NDER THE HEAD SECURED LOANS IN SCHEDULE C TO THE ACCOUNTS THE ASSESSEE HAS MADE A NOTE WHICH INTER ALIA STATES THAT IT WAS T AKEN FOR WIND ENERGY FARM PROJECT AT SATARA. SUCH LOAN WAS TAKEN IN THE EARLIER YEAR (YEAR ENDED 31.03.2004) TO THE EXTENT OF ` 1 60 00 000/- AND IT WAS SUBMITTED BEFORE US THAT THE LOANS WERE TAKEN F OR THE WIND ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 5 ENERGY BUSINESS AND NO INTEREST WAS DISALLOWED IN T HE EARLIER YEAR. AS REGARDS THE INTEREST OF ` 23 51 667/- PAID ON THE SECURED LOAN FROM SATARA CO-OPERATIVE BANK OUR ATTENTION WAS DR AWN TO PAGE 80 OF THE PAPER BOOK AND IT WAS SUBMITTED THAT THE LOA N WAS TAKEN IN THE EARLIER YEAR AND AN AMOUNT OF ` 92.40 LAKHS WAS INVESTED IN THE HOTEL PROJECT OF KAMAT HOLIDAY RESORTS PRIVATE LIMI TED. THIS WAS PART OF THE ASSESSEES BUSINESS AND THEREFORE THE I NTEREST WAS ALLOWABLE ACCORDING TO THE ASSESSEE. AS REGARDS T HE INTEREST PAID TO ABN AMRO BANK IT WAS POINTED OUT THAT IT WAS A SECURED TERM LOAN TAKEN FOR THE PURCHASE OF VEHICLE FOR THE PURP OSE OF THE ASSESSEES BUSINESS. IT WAS THUS SUBMITTED THAT NO PART OF THE SECURED LOANS WAS UTILIZED FOR THE PURPOSE OF EARNI NG EXEMPT INCOME SO THAT THE INTEREST CAN BE DISALLOWED EITHE R UNDER SECTION 36(1)(III) OR UNDER SECTION 14A OF THE ACT. 7. ON A CAREFUL CONSIDERATION OF THE MATTER IN THE LIGHT OF THE FACTS BROUGHT BEFORE US ON THE BASIS OF THE CONTENT S OF THE PAPER BOOK IT APPEARS TO US THAT THESE FACTS OUGHT TO BE CONSIDERED BY THE ASSESSING OFFICER BEFORE ANY DECISION IS TAKEN REGA RDING THE DISALLOWANCE OF THE INTEREST EITHER UNDER SECTION 3 6(1)(III) OR UNDER SECTION 14A OF THE ACT. THE STAND OF THE DEPARTMEN TAL AUTHORITIES IS THAT THE INTEREST WAS PAID TO EARN SHARE OF PROFITS AND DIVIDENDS WHICH WERE EXEMPT FROM TAX THE ASSESSING OFFICER H AD ALSO STATED THAT THE NEED FOR INTEREST AROSE ONLY BECAUSE THE I NTERNAL ACCRUALS WERE NOT USED FOR THE ASSESSEES OWN EXPANSION. TH E FACTS BROUGHT TO OUR NOTICE ON THE BASIS OF THE CONTENTS OF THE PAPER BOOK HOWEVER INDICATE THAT THE LOANS WERE UTILIZED NOT FOR THE PURPOSE OF ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 6 INVESTING IN THE PARTNERSHIP FIRM OR FOR EARNING TA X FREE DIVIDENDS BUT THEY WERE UTILIZED TO EARN TAXABLE INCOME FROM THE WIND ENERGY BUSINESS AND THE BUSINESS OF FINANCING THE HOTELS. THESE FACTS SHOULD BE VERIFIED BY THE ASSESSING OFFICER BEFORE ANY DECISION IS TAKEN REGARDING THE ALLOWABILITY OF THE INTEREST. IN THE INTEREST OF JUSTICE WE THEREFORE SET ASIDE THE ORDERS OF THE DE PARTMENTAL AUTHORITIES ON THIS POINT AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR ENABLING HIM TO TAKE A FRESH DECISION REGARDING THE ALLOWABILITY OF INTEREST AFTER GIVING ADEQUATE OPPORTUNITY TO THE ASSESSEE. THE ASSESSING OFFICER ALSO HAS TO KEEP IN MIND THE GUIDELINES GIVEN BY THE HONBLE BO MBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT (2010) 328 ITR 81 (BOM) BEFORE INVOKING SECTION 14 A OF THE ACT. IT MAY BE CLARIFIED THAT IN THE ABOVE JUDGMENT IT HAS BEEN HELD THAT RULE 8D OF THE INCOME TAX RULES IS APPLICABLE FROM THE ASSESSMENT YEAR 2008-09. WITH THE ABOVE DIRECTIONS WE RESTORE THE MATTER TO THE ASSESSING OFFICER. 8. THE ASSESSEES APPEAL IS THUS ALLOWED BUT ONLY F OR STATISTICAL PURPOSES. 9. IN THE APPEAL BY THE DEPARTMENT GROUND NOS: 4 A ND 5 ARE GENERAL AND REQUIRE NO DECISION. GROUND NO: 3 WHI CH IS AGAINST THE DECISION OF THE CIT(A) WITH REGARD TO THE DISAL LOWANCE OF THE INTEREST UNDER SECTION 14A OF THE ACT HAS BECOME I NFRUCTUOUS IN THE LIGHT OF OUR DECISION IN THE ASSESSEES APPEAL RELA TING TO THE ALLOWABILITY OF THE INTEREST. ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 7 10. GROUND NO: 1 IS TO THE EFFECT THAT THE CIT(A) E RRED IN TREATING THE INTEREST ON NON-CONVERTIBLE DEBENTURES AND INTE REST ON UNSECURED LOANS AS BUSINESS INCOME. THE ASSESSING OFFICER HAD TREATED THE INTEREST AS INCOME UNDER THE HEAD INCO ME FROM OTHER SOURCES. THIS ISSUE NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1998-99 AND 1999-2000 IN ITA NOS: 1147/MUM/2002 AND 1479/MUM/2003 DATED 06.01.2004. IN PARAGRAPH 18 OF THE SAID ORDER IT HAS BEEN HELD THA T THE INTEREST ON NON-CONVERTIBLE DEBENTURES IS ASSESSABLE AS BUSINES S INCOME BECAUSE THE DEBENTURES WERE HELD AS TRADE INVESTMEN TS HELD ON ACCOUNT OF BUSINESS. RESPECTFULLY FOLLOWING THIS D ECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE WE DIRECT THE ASSESSING OFFICER TO ASSESS THE INTEREST UNDER THE HEAD BUSI NESS. 11. GROUND NO: 2 IS THAT THE CIT(A) ERRED IN DELETI NG THE INTEREST OF ` 52 50 977/- ON ACCOUNT OF INTEREST FREE LOANS GIVEN BY THE ASSESSEE TO V V KAMAT HUF WHICH IS A MAJOR SHAREH OLDER OF THE COMPANY. THIS ISSUE HAD ALSO COME UP BEFORE THE TR IBUNAL IN THE ORDER CITED ABOVE. THE ACTUAL DECISION IS IN PARAG RAPH 17 OF THE SAID ORDER. IN THIS PARAGRAPH THE FOLLOWING FINDIN GS HAVE BEEN RECORDED: - (A) THE ASSESSEE ADVANCED FUNDS TO V V KAMAT HUF AS INTEREST BEARING LOANS OUT OF INTEREST FREE INTERNAL ACCRUALS AND INTEREST FREE ADVANCES RECEIVED FROM KAMAT HOTELS. ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 8 (B) THE FINANCIAL CONDITION OF V V KAMAT HUF WAS PRECARIOUS LOOKING AT THE HUGE LOSSES MADE FROM YEAR TO YEAR. (C) DUE TO A NUMBER OF SUITS FILED AGAINST V V KAMA T HUF BY THE CREDITORS V V KAMAT HUF BECAME FINANCIALLY UNVIABLE. (D) THE DEBT THEREFORE BECAME IRRECOVERABLE BOTH T HE PRINCIPAL AND THE INTEREST. (E) IN ORDER TO GIVE A BREATHER TO V V KAMAT HUF T O REVIVE ITS BUSINESS A RESOLUTION WAS PASSED BY THE ASSESSEE COMPANY ALLOWING A MORATORIUM ON THE INTEREST. (F) THE ASSESSEE COULD HAVE EVEN WRITTEN OFF THE DE BT AS BAD WHICH WOULD HAVE BEEN ALLOWABLE. (G) THE DECISION OF THE ASSESSEE TO WIPE THE INTERE ST WAS THUS TAKEN ON GROUNDS OF BUSINESS EXPEDIENCY. (H) SINCE NO INTEREST HAD ACCRUED OR ARISEN TO THE ASSESSEE NO NOTIONAL INTEREST CAN BE ADDED HAVING REGARD TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. SHOORJI VALLABHDAS & CO. 46 ITR 144 (SC). IT WAS ON THE BASIS OF THE ABOVE FINDINGS THAT THE TRIBUNAL HAD DELETED THE NOTIONAL INTEREST ADDED IN THE ASSESSME NT YEAR 2003- 04. ADMITTEDLY THE FACTS REMAIN THE SAME FOR THE YEAR UNDER APPEAL. THEREFORE RESPECTFULLY FOLLOWING THE ORDE R OF THE TRIBUNAL ITA NO: 2676/MUM/2009 ITA NO: 3238/MUM/2009 9 CITED ABOVE IN THE ASSESSEES OWN CASE WE CONFIRM THE DECISION OF THE CIT(A) TO DELETE THE INTEREST OF ` 52 50 977/-. 12. IN THE RESULT THE APPEAL OF THE DEPARTMENT IS DISMISSED. 13. TO SUM UP THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND THE DEPARTMENTS APPEAL IS DISMISSED. NO COSTS. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH MARCH 2011. SD/- SD/- (R K PANDA) (R V EASWAR) ACCOUNTANT MEMBER PRESIDE NT MUMBAI DATED 29 TH MARCH 2011 SALDANHA COPY TO: 1. M/S PLAZA HOTELS PVT. LTD. 70-C NEHRU ROAD VILE PARLE (EAST) MUMBAI 400 099 2. DCIT RANGE 8(2) MUMBAI 3. CIT-VIII MUMBAI 4. CIT(A)-VIII MUMBAI 5. DR C BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR ITAT MUMBAI