Case Law Details
Moonrock Hospitality (P) Ltd. Vs ACIT (ITAT Delhi)
The assessee appealed against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2016-17, challenging the confirmation of disallowance under Section 36(1)(iii) of the Income Tax Act, 1961. The dispute related to the proportionate interest disallowed on the ground that the assessee had advanced interest-free funds to its wholly owned subsidiary. The assessee contended that the funds had been extended to the subsidiary to pursue its business activities in furtherance of commercial expediency.
The assessee, a company having investments in wholly owned subsidiaries, had borrowed funds from various companies and advanced an interest-free loan of ₹2,49,50,000 to its subsidiary, M/s Vinu Promoters Pvt. Ltd. The Assessing Officer observed that the advance had been made out of interest-bearing funds and called upon the assessee to explain why interest expenditure should not be disallowed under Section 36(1)(iii). Although the assessee submitted that the advance was for business purposes, the Assessing Officer held that there was diversion of interest-bearing funds towards a non-interest-bearing advance to a related concern. Applying an interest rate of 9%, the Assessing Officer computed proportionate interest and ultimately made a disallowance of ₹10,88,438 under Section 36(1)(iii). The CIT(A) upheld the disallowance.
Before the Tribunal, the assessee relied upon several judicial precedents, including the Delhi High Court’s decision in CIT vs. Tulip Star Hotels Ltd., submitting that interest on borrowed funds invested in a subsidiary to acquire control of a new business asset is allowable under Section 36(1)(iii). The assessee also referred to its Memorandum of Association to demonstrate that its business objects included carrying on hotel-related businesses and promoting companies for acquiring the company’s properties, rights, and liabilities. Reliance was also placed on the Supreme Court’s decision in Hero Cycle (P.) Ltd. and the Bombay High Court’s decision in CIT vs. Reliance Communications Infrastructure Ltd., along with other judicial authorities, to contend that interest on borrowed funds advanced to a wholly owned subsidiary for business purposes could not be disallowed.
The Tribunal considered the rival submissions and the judicial precedents cited. It observed that the Assessing Officer had made the disallowance on the premise that interest-bearing funds had been diverted towards a non-interest-bearing advance, while the CIT(A) had disregarded the assessee’s plea of commercial expediency. The Tribunal found merit in the assessee’s submissions and noted that the Delhi High Court in Tulip Star Hotels Ltd. had held that interest paid on borrowed capital invested in a subsidiary to acquire control of a new hotel was allowable under Section 36(1)(iii). It further noted that the Bombay High Court in Reliance Communications Infrastructure Ltd. had held that no disallowance of interest could be made where borrowed funds were utilised for investments in a subsidiary company and interest-free advances to a related concern for furthering business. The Tribunal also referred to the Supreme Court’s decision in Hero Cycle (P.) Ltd., which held that once a nexus between expenditure and business purpose is established, the Revenue cannot substitute its judgment for that of the businessman.
Since it was undisputed that the assessee had extended funds to its wholly owned subsidiary for business purposes, the Tribunal held that no disallowance of interest paid on borrowed funds could be made under Section 36(1)(iii). It accordingly set aside the order of the CIT(A), directed the Assessing Officer to delete the disallowance of ₹10,88,438, and allowed the assessee’s appeal.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the assessee is directed against the order dated 6th May, 2019 of the CIT(A)-6, New Delhi, relating to Assessment Year 2016-17.
2. The only effective ground raised by the assessee reads as under:-
“[2] That on the facts & circumstances of the case the Learned CIT(A), New Delhi, has grossly erred both in law and on facts in confirming the proportionate interest computed at Rs.22,56,750/- by the Ld. AO and making addition of Rs.20,56,750/- by incorrectly applying the provisions of section 36(l)(iii) of the I.T. Act, 1961 despite of the admitted fact that the funds have been extended to a wholly-owned subsidiary company to pursue its business activities and not for any purpose other than business in furtherance of commercial expediency.”
3. Facts of the case, in brief, are that the assessee is a company having investments in wholly owned subsidiaries along with loan given to such companies mainly out of funds borrowed from various other companies. It filed its return of income on 30th August, 2016 declaring loss of Rs.52,06,669/-. During the course of assessment proceedings, the AO noted that the assessee company has advanced interest free loan of Rs.2,49,50,000/- to its subsidiary company M/s Vinu Promoters Pvt. Ltd. out of its interest bearing funds received on account of unsecured loan from various companies. He observed that this loan was advanced in previous years and a sum of Rs.2,52,00,000/- was outstanding against the company at the start of the year. The AO asked the assessee to explain as to why disallowance of interest expenses should not be made in view of the provisions of section 36(1)(iii) of the IT Act. The assessee explained that interest expenses are allowable as the funds were extended to wholly owned subsidiary for the purpose of business.
4. However, the AO was not satisfied with the explanation given by the assessee. According to him, there is diversion of interest bearing funds towards non-interest bearing advance to a related concern. Since the assessee company has paid interest @ 9% on unsecured loans, the AO computed the proportionate amount of interest on interest free advances given to subsidiary companies at Rs.22,56,750/-. Since the assessee has claimed total expenses at Rs.54,38,294/-out of which the AO had already made disallowance of Rs.41,49,856/- u/s 14A and since the assessee company had already offered a sum of Rs.2 lakhs as disallowance u/s 14A in its computation of total income, the AO made addition of the remaining amount of interest expenses of Rs.10,88,438/- u/s 36(1)(iii) of the Act. In appeal, the ld.CIT(A) upheld the action of the AO.
5. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
6. The ld. Counsel for the assessee, at the outset, submitted that the Hon’ble Delhi High Court in the case of CIT vs. Tulip Star Hotels Ltd., 338 ITR 482, has held that where assessee is engaged in the business of owning, running and managing hotels, borrowed money and invested the same in its subsidiary company with a view to acquire control of a new hotel, it was to be held that interest paid on borrowed capital was allowable u/s 36(1)(iii) of the Act. Referring to the main object of the assessee company as per its Memorandum of Association, copy of which is placed at page 60 of the paper book, the ld. Counsel drew the attention of the Bench to the main objects which are as under:-
“(A) THE MAIN OBJECTS TO BE PURSUED BY THE COMPANY ON ITS 1NCORPORATON ARE:-
1. To acquire, taken on lease or under an arrangement, deal, trade and purchase, sell, construct, own, posses, manage, carry on business of Hotel, Guest House, Malls, Restaurant, Cafe, Tavern, place of refreshment/Entertainment, boarding and lodging, house keepers, licensed victuallers, wine/beer/brandy/whisky and spirit merchants, ice cream parlours, tea/coffee lounge, motels, snack bars, fast food courts and every type of eating house, purveyors, cinema and show on caterers for public amusement; proprietors, porters on brokers of food, local and foreign produce of all types and kinds of perfumes, chemist, toys, other items of games, fancy items, gift items, clubs, nightclubs, discotheques, bath, dressing rooms, laundries, places of amusement, recreation, sport1 entertainment, sports bar, casino, children cafe, tobacco and cigar merchant, supplier/caterers for railways/shipping/aeroplanes companies and other modes of carriers, cinema- theatrical and opera box and to carry on the business of imports and exports of goods utilized for the aforesaid business.”
7. Similarly, referring to the other objects of the assessee company, as per clause 19 at page 4 of the Memorandum of Association, he submitted that it is the other object of the assessee company to establish or promote or concur in establishing or promote any company for the purpose of acquiring all or any of the properties, rights and liabilities of the Company:-
“19. To establish, or promote or concur in establishing or promote any company for the purpose of acquiring all or any of the properties, rights and liabilities of the Company.”
8. Referring to the decision of the Hon’ble Supreme Court in the case of Hero Cycle (P.) Ltd., reported in 379 ITR 347, he submitted that the Hon’ble Supreme Court in the said decision has held that once it is established that there is nexus between expenditure and purpose of business Revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case.
9. Referring to the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Communications Infrastructure Ltd., reported in 260 CTR 159, he submitted that the Hon’ble Bombay High Court in the said decision has held that where assessee for furthering its business had utilized borrowed funds for making investments in its subsidiary company and for making interest free advances to a related company, no disallowance of interest paid on borrowed funds could be made.
9.1 The ld. Counsel for the assessee also relied on the following decisions:-
(i) SA Builders Ltd. vs. CIT (2007) 158 Taxman 74 (SC);
(ii) PCIT vs. Reebok India Company (2018) 98 taxmann.com 413 (Del);
(iii) CIT vs. Dalmia Cement (P) Ltd. (2002) 121 Taxman 706 (Del);
(iv) Hindalco Industries Co. vs. CIT (2017) 88 taxmann.com 532 (All);
(v) DCIT vs. Enercon India Ltd. (2017) 82 taxmann.com 334 (Mumbai Trib.);
(vi) ACB India Power Ltd. vs. DCIT (ITA No.82/Del/2016 (Del ITAT); &
(vii) CIT vs. Tulip Star Hotels Ltd. (2011) 16 taxmann.com 335 (Del)
10. He accordingly submitted that this being a covered matter in favour of the assessee, the ground raised by the assessee should be allowed.
11. The ld. DR, on the other hand, heavily relied on the orders of the AO and the CIT(A).
12. I have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, made addition of Rs.10,88,438/- u/s 36(1)(iii) of the Act on the ground that the assessee has diverted its interest bearing funds towards non-interest bearing advances to a related concern. I find, the ld.CIT(A) upheld the action of the AO disregarding the argument of the assessee that loan had been advanced on account of commercial expediency and, therefore, no disallowance could be made in the light of the decision of the Hon’ble Supreme Court in the case of SA Builders vs. CIT reported in 288 ITR 1. It is the submission of the ld. Counsel that when the assessee has borrowed money and invested the same in its subsidiary companies with a view to acquire control of a new asset, such interest paid on borrowed capital has to be allowed u/s 36(1)(iii) of the Act.
13. I find merit in the above arguments of the ld. Counsel for the assessee. The Hon’ble Delhi High Court in the case of Tulip Star Hotels Ltd. (supra) has held that where assessee is engaged in the business of owning, renting and managing hotels, borrowed money and invested the same in its subsidiary company with a view to acquire control of a new hotel, such interest paid on borrowed capital is allowable u/s 36(1)(iii) of the IT Act, 1961.
14. I find, the Hon’ble Bombay High Court in the case of CIT vs. Reliance Communications Infrastructure Ltd. (supra) has held that where the assessee, for furthering its business had utilized borrowed funds for making investments in its subsidiary company and for making interest free advances to a related company, no disallowance of interest paid on borrowed funds could be made. I find, the Hon’ble Supreme Court in the case of Hero Cycle (supra) has held that once it is established that there is nexus between expenditure and purpose of business, Revenue cannot justifiably claim to put itself in the arm chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. The various other decisions relied on by the ld. Counsel for the assessee in the case law compilation also supports the case of the assessee to the proposition that where interest free advances made to a wholly owned subsidiary company, no disallowance of interest paid on borrowed fund could be made. Since, in the instant case, admittedly, the assessee has extended funds to its wholly owned subsidiary company for the purpose of business, therefore, in view of the decisions cited supra, I hold that no interest paid on borrowed funds could have been disallowed u/s 36(1)(iii) of the IT Act, 1961. I, therefore, set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs.10,88,438/-. The grounds raised by the assessee are accordingly allowed.
15. In the result, the appeal filed by the assessee is allowed.
The decision was pronounced in the open court on 22.09.2021.
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