TMI Blog2018 (3) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... pand their business in hospitality in NCR region, it was necessary for them to invest in GGGRL, which was owning and operating a premium 18 hole golf course - Held that:- The reasons for disallowance of the expense by the learned AO is that during the relevant previous year the assessee did not carry on any business and that is the reason why such an expense cannot allowed - Held that:- where there is nexus between expenditure and purpose of business, interest on borrowed capital whether it is for investment of acquire controlling interest in a subsidiary or towards loan in view of the business expediency, interest on the borrowed capital cannot be disallowed, we hold that the investment in GGGRL and to lend amounts to them for the purpose of strengthening the hospitality business, mere non conduct of hotel business in the previous year due to the temporary suspension thereof by the assessee cannot be a ground to deny the deduction of the interest expense on the borrowed capital - Decided in favour of assessee. - ITA No.4851/Del/2011 And ITA No.4970/Del/2011 - - - Dated:- 26-2-2018 - SHRI G.D. AGRAWAL, HON BLE PRESIDENT AND SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER For The As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the time limit. Net interest income from advances made to the group companies amounting to ₹ 1,68,355/- was offered to tax. An amount of ₹ 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 Lodhi hotel operations in view of extensive renovation of the hotel building (which was under renovation/reconstruction during the previous year relevant to the subject assessment year) no income was earned by the assessee from the business for the subject assessment year. The assessee had capitalized expenses in connection with the renovation/reconstruction activity under the head 'Capital Work-inprogress' (CWIP). However operating and other expenses relating to day to day administration of the business were charged to Profit and Loss account and the same, except preoperational period expense, were claimed by the assessee in the return of income 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 the income of the appellant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. vs CIT (1993) 201 ITR 464 wherein it was held that when the shares which are acquired not for the purpose of earning of income but only for the purpose of acquiring the controlling rights over another company, the interest on the borrowed funds cannot be treated as business purpose of the assessee and was not allowable. Ld.CIT(A) turned down the alternative plea of the assessee that the interest expense of ₹ 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 the 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 CIT(A) that the alleged expenses claimed by the assessee as revenue in nature be treated as capital expenditure and the learned AO to allow depreciation thereon at the rates allowable on buildings, it is the argument of the learned AR that the assessee purchased a running hotel and admittedly conducted operations till October 2002, as such it cannot be said that the business of the assessee was not set up. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilding, at no point of time, brought the business of the assessee to an end. Even during this period also the assessee actively engaged in the business in managing the GGGRL. Learned AR, therefore, submitted that the operating expenses incurred in the course of resumptions of hotel operations should be allowed for tax purposes, inasmuch as the renovation of the building was essential for the assessee to continue their business and in fact, immediately after the renovation assessee resumed the hotel business. 14. In support of his contention that the suspension 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 decision 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 machinery for 10 - 19 years to exploit them commercially after which they were returned to the assessee. Hon ble Apex Court held that it was only temporary in nature and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 steps in that direction is taken irrespective of the first sale, the business is said to have been commenced. 18. Insofar as the fact pleaded by the assessee that 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 there 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 learned CIT(A) in his order also shows that the assessee conducted hotel business up to 31st October 2002 therein. The question - whether the assessee commenced business or not is, therefore, not relevant for the adjudication of the claim now preferred by the assessee. What is to be seen is whether there was any closure of business necessitating the assessee to set up the business again? and whether the assessee is entitled to claim the expenses to the tune of ₹ 3,55,63,725/- could be allowed as deduction under section 37 of the Act or not? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee abandoned the business requiring them to resetup it again. No set up is required in this case. While respectfully following the decision of the Hon ble apex Court in M/s Kalyanji Mavji (supra) we further hold that the assessee s claim of 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 to 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 assessee s grounds are allowed. 22. Now coming to the interest expense, it is the case of the assessee that in order to expand their business in hospitality in NCR region, it was necessary for them to invest in GGGRL, which was owning and operating a premium 18 hole golf course, that in that pursuit on 2.5.2005 they have acquired 51% stake for a consideration of 24.25 crores and as a condition precedent for such acquisition they h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the investments were made in subsidiary company and monies were advanced to related companies for furthering business of the assessee. The Hon ble Bombay High Court held that no disallowance of interest charges can be made. 27. In CIT vs RPG Transmissions Ltd. (2014) 48 Taxman.com 57 (Mad), it is held that when an investment is made by the assessee in shares of the group company for strategic business purposes, because companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments, interest on borrowed capital cannot be disallowed. 28. In Hero Cycles P. Ltd. vs CIT (2015) 63 Taxman.com 308 (SC) the Hon ble apex court held that when the assessee had used the borrowed funds for giving interest free loans to its subsidiary companies, and when it was imperative for the assessee 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 that during the relevant previous year the assessee did not carry on any business and that i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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