TMI Blog2021 (7) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... rder on the ground of low tax effect on disputed issue due to circular issued by CBDT. Accordingly, we hold that the issue of allowability of interest paid on loans need to be examined independently in Asst Year 2013-14 dehors the fact of non-filing of appeal by the revenue before us for Asst Year 2012-13. CIT-A had enhanced the income by treating the interest income on debentures to be taxed under the head income from other sources and disallow the entire gross interest paid on loans u/s 36(1)(iii) of the Act. Since the aforesaid issue of allowability of interest paid is set aside to the file of the ld CITA this interconnected issue of interest income on debentures getting taxed as income from other sources is also set aside to the file of ld CITA for fresh adjudication in the light of aforesaid directions. Grounds raised by the assessee allowed for statistical purposes. - ITA No.5305/Mum/2019 And ITA No.5306/Mum/2019 - - - Dated:- 15-6-2021 - Shri M. Balaganesh, AM And Shri Ravish Sood, JM For the Assessee : Shri B.V. Jhaveri For the Revenue : Shri Tharian Oommen ORDER PER M. BALAGANESH (A.M): These appeals in ITA Nos. 5305/Mum/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly reduced the business loss claimed by the assessee thereon. 4. In first appeal, the ld CITA upheld the action of the ld AO in disallowing the interest u/s 36(1)(iii) of the Act . But the ld CITA proceeded to treat the interest income on debentures amounting to ₹ 99,00,000/- to be taxed under the head income from other sources‟ and accordingly disallowed interest paid on borrowed funds u/s 36(1)(iii) of the Act to the tune of ₹ 4,68,55,519/-. This action resulted in enhancement of income by ₹ 99 lacs by the ld CITA. Aggrieved, the assessee is in appeal before us. 5. The ld AR argued that the borrowed funds from IBFSL were utilised by the assessee by investing in 3300000 debentures of KA Hospitality Pvt Ltd of ₹ 100 each and that these debentures are convertible into equity and accordingly it is a business decision taken in long term interest by the assessee company to subscribe to convertible debentures. He submitted that KA Hospitality Pvt Ltd is engaged in the business of bringing uber-luxury stand-alone world class restaurants and serving authentic cuisine in India. He further stated that considering the profile of M/s. KA Hospitality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bright future in Restaurant Business and therefore, the investment in debentures of M/s. KA Hospitality Pvt. Ltd. was a business decision taken on the grounds of commercial expediency of the assessee company. In support of this, he placed reliance on the decision of Hon‟ble Supreme Court in the case of S A Builders Ltd vs CIT reported in 288 ITR 1 (SC). 5.3. The ld AR also filed a written reply on 4.6.2021 in response to the queries raised by the bench wherein it was stated that the hospitality business was carried on only by M/s KA Hospitality Pvt Ltd and not by the assessee and that the assessee company had merely invested in convertible debentures thereon. Since M/s KA Hospitality Pvt Ltd had incurred losses upto Asst Year 2018-19, the assessee company did not receive any income from hospitality business other than interest on debentures. It was also stated that the assessee company, in order to meet its financial crisis, sold about 50% of its debentures in Financial Year 2017-18 at ₹ 117.50 per debenture and earned long term capital gains thereon, which was duly offered to tax in Asst Year 2018-19. It was also stated that M/s KA Hospitalilty Pvt Ltd on 22.3.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of low tax effect on disputed issue due to circular issued by CBDT. Accordingly, we hold that the issue of allowability of interest paid on loans need to be examined independently in Asst Year 2013-14 dehors the fact of non-filing of appeal by the revenue before us for Asst Year 2012-13. 6.1. It is not in dispute that the assessee had earned interest income on debentures investment at the rate of 3% per annum amounting to ₹ 99 lacs during the year under consideration. The same rate of return was stated to be earned in subsequent years also on the value of debentures held in respective years. It is a fact that the assessee is paying interest on its borrowings at an approximate rate of 14% interest per annum. Hence there arises a controversy as to whether any prudent businessman would borrow money at the rate of approximately 14% and invest in debentures to earn interest at the rate of 3%. Even though the investment in convertible debentures was made by the assessee in its sister concern, it is for the assessee to prove that either it or its sister concern was benefitted out of the investment made in convertible debentures. Originally the investment in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantially, we find that there is no finding given by the ld CITA to prove that the said increase in fixed assets had happened out of amounts received from assessee in the form of debenture investment. We find that this finding would be crucial for adjudication of the issue in dispute. Further, we find that no finding is given by the ld CITA to prove that M/s KA Hospitality Pvt Ltd was benefitted out of the amounts received in the form of debenture investment by using the said funds for the purpose of its business. Without this finding, the ratio laid down by the Hon‟ble Apex Court in the case of SA Builders Ltd reported in 288 ITR 1(SC) cannot be applied directly. Hence the reliance placed on the same by the ld AR is totally misplaced at this juncture. 6.2. We further find that the ld AR had placed reliance on the decision of Hon‟ble Andhra Pradesh High Court in the case of CIT vs Peninsular Investment Ltd reported in 29 taxmann.com 422 (AP) in support of its contentions. On perusal of the said decision, we find that in that case , that assessee was engaged in the business of investment in shares and loans were borrowed from one group company to make investment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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