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TMI Blog2024 (12) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... d partly allowed the appeal preferred by the Assessee against the Assessment Order, dated 30/12/2019, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as 'the Act']. In the aforesaid appeal, the Assessee has filed cross objections. ITA No.913/Mum/2024 3. The Assessee has raised following grounds of appeal:- I. DISALLOWANCE UNDER SECTION 36(1)(iii) a. Learned CIT(A) erred in disallowing Rs. 24,37,53,214/- being interest under section 36(1)(iii) of the Act both on facts and in law. b. On the facts and circumstances of the case and in law, Learned CIT(A) erred invoking the provisions of Section 36(1)(iii) of the Act to disallow the following amounts out of interest expenditure by holding that the advancing of interest free loan to 100% subsidiaries did not fall within the meaning of "for the purpose of the business" in Section 36 (1)(iii) of the Act (1) Rs. 24,26,33,040/- proportionate interest relatable to alleged interest free loan given to My Orchid Hotels Pune Private Limited; (OHPPL) (2) Rs. 11.20.175/- proportionate interest relatable to alleged interest free loan given to M/s Mahodadhi Palace Private Ltd. (MPPL) c. Learned CIT (A) e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .102.64 crore) reported in the AIR with the amount of addition made on the basis of the cash deposits (Rs.43.19crore) while deciding the issue. The order of the Ld. CIT(A) does not mention about reconciliation of the total amount of cash deposited during the FY. 2016-17 and the amount of cash deposit made during period from 09.11.2016 to 30.12.2016 by the assessee" 3. Whether in the facts and circumstances the Ld.CIT(A) was right in deciding the issue without looking into larger issue of reconciliation of the amounts actually deposited and reflected in the AIR for F.Y. 2016-17. It is pertinent to mention here that the reconciliation was neither the mandate for Remand Report nor it found any mention in the Remand Report 4. Whether in the facts and circumstances the Ld. CIT(A) was right in holding that the cash deposits added in the assessment order was over and above the turnover reported by the appellant, and has not given any finding not has analyzed and justified this in the appellate order and is merely like a comment without any explanation 5. Whether in the facts and circumstances the Ld. CIT(A) was right in deleting the addition without giving proper reasoning and recon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) Orchids Hotel Pune Pvt Ltd INR 24,26,33,040/- INR 196,46,39,996/- x 12.35% p.a. Thus, vide Assessment Order, dated 30/12/2019, passed under Section 143(3) of the Act, the Assessing Officer made, inter alia, (a) Addition of INR.43,19,29,453/- on account of unexplained cash deposits and (b) Disallowance of INR.24,37,53,214/- under Section 36(1)(iii) of the Act. 7. Being aggrieved, the Assessee preferred appeal before the CIT(A) challenging, inter alia, the above additions. Before the CIT(A) it was contended on behalf of the Appellant that the assessment was framed on the Assessee without granting proper opportunity of being heard. The information/documents furnished by the Assessee during the course of assessment proceedings were not taken into consideration by the Assessing Officer. The Appellant also filed additional documents along with application for admission of additional evidence. The CIT(A) called for a report in relation from the Assessing Officer in this regard. The submissions and supporting documents filed by the Assessee were forwarded to the Assessing Officer. Taking the same as additional evidence, the Assessing Officer carried out inquiry/verification. Noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative as well as synopsis/submission filed by the Assessee before us. ITA No.913/Mum/2024 9. We would first take grounds raised by the Assessee in ITA No. 913/Mum/2024. All the grounds are directed against the addition made by the Assessing Officer under Section 36(1)(iii) of the Act which was sustained by the CIT(A). 9.1. We have given thoughtful consideration to the rival submissions. The case set up by the Assessee is that it is admitted position that the funds were granted by the Assessee, engaged in hospitality business, to its 100% subsidiaries engaged in the same line of business. The funds were given to Orchid Hotels during previous years relevant to the Assessment Years 2011-2012 to 2013-2014, whereas the funds to MPPL were given during previous years relevant to the Assessment Year 2015-2016. The interest was charged from Orchid Hotels till Assessment Year 2014-2015 and from MPPL till Assessment Year 2017-18 (upto 21/02/2017). In view of the adverse financial conditions being faced by the wholly owned subsidiaries, the proposal to waive interest was accepted by the Board of Directors of the Assessee (a public listed company). The Assessee has filed copy of the loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est paid in respect of capital borrowed that it should be used for the purpose of the business. In the case of the assessee, it has been established that interest bearing funds have been diverted for non business purposes. Therefore, proportionate interest is to be disallowed u/s. 36(1)(ii) of the Act" (Emphasis Supplied) 9.2. On perusal of above, it is clear that both the Assessing Officer and the CIT(A) have concluded that grant of loan to subsidiary cannot be held to be for the business purpose. We note that while dealing with the contention raised by the Assessee regarding the use of mixed funds the CIT(A) has, in paragraph 4.3.3. to 4.3.5 of the order impugned, referred to the judgment of the Hon'ble Supreme Court in the case of S.A. Builder Vs. CIT(A), Chandigarh & Ors.:288 ITR 1 (2006). On perusal of the aforesaid judgment, we find that the Hon'ble Supreme Court has held as under: "In our opinion, the High Court as well as the Tribunal and other Income Tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its sister concern as a measure of commercial expediency. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is admitted position that the Assessee had granted loans to wholly owned subsidiaries in the same line of business. Thus, the Assessee had deep interest in the subsidiaries. The CIT(A) has recorded that the wholly owned subsidiaries were operational and running hotels. The fact that the subsidiaries were undertaking projects related to hospitality/restaurant business and that the funds have been used for the same has not been doubted by the authorities below. The Hon'ble Supreme Court has, in the case of SA Builders (supra), held that in case where an assessee has deep interest in the subsidiary and the same is used by the subsidiary for business purpose, the assessee would be entitled to claim deduction for interest expenses incurred in respect of loans granted to such subsidiary. In our view, the above judgment applied to the facts of the present case and the Assessee would be entitled to claim deduction for interest expenses incurred in relation to loan to subsidiaries. The Revenue has failed to bring on record any material to persuade us to take a different view of the matter. 9.4. Further, the findings returned by the CIT(A) that the wholly owned subsidiaries were not fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for cash deposits/business deposits held with HDFC Bank and other entries reported in AIR/SFT were either old entry, duplicate entry, time deposit etc. Further, it is reported in the remand report at para 6.5 that the addition on account of the cash deposits made in the assessment order is over and above the turnover reported by the appellant. During the remand proceedings, nothing contrary to the claim of the appellant has been found. In view of the above, relying on the decision of the assessing officer in the remand report, the addition made by the AO is deleted. Ground No. 2 is allowed." 10.1. During the course of hearing, nothing was placed on record to controvert the above factual findings returned by the CIT(A) by placing reliance on the Remand Report, dated 30/01/2024. On perusal of the Assessment Order, we note that vide notice, dated 28/12/2019, the Assessing Officer had granted final opportunity to the Assessee to provide reconciliation of cash deposits and/or to substantiate with documentary evidences the source of such cash deposits made during the course of demonetization period stating as under: "Perusal of the ITS/AIR/SFT details reveal that during demonetizati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remand report in respect of the submissions of the Assessee which were not considered by the Assessing Officer during the assessment proceedings as well as in respect of the additional evidence filed by the Assessee before the CIT(A). Therefore, we do not find any infirmity in the action of the Assessing Officer submitting the aforesaid remand report. 10.4. In the remand report, after verification, the Assessing Officer concluded that there was nothing to contradict the claim of the Assessee and therefore, in effect, accepted the explanation of the Assessee regarding cash deposits having been made in the normal course of restaurant/hospitality business admittedly being run by Assessee. The CIT(A) also accepted the remand report and deleted the addition after considering the reply/submission filed by the Assessee. Nothing has been brought on record by the Revenue to either controvert the findings of the Assessing Officer [in the remand report] and the CIT(A) [in the order impugned]; or to support the factual issues raised in the grounds of appeal. Further, no infirmity has been pointed out in the replies/details furnished by the Banks and/or the documents, details, bank certificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned CIT(A) erred in failing to appreciate that the loans were given to 100% subsidiaries (OHPPL and MPPL) by the appellant in earlier years out of mixed funds available with the appellant and the appellant's net owned funds at the time of giving these loans were in excess of loan amounts and as such there was no justification for invoking the provisions of Section 36(1)(iii) of the Act. Learned CIT(A) further erred in not appreciating that under the law, in a case when loan is given out of mixed funds and the net owned funds of the assessee are more than the borrowed funds, it is reasonable to presume that the loan was given out of own funds. e. Learned CIT(A) erred in failing to appreciate that the appellant had already disallowed an amount of Rs,5,25,20,407/- out of the interest expenditure of Rs. 14,35,63,696/- debited to the Profit and Loss account and actual claim of interest amount was only Rs. 9,10,43,289/- and disallowance of Rs. 24,16,10,195/-.- out of Rs. 9,10,43,289/- was not only incorrect but unreasonable, excessive and not warranted. f. Learned CIT(A) erred in assuming the average interest rate of 12% for making the above disallowance which is nowhere near ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue in appeal for the Assessment Year 2017-18 shall apply mutandis mutatis to the issues raised in the present appeal pertaining to Assessment Year 2018-19. Accordingly, in view of reasoning given in paragraph 9 to 9.5 above, disallowance of INR.24,16,10,195/- made by the Assessing Officer under Section 36(1)(iii) of the Act is deleted. Thus, Ground No. 1(a) to 1(d) raised by the Assessee are allowed and therefore Ground No.1(e) to 1(h) raised by the Assessee are dismissed as being infructuous. Ground No. 2(a) to 2(e) 15. Ground No.2(a) to 2(e) raised by the Assessee pertain to addition made by the Assessing Officer under Section 24 of the Act treating INR.11,39,55,350/- as income from house property. 15.1. The relevant facts for adjudication of the grounds under consideration are that during the assessment proceedings the Assessing Officer noticed that Assessee had received rental income of INR.11,84,13,684/- on which tax was deducted at source under Section 194(I)(b) of the Act. However, in the return of income the Assessee has offered to tax an amount of INR.44,58,334/- as income from house property. Therefore, the Assessee was asked to provide the reconciliation statement a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Loss Account as 'Revenue from Operations'. It has not been disputed by the Revenue that chart showing details of TDS under Section 194(1)(b) of the Act and details of rent earned by the Appellant as per Form 26AS and rent offered by the Appellant as per the Gross Revenue in the Profit and Loss Account were note filed before the Authorities below. Therefore, keeping in view the overall facts and circumstances of the case we delete the addition of INR.11,39,55,350/- made under Section 24 of the Act and set aside the issue back to the file of Assessing Officer for denovo adjudication after carried out necessary enquiries/verifications. The Assessee is directed to file all relevant details and document before the Assessing Officer and co-operate in the hearing. The Assessing Officer is directed to grant reasonable opportunity of being heard to the Assessee. In term of aforesaid the Ground No. 2(a) to 2(e) raised by the Assessee are allowed for statistical purposes. 16. In result, (a) appeals preferred by the Revenue for the Assessment Years 2017-18 is dismissed; (b) the Appellant preferred by the Assessee for the Assessment Years 2017-2018 is allowed and (c) Appellant preferred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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