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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
Before: Dr. B. R. R. KumarSh. Yogesh Kumar US
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of the ld. CIT(A)-34, New Delhi dated 13.02.2019.
Following grounds have been raised by the assessee:
“1. That on the facts and circumstances of the case, the order of the Ld. Commissioner of Income Tax, (Appeal) is bad in law and on the facts of the case.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in sustaining the disallowance out of interest amounting to Rs 76,28,290/- u/s 36(1)(iii) of the Income Tax Act without appreciating the fact that the interest free funds available with the company were much more then the alleged capital work in progress.
2 Enchanted Wood Club Ltd. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in disallowing interest without appreciating that no such disallowance was made / sustained in any of the earlier years. The assessee had not raised any fresh loan in the year under reference or in any earlier years after A Y 2010-2011.
4. Without prejudice to the above, the Ld. CIT(A) failed to appreciate that the assessee had given all its assets and facilities on lease to a third party i.e. VCI Hospitality Pvt. Ltd. on a fixed monthly license fees. Thus as far as the assessee is concerned all the assets and facilities owned by the assessee were duly put to use. Therefore no disallowance u/s 36(1)(iii) of the Income Tax Act should have been sustained.
5. Without prejudice to the above, the Ld. AO has wrongly computed the amount of capital work in progress as well as the amount of interest disallowed u/s 36(1)(iii) of the Income Tax Act.”
The brief facts of the case are that the assessee is engaged in the business of running of club and hotel. During the year under consideration, appellant has declared rental income by leasing out club and hotel. Return declaring an income of Rs. NIL was filed on 01.10.2013. The AO has completed the assessment u/s 143(3) vide order dated 28.03.2016 after making addition u/s 36(1)(iii) at Rs. 76,28,290/- and prior period expenses of Rs. 5,09,746/- and Rs. 5,00,000/-. The total income assessed at Rs. 2,08,54,160/-.
Heard the arguments of both the parties and perused the material available on record.
• The assessee has submitted that AO has disallowed a sum of Rs. 76,28,290/- out of the interest paid amounting to 3 Enchanted Wood Club Ltd. Rs. 1,95,06,935/- including interest on term loan capitalized during the year. • The AO has made the disallowance on the ground that borrowed funds were also utilized in the fixed assets out of which Rs. 25,53,51,760/- incurred on assets not put to use. • The appellant has submitted that no disallowance out of interest u/s 36(1)(iii) can be made as the appellant had given all the assets and liabilities on lease/license to a third party M/s VCI Hospitality Pvt. Ltd. • The assessee has been receiving a fixed amount of Rs. 3.75 crore per annum hence all of its assets and facilities were put to use. • No fresh loan was taken by it during the year under consideration. • The term loan outstanding as on 31.03.2012 at Rs. 12.08 crores and cash credit of Rs. 75,00,000/- were converted into one term loan of Rs. 13 Crores. • No disallowance was made in AY 2012-13. • The assessee had sufficient interest free fund to the extent of Rs. 19.90 crores which are more than the alleged investment fixed assets not put to use.
We have considered the facts of the case, finding of the / submissions of the appellant. The AO has disallowed the interest borrowed funds which were utilized for the purpose of the capital asst put to use as per the proviso of section 36(1)(iii). The investment in capital assets is not put to use is made out of interest free fund.
4 Enchanted Wood Club Ltd. 6. The financials of the assessee are as under:
The table indicates that own funds are much more than the loan funds.
The table indicates that the amounts have been duly capitalized.
Capitalization of interest on the term loan is reflected in the last column.
The table reveals that the amounts received out of sale of services which have been purchased by obtaining the loan are duly reflected.
6 Enchanted Wood Club Ltd. 11. Thus, ongoing through the interest on term loan, interest on working capital loan, interest on unsecured loan, total interest paid, interest capitalized, interest claimed and bank charges, we hold that no disallowance u/s 36(1)(iii) is called for.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 29/06/2022.