GOAN HOTELS & REALTY PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 12(2)(2), MUMBAI

The present appeal preferred by the Assessee is directed against the Order, dated 30/08/2024, passed by The Commissioner of Income Tax, Appeal, Kolkata -27 [hereinafter referred to as the ‘CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Learned CIT(A) had partly allowed the appeal against the Assessment Order, dated 20/12/2019, passed under Section 143(3) of the Act for the Assessment Year 2017-2018. 2. The Assessee has raised following grounds of appeal:

On the facts and in the circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in not quashing the assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961. 2. On the facts and the circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in upholding the addition of Rs 5,44,79,927/-on account of disallowance of interest expenses despite the fact that source of payment of Rs 58.85 cores paid to Conwood DB JV is out of the interest free funds borrowed from its holding company, M/s Marine Drive Hospitality and Reality P Ltd and no part of the interest bearing funds were used to make the said payment.

On the facts and the circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in upholding the addition of Rs 5,44,79,927/-on account of disallowance of interest expenses without considering the reply letter dated 05.12.2019 filed by the appellant company during the assessment proceedings, which specifically provides a tabulated breakup of Rs 76,93,15,003/- received from the holding company. On perusal of the said breakup, it can be observed that Rs 58.85 crores paid to Conwood DB JV was paid out of the interest free funds of Rs 76,93,15,003/- borrowed from the holding company.

On the facts and circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in upholding the disallowance of Rs 5,44,79,927/- made by the Ld. Assessing Officer on the ground that the appellant had not submitted conveyance deed and bank statement to prove its contention that the investment in Conwood DB JV was out of non- interest bearing funds despite the fact that the had duly submitted conveyance deed as well as relevant extract of bank statement vide submission dated 05.12.2019 in para 9.1 and 9.2 which has also been reproduced at page 17 of the impugned Appellate Order and Grounds of Decision dated 30.08.2024. 5. On the facts and the circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in upholding the addition of Rs 5,44,79,927/-on account of disallowance of interest expenses without taking into consideration that the appellant company has interest- free borrowed funds amounting to Rs 260.98 crores and the payment made to Conwood DB JV is Rs 58.85 crores which is much lesser than the interest free borrowed funds available with the appellant company, thus, it shall be presumed that the said payment made to Conwood DB JV is out of the interest free borrowed funds of the appellant company.

On the facts and the circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in upholding the addition of Rs 5,44,79,927/-despite the fact that the Ld. Assessing Officer failed to issue any show cause notice in this regard thereby depriving the appellant company of proper opportunity of being heard.

On the facts and circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in upholding the addition of Rs 5,44,79,927/-on account of disallowance of interest expenses without rejecting or passing any adverse comment on the decision of the Hon'ble Income Tax Appellate Tribunal, Mumbai Bench in the matter of HDFC Bank Ltd. v. Deputy Commissioner of Income-tax -2(3), Mumbai, ITA No.374/Mum/2012 on which the appellant company has placed reliance.

On the facts and the circumstances of the appellant's case and in law, the Learned Commissioner of Income Tax (Appeal) erred in passing the impugned appellate order u/s 250 of the Act, dated 27.08.2024, without granting an opportunity of hearing through video conferencing before deciding on the matter even after requesting for the same, thereby depriving the appellant company of proper opportunity of being heard.”

The relevant facts in brief are that the Assessee is a company engaged in business of hospitality and real-estate development. For the Assessment Year 2017-2018, the case of the Assessee was selected for scrutiny. Assessment under Section 143(3) of the Act was framed on the Assessee vide Assessment Order, dated 20/12/2019. The Assessing Officer, inter-alia, disallowed interest expenses of INR.5,44,79,927/- claimed by the Assessee as deduction. In appeal preferred by the Assessee, the Learned CIT(A) sustained the disallowance and declined to grant any relief on this issue. Being aggrieved, the Assessee has carried the issue in appeal before this Tribunal.

We have heard both the sides and have perused the material on record.

On perusal of the Assessment Order we find that the Assessing Officer have made following observations while disallowing interest expenses of INR.5,44,79,927/-: “5.1 The assessee has for the year claimed financial expenses of Rs.58,90,78,884/- It is further seen that the assessee is having negative reserves at 172.59 crores and has borrowings of Rs 642.87 crores and the total net availability of funds as per balance sheet is only Rs.614 75 crores considering the negative reserves. It is further seen that out of the borrowings an amount of Rs.366.83 crores was interest bearing. The assessee has made Investment in non-current assets at Rs.55.75 crores and in a project at Rs.58.85 crores which has not yet commenced and is in the initial stages Accordingly the assessee has made the said investments totalling to Rs.114.60 crores from borrowed funds. The assessee has however clarified that an amount of Rs.260.98 crores is from the holding Company M/s. Marine Drive Hospitality Pvt. Ltd. which is non interest bearing and out of the same an amount of Rs.55.75 crores is for purchase of the non current investment and the balance amount of Rs.205.24 crores is the commitment towards running of the hotel which has also been mentioned as such in the Financials of the assessee at Note 20 to the Financial accounts.

2 The said facts indicated that the assessee has utilised an amount of Rs.58.85 crores out of the funds including interest bearing funds during the year for investment in the project wherein the activity has not commenced. During the course of assessment proceedings the assessee was required to provide the co-relation of the utilisation of borrowed funds and source of the funds invested in the project. However the assessee has not filed any co-relation in this connection. The financials clearly indicate that the assessee has also utilised interest bearing borrowed funds for purpose of investment in the project. In view of the same there is no alternative but to disallow a portion of the financial expenses claimed on prorate basis of the funds utilised for the project to the total funds available with the assessee for the year. Accordingly the interest expense attributable to the said project is determined at Rs.5.44 crores (56.91 x 58.85/614.75). In view of the same, the said amount of Rs.5,44,79,927 /- is disallowed as related to the project. However, the said amount is allowed to be capitalised towards cost of the project for determining the profits in future years.” (Emphasis Supplied) On perusal of above, it becomes clear that the Assessing Officer was of the view that the Assessee had utilized interest bearing funds for making investments. Despite having been granted opportunity the Assessee had failed to establish nexus between source of funds and its utilization to show that the investments were sourced from interest-free funds. Therefore, the Assessing Officer made proportionate disallowance of interest expenses amounting to INR.5,44,79,927/-.

In appeal before the Learned CIT(A), the Assessee contended that the Assessee had made payment of INR.58.85 Crores to Conwood DB JV for acquiring rights to project receipts. In support the Assessee filed (a) copy of Deed of Assignment of Development Rights and (b) copy of Indenture of Conveyance. It was explained that the source of funds utilized for making the aforesaid payment was interest-free loan taken from its holding company, namely, Marine Drive Realty and Hospitality Private Limited. In support the Assessee filed Statement showing details of unsecured loans and relevant Bank Statements. However the Learned CIT(A) was not convinced and therefore, decline to grant any relief to the Assessee holding as under: