THE COMMISSIONER OF INCOME TAX,COCHIN vs. HOTEL & ALLIED TRADES (P) LTD.,KOCHI-03

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ITA/1373/2009HC KeralaKLHC01026134200907 February 2019Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON7 pages
AI SummaryDismissed

What did the High Court hold?

The High Court rejected the appeals filed by the Revenue and upheld the orders of the Tribunal in both ITA No. 1373/2009 and ITA No. 25/2013. The Court noted that the Commissioner's order under Section 263 was specifically based on Section 14A. Regarding the applicability of Section 14A, the Court relied on the Supreme Court's decision in Commissioner of Income Tax v. M/s.Essar Teleholdings Ltd., which held that the machinery provisions for Section 14A came into effect only from Assessment Year 2007-08, making its application prospective. Therefore, Section 14A could not be applied retrospectively to the assessment year in question. The Tribunal's interference with the Section 263 order was thus justified.

What were the facts?

The assessee, Hotel & Allied Trades (P) Ltd., had borrowed funds and incurred interest liability. They also advanced funds interest-free to a subsidiary company. The Assessing Officer disallowed a small portion of the interest claimed. The Commissioner, invoking Section 263, sought to disallow proportionate interest on borrowed funds under Section 14A of the Income Tax Act, 1961, by revising the assessment order. The Income Tax Appellate Tribunal (ITAT) set aside the Commissioner's order, relying on the Supreme Court decision in M/s.S.A.Builders Ltd. v. Commissioner of Income Tax. The Revenue (Commissioner of Income Tax) appealed against the ITAT's order in ITA No. 1373/2009, and the consequential order was challenged by the assessee in ITA No. 25/2013. The appeals were heard together.

What were the issues?

1. Whether the Tribunal was correct in interfering with the order passed under Section 263 of the Income Tax Act, 1961, by holding that the Commissioner erred in applying Section 14A of the Act to disallow proportionate interest on borrowed funds, considering the decision in M/s.S.A.Builders Ltd. v. Commissioner of Income Tax. Assessee's Contentions (implied by Tribunal's reliance on S.A.Builders): The assessee argued that the interest-free advances to the subsidiary were made out of own funds and there was commercial expediency for such advances. Therefore, Section 14A was not applicable. Revenue's Contentions (implied by appeal): The Revenue contended that the Commissioner was justified in invoking Section 263 and applying Section 14A to disallow proportionate interest on borrowed funds, as the assessee had made interest-free advances to its subsidiary.

Which sections of the Income-tax Act were involved?

Section 263,Section 14A

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 07TH DAY OF FEBRUARY 2019 / 18TH MAGHA, 1940 ITA.No. 1373 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 285/COCH/2006 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 28-03-2008 APPELLANT/S:/RESPONDENT/REVENUE: THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH SC FOR INCOME TAX RESPONDENT/APPELLANT/ASSESSEE: HOTEL & ALLIED TRADES (P) LTD., CASINO HOTEL, WILLINGDON ISLAND,, KOCHI-03. BY ADVS. SRI.JOSEPH MARKOSE (SR.) SHRI.ALEXANDER JOSEPH MARKOS SHRI.SHARAD JOSEPH KODANTHARA SRI.ABRAHAM JOSEPH MARKOS SRI.ISAAC THOMAS SRI.V.ABRAHAM MARKOS THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07.02.2019, ALONG WITH ITA.25/2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITAs1373/09& 25/13 -2- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 07TH DAY OF FEBRUARY 2019 / 18TH MAGHA, 1940 ITA.No. 25 of 2013 AGAINST THE ORDER/JUDGMENT IN ITA 662/COCH/2007 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 27-07-2012 APPELLANT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX, KOCHI. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT/ASSESSEE: M/S. HOTEL & ALLIED TRADES (P) LTD., C/O.CASINO HOTEL, W/ISLAND, COCHIN-3. BY ADVS. SRI.ABRAHAM JOSEPH MARKOS SRI.ABRAHAM VARGHESE THARAKAN SRI.BINU MATHEW SRI.JOSEPH MARKOSE (SR.) SRI.TOM THOMAS (KAKKUZHIYIL) SRI.V.ABRAHAM MARKOS THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07.02.2019, ALONG WITH ITA.1373/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITAs1373/09& 25/13 -3- K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- ITA Nos. 1373 of 2009 and 25 of 2013 ------------------------------------------- Dated this the 7th day of February, 2019

J U D G M E N T Vinod Chandran, J. Both the appeals are connected, insofar as the dis-allowance of expenditure having been directed in a proceedings under Section 263 of the Income Tax Act, 1961 (“Act” for short) which is challenged in ITA No.1373/2009 and the consequential order is challenged in ITA No.25/2013. 2. The question is of dis-allowance of interest on borrowed funds. Admittedly, the assessee had borrowed funds on which there was interest liability. The assessee had also advanced amounts to a subsidiary company, which was interest free. The assessee's case was that they had sufficient own funds to advance money to the subsidiary company and that no part of the borrowed amounts were, in fact, advanced to -4- the subsidiary company. The Assessing Officer disallowed only a small portion of the interest claimed as expenditure. The Commissioner sought to invoke Section 14A of the Act to disallow proportionate interest in the borrowed funds of the assessee, by an order under Section 263. The Tribunal interfered with the order under Section 263 relying on the decision of the Honourable Supreme Court in (2007) 288 ITR 1 [M/s.S.A.Builders Ltd. v. Commissioner of Income Tax].

3.

The questions arising are two fold. Whether there should have been an examination on facts, going by the dictum of M/s.S.A.Builders Ltd. as to whether there was a commercial expediency insofar as the interest free advances made to the subsidiary company and whether Section 14A could have been applied. We find that the order under Section 263 was passed specifically based on Section 14A. As far as the applicability of Section 14A is concerned, the Honourable Supreme Court in (2018) 401 ITR 445 -5- [Commissioner of Income Tax v. M/s.Essar Teleholdings Ltd.] held that the machinery provisions having come only from the assessment year 2007-08, the application of Section 14A would be prospective to that. In such circumstances, we reject the appeals and uphold the orders of the Tribunal in both the appeals. No costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE -6-

Appendix — schedule of exhibits
APPENDIX OF ITA 1373/2009 APPELLANT'S EXHIBITS: ANNEXURE-A COPY OF ASSESSMENT ORDER DATED 18/8/2003 FOR THE ASSESSMENT YEAR 2001- 02 ANNEXURE-B COPY OF ORDER U/S.263 DATED 13/3/06 OF THE COMMISSIONER OF INCOME TAX. ANNEXURE-C COPY OF THE ORDER DATED 28/3/2008 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.285/COCH/2006. [True Copy] jg ITAs1373/09& 25/13 -7- APPENDIX OF ITA 25/2013 APPELLANT'S EXHIBITS: ANNEXURE-A COPY OF THE ASSESSMENT ORDER U/S.143(3) PASSED BY THE ASSESSING OFFICER ON 18/8/2003 FOR AY 2001-02. ANNEXURE-B COPY OF THE CIT'S ORDER U/S 263 DATED 13/3/2006. ANNEXURE-C COPY OF ITAT'S ORDER NO. ITA NO. 285/COCH/2006 DATED 18/3/2008. ANNEXURE-D COPY OF ORDER U/S.143(3) RWS. 263 OF IT ACT DATED 26/4/2006 OF THE ASSESSING OFFICER FOR AY 2001-02. ANNEXURE-E COPY OF ORDER OF THE CIT(A)-II, IN ITA NO. 26/R-1/E/CIT-II/06-07 DATED 19/4/2007. ANNEXURE-F COPY OF THE ITAT'S ORDER IN ITA NO. 662/COCH/2007 DATED 27/7/2012. [True Copy] jg

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