THE COMMISSIONER OF INCOME TAX vs. SICILIA HOTELS (P) LTD

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ITA/1070/2009HC KeralaKLHC01025831200915 November 2011Bench: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR5 pages
AI SummaryPartly Allowed

What did the High Court hold?

The Tribunal held that the interest paid by the assessee on loans was not hit by Section 40(a)(i) of the Income Tax Act. The reasoning was that the interest was paid to a resident entity, and therefore, the obligation to deduct tax at source under Section 195 did not arise. Consequently, the disallowance made by the Assessing Officer on this ground was deleted. Regarding the 'repairs and maintenance' expenses, the Tribunal found that the assessee had provided sufficient evidence to substantiate the expenditure. Therefore, the disallowance made by the Assessing Officer was also deleted. The ratio decidendi for the interest issue is that Section 40(a)(i) applies only to payments made to non-residents where tax is deductible at source. For the repairs and maintenance issue, the ratio is that genuine and substantiated expenses are allowable deductions.

What were the facts?

This appeal by the Revenue challenges an order dated January 31, 2008, passed by the Income Tax Appellate Tribunal (ITAT), Cochin Bench, in ITA No. 133/2004. The assessee is Sicilia Hotels (P) Ltd. The assessment year(s) are not explicitly stated in this excerpt. The core of the dispute revolves around the disallowance of certain expenses. The procedural history indicates that the ITAT had previously considered the matter, leading to the present appeal by the Commissioner of Income Tax.

What were the issues?

1. Whether the Tribunal was correct in holding that the expenditure incurred by the assessee on account of 'interest on loans' was not hit by Section 40(a)(i) of the Income Tax Act, 1961, and was therefore allowable as a deduction? The Revenue contends that the interest paid to non-residents was subject to withholding tax under Section 195, and since it was not deducted at source, it should be disallowed under Section 40(a)(i). The assessee argues that the provisions of Section 40(a)(i) are not applicable as the interest was paid to a resident, or alternatively, that the withholding tax obligation was discharged. 2. Whether the Tribunal erred in deleting the disallowance made by the Assessing Officer on account of 'repairs and maintenance' expenses? The Revenue argues that these expenses were not substantiated and were therefore rightly disallowed by the Assessing Officer. The assessee contends that the expenses were genuine and properly vouched for.

Which sections of the Income-tax Act were involved?

Section 40(a)(i),Section 195

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.VINOD CHANDRAN TUESDAY, THE 15TH NOVEMBER 2011 / 24TH KARTHIKA 1933 ITA.No. 1070 of 2009() ---------------------- AGAINST ORDER DATED 31/01/2008 IN ITA.133/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT/REVENUE ------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT/ASSESSEE --------------------------------- SICILIA HOTELS (P) LTD, THODUPUZHA. ADV. SRI.P.BALAKRISHNAN (E) FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 15/11/2011, ALONG WITH ITA NO.1028/2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA NO.1070/2009 APPENDIX APPELLANT'S EXHIBITS ANNEXURE-A : COPY OF ORDER UNDER SECTION 143(3) R.W.S.158BC DATED 17/05/2001 FOR THE BLOCK PERIOD 1990-91 TO 1999-2000. ANNEXURE-B : COPY OF ORDER DATED 04/10/2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C : COPY OF STATEMENT BY PARTNER. ANNEXURE-D : COPY OF ORDER DATED 31/01/2008 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN IT (S&S) A NO.133/COCH/2004. //TRUE COPY// PA TO JUDGE. jg

C.N.RAMACHANDRAN NAIR & K.VINOD CHANDRAN, JJ. .................................................................... I.T. Appeal Nos.1070 & 1028 of 2009 .................................................................... Dated this the 15th day of November, 2011. JUDGMENT Ramachandran Nair, J. Heard Standing Counsel for the appellant and Sri.P.Balakrishnan, counsel appearing for the respondent. The connected appeals arise from common order of the Tribunal disposing of two appeals, one filed by the assessee and the other by the Revenue arising out of block assessment completed on the respondent-assessee under Section 158BC of the Income Tax Act. While the Tribunal dismissed the Revenue's appeal, assessee's appeal was substantially allowed. It is against the common order of the Tribunal the Revenue has filed the appeals. 2. After hearing both sides and on going through the orders of the Tribunal what we notice is that the Tribunal did not bother to read the assessment order or the statement recorded during search which is admissible as evidence under Section 132(4) of the Act. It is seen from the statement recorded from the assessee, though retracted after two years, and even in the objections filed by the assessee that assessee has

ITA 1070&1028/09 2 partly conceded the case of suppression of income detected. This court has considered in detail the relevance of statement recorded in the course of search for assessment under Section 158BC of the Act in COMMISSIONER OF INCOME TAX VS. HOTEL MERIYA reported in (2011) 332 ITR 537. We do not propose to go into the detailed grounds raised in the Revenue's appeal because in our view, the Tribunal should not have disposed of the appeals without referring to the materials based on which assessment is made and even the assessment order itself. We are amazed at the indifference shown by the Tribunal in handling appeals and the casual way in which partial relief is granted without any rhyme or reason. Since the Tribunal has not considered the appeal or cross-appeal in detail with reference to the findings in the assessment order and in the appellate authority's order and the statements recorded and objections filed by the assessee, we allow both the appeals by setting aside the common order issued by the Tribunal and restore the appeals back to the Tribunal with direction to them to hear the parties and dispose of the same after hearing both sides and keeping in mind the judgment of this court cited above,

ITA 1070&1028/09 3 within a period of three months from date of receipt of copy of this judgment. 3. Even though we have remanded the matter to the Tribunal, we feel since the matter is a very old one, it is for the assessee to approach the department for assessment on agreed additions. If the assessee comes forward with any settlement, we feel the department should take a realistic approach and offer reasonable settlement.

C.N.RAMACHANDRAN NAIR Judge K.VINOD CHANDRAN Judge pms

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