THE COMMISSIONER OF INCOME TAX-1, vs. M/S. HOTEL AND ALLIED TRADES PRIVATE LTD.,

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ITA/25/2013HC KeralaKLHC01025910201307 February 2019Bench: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON7 pages
AI SummaryDismissed

What did the High Court hold?

The High Court upheld the orders of the Tribunal in both appeals, thereby rejecting the appeals filed by the Revenue. 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 referred to the Supreme Court's decision in Commissioner of Income Tax v. M/s.Essar Teleholdings Ltd., which held that the machinery provisions of Section 14A came into effect only from the assessment year 2007-08, making its application prospective. Consequently, the Court found that Section 14A could not be applied to the assessment year in question (impliedly prior to 2007-08). The Court did not find it necessary to examine the factual aspect of commercial expediency as per M/s.S.A.Builders Ltd. because the issue of Section 14A's applicability was decided on a legal ground. The operative direction was to reject the appeals and uphold the Tribunal's orders.

What were the facts?

The appeals concern the disallowance of interest expenditure. The assessee, Hotel & Allied Trades (P) Ltd., had borrowed funds and incurred interest liability. Simultaneously, it advanced interest-free funds to a subsidiary company. The Assessing Officer disallowed a small portion of the interest. The Commissioner, invoking Section 263, sought to disallow proportionate interest on borrowed funds under Section 14A, citing the assessee's interest-free advances to the subsidiary. The Tribunal, relying on the Supreme Court decision in M/s.S.A.Builders Ltd. v. Commissioner of Income Tax, set aside the Commissioner's order. The High Court considered the applicability of Section 14A and the Supreme Court's ruling in CIT v. M/s.Essar Teleholdings Ltd. regarding its prospective application.

What were the issues?

1. Whether the Tribunal erred in interfering with the Commissioner's order under Section 263, particularly concerning the disallowance of interest expenditure under Section 14A, when the assessee had made interest-free advances to a subsidiary company? (Mixed question of law and fact, concerning Section 14A and Section 263). Assessee's Contention (implied from Tribunal's reliance): The assessee argued that it had sufficient own funds for the advances to the subsidiary and that no borrowed funds were used for this purpose. The Tribunal's reliance on M/s.S.A.Builders Ltd. suggests an argument regarding commercial expediency and the non-applicability of Section 14A in such circumstances. Revenue's Contention (implied from Commissioner's action): The Revenue contended that Section 14A was applicable to disallow proportionate interest on borrowed funds, as the assessee had made interest-free advances to its subsidiary, implying a nexus between borrowed funds and exempt income (though not explicitly stated as an argument in the provided text, it's the basis for invoking Section 14A). 2. Whether Section 14A of the Income Tax Act, 1961, could be applied retrospectively or prospectively, especially in light of the decision in Commissioner of Income Tax v. M/s.Essar Teleholdings Ltd. regarding its machinery provisions?

Which sections of the Income-tax Act were involved?

Section 14A,Section 263

AI-generated summary — verify with the full judgment below

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

ITAs1373/09& 25/13 -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

ITAs1373/09& 25/13 -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. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE

ITAs1373/09& 25/13 -6- 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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