C.I.T.UDAIPUR vs. LAKE PALACE HOTELS and MOTELS PVT.LTD.

(2007) 1 SCC 781, decided on December 14, 2006.

(2019) 260 Taxman 179 (SC) 4. 2013 SCC Online Guj 8762 (Uploaded on 10/04/2026 at 04:47:59 PM) (Downloaded on 28/10/2026 at 12:39:56 AM) [2026:RJ-JD:14814-DB] (5 of 10) [ITA-107/2015] account. The assessee has taken term loan from SBI of Rs. 77,98,82,458/-, which was outstanding during the year. The assessee has, on the other hand, advanced Rs. 28,72,16,549/- to Historic Resort Hotels Pvt. Ltd. (HRH) and Rs. 12,72,08,023/- to Rajput Hotels & Resort Pvt. Ltd. (RHR), which are its sister concerns. The A.O. has found that these advances are from interest bearing funds. From the following chart the position of opening and closing Balance of the assessee-company, is depicted:- Name

As per the above chart the AO has treated the total of average balance amount of Rs. 42,32,27,278/- as interest bearing funds to have been given to its subsidiaries interest free. Accordingly, he has disallowed a sum of Rs. 5,30,12,131/- by calculating interest at the rate of 12% p.a. According to A.O. even after considering share holders funds and reserve funds only surplus of Rs. 12,28,50,015/- against which the assessee has an investment of Rs. 15,96,67,965/- (as per schedule 'F' of the Balance Sheet). Thus, there were no interest free surplus funds available with the assessee, and with reference to various decisions he has justified the above disallowance.

Aggrieved, the assessee filed appeal and ld. CIT(A) has deleted this addition on the reasoning that in fact no such interest free advances have been given to the sister concerns who all are in the similar business and for mutual benefit and particularly for the Business interest of the assessee- company, such expenses are made, inter-se. In earlier years similar expenses have been allowed and not doubted. The ld. CIT(A) has given reasonings to arrive at his conclusion But the revenue is, now, aggrieved.

After considering same and similar and rival submissions of the parties in the light of the evidence available on record, we are also of the opinion as has been taken by ld. CIT(A). In fact, in the given case, interest free advances have been given to further and enhance asessee's business interest and for the business purpose. Before us also the modus of operation amongst the concerns of group was explained and we are in agreement with ld. CIT(A) that these advances pertain to expenses incurred on reciprocal basis. It is an undisputed fact that HRH, are assessee's sister concerns. The assessee is in the hotel business and its sister concerns are also in the hotel business, and they operate from the cities of Udaipur, Jaisalmer and Bikaner. It was found that these concerns incur expenses to meet to requirements of their guests (customer) though their units, and bills are raised by way of debit notes to the concerned entity to which the customers / guest belonged to. This practice helps the sister concerns in getting regular guests as booking is done of tourist groups who visit different places. Each concern accommodates each others' guest. The miscellaneous expenses like the petrol, diesel, electricity, printing work, telephone, interest, etc. are recovered through debit notes from the concerns for whom these expenses are related to. In the similar pattern, the expenses are incurred on mutual benefit basis to enhance each other's business interests. That is why neither the sister concerns charge interest from the assessee, nor the assessee charges interest from them. It was found that no part of such expenses are incurred other than on business considerations. We have also confirmed that similar expenses were made in the earlier year and (Uploaded on 10/04/2026 at 04:47:59 PM) (Downloaded on 28/10/2026 at 12:39:56 AM) [2026:RJ-JD:14814-DB] (6 of 10) [ITA-107/2015] the same has been allowed in the assessment made for A.Y. in 2006-07 u/s 143(3) of the Act. During the year the net outstanding amount has reduced and this fact is proved by the above, undisputed, chart. The decisions on which AO has placed reliance were rendered on distinguishable facts. Therefore, this interest has to be allowed even u/s 36(1)(iii) of the Act. So long as the interest free advances subserve the business interest of an assessee, the interest, part cannot be disallowed with reference to interest paid, on proportionate basis. The departments not raised any issue regarding admission of an additional evidence in Violation of Rule 46A of the I.T. Rules. The facts and figures taken by ld. CIT(A) are from the Balance Sheet, etc which were also available before AO.

Regarding, decisions on which AO has relied, we have already observed that these decisions, in fact, support the case of the assessee- to commemorate the memory of assessee's deceased husband. This is purely and apparent by a personal expenditure and deduction of interest us/36(1)(ii) cannot be allowed. Therefore, this decision is exclusively for the purpose of assessee's business. But in the given case the assessee-company has incurred expenses as advance to its subsidiaries for business purpose and not otherwise. Rather the assessee and its subsidiaries have incurred mutual expenses for mutual business benefits and no personal element is involved therein. This decision also supports the case of the assessee (iii) K. Somasundaram & Brothers vs CIT 238 ITR 939 (Mad) in that case out of interest paid on borrowing to the extent of interest free loan given to the relatives of the partners was disallowed u/s 36(1)(ii) but the facts of this case are entire different. (iv) in Abhishek Industries case (2006) 156 Taxman 257 (P&H) in that case interest free advances were given to sister concern without any business purpose. Again, the ratio of this decision cannot apply the case in hand.

Accordingly, we confirm, the impugned deletion and dismiss ground No. (1) and 1.1 of revenue's appeal. 8.The facts apropos ground No. (2) and (2.1) that the assessee during the relevant year has paid the following expenses :- Repair of Building : Rs. 31,05,513/- Repair of Electrical : Rs. 07,11,059/- As per the AO expenditure incurred by the assessee is as under: Repair of Building S. No Supplier Item Amount

Parshwa Trading Co. Pump 95,212

Shree Construction Construction of DG Foundation,

R.K. Decorators Painting work at 42,455 (Uploaded on 10/04/2026 at 04:47:59 PM) (Downloaded on 28/10/2026 at 12:39:56 AM) [2026:RJ-JD:14814-DB] (7 of 10) [ITA-107/2015] Badipal Toilets

The ARC Badipal Staff quarters 07,87,980

M.K. Construction Co. Construction, RCC etc. work 02,69,729 31,05,513 Repair of Electricals S. No Supplier Item Amount

Mega Sound Conference set up on 17.06.2008 45,958

Mega Sound Speakers

Parshwa Trading Co Pump 07.10.2008 42,455

Dhan Sampda Pump 30.12.2008 07,87,980

Parshwa Trading Co. Pump 29.12.2008 81,434

Soner Communication P. Ltd Telephone

Soner Communication P. Ltd Telephone

The ld. CIT(A) has found some of the expenses are revenue and some of them to be capital, in nature. Against the finding of ld. CIT(A) where he has treated the expenses are revenue in nature, the revenue has came up in appeal. The ld. CIT(A) has deleted the disallowance of expenditure of Rs. 11,95,376/ out of total disallowance of Rs. 31,05,513/-, made on account of repairs of the building and claimed as revenue expenditure u/s 37(1) of the Act. The ld. CIT(A) has further deleted the disallowance of Rs. 7,11,059/ spent on repairs of electrical and claimed as revenue expenditure u/s 37(1).

We have heard the parties. The ld. CIT(A) has treated the following expenses as of revenue in nature:- (i) Pump expenditure of Rs. 95,212/- (ii) Painting work expenditure of Rs. 42,455/- (iii) Construction of RCC, etc of Rs. 2,69,729/- (iv) Badipal Staff Quarter Rs. 7,87,980/-. Thus, out of total disallowance of Rs. 31,05,513/- the ld. CIT(A) has deleted the disallowance of Rs. 11,95,376/- which is total of items (i) to (iv), as above. We will discuss each item to see of it is a capital expenditure or a revenue expenditure. (i) An expenditure of Rs. 95,212/- was incurred to make the sewerage plant, installed in the earlier years and whose WDV is shown at Rs. 52,92 lakhs at the end of the year, functional. This expenditure cannot be treated as a capital one which was spent on submersible pump with grinder which was installed in the sewerage plant. This is, obviously, a revenue expenditure. (Uploaded on 10/04/2026 at 04:47:59 PM) (Downloaded on 28/10/2026 at 12:39:56 AM) [2026:RJ-JD:14814-DB] (8 of 10) [ITA-107/2015] (ii) Expenditure of Rs. 42,455/- incurred on painting is to be treated as revenue expenditure without much ado. (iii) Expenditure of Rs. 7,87,980/- incurred towards repair of staff quarters has to be treated revenue expenditure. It is noticed that new staff quarters have not been constructed. (iv) The expenditure of Rs. 2,69,729/- incurred on account of construction RCC etc. work to shift the existing water tank, can be treated as revenue expenditure. Thus, we don't find any fallacy in the above finding of ld. CIT(A) and accordingly, confirm the same.

The AO has disallowed an expenditure of Rs. 7,11,059/- incurred towards repair of electrical items, as shown in the chart extracted in the earlier part of this order. The ld. CIT(A) has allowed only Rs. 41,560/-, Rs. 65,800/-, Rs. 81,434/-, Rs. 2,15,280/- and Rs. 1,87,200/. The ld. CIT(A) has confirmed addition of Rs. 45,985/ incurred on conference set up and of Rs. 73,800/- incurred on speakers.

After hearing both sides, we don't find any fallacy in the impugned deletion and, therefore, confirm he order to that extent. The ground raised is not correct, in fact, ld. CIT(A) has not allowed the entire expenditure of Rs. 7,11,059/-, as has been pleaded in ground No. 2. 1. Accordingly, we cannot allow ground No. 2 and 2.1 of this appeal and dismiss them.

The facts apropos ground No. (3) are that the AO has noticed payments made by the assessee-company to the persons specified in Section 40A(2)(b) on which tax at source (TDS) has not been deducted as per law. The assessee's contention is that it is not required to deduct TDS on these payments. But, the A.O. has not agreed and has made an addition of Rs. 1,31,00,000/-. As per the AO these payments have been made for the services provided by the Lake Palace Hotels Pvt. Ltd. (LSPH) of Rs. 5.42 lakhs, and remaining amount paid for the Services provided by the Historic Resort Hotels Pvt. Ltd. These services are mainly related to marketing and salary payments. As per the assessee, these are reimbursements of expenses paid by the payees on behalf of the assessee-company. But the AO has treated them as paid under mutual arrangement agreement and TDS provisions are applicable. That the assessee-company rendered services and received payments by way of sharing of expenses which ttract TDS provisions. Accordingly, he has disallowed an amount of Rs. 1,31,00,000/.

When the assessee went in appeal before ld. CIT(A), the ld. CIT(A) after considering the various submissions made by the assessee-company, has held as under: "From the above it is apparent that TDS has been deducted by the actual payer of the expenses i.e. M/s Lake Shore Palace Hotel. Ltd and Historic Resort Hotels Pvt. Ltd as per provision of the Act and debit note has been raised in the case of the assessee which has been squared up by debit entry. Moreover, the amounts are not remained payable at the end of the year. In view of the above facts, addition made u/s 40(a)(ia) is not sustainable in the eyes of law and the same is deleted. This ground of appeal is allowed."