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Income Tax Appellate Tribunal, “F” Bench, Mumbai
Per B.R.Baskaran (AM) :-
The Revenue has filed these appeals relating to A.Y. 2012-13 to 2016-17 challenging the orders passed by learned CIT(A)-8, Mumbai.
Since some of the issues in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
The assessee was formerly known as Tulip Hospitality Services limited. It is engaged in the hotel business.
The first common issue contested by the Revenue in all the five years relates to depreciation on FSI. The assessee had paid a sum of Rs. 68.16 lakhs
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during the financial year relating to A.Y. 2005-06 for acquiring FSI at a cost of Rs. 3,40,81,320/-. The assessee included above said amount in block of asset and claimed depreciation @ 25% on the total cost of Rs. 3.40 crore. The AO noticed that the depreciation claim on the above asset had been rejected by the Assessing Officer in the earlier years. However, Ld CIT(A) had allowed depreciation @ 10% on the actual payment of Rs.68.16 lakhs. During the year under consideration the assessee had claimed depreciation of Rs.11,37,327/-. The Assessing Officer accordingly, following the decision rendered by learned CIT(A) in the earlier years, held that in A.Y. 2012-13 depreciation @ 10% only allowable on the WDV of Rs. 36.22 lakhs. Accordingly he allowed depreciation of Rs. 3,62,244/- in A.Y. 2012-13 and disallowed balance amount of Rs. 7,75,083/-. For the identical reasoning the Assessing Officer disallowed part of depreciation claimed by the assessee in other four years also.
Learned CIT(A) noticed that the identical issue has been decided by the ITAT in assessee’s own case in ITA No. 3189/Mum/2011 relating to A.Y. 2005- 06 dated 26.8.2016, wherein the Tribunal has held that the depreciation is allowable @ 10% and depreciation has to be allowed on the whole consideration towards FSI of Rs. 3,40,81,320/-. Accordingly, learned CIT(A) directed the Assessing Officer to allow depreciation @ 10% on the whole cost of FSI.
We have heard both the parties on this issue and perused the record. We noticed that learned CIT(A) followed the decision rendered by the Coordinate Bench in assessee’s own case in A.Y. 2005-06 and operative part of the order has been extracted as under by learned CIT(A) :-
“Now, coming to the rate of depreciation, whether it has to be allowed @ 10% or 25%, we do not find any merits in the contention of the assessee that the additional FSI is a business or commercial rights falling within the realm and scope of ‘intangible asset’ within the scope of section 32(1)(ii). The FSI only relates to giving of the right to construct additional floor to the assessee which only goes to enhance the value or cost of the existing asset/building. It strictly pertains to the addition in the building only and, therefore, depreciation
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allowable would be at the rates applicable to the buildings only and for not some kind of intangible right u/s 32(1)(ii). Accordingly, we uphold the observation and order of the Ld. CIT(A) to the extent that the depreciation allowable would be on rates applicable to the building only that is, @10% and not @ 25% for some kind of intangible right. Thus in our conclusion, the assessee would be entitled to depreciation @ 10% on the whole of the consideration towards FSI of Rs.3,40,81,320/-. In view of our finding ground no.1 is treated as dismissed and ground No.2 is treated as allowed.
Since the learned CIT(A) has followed the decision rendered by the Tribunal on this issue, we do not find any reason to interfere with his decision in all the five years under consideration.
Next common issue contested by the revenue in all the five years relates to disallowance of depreciation on intangible assets. The assessee had claimed depreciation on intangible assets, which were in the nature of licenses, franchises and other business and commercial rights. The Assessing Officer noticed that the said depreciation had been disallowed by him in the earlier years. Accordingly, the Assessing Officer disallowed the depreciation claimed on intangible assets in all the five years under consideration.
Learned CIT(A) noticed that an identical issue has been adjudicated by the ITAT, Mumbai in assessee’s own case in ITA No. 4783 & 5571/Mum/2008 dated 11.3.2015 relating to A.Y. 2004-05, wherein the Tribunal had allowed claim of the assessee. Following the decision of the Tribunal. the learned CIT(A) deleted the disallowance made in all five years under consideration.
We have the parties and perused the record. We noticed that learned CIT(A) has extracted the order passed by the Tribunal as under :-
“13.1 By the impugned order, the CIT(A) allowed the depreciation after having the following observations:- "2.3 I have considered the assessment order and written submissions and my appellate order No. CIT(A) XXX/IIT-204106-07 dated 22.10.200B for A. Y.2003-04. In my appellate order cited above, at pages 15 to 17, paras 10.4 to 10.19, I have held that depreciation on intangible assets is to be allowed in A. Y. 2003-04. Aas for AY 2004-
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05, the appellant has claimed the depreciation on intangible assets at Rs.8,67,71,053/-on account of WDV as on 31.03.2003 (AY: 2003-04), and the facts are same. Hence, the depreciation on WDV is therefore, the disallowance of depreciation at Rs.8,67,71,053/- is deleted”.
13.2 We have considered rival contentions and perused the record. We found that the CIT(A) in its earlier order for A.Y. 2003-04 has deleted the disallowance of depreciation after having the following observation :
"10.4 I have carefully considered the assessment order and the submissions made by appellant during appellate proceedings. The depreciation on intangible assets of Rs.465,27,78,949/ at Rs.11,50,94,737/- was claimed by the appellant in respect of the running business which was acquired on "slump sale basis" There is no dispute about the computation of depreciation at RS.11,50,94,737/-. The claim of depreciation or assessment year under consideration is the first year of such a claim. The A. O. has also accepted that intangible assets were part of slump sale. The A. O. has however, relied mainly on three propositions for the purpose of denying the depreciation. Briefly stated, they are:
i) The appellant had not bifurcated the amount to different assets. ii) The appellant had not proved that the intangible assets were used for the purposes of its business; and iii) The appellant failed to prove that the condition precedent referred to in Section 32 have not been fulfilled.
10.5 The Assessing Officer's contention that the appellant has not bifurcated the amount among different assets is not based on the facts of the case as the appellant had purchased all the intangible assets on "slump sale basis' and had not paid separate price for each of such intangible assets. Further, all the intangible assets fall under block of assets' on which depreciation is allowable @25%. The AO having accepted the fact that intangible assets were acquired by appellant on slump sale basis", in such a case of acquisition of an undertaking as a going concern, the composite consideration cannot be bifurcated between various assets heeds to be accepted. The allocation of cost of acquisition for each block of assets in a fair and reasonable manner permitted by law has to be accepted.
10.6 The second proposition that the appellant had not used the intangible assets in their business cannot be accepted as the hotel business could not have been carried out without these license permits. The Assessing Officer has also not denied these facts. Therefore, the Assessing Officer's contention on this proposition that intangible assets were not used for the appellant's business also fails.
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10.7 The third proposition of the Assessing Officer that the condition precedent referred to in section 32 have not been fulfilled cannot be accepted as the invaluable permits license, approvals for the purpose of operating hospitality business squarely falls within the purview of the definition of intangible assets given in explanation 3 of section 32 of the Act.
10.8 In this regard, yet another question' which the A O. has not considered and which can be raised is the 5th proviso to section 32 of the Act, which provides that aggregate depreciation allowable to the predecessor and successor in the case of succession referred to in clauses (xiii) and (xiv) of section 47 or section 170 or to the amalgamating and amalgamated company' in the case of amalgamating or to the 'demerged and resulting company in the case of demerger, as the case may be, shall not exceed, the amount of depreciation as if the succession, amalgamation etc. had not taken place. This question was posed, to the appellant's AR. who has vide a separate note replied as under:
"Now, a question has arisen, whether in view of the 5th proviso to section 32 of the Income-tax Act, 1961 ("the Act') whether a part of the depreciation is to be apportioned and to the allowed to predecessor owner. In our considered opinion, we would like to state that the said proviso to section 32 is not applicable to the facts of the assessee case. The said provisions are applicable to the following cases only:
(1) Transfer of capital assets by a firm to a company as contemplated in section 47(xiii);
(2) Transfer of capital assets by a sole proprietary concern to a company in terms of section 47(ivx);
(3) Succession of business, referred to, in section 170;
(4) Transfer of assets by a amalgamating company to the amalgamated company and;
(5) Transfer of assets in a demerger by the demerged company to the resulting company.
Firstly, it is submitted that it is not a case of succession. The assessee had purchased the said hotel in an open bid from the Government owned Corporation i.e. Hotel Corporation of India, and by purchasing, the assessee has become owner of the said hotel. The purchase of Hotel by the assessee from Hotel Corporation of India does not amount to succession in as much as that the said company was not only running the said Single hotel sold to assessee. Thus, by effecting the sale of single hotel does not tantamount to succession of the whole business. In this regard, the reliance is placed on the decision of
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Gujarat High Court in the case of Premji Khimraj Shah vs., IT.O.(118 ITR 216). The said provision to section 32 is applicable only in those cases which are covered by sub-clause (xiii) and (xiv) of section 47 or section 170 of the Act. The proviso to sub-section (xiii) &- (xiv)' indicates that sub-section (xiii) is applicable only where any transfer of capital assets or intangible assets has been effected by a firm to a company as a result of succession of the firm by a company. The provisions of sub-section (xiv) is applicable only where a sole proprietary concern is succeeded by company. Thus, it may please be noted that in our case, no transfer has taken place from a firm to a company nor the said business of hotel was a proprietary concern succeeded by a company. Thus, the applicability of these said sub- section i.e. (xiii) & (xiv) of section 47 is, therefore, totally ruled out in our case. Another provision i.e. section 170 is also not applicable to the facts of our case as the said provisions are applicable only where a business has been succeeded otherwise than on death. The phenomenon of death in the said provisions clearly shows that the provisions of section 170 are applicable only where business is being run either by individual or Karta of HUF, because the phenomenon of death occurs only in these two types of cases., No death will occur to a company firm which could only be either liquidated or dissolved respectively. The 5th proviso to section 32 are also applicable to amalgamating company and demerger company. In our case, neither there is a amalgamation nor there is a demerger at all. Thus, our case is fully outside the purview of 51 h proviso to section 32."
From the above submission, it is seen that the appellant's case neither falls in the category of succession (as provided in section 47, clauses (xiii) or (xiv) or section 170), nor amalgamation or demerger. Hence, I agree that 5th proviso to section 32 of the Act would not be attracted to the case of the appellant.
10.10 Taking into consideration, the facts that the A.O. had accepted that intangible assets were acquired by way of "slump sale" and for the reasons recorded in earlier paras, I hold that the depreciation on intangible assets' at Rs.46,27,78,949/- @ 25% claimed at Rs.11,50,94,737/- is admissible as the same were used for the purpose of appellant's business.
10.11 This ground of appeal is therefore allowed."
13.3 We found that allocation of cost of acquisition for each block of assets in a fair and reasonable manner as permitted by law had to be accepted. Further, the CIT(A) observed that even the Assessing Officer has not denied that the hotel business could not be carried out without the sale licenses and permits. The CIT(A) further stated that 5 proviso to Section 32 of the Act would not be attracted to the case of the assessee. We, therefore, do not find any reason to interfere in the order of CIT(A) in this regard.”
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Since the learned CIT(A) has followed the decision rendered by the ITAT, we do not find any reason to interfere with his order.
The next common issue contested by the revenue in all the five years relates to the disallowance of interest expenses paid to M/s Cox & Kings. The AO noticed that the assessee had issued Debentures amounting to Rs.18.00 crores to M/s Cox & Kings in the past and was paying interest @ 24%. It was noticed that the assessee has also borrowed another loan of Rs.22.58 crores from M/s Cox & Kings at the interest of 12%. The assessee justified payment of interest @ 24% stating that the debentures could not be redeemed on the date of maturity and it was constrained to roll over the maturity for further period after accepting the terms and condition that the interest shall be paid at rate of 24%. The AO was not convinced with the explanations of the assessee and accordingly, he restricted the interest rate on Debentures @ 12%. Accordingly, he disallowed the excess interest amount in all the five years under consideration.
The Ld CIT(A) noticed that an identical disallowance made in AY 2010-11 has been deleted by the Tribunal in the assessee’s own case in ITA No.1851/Mum/2014 dated 16.03.2017. Following the same, the Ld CIT(A) deleted the disallowance made in all the five years under consideration.
We heard the parties on this issue and perused the record. We notice that the Tribunal has deleted an identical disallowance made in AY 2010-11 following the decision rendered by Jaipur bench of Tribunal passed in ITA No. 760/JP/2015, wherein it was observed that the revenue has not placed any material under identical facts and circumstances that the fair market rate of interest is lower than what the assessee has claimed. It was further held that the AO has to give a finding having regard to fair market rate. Accordingly, it was held that the AO could not have made disallowance u/s 40A(2)(a) of the
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Act. We notice that the Hon’ble Bombay High Court, vide its order dated 22nd November, 2021 passed in ITA No.1911 of 2017, has upheld the view expressed by the co-ordinate bench in AY 2010-11 with the following observations:-
6 In the assessment year, if one considers the assessment order, the Assessing Officer has not placed any material under identical facts and circumstances to justify that the fair market rate of interest was lower than what respondent has paid. The Assessing Officer has not recorded any finding or collected any material to show that the interest paid by respondent was in excess of the fair market rate. Section 40A (2) (a) reads as under:
40A (2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as i so considered by him to be excessive or unreasonable shall not be allowed as a deduction:
Provided that for an assessment year commencing on or before the 1 day of April, 2016 no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in Section 928A, if such transaction is at arm's length price as defined in clause (11) of Section 92F.
As provided under Section 40A (2) (a), the Assessing Officer was duty bound to form a personal opinion, after having regard to the fair market value of the goods, services or facilities for which payment is made, that such expenditure is excessive or unreasonable. As stated earlier, there is no material placed to indicate what would have been the fair market value of interest that would have been payable on the debentures and why such payment was excessive or unreasonable. Simply relying on the auditors' finding is not enough.
7 Moreover, the ITAT has rightly concluded that the provisions like Section 40A are meant to check evasion of tax through excessive or unreasonable payment to relatives and associate concerns and should not be applied in a manner which will cause hardship in bonafide cases relying on Section 40A(2) of the Act. Moreover, it is not a case of tax evasion in as much as it is not the Revenue's case if the rate would have been less the assessee's profit would have been more. As could be seen from the assessment order
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itself respondent had filed return of income for Assessment Year 2010-2011, which is the year in question, declaring loss at Rs.31,88,44,909/- and the return of income had been processed under Section 143 (1) of the Act. We find support for this view from the judgment of the Division Bench of this Court (Panaji Bench) in Commissioner of Income Tax V/s. VS. Dempo and Co. P. Ltd.".
8 In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.”
In the years under consideration also, the AO has not given any finding having regard to the fair market rate. The Ld A.R further submitted that the assessee has been continuously incurring losses and the said losses could not be set off by the assessee for want of profits. Accordingly, he submitted that there was no tax benefit to the assessee by paying interest at the alleged higher rate. However, we noticed that the Hon’ble Bombay High Court has upheld the order passed by the Tribunal in AY 2010-11 on an identical disallowance made in that year. Accordingly, following the decision rendered by Hon’ble Bombay High Court in the assessee’s own case, we uphold the decision rendered by Ld CIT(A) on this issue.
The next issue relates to the disallowance of interest u/s 36(1)(iii) of the Act. The AO noticed that the assessee has given interest free advances to its sister concerns, while it was paying interest on moneys borrowed by it. Accordingly, the AO disallowed proportionate interest expenditure in all the five years under consideration. The Ld CIT(A) noticed that an identical disallowance made in AY 2010-11 has been deleted by the Tribunal on noticing that the interest free funds available with the assessee was more than the interest free advances given. Following the same, the Ld CIT(A) deleted the disallowance made u/s 36(1)(iii) in all the years under consideration.
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We heard the parties and perused the record. The assessee has furnished the details of interest free funds available with it and the interest free funds given by it to its sister concerns:- (Rs. In crores) Asst. Year Interest free funds Interest free funds given taken from related to related parties parties 2012-13 98.84 2.46 2013-14 119.99 6.15 2014-15 107.40 7.31 2015-16 280.23 10.17 2016-17 239.55 14.14
We notice that the quantum of interest free funds taken by the assessee from its related parties are more than the amount of interest free advances given to other related parties. Under identical set of facts, the co-ordinate bench has deleted the disallowance of interest expenses in AY 2010-11 following the decision rendered by Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd (313 ITR 340)(Bom). Accordingly, following the above said decision, we confirm the orders passed by Ld CIT(A) in deleting the disallowance in all the years.
Now, we shall take individual issues urged by the assessee in certain years. The individual issue urged in AY 2012-13 relates to the disallowance made out of travelling expenses. The AO noticed that the assessee has claimed travelling expenses of Rs.18,41,075/-. Since no details like proof of payment, nature and allowability of travelling expenses were furnished, the AO disallowed entire claim. The Ld CIT(A), however, restricted the disallowance to 50%.
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We heard the parties on this issue and perused the record. The Ld A.R submitted that the assessee has incurred travelling expenses for the purpose of business only. Hence no disallowance is called for out of travelling expenses. On the contrary, the Ld D.R submitted that the assessee has failed to furnish the details and hence the disallowance has been made. We notice that the AO has made disallowance only in AY 2012-13 and in all other years, the claim has been allowed. Since the assessee has failed to furnish the details, some disallowance is called for. We find that the disallowance of 50% made by Ld CIT(A) is reasonable. Accordingly, we uphold the order passed by Ld CIT(A) on this issue.
The next issue urged in AY 2014-15 and 2015-16 relates to the disallowance of claim made u/s 40(a) of the Act on the ground of deduction/payment of tax deducted at source.
In AY 204-15, the assessee had claimed deduction of certain expenses as admissible u/s 40(a) of the Act. The AO noticed that the amount claimed by the assessee included interest expenditure of Rs.4,48,54,200/- and Rs.4,32,00,000/- being interest payments made to M/s Cox & Kings Ltd in the year relevant to AY 2013-14. The AO further noticed that he had disallowed a sum of Rs.1,25,59,308/- u/s 40A(2)(a) and another sum of Rs.2,16,59,178/- u/s 36(1)(iii) from out of interest expenses. Accordingly, he took the view that both these expenses cannot be allowed u/s 40(a) of the Act, since the disallowance had not been made u/s 40(a). Accordingly he rejected the claim for deduction u/s 40(a) to the extent of Rs.3,42,18,486/-.
On identical reasoning, the AO disallowed the claim made by the assessee u/s 40(a) to the tune of Rs.3,63,04,274/- in AY 2015-16, since he had disallowed the above said amount in AY 2014-15 u/s 40A(2)(a) and 36(1)(iii).
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The Ld CIT(A) noticed that he has deleted the disallowance of interest expenses of Rs.3,42,18,486/- in AY 2013-14 and Rs.3,63,04,274/- in AY 2014-15 made by the AO u/s 40A(2)(a)/36(1)(iii). Accordingly, the Ld CIT(A) held that the deduction claimed by the assessee u/s 40(a) is allowable in AY 2014-15 and 2015-16 respectively. Accordingly he directed the AO to allow the claim made u/s 40(a) of the Act in the respective years.
In the earlier paragraphs, we had upheld the decision rendered by the Ld CIT(A) on the issue of disallowances made u/s 40(A)(2)(a) and 36(1)(iii) in AY 2013-14 and 2014-15. Hence the claim made by the assessee u/s 40(a) in AY 2014-15 and 2015-16 was rightly allowed by Ld CIT(A). Accordingly, we uphold the order passed by Ld CIT(A) on this issue in AY 2014-15 and 2015- 16.
In the result, all the appeals filed by the revenue are dismissed.
Order pronounced in the open court on 20.07.2022.
Sd/- Sd/- (RAHUL CHAUDHARY) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 20/07/2022 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy//
(Assistant Registrar) PS ITAT, Mumbai