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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: HON’BLE SHRI MAHAVIR SINGH, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Per Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeals by revenue as well as assessee for Assessment Year [AY] 2014-15 contest separate orders of Ld. first appellate authority on different grounds of appeal
. Since, common issues are involved, we proceed to dispose-off the same by way of this common order for the sake of convenience and brevity. Cross Appeals in the case of M/s. Olive Bar & Kitchen Pvt. Ltd
2. The assessee is contesting the disallowance u/s 36(1)(iii) for Rs.28.09 Lacs whereas revenue is contesting the deletion of pre- operative expenditure of Rs.187.54 Lacs by Ld. Commissioner of Income Tax (Appeals)-21, Mumbai [CIT(A)] vide impugned order dated 30/11/2017. 3.1 Facts leading to the same are that the assessee being resident corporate assessee stated to be engaged in the business of restaurant & related activities was assessed u/s 143(3) for impugned AY on 24/10/2016 by Ld. Assistant Commissioner of Income Tax-13(1)(1), Mumbai wherein the income of the assessee was determined at Rs.237.97 Lacs after certain additions / disallowances as against returned income of Rs.45.33 Lacs e-filed by the assessee on 20/11/2014. The Book Profits u/s 115JB were determined at Rs.131.99 Lacs as against Rs.129.30 Lacs reflected by the assessee. 3.2 During assessment proceedings, it transpired that the assessee claimed a deduction of Rs.187.54 Lacs in its computation of income on account of pre-operative expenditure pertaining to following units: - No. Unit Amount (Rs.) 1. Olive Bistro, Hyderabad 50,51,151/- 2. Olive Okhla 6,13,403/- 3. Olive Irani Café, Gurgaon 48,19,629/- 4. Olive Bistro, Gurgaon 82,69,854/- Total 1,87,54,037/- It was explained that the assessee was incorporated in the year 2000 and commenced commercial activity in the same year by opening first restaurant at Pali Hill Tourist Hotel Pvt. Ltd., Union Park, Khar (W), Mumbai followed by chain of restaurant in subsequent years at various other places. During the impugned AY, the assessee incurred expenses of Rs.526.11 Lacs which was debited under the head Leasehold Property / Capital Work in Progress and reflected under Fixed Asset in the Balance Sheet. Out of the same, the assessee claimed an expenditure of Rs.187.54 Lacs in the computation of income since these were deductible revenue expenditure u/s 37(1). Further, since the aforesaid 4 units were set up for expansion of existing restaurant business, the pre-operative expenditure was incurred for expansion of existing business and therefore, out of total expenditure, expenses of revenue in nature has been claimed u/s 37 of the Act. Reliance was placed on the decision of Hon’ble Karnataka High Court rendered in CIT Vs. Hindustan Machine Tools Ltd. to buttress the submissions. However, not convinced, Ld. AO noted that the restaurants at Pune & Hyderabad commenced operations only during the month of November, 2012 & July, 2013 respectively and the expenses were incurred prior to commencement of business. Further, since no income from the new units was credited to the profit & loss account during the impugned AY and therefore, the expenditure was not allowable following matching principle. Finally, the claim u/s 37 was rejected. As a logical consequence, depreciation against the same was allowable @15% which resulted into net addition of Rs.159.40 Lacs in the hands of the assessee. 3.3 The disallowance u/s 36(1)(iii) stem from the fact that the assessee advanced interest free loan of Rs.305.70 Lacs to an entity namely M/s Joie De Vivre whereas it claimed interest expenditure of Rs.28.09 Lacs against borrowed funds. The assessee, inter-alia, took shelter of the plea that in case of usage of mixed funds, a presumption was to be drawn in assessee’s favor that interest free loans were funded out of own funds / interest free funds available with the assessee. Reliance was placed on decision of Hon’ble Bombay High Court rendered in CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340]. Another plea raised was the fact that the loans were given to an associate for the purpose of carrying on its business activity and therefore, the disallowance was not warranted in terms of ratio of decision of Hon’ble Apex Court rendered in S.A.Builders Vs. CIT [288 ITR 1]. However, not convinced with assessee’s explanations / submissions, the interest expenditure of Rs.28.09 Lacs as claimed by the assessee u/s 36(1)(iii) was disallowed.
Aggrieved, the assessee contested both the issues with partial success before Ld. first appellate authority vide impugned order dated 30/11/2017. The first appellate authority, after considering factual matrix as well as assessee’s detailed submissions, deleted addition on account of pre-operative expenditure by observing as under: - 10. Decision I have considered the facts of the case and the assessee's submission. The Appellant is engaged in the business of running restaurants. For the year under consideration, the Appellant has incurred expenses of Rs. 5,26,11,620/-(5,18,19,867 + 7,91,753) which was debited under the head 'Leasehold Property / Capital Work in Progress' respectively and reflected under 'Fixed Asset Schedule' in the Financial Statement. Out of Rs. 5,26,11,620/-, the assessee has claimed expenses aggregate of Rs.1,87,54,037/-; being of Rs.50,51,151/- (Olive Bistro, Hyderabad), Rs. 6,13,4037- (Olive Okhala), Rs. 4.8.19.629/- (Olive Irani Cafe, Gurgaon) and Rs.82,69,854/- (Olive Bistro, Gurgaon); in its Computation of Total Income as they are deductible revenue expenses allowable u/s 37(1) of the Act. During assessment proceeding the AO asked the appellant to show cause as to why the expenses of Rs.1,87,54,037/- should not be disallowed and added back to the total income holding the same as capital expenditure. In response The Appellant submitted that the pre -operative expenditure of Rs. 1,87,54,037/- are revenue expenditure deductible u/s 37(1) of the Act. These expenses has not brought into existence any capital asset or enduring benefits. The Appellant submitted that since it was already in the business of running restaurants, opening of new restaurants constitutes expansion and extension of existing business with common fund, common' control arid common management., The Appellant had not obtained any enduring benefit and no capital assets came into existence. None of these expenses involved construction of any capita! asset. It was submitted that these expenses aggregating to Rs.1,87,54,037/- [i.e.Rs. 50,51,151 + Rs. 6,13,403+ Rs. 48,19,629+ Rs. 82,69,854] relating to Delhi and Hyderabad restaurants are purely in the nature of revenue expense i.e. Advertisement, Salaries and Wages, Travelling Expenses, Rent, Repairs and maintenance, Staff Room Expenses, Food & Provision, Water Charges, Bank Charges, PF Employer Contribution, ESIC Employer Contribution etc which were incurred for the purpose of expansion of the existing business. It is therefore submitted that the expenses of Rs. 1,87,54,037/- were incurred in the course of carrying on and for the purpose of business and hence the same are allowable as revenue expenditure under section 37 of the Act. However, the AO is not convinced with the. submission of the Appellant and disallowance expenses of Rs.1,87,54,037/- by holding the same as Capital expense. 10.2 I find that the similar disallowance was also made by the AO in the immediately preceding year i.e.A.Y.2013-14 wherein on similar facts the Ld.AO disallowed Pre- Operative expenses aggregating to Rs;79,01,139/- pertaining to Pune and Hyderabad restaurants, holding the same as Capital expense. However, on appeal by assessee, my predecessor vide order dt.02.05.2017 in Appeal Number CIT(A)- 21/DCIT-13(1)(1)/IT-67/2016-17 allowed the appeal of assessee and directed the AO to treat the Pre-Operative expense on opening of new restaurants as revenue in nature. The operating part of the order of my predecessor is reproduced as under: "6.6. / have considered the facts and the submissions carefully. The appellant company is in restaurant business which was started in October 2000 at Khar, Mumbai. During the year FY 2012-13, expenditure of Rs.3,11,16,461 was debited under the head leasehold property / capital work in progress under the Fixed Assets schedule. It is only in the computation of income for the tax return that an expense of Rs.79,01,139 as expenditure u/s 37(1) was claimed out of the expense of Rs.3,11,16,461 capitalized as part of WIP in books. The operation commenced as per assessee's submission in respect of "Olive Bistro" Pune in November 2012, and in respect of "Olive Bistro" at Hyderabad in July 2013. That the appellant has an existing restaurant business is not in doubt. Neither is the fact that expenditure in question is incurred in respect of additional restaurants set up and which is in the nature of expansion of the existing restaurant business. The management, the control and funds utilized are common. In these facts, the judicial decisions cited do support the appellant's contention. The ground of appeal no 4 is therefore allowed."
10.3 I find that the fact in the case of the Appellant during the year under consideration is similar to that in the preceding year i.e.A.Y.2013-14. The Appellant is already started its restaurants business in the year 2000. Thereafter, the Appellant has started various other restaurants at different locations. The Appellant has already commenced its business activities in earlier years. During the year under consideration, the Appellant has incurred pre-operative expenditure on its new restaurants namely Olive Bistro, Olive Okhala, Olive Irani Cafe, Gurgaon and Olive Bistro, Guragaon. These expenses are purely in the nature of revenue expense which are incurred for the expansion of the existing business. Hence, respectfully following decision of my predecessor in preceding year i.e.A.Y.2013-14 I hereby direct the AO to treat the expenses of Rs.1,87,54,037/- incurred by the Appellant as deductible revenue expense Accordingly, Ground No. 4 of appeal is allowed in favour of the Appellant.
However, the disallowance u/s 36(1)(iii) was confirmed by observing as under: - 14. Decision I have considered the facts of the case and the assessee's submission. During the year the Appellant has debited interest expense of Rs.28,09,890/- to its P&L A/c and same is claimed as deductible revenue expense. The Appellant has also granted loan aggregating to Rs.3,05,70,478/- in earlier years (including loan of Rs.88,78,203/- granted during the year) to its associate concern Joie De Vivre Private Limited. The AO disallowed total interest expense of Rs.28,09,890/- u/s 36(1)(iii) of the Act on the ground that interest bearing funds are transferred for giving interest free loans and advances to its associate Joie De Vivre Private Limited. I do find merit in the disallowance made by the AO. The Appellant submitted that the interest free advances were given to its associate concern Joie De Vivre Private Limited for the-purpose of carrying on its business activities. Joie De Vivre Private Limited is also engaged in the business of running restaurant. It was submitted that the Appellant carried on its business activities in its own entity as well as through its associates thus the funds provided by the Appellant to its associate are used for carrying on the business by the Appellant. 14.2 The appellant submits that, the total own fund of the Appellant is aggregating to Rs.36,87,32,849/- as against the total interest free loans and' advances of Rs.3,05,70,478/- granted to Joie De Vivre Private Limited, and, in view of the decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. Reliance Utilities & Power Ltd (313 ITR 340) the interest should be allowed; it cannot be said that the interest free loans and advances were given to associate entity Joie De Vivre Private Limited out of available own fund of the Appellant; hence the claim of the appellant that no interest expense can be disallowed u/s 36(1)(iii) of the Act, is not tenable. I further observe that the argument of substantial amount of loans and advances were given to associate concern Joie De Vivre Private Limited in earlier years and in the scrutiny assessment proceedings completed u/s 143(3) of the Act, the AO accepted the interest free loans and advances given to associate concern Joie De Vivre Private Limited for business purpose and no disallowance of interest expense was made u/s 36(1)(iii) of the Act does not support the contention of the appellant as each year is independent and this cannot be a basis for allowance of interest expenditure, but the disallowance is based on facts and circumstances of the case for that year.. Thus, on this ground also the disallowance of interest expense made by the AO u/s 36(1)(iii) of the Act cannot be held be not justified. In this context, I fully agree with the distinction made by the Assessing Officer with respect to the ratio laid down by the Hon'ble High Court of Bombay in the case of Reliance Utilities and Power Ltd. (Supra) and the facts of the assessee’s case. Further, it is also to be mentioned that the business of the assessee cannot the business of the subsidiary company in law. It is also to be mentioned that all the borrowed and advanced funds are for the purpose of business and when the assessee had sufficient cash balance at his disposal, it should not have borrowed funds from outside which have to be taken at a cost i.e. interest-bearing funds, rather the assessee should have abstained itself in lending funds to its subsidiary/associate concern without charging interest. Moreover, as pointed out by the Assessing Officer, the interest claimed by the appellant is not allowable. I therefore hold that interest expense of Rs.28,09,890/- disallowed by the AO u/s 36(1)(iii) is justified on the facts and circumstances of the case of the Appellant and the action of AO the is upheld. Accordingly Ground No.5 in appeal is dismissed.
The stand of first appellate authority has given rise to cross-appeal before us. 5.1 The Ld. Authorized Representative for Assessee [AR], at the outset, submitted that first appellate authority provided relief to the assessee qua pre-operative expenditure by relying upon the order of its predecessor for AY 2013-14. The said order for AY 2013-14 was subject matter of challenge by the revenue before this Tribunal vide order dated 05/12/2018 wherein the matter has been settled in assessee’s favor. The copy of the order has been placed on record. The Ld. DR could not controvert the aforesaid facts. 5.2 Upon careful consideration, we find the issue to be recurring in nature which has already been delved upon by the co-ordinate bench of this Tribunal in assessee’s own case for AY 2013-14 wherein the stand of Ld. first appellate authority has been confirmed. Nothing has been brought on record to demonstrate any change in material facts or circumstances. Therefore, respectfully following the binding judicial precedent, we dismiss the revenue’s appeal. It is, however, made clear that since the expenditure has been capitalized in the books of accounts and claimed only in the computation of income, no deduction thereof including depreciation, in any manner, would be allowable to assessee against the same in any assessment year. The consequential depreciation of 15% as allowed by Ld. AO shall stand reversed. The Ld. AO is directed to allow deduction of the impugned expenditure subject to verification of the fact that depreciation against the stated expenditure has not been allowed to the assessee in the computation of income either in impugned AY or in subsequent years. With these directions, the revenue’s appeal stands dismissed.
So far as the disallowance u/s 36(1)(iii) is concerned, upon perusal of financial statements, it transpires that the assessee’s opening own funds in the shape of share capital and free reserves aggregating to Rs.36.87 Crores far exceeds the interest free loans of Rs.3.05 Crores advanced by the assessee. It has been argued that in case of mixed usage of funds, a presumption was to be drawn in assessee’s favor that interest free loans were granted out of free funds available with the assessee in terms of decision of Hon’ble Bombay High Court rendered in CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340]. However, both the lower authorities distinguished the same on the ground that the decision was rendered in the context of investments made by the assessee and not in the context of grant of interest free advances. However, the said reasoning, in our opinion, would hold no water since the ratio of the cited decision would apply in all cases where the funds were diverted for non-business purposes i.e. either to make investments or to advance interest free loans. Therefore, the lower authorities were not justified in disallowing the same particularly in view of the fact that fresh loans granted by the assessee to the said entity during impugned AY was only to the tune of Rs.88.78 Lacs. Another factor is to be noted that the loan has been granted by the assessee to its subsidiary company and Ld. AO has rejected the stand of the assessee on the ground that the business of the subsidiary could not be considered in law as the business of the assessee without controverting the fact that the aforesaid subsidiary was also engaged in the business of running the restaurants and without appreciating the fact that the assessee would derive business benefits out of the same. In such a scenario, the ratio of decision of Hon’ble Apex Court rendered in S.A. Builders Vs. CIT [288 ITR 1] would also become applicable to the facts of the case. Therefore, viewed from any angle, the impugned disallowance, in our opinion, could not be sustained. Hence, by deleting the same, we allow the assessee’s appeal. Revenue’s appeal in the case of M/s. Olive Café South Pvt. Ltd.
The revenue is similarly aggrieved by the order of Ld. first appellate authority in granting relief to the assessee on account of pre-operative expenditure. The assessee claimed pre-operative expenditure to the extent of Rs.82.50 Lacs in the computation of income which were disallowed. The Ld. first appellate authority deleted the same by relying upon the order of its predecessor for AY 2013-14. The revenue challenged the stand of first appellate authority, however without any success, before this Tribunal vide common order dated 05/12/2018, a copy of which is already on record. Facts and circumstances being pari-materia the same, our observations, directions, conclusions etc. as given in para 5.2 shall mutatis mutandis apply in this case also. Resultantly, the appeal stands dismissed.
Conclusion 8. The revenue’s appeals stands dismissed whereas assessee’s appeal ITA No. 660/Mum/2018 stands allowed. Order pronounced in the open court on 09th April, 2019. Sd/- Sd/- (Mahavir Singh) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांक Dated : 09/04/2019 Sr.PS, Jaisy Varghese आदेशकी�ितिलिपअ�ेिषत/Copy of the Order forwarded to : अपीलाथ�/ The Appellant 1. ��थ�/ The Respondent 2. आयकरआयु�(अपील) / The CIT(A) 3. आयकरआयु�/ CIT– concerned 4. िवभागीय�ितिनिध, आयकरअपीलीयअिधकरण, मुंबई/ DR, ITAT, Mumbai 5. गाड�फाईल / Guard File 6.