DCIT, CHENNAI vs. ORIENTAL HOTELS LIMITED, CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

A) Assessment year 2010-11:

The assessee has raised several grounds in its appeal however the cruxes of the issues are:-

(i) The Ld.CIT(A) has erred in confirming the order of Ld.AO, who had made addition of Rs.3,14,00,000/- invoking the provisions of Section 14A r.w.r.8D of the Rules.

(ii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO, who had disallowed the expenditure of Rs.20,64,671/- incurred towards payment of pension, reimbursement of medical bills and vehicle maintenance, to the erstwhile assessee company.

(iii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO, who had disallowed interest expenditure of Rs.3,59,28,393/- on borrowed capital incurred for extension of business.

B) Assessment year 2011-12:-

The assessee has raised three grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in sustaining the addition of Rs.20,41,000/- as against the addition of Rs.1,09,43,000/- made by the Ld.AO invoking the provisions of Section 14A r.w.r.8D of the Rules when the assessee had correctly apportioned the expenditure to be disallowed at Rs.3,46,945/-.

C) Assessment years 2012-13:-

The assessee has raised three grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in upholding the order of the Ld.AO who had made addition of Rs. 2,58,91,221/- invoking the provisions of Section 14A r.w.r.8D of the Rules when the assessee had correctly apportioned the expenditure to be disallowed at Rs.4,27,561/-.

The Revenue has raised four grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in restricting the disallowance U/s.14A of the Act to the extent of exempt income.

Subsequently the cases was selected for scrutiny and the Ld.AO passed orders U/s.143(3) of the Act wherein additions were made.

Thereafter the assessee carried the matter before the Ld.CIT(A) and the additions made by the Ld.AO were either sustained or partially sustained, aggrieved by which the assessee is in now appeal before us. The Revenue is also in appeal for the assessment year 2011-12 for restricting the disallowance made by the Ld.AO invoking Section 14A of the Act.

Assessee’s Appeal:-

Assessment year 2010-11:-

During the course of scrutiny assessment proceedings, it was observed by the Ld.AO that the assessee had earned dividend income of Rs.29,18,749/- which is exempt from tax. It was further observed that the assessee had made investments to the extent of 122.52 crores and the investment transactions were mixed up in the books of accounts and not segregated. Therefore the Ld.AO opined that pro-rata interest bearing funds have also been deployed for the purpose of investments. Thereafter coming to the conclusion that the assessee had incurred expenditure towards earning exempt income, invoked the provisions of Section 14A r.w.r. 8D of the Rules by rejecting the explanations submitted by the assessee that, on allocation of expenses, only to the extent of Rs.3,51,873/- had been incurred for the purpose of earning exempt income. Accordingly the Ld.AO worked out the disallowance at Rs.3,17,50,000/- and added to the income of the assessee. On appeal, the Ld.CIT(A) concurred with the view of the Ld.AO and upheld his order by relying on various decisions cited in his order.

5.1 Before us the Ld.AR submitted that the assessee had worked out in detail by allocating the actual expenditure incurred return of income. He further submitted that the Ld.Revenue Authorities without examining the same had blindly invoked the provisions of Section 14A r.w.r 8D of the Rules and worked out the disallowance at Rs.3,17,50,000/- which is erroneous. It was therefore pleaded that the addition made by the Ld.Revenue Authorities may be deleted and the expenses disallowed by the assessee itself may be considered for the purpose of disallowance U/s.14A of the Act. The Ld.DR on the other hand relied on the orders of the Ld.Revenue Authorities and prayed for confirming the same.

5.2 We have heard the rival submissions and carefully perused the materials available on record. In the case of the assessee, it is apparent that the assessee had itself worked out the disallowance with respect to the actual expenditure incurred by it for earning exempt income. However it appears that the Ld.Revenue Authorities without examining the same had abruptly come to a conclusion that Rule 8D is required to be applied and such computation for disallowance is automatic by virtue of the provisions of the Act. It is pertinent to mention that Section 14A of determine the disallowance only if he is satisfied that the claim made by the assessee in respect of the expenditure incurred by it for earning exempt income is found to be not appropriate. But in the case of the assessee, the Ld.AO without examining the computation made by the assessee has blindly applied Rule 8D of the Rules. This action of the Ld.AO is not appropriate and not in accordance with law. Therefore we hereby remit the matter back to the file of Ld.AO for verifying the computation made by the assessee with respect to the expenditure incurred by it for earning exempt income and thereafter pass appropriate speaking order in accordance with law and merit. We also direct the Ld.AO to furnish detailed reasons for rejecting the computation of actual expenditure incurred and worked out by the assessee if the claim of the assessee is rejected so that the appellate authorities and the higher judiciary will be in a position to understand the actual facts of the issue. It would be pertinent to mention that if the assessee is able to establish that it has not incurred any expenditure other than what it has worked out in its computation by apportioning the relevant expenditures then there would be no scope for computing the disallowance by applying Rule 8D of the Rules because such mention that Rule 8D of the Rules has to be applied only if the actual expense incurred by the assessee for earning exempt income cannot be apportioned from data available from the books of accounts of the assessee. It is ordered accordingly.

During the course of scrutiny assessment, it was observed by the Ld.AO that the assessee had paid an aggregate amount of Rs.20,64,671/- to the erstwhile Managing Director of the company Mr. B.S. Reddy and his spouse Mrs. B.S. Reddy and Mrs. S.S.

Yusuf the spouse of the erstwhile Managing Director of M/s. CBH India Limited (a company merged with the assessee company), with the approval of the Board of Directors of the company, as pension, reimbursement of actual medical expenses and actual vehicle maintenance expenses. The Ld.AO opined that there is no business connection with respect to these payments made by the assessee company and therefore as per Section 37 of the Act, it cannot be claimed as allowable expenses. Accordingly the Ld.AO added to the income of the assessee. On appeal, the Ld.CIT(A) concurred with the view of the Ld.AO by rejecting the decision cited by the Ld.AR in the case CIT vs. Lucas Indian Service Ltd., reported in 239 ITR 429 (Madras High Court), CIT Vs. Lakshmi Cements Pvt. Ltd., reported in 104 ITR 711 and Indian Overseas Bank Vs. CIT reported in 63 ITR 703, by holding that facts of these cases are not identical to the case of the assessee because in these cases commercial expediency was established unlike in the case of the assessee.

6.1 Before us the Ld.AR argued by stating that the payment made to the ex-employees who were the Managing Directors of the assessee company and their spouse was in lieu of the services rendered by the Managing Directors during the past and the payment was in the nature of pension. He further argued that such expenditure was necessary to be met in order to secure the morale of the existing Board of Directors of the assessee company. It was therefore submitted that there was commercial expediency for making such payment to the ex-employees / spouse of the ex- employees. Hence it was pleaded that the addition made by the deleted. The Ld.DR on the other hand relied on the orders of the Ld.Revenue Authorities.

6.2 We have heard the rival submissions and carefully perused the materials available on record. We find merit in the submission of the Ld.AR. The erstwhile Managing Directors of the assessee company were managing the company in order to earn maximum revenue drawing remuneration. Therefore their functioning can be attributed as the employees of the assessee company during the past. When such benefits are extended to them, after retirement for their past services to the assessee Company, it is in the nature of pension. Since such benefits extended to the past employees/Directors boost the morale of the present employees/Directors, it cannot be said that there is no commercial expediency. In the case Lucas Indian Service Ltd., (supra) the Hon’ble Jurisdictional Madras High Court has categorically held that pension paid to the family of the deceased / retired Directors of the company would generate confidence in the mind of the employees that they would be taken care off after retirement and therefore such payments were made on the ground of commercial CIT vs. Lakshmi Cement Distributors Pvt. Ltd. supra and in the case Indian Overseas Bank Vs. CIT supra, the same view was taken by the Hon’ble Gujarat High Court and Jurisdictional Madras High Court respectively. Therefore the decision of these cases relied by the assessee and the Ld.AR is squarely applicable to the case of the assessee and the Ld.CIT(A) is not right in rejecting the same as not applicable to the facts of the case of the assessee.

For the above stated reasons, we hereby direct the Ld.AO to delete the addition of Rs.20,64,671/-.

It was observed by the Ld.AO that the assessee had extensively borrowed funds for the purpose of extension of its hotel business towards additional construction in its units at Coimbatore and Kovalam. The Ld.AO further observed that the construction was in progress during the relevant assessment year. It was also revealed that the assessee had claimed interest attributable towards borrowed fund as revenue expenditure. The Ld.AO opined that as

per provisions of Section 36(1)(iii) of the Act, the interest on funds capitalized until such asset is put to use. Since the assessee could not furnish the details of the utilization of the fund the Ld.AO disallowed the interest of Rs.3,59,28,393/- by holding that the interest was attributable for acquisition of assets which was not put to use during the relevant assessment year. On appeal, the Ld.CIT(A) concurred with the view of Ld.AO by observing as follows:-

“On going through the findings of the AO and the arguments of the ld.AR, I find that the appellant has not filed the full details with regard to interest expenditure capitalized before the AO. The bifurcation of capitalized interest filed before me was not filed before the AO. Further, the bifurcation of interest expenditure capitalized, filed before me, do not have supporting evidence. In view of the above facts, I have no hesitation to agree with the findings of the AO.”

7.1 Before us the Ld.AR submitted that the borrowed funds were utilized towards renovation and repair, which are to be claimed as revenue expenditure and therefore the interest expenditure on such borrowed funds are also to be treated as revenue expenditure. Therefore the assessee had claimed the interest expenditure as deduction and not capitalized as per the provisions of Section 36(1)(iii) of the Act. It was therefore pleaded LD.CIT(A) is devoid of merits and hence deserves to be deleted.

The LD.DR on the other hand relied on the orders of the Ld.Revenue Authorities.

7.2 We have heard the rival submissions and carefully perused the materials on record. The explanation offered by the Ld.AR is very much verifiable from the statement of accounts produced by the assessee before the Ld.Revenue Authorities. It appears that the Ld.Revenue Authorities without examining the same had presumed that the borrowed funds were utilized only for the purpose of acquiring a new asset. From the Orders of the Ld.Revenue Authorities it is evident that they have not examined the fund flow of the assessee, to justify their stand. Since the issue percolates to the fact as to whether the borrowed funds were utilized for acquiring a new asset or utilized towards renovation and repair, and since we do not have any materials before us to verify the same, we hereby remit the matter back to the file of Ld.AO for de-nova consideration.

For the assessment year 2011-12, the disallowance worked out by the Ld.AO U/s.14A r.w.r. 8D is Rs.1,09,43,000/-, though the assessee had computed the actual expenditure incurred by it for earning exempt income as Rs.3,46,945/-. The Ld.CIT(A) had restricted the disallowance to the extent of dividend income earned by it during the relevant assessment year following the judgment in the case of Rayalla Corporation Pvt. Ltd., in ITA No. 908/2005.

However for the assessment year 2010-11 herein above, since we have held that if the assessee is able to establish that it has not incurred any expenditure other than what it has worked out in its computation by apportioning the relevant expenditures then there would be no scope for computing the disallowance by applying Rule 8D of the Rules, the same decision will follow in the case of the assessee for the relevant assessment year 2011-12 also.

Assessment year 2012-13

For the assessment year 2012-13, the disallowance worked out by the Ld.AO U/s.14A r.w.r. 8D is Rs.2,58,91,221/-, though the earning exempt income as Rs.4,27,561/-. The Ld.CIT(A) had confirmed the order of the Ld.AO by agreeing with his view.

However for the assessment year 2010-11 & 2011-12 herein above, since we have held that if the assessee is able to establish that it has not incurred any expenditure other than what it has worked out in its computation by apportioning the relevant expenditures then there would be no scope for computing the disallowance by applying Rule 8D of the Rules, the same decision will follow in the case of the assessee for the relevant assessment year 2012-13 also.

Revenue’s Appeal, Assessment year 2011-12:-

Order pronounced on the 24th May, 2018 at Chennai.