THE INDIAN HOTELS COMPANY LTD,MUMBAI vs. ADDL CIT CIR 2(2), MUMBAI

PER RAM LAL NEGI, JM These are the appeals and cross objection filed by the assessee and the revenue against the order dated 19/11/2009 passed by the Ld. CIT (A)-15, Mumbai, for the assessment year 2005-06, vide which the Ld. CIT (A) has partly allowed the appeal of the assessee filed against assessment order passed u/s 143(3) of the Income Tax Act, 1961 (for short ‘the Act’). is the cross appeal filed by the revenue and Cross Objection No. 169/Mum/2010 has been filed by the assessee. Since, the cross appeals and the cross objection pertain to the same assessee the same were clubbed, heard together and are being disposed of by this common order for the sake of convenience. ITA No. 371/Mum/2010 (Assessment Year: 2005-06) Brief facts of the case are that the assessee engaged in the business of running hotels, which operates its own hotel as well as hotels owned by others, filed its return of income for the assessment year under consideration declaring the total income of Rs. 51,26,70,391/-. The return was processed u/s 143 (1) of the Act. Subsequently, the assessee filed revised return declaring income of Rs. 49,96,78,100/-. Since, the case was selected for scrutiny notice u/s 142 (1), calling for the information and explanation on the various issues were served on the assessee. In response thereof details were submitted by the assessee. The AO after taking into consideration the submissions of the assessee in the light of the details furnished determined the total income of the assessee at Rs. 87,55,70,420/- making following disallowances/additions: a. Adjustment u/s 92CA (3) of the Act Rs. 12,66,57,377/- b. Disallowance out of interest on account of 841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06

2. Aggrieved by the assessment order, the assessee preferred the first appeal before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee deleted the following additions made by the AO:

1. Disallowance out of interest on account of advances given to group companies without interest of at concessional rate of interest Rs. 23,21,666/- 2. Disallowance of interest on share application Rs. 92,800/- 3. Expenditure on replacement of carpets Rs. 1,00,87,545/- 4. Expenditure on replacement of linen Rs. 3,65,88,495/- treated as capital expenditure 5. Prorata premium on 1% foreign currency Rs. 8.59,34,837/- convertible bonds.

841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06

1. “On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has legally erred in upholding the action of the Assessing Officer in making a further disallowance of Rs. 67,422,061/- u/s 14A even though the Appellant had suo moto disallowed Rs. 14,805,348 u/s 14A in its return of income.

2. On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has legally erred in upholding the action of the Assessing Officer in disallowing expenses u/s 14A even though the expenses were incurred for indivisible business.

3. On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has legally erred in upholding the action of the Assessing Officer in disallowing administrative expenses u/s 14A even though no administrative expenses were actually incurred in relation to exempt income. 4. On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has legally erred in upholding the action of the Assessing Officer in rejectings the Appellants contention that the investments which are of strategic in nature should not be considered for disallowance u/s 14A as the object is to acquire the control and dividend in such cases is incidental. 5. Without prejudice to Ground No. 1 and in the alternative and on the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has legally erred in upholding the action of the Assessing Officer in not considering the working for calculation of disallowance u/s 14A and applying Rule 8D mechanically.

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4. The sole ground of appeal pertains to disallowance of Rs. 6,74,22,061/- u/s 14A of the Act. The Ld. counsel for the assessee submitted that the Ld. CIT (A) has erred in upholding the action of the AO in sustaining the disallowance of Rs. 6,74,22,061/- ignoring that the appellant has made suo moto disallowance of Rs. 1,48,05,348/- u/s 14A of the Act. The Ld. CIT (A) has further ignored the fact that no administrative expenses were actually incurred in relation to exempt income. The investments are strategic in nature, therefore, should not be considered for disallowance u/s 14A. The Ld. counsel without prejudice to the above grounds and in alternative submitted that the Ld. CIT (A) has erred in upholding the action of AO in not considering the working for calculation of disallowance u/s 14A and applying rule 8D mechanically. The Ld. counsel further submitted that in the A.Y. 2004-05, the AO accepted the suo moto disallowance of 10% of the exempt income u/s 14A based on the stand of the Department for the A.Ys. 1998-99 to 2002-03. Hence, the assessee has made the suo moto disallowance. The Ld. counsel further submitted that provisions of Rule 8D are not retrospective in nature and are applicable w.e.f. A.Y. 2008-09. Moreover, the strategic investment and investment not yielding taxable income is required to be excluded from the value of investments.

5. On the other hand, the Ld. Departmental Representative (DR) relying on the order passed by the Ld. CIT (A) submitted that there is no infirmity in the order of the Ld. CIT (A). Hence, there is no merit in the appeal of the assessee.

6. We have heard the rival submissions and also perused the material on record including the cases relied upon by the parties. The only grievance of the assessee is that the Ld. CIT (A) has wrongly upheld the disallowance made by AO u/s 14A of the Act. As contended by the Ld. counsel for the assessee, the suo moto disallowance made by the assessee is in accordance with the earlier 841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06 years orders, which was accepted by the Department. We notice that the AO has accepted the suo moto disallowance of Rs. 1,09,33,117/- u/s 14A during the assessment year 2004-05 on the basis of the disallowance made in the year 1998-99 to assessment year 2002-2003 holding that the asessee’s claimed is found to be correct and in order. The assessee has pointed out that as per the decision of the coordinate Bench in the case of Garware Walls Ltd. vs. Addl. CIT 2014 65 SOT 86 (Mum.Trib.) and other Benches of the Tribunal strategic investments made by the assessee are required to be excluded from the value of investment. As per the decision of Delhi Bench of the Tribunal only those investments are to be considered for computing the average value of investment, which yield exempt income during the year. In Godrej and Boyce Mfg. Company Ltd. 328 ITR 81 (Bom), the Hon’ble Bombay High Court has held that the provisions of rule 8D are not retrospective in nature and shall apply w.e.f. A.Y. 2008-09. Hence, in the light of the aforesaid decisions and in view of the fact that the suo moto disallowance made by the assessee was allowed by the department in the year 2004-05, we are of the considered view that the suo moto disallowance made by the AO in the assessment year under consideration, which is 10% of the exempt dividend income is reasonable. We therefore, set aside the order of the Ld. CIT (A) and direct the AO to delete the disallowance confirmed by the Ld. CIT (A) and accept the suo moto disallowance made by the assessee u/s 14A of the Act. We accordingly allow the sole ground of appeal of the assessee.

ITA No. 841/MUM/2010 (Assessment Year: 2005-06) Vide the revenue has challenged the impugned order on the following effective grounds:

841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06

2. (a) On the facts and in the circumstance of the case and in law the Ld. CIT (A) erred in deleting the disallowance of interest of Rs. 2321666 made by the A.O. as assessee utilized the borrowed funds for giving concessional interest advance to group companies. (b) On the facts and in the circumstance of the case and in law the CIT (A) erred in ignoring the fact that the Deptt. has filed the appeals to the ITAT against the CIT (A)’s orders for the A.Ys. 1998-99, 99-2000, 2003-04 and 2004-05.

3. (a) On the facts and in the circumstance of the case and in law the Ld. CIT (A) erred in deleting the disallowance of Rs. 92800/- on share applications pending allotment made by the A.O. as the assessee had diverted the borrowed funds for non business purposes.

(b) Or, the facts and in the circumstances of the case and in law the CIT (A) erred in ignoring the fact that the Deptt. has filed appeals to the ITAT against the CIT (A)’s orders for the A.Ys. 1998-99, 99-2000, 2003-04 and 2004-05.

4. (a) On the facts and in the circumstance of the case and in law the Ld. CIT (A) erred in treating Rs. 10087545/- incurred on replacement of carpet as revenue expenditure instead of the capital expenditure.

(b) On the facts and in the circumstances of the case and in law the CIT (A) erred in ignoring the fact that the Deptt. has filed appeals to the ITAT against the CIT (A)’s orders for the A.Ys. 1998-99, 99-2000 & 2003-04.

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(b) On the facts and in the circumstances of the case and in law the CIT (A) erred in ignoring the fact that the Deptt. has filed appeals to the ITAT against the CIT (A)’s orders for the A.Ys. 1998-99, 99-2000 & 2003-04. 6. (a) On the facts and in the circumstance of the case and in law the Ld. CIT (A) erred in deleting the disallowance on account of conversion of foreign exchange deposit placed by the assessee with Wholly Owned Subsidiary (WOS) viz. Taj International Hongkong Ltd.

(b) On the facts and in the circumstances of the case and in law the CIT (A) erred in ignoring the fact that the Deptt. has filed appeals to the ITAT against the CIT (A)’s orders for the A.Ys. 1998-99, 99-2000.

7. (a) On the facts and in the circumstance of the case and in law the Ld. CIT (A) erred in deleting the addition of Rs. 126080369/- being adjustment on account of interest charged on loan given by the assessee to its associate enterprise M/s TIHK being not a arm’s length.

(b) On the facts and in the circumstances of the case and in law the CIT (A) erred in ignoring the fact that the Deptt. has filed appeals to the ITAT against the CIT (A)’s orders for the A.Ys. 2003-04 & 2004-05.

8. (a) On the facts and in the circumstance of the case and in law the Ld. CIT (A) erred in deleting the addition of Rs. 577008/- made by the A.O. on account of non charging of guarantee fee by the assessee from its AE’s by providing letter of comfort to the bank’s for the loans granted to the AE’s and thus providing a benevolent advantage to the AE’s.

(b) On the facts and in the circumstances of the case and in law the CIT (A) erred in ignoring the fact that the Deptt. has filed appeals to the ITAT against the CIT (A)’s orders for the A.Ys. 2003-04 & 2004-05.

841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06

9. For these and other grounds that may be urged at the time of hearing, the decision of the CIT (A) may be set aside and that of the AO restored.”

3. Ground No. 2 pertains to disallowance of interest of Rs. 23,21,666/- on advances to subsidiary and group company. The Ld. DR relying on the assessment order submitted that the Ld. CIT(A) has wrongly deleted the disallowance made by AO as the assessee utilized the borrowed funds for giving concessional interest advances to group companies. The AO has rightly pointed out that the advance given to the subsidiary companies as sister concern cannot be treated as incurred for the purpose of the business of the assessee.

4. The Ld. counsel for the assessee submitted that the assessee had given advance of Rs. 3,50,00,000/- to its subsidiary KTC Hotels Ltd. in the FY 1998- 99 and Rs. 1,03,36,844/- to a group company Taida Trading and Industries Ltd. in the FY 1993-94. The AO disallowed interest @ 4.64%. The Ld. counsel further submitted that the Tribunal confirmed the disallowance made on account of advance given to M/s Taj and Taida, whereas disallowance made in respect of advances given to its group company KTC was deleted on the ground that similar disallowance was made in the case of assessee for earlier years. In the assessment year 1998-99, this issue was referred to a third member and the third member decided this issue in favour of the assessee holding that the relevant advances having been given by the assessee to its subsidiary company, the disallowance of interest attributable to the said advances was not justified. The said decision was followed in the subsequent assessment year 2002-03 and accordingly the Tribunal following its earlier decision upheld the order of the Ld. CIT (A) deleting disallowance made by AO.

841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06

5. We have heard the rival submissions and perused the material on record including the decision of the coordinate Bench. We notice that the coordinate Bench has set aside the findings of the Ld. CIT (A) so far as the advances made to Taida Trading and Industries Ltd. is concerned. As regards the advances made to KTC Hotels Ltd., the Tribunal has held that there is no justification in making disallowance of interest attributable to the assessee’s own subsidiary company. During the assessment year under consideration, the assessee advanced Rs. 4,79,630/- to Taida Trading and Industries Ltd. and Rs. 18,42,036/- to KTC Hotels Ltd. Since, this issue has been dealt with by the coordinate Bench in assessee’s own case for the A.Ys. 2003-04 and 2004-05, we respectfully following the decision of the coordinate Bench partly allow this ground of appeal and set aside the impugned order passed by the Ld. CIT (A) in respect of advance given to M/s Taida Trading and Industries Ltd. and uphold the order deleting the disallowance made by AO in respect of advance given to M/s KTC Hotels Ltd. AO is directed to compute the disallowance of interest in terms of the said order.

6. Ground No. 3 pertains to disallowance of interest on share application money pending allotment. The Ld. DR relying on the assessment order submitted that the AO has disallowed interest only share application money in earlier years in view of the facts that it is not for the share application but the borrowed funds were diverted for non-business purposes. Hence, the findings of the Ld. CIT (A) are liable to be set aside.

841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06

of the revenue.

10. Ground No 4 of appeal pertains to expenditure on replacement of carpets. The Ld. DR relying on the assessment order submitted that the expenditure incurred on carpets give enduring benefits to the assessee.

841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06 Moreover, the expenditure on carpets does not fall within the purview of revenue expenditure being capital assets.

13. Ground No. 5 pertains to expenditure on replacement of linen the Ld. Departmental Representative (DR) submitted that the Ld. CIT (A) has wrongly deleted the expenditure of Rs. 3,65,88,495/- incurred on replacement of linen as the expenditure give enduring benefits to the assessee and the same cannot be treated as revenue expenditure.

16. Ground No. 6 of the revenue’s appeal pertains to adjustment on account of difference on rates of foreign exchange on deposit placed with Wholly Owned Subsidiary (WOS) i.e. Taj International Hongkong Ltd. (TIHK). The Ld. DR relied on the findings of the AO.

the learned DR has relied on the order of the AO in support of the Revenue’s case. It is observed that the impugned additions were made by the AO mainly relying on AS-11. According to the AO, as per the said accounting standard, the investment made in shareholder’s deposit with TIHK by the assessee company was required to be recognized at the exchange rate prevailing on the last date of the relevant previous year. However, as submitted on behalf of the assessee before the learned CIT (Appeals) as well as before us, only the monetary items are required to be reported/recognized at the exchange rate prevailing on the last date of the relevant transaction. As per the classification made in AS-11, monetary items mainly include amounts held on current account, such as, cash receivables, payables etc. while non-monetary items include amounts held on capital account, such as, fixed assets, investment in shares etc. In the present case, the shareholders deposit represented the amount held by the assessee on capital account inasmuch as it was convertible into equity shares within a period of 10 years and if not so converted, it was liable to be refunded to the assessee company only after a period of 10 years. In our opinion, the said amount thus was in the nature of non-monetary item which was required to be reported/recognized at the exchange rate prevailing on the date of relevant transaction even as per AS-11 as rightly held by the learned CIT (Appeals). We, therefore, find no infirmity in the impugned orders of the learned CIT (Appeals) deleting the additions made by the AO on this issue and upholding the same, we dismiss relevant grounds of the Revenue’s appeals.”

20. Ground No. 7 of the revenue’s appeal is against the action of Ld. CIT (A) in deleting the addition of Rs. 12,60,80,369/- being adjustment on account of interest charged on loan given by the assessee to its associate enterprise M/s Taj International Hongkong Ltd. The Ld. DR submitted that the assessee had 841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06 granted loan to Taj Asia Ltd. to the tune of 1.5 million USD and to Taj International Hotels (UK) Ltd. to the tune of 2.362 million USD, 90 million USD and 32 million USD. The AO has rightly followed the order of TPO and held that the interest charged on loan given to TIHK is not at arm’s length and has rightly confirmed the adjustment of Rs. 12,60,80,369/- made to the value of the international transaction in question.

“27 We have considered the rival submissions and also perused the relevant material on record. As regards the issue relating to arm’s length rate of interest charged by the assessee company to its AE on the outstanding interest, it is observed that the same is squarely covered by the decision of co-ordinate Bench of this Tribunal rendered in the case of Hinduja Global Solutions Ltd. Vs. ACIT vide its order dtd. 5th June, 2013 in wherein it was held, following the decision of Delhi Bench of this Tribunal in the case of Cotton Natural (I) P. Ltd. Vs. DCIT, that the CUP method is the most appropriate method to determine the arm’s length rate of interest of the international transaction involving 841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06 lending of money by the assessee company in foreign currency to its AE and LIBOR being inter-bank rate fixed for the international transaction has to be adopted as arm’s length rate. Respectfully following this decision of the co-ordinate Bench of this Tribunal, we uphold the impugned order of the ld. CIT (A) deleting the addition made by the A.O./TPO in respect of international transaction involving interest charged by the assessee on outstanding interest from its AE.”

24. Ground No. 8 pertains to non charging guarantee fees from AEs by providing letter of comfort to the Bank for the loan granted to the AE. The Ld. Departmental Representative relying on the assessment order submitted that AO has rightly confirmed the order of TPO that the transaction of giving undertaking i.e. letter of comfort to the banks for loans granted to AEs is an international transaction. The Ld. CIT (A) has wrongly held that the appellant has no intention of taking any obligation of liability to repay the loans in case its subsidiaries unable to repay the same. The intention of the assessee in issuing the letter of comfort was merely to confirm the affiliation of subsidiaries and issued as a part of its shareholders activities.

25. On the other hand, the Ld. counsel for the assessee submitted that the letter of comfort was given by the assessee company to its AEs to avail loan from financial institutions, which is outside the ambit of international transaction. The Ld. counsel relying on the decision of Hon’ble Karnataka High Court passed in M/s United Braveries (Holdings Ltd.) vs. Karnataka Estate 841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06 Industrial Investment and Development Corporation Ltd. MFA No. 4243 of 2007 in which it has been held that the letter of comfort merely indicates the appellant’s assurance that the respondent would comply the terms of financial transactions without guaranteeing performance in the event of default.

CO No. 169/MUM/2010 (Assessment Year: 2005-06)

The assessee has filed the cross objection against the impugned order on the following grounds:

1. “On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) [‘CIT (A)’] has legally erred in not adjudicating the following without prejudice ground on loss arising on account of foreign exchange difference in respect of shareholder’s deposits placed with a subsidiary company:

“8. Without prejudice to Ground No. 7 above, and on the facts and in the circumstances of the case, the Addl. CIT has legally erred in not allowing the foreign exchange fluctuation loss of Rs. 27,365,120 being difference of rate of foreign exchange on deposit placed with the Appellant’s wholly owned subsidiary viz. Taj International (Hong Kong) Limited 841/Mum/2010 & CO 169/Mum/2010 Assessment Year: 2005-06 due to appreciation of the rupee, though there was no change in facts compared to earlier years.”

2. On the facts and in the circumstances of the case, the Learned CIT (A) has legally erred in not adjudicating the following without prejudice grounds on allowability of depreciation on expenses incurred for replacement of carpet and linen:

“5. Without prejudice to and in the alternative to ground nos. 3 and 4 above, and on the facts and in the circumstances of the case the Addl. CIT has legally erred in granting depreciation on replacement of linen and carpets at the rate applicable to furniture and fixtures, thereby allowing depreciation only @ 15%, instead of treating linen and carpets as income earning apparatus eligible for depreciation @ 25%.

“6. Without prejudice to and in the alternative to ground nos. 3 and 4 above, and on the facts and in the circumstances of the case the Addl. CIT has legally erred in granting depreciation on the opening WDV of replacement of linen and carpets at the rate applicable to furniture and fixtures, thereby allowing depreciation only @ 15% instead of treating linen and carpets as plant & machinery eligible for depreciation @ 25%.”

2. Vide first ground of cross objection the assessee has challenged the action of the Ld. CIT(A) in not adjudicating the without prejudice ground on the loss arising on account of foreign exchange different in respect of share capital placed with a subsidiary company. Since we have rejected the ground raised by the revenue in its appeal, the alternative contention of the assessee does not survive. Hence, we reject this ground of the assessee.