WESTCOURT HOSPITALITY PVT LTD,NEW DELHI vs. DCIT, CIRCLE-25(1), DELHI

That on the facts/circumstances of the case and in law, the expenses of Rs.15,00,000/- incurred towards the services taken from M/s Studio U Plus Advisory Pvt. Ltd., deserves to be allowed. NOTE: The assessee craves leave to amend/modify aforementioned grounds of appeal

Heard the contentions of both the parties and perused the material available on record. It is seen that assessee has claimed only Rs. 1,200/- on the increase in share capital and remaining amount & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. was spent on the issue of CCD which is loan and not thus the provisions of section 35D of the Act are to applicable to the facts of the present case. The hon’ble jurisdictional high court in the case of Havels India Ltd. (supra) under identical circumstances has held the expenses on the issue of debentures as revenue expenditure by making following observations: “It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure. Reference in this connection may be made to the leading judgment of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52 . The question before us however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company. Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee, in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue, we are not inclined to take a different view.”

It is a fact on record that the expenses disallowed are in relation to the issue of CCD and therefore, by respectfully following the judgement of hon’ble jurisdictional high court in the case of Havels India Ltd. (supra), in our considered opinion there is no doubt about the nature of these expenses as revenue expenditure and accordingly, we hereby confirm the order of ld. CIT(A) deleting the disallowance made. In the result, ground of appeal No.1 of the revenue is hereby dismissed.

Ground of appeal No.2 of the 1revenue is regarding the deletion of the addition of Rs. 43,72,80,000/- made u/s 68 of the Act.

Before us, ld. CIT DR vehemently supported the order of the Ao and submits that the assessee has not established the creditworthiness of the lender before the AO and had filed additional evidences before ld. CIT(A) though ample opportunity was provided by the AO. Ld. CIT DR submits that assessee had issued CCD to the director Shri Manoharan Govindaswamy and his family members however, their creditworthiness is doubtful. Ld. CIT- DR drew our attention to the Agreement to Sale with Godrej Constructions Projects LLP executed with the family members of the director, available at paper book pages 36-92, as per which Godrej Properties has given refundable deposit of Rs. 45 crores to the family of Shri Manoharan Govindaswamy. Ld. CIT DR submits since Shri Manoharan Govindaswamy has failed to substantiate the source of the fund in his hands and ld. CIT(A) has admitted the additional evidences without any cogent reason as to why the same were not filed before the AO therefore, he requested for the restoration of the addition made by the AO.

On the other hand, ld.AR vehemently supported the order of ld. CIT(A) and submits that assessee has discharged the burden casted upon it of establishing all the three ingredients required u/s 68 of the Act as the CCD allotted are in the nature of borrowing. Ld. AR submits that the source of source was also established by filing the copy of agreement through which the family member of the director Shri Manoharan Govindaswamy received the funds which were given to him for subscribing the CCD issued by the assessee company. He further submits that the ld. CIT(A) has obtained remand report from & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. the AO which is reproduced at pages 4 to 8 of the appellate order. Ld. AR submits that from the perusal of the remand report it could be seen that the assessee and his family members have duly complied with the summons issued and filed all the details regarding source of funds in their hands. He further drew our attention to the fact that all the family members of the director has accepted providing him the funds which were invested in CCD and merely such funds were given as refundable security, it was wrongly presumed by the At that they have no creditworthiness. Ld. AR submits that once the source of source is established, the ld. CIT(A) has rightly deleted the addition, and he prayed for the confirmation of the said order on this issue. Ld. AR also filed written submission which reads as under: APROPOS REVENUE'S GOA NO.2 4. The learned AO had dealt with the issue relating to addition of Rs.43,72,80,000/- made by him u/s 68 in para 4.1 of the assessment order. Upon observing that the assessee had explained that it had received Rs.437280000/- from Shri Manoharan Govindaswamy, the learned AO had required the assessee to prove the identity, genuineness and creditworthiness of Shri Manoharan Govindaswamy. The assessee had furnished copy of bank statement of Shri Manoharan Govindaswamy while explaining that the source of such funds was the financial transaction between the family members of Shri Manoharan Govindaswamy and GODREJ. Upon going through the documents furnished by the assessee relating to the financial transaction between the family members of Shri Manoharan Govindaswamy and GODREJ, the learned AO had noted that GODREJ was to give Rs.45 Crores to the family members of Shri Manoharan Govindaswamy as refundable deposit. Towards end of para 4.1(f) on page 3 of the assessment order, the learned AO had mentioned "Thus it is noted that the claim that the amount invested by Shri Manoharan Govindaswamy is from borrowed funds from his family members is not proved". Ultimately the learned AO had made an addition of Rs.437280000/-u/s 68, while treating the same as unexplained credit.

Copy of Development Agreement dt.24.01.2018 between the family members & Ors. and GODREJ is placed in the paper book at PB:36- 92.

Before us, Revenue has failed to controvert the findings given by Ld. CIT(A) which are based on the documents submitted by the subscriber of CCD and from the persons who provided the funds to him for making such investment. The assessee has discharged its burden of proving all the three ingredients of section 68 of the act i.e. the identity of the subscriber which is beyond doubts as the AO himself observed that he is one of the director of the assessee. The Second is Genuineness of the transaction which is also not in dispute as all the funds were transferred through banking channel. Third is creditworthiness of the subscriber which is doubted by the AO. As observed above, the assessee has filed the bank statements and ITR of the subscriber. Further before the AO, assessee has filed all the details of the persons from whom the subscriber has received the funds. As observed above, assessee has proved the source of source also though the amendment in section 68 was made vide Finance Act, 2022 wherein second proviso was inserted, so as to provide that the nature and source of any sum, whether in the form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or subscriber. This amendment has taken effect from 1st April, 2023 and accordingly applies in relation to the assessment year 2023-24 and all subsequent & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. assessment years. The year before us is AY 2018-19 thus this amendment is not applicable in the present case.

The coordinate Bench of Delhi bench of Tribunal in the case of ACIT v Smt. Prem Anand in vide order dated 13.04.2017 held that amendment made in section 68 of the Act w.e.f. 01.04.2013 empowers the A.O. to examine source of source in case of share application money / share capital / share premium and thus this amendment does not give power to the A.O. to examine source of source of non-share capital cases.

The Hon’ble Delhi High Court in the case of CIT vs Vrindavan Farms Pvt. Ltd. in of 2015 dated 12.08.2015 has held as under:- "The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their return of income. lt was observed by the ITAT that the Assessing Officer had not undertaken any investigation of the veracity of the documents submitted by the assessee, the departmental appeal was dismissed by the Hon’ble High court.”

The Hon'ble Delhi High Court in the case of PCIT vs. Agson Global Pvt. Ltd reported in [2022]134 Taxmann.com 256 (Delhi) while allowing the appeal in favour of the assessee towards the additions made u/s 68 of the Act has held as under: “Section 68 of the Income-tax Act, 1961 – Cash credits (Share capital money) – Assessment years 2012-13 to 2017-18 – Assessee-company received share capital and share premium money from several investors – Assessing Officer made addition in respect of same on account of unaccounted income under section 68 on basis of recorded statement of managing director of assessee-company – Whether since assessee placed sufficient documentary evidence to establish that money which assessee had paid to investors was routed back to it in form of share capital/share premium and identity, creditworthiness and genuineness of investors was proved, there was no justification to make addition & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. under section 68 – Held, yes [Paras 11.4, 11.5 and 14.4] [In favour of assessee]” ………… 27. Regarding surrounding circumstances, it is observed that while making addition u/s 68 of the Act, the AO has doubted the financial capacity of loan creditors but such addition cannot be made on preponderance of probability and there has to be some evidence and substance in contention. The Assessing Officer has not brought anything on record to establish that the sources in the hands of loan creditors is non-genuine. Merely because they have shown meager income or no sufficient sources as presumed by Assessing Officer, loan taken by appellant from them cannot be held to be accommodation entries. It is well-settled position of law that no matter how strong suspicion is, it cannot take place of the evidence. Therefore, in the absence of any evidence showing that in fact, appellant has given cash in lieu of unsecured loan taken, merely on the basis of suspicion, no addition can be made for which reliance is placed on decision of Hon'ble Supreme court in the case of Daulatram Rawatmull, (1964) 53 ITR 574.

On the issue of discharge the onus of establishing the creditworthiness of the loan creditor, the Hon'ble Delhi High court in the case of Mod. Creations (P.) Ltd. v. ITO reported in [2013] 354 ITR 282, has held as under: "It will have to be kept in mind that Section 68 of the I.T. Act only sets up a presumption against the Assessee whenever unexplained credits are found in the books of accounts of the Assessee. It cannot but be gainsaid that the presumption is rebuttable. In refuting the presumption raised, the initial burden is on the Assessee. This burden, which is placed on the Assessee, shifts as soon as the Assessee establishes the authenticity of transactions as executed between the Assessee and its creditors. It is no part of the Assessee's burden to prove either the genuineness of the transactions executed between the creditors and the sub-creditors nor is it the burden of the Assessee to prove the creditworthiness of the sub-creditors. 20.1 It was further observed by the hon’ble court as under: 14. With this material on record in our view as far as the Assessee was concerned, it had discharged initial onus placed on it. In the event the revenue still had a doubt with regard to the genuineness of the transactions in issue, or as regards the creditworthiness of the creditors, it would have had to discharge the onus which had shifted on to it. A bald assertion by the Assessing Officer that the credits were a circular route adopted by the Assessee to plough back its & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. own undisclosed income into its accounts, can be of no avail. The revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. The revenue would be required to bridge the gap between the suspicions and proof in order to bring home this allegation. The ITAT, in our view, without adverting to the aforementioned principle laid stress on the fact that despite opportunities, the Assessee and/or the creditors had not proved the genuineness of the transaction. Based on this the ITAT construed the intentions of the Assessee as being mala Ride. In our view the ITAT ought to have analyzed the material rather than be burdened by the fact that some of the creditors had chosen not to make a personal appearance before the A.O. If the A.0. had any doubt about the material placed on record, which was largely bank statements or the creditors and their income tax returns, it could gather the necessary information from the sources to which the said information was attributable to. No such exercise had been conducted by the A.O. In any event what both the A.O. and the ITAT lost track of was that it was dealing with the assessment of the company, i.e., the recipient of the loan and not that its directors and shareholders or that of the sub- creditors. If it had any doubts with regard to their credit worthiness, the revenue could always bring it to tax in the hands of the creditors and/or sub-creditors.

In view of the above discussion, we find no error in the order of ld. CIT(A) who has rightly deleted the addition and therefore the same is hereby upheld. Accordingly, ground of appeal No. 2 is dismissed.

In the result, appeal of the Revenue is dismissed.

All the grounds of appeal taken by the assessee are with respect to the disallowance of expenses of Rs.1,78,50,000/- claimed by the assessee under the head professional charges thus they are taken together for consideration.

A company named West One Electronic City Pvt. Ltd. was owing/holding a land in Bangalore (area admeasuring 7 acres), for which substantial payments were already made to Bangalore Development Authority. With a view to enter into some arrangement with West One Electronic City Pvt. Ltd., the assessee had taken a conscious call to take professional consultancy services in advance and in this process the assessee had incurred expenses to the tune of Rs.17850000/-. Details regarding expenses incurred. Name of Service Date of Amount of Out of IGST Provider Invoice Service pocket Amount(Rs.) Charges expenses (Rs.) (Rs.) Westcourt Real 05.12.2017 11200000 2016000 Estate Pvt. Ltd. (PAN:AACW6937F) Studio U + A 05.12.2017 1500000 270000 Advisory Pvt. Ltd. Westcourt Real 01.03.2018 5150000 30000 932400 Estate Pvt. Ltd. (PAN:AACW6937E) 17850000 30000 3218 ACIT Vs. Westcourt Hospitality Pvt. Ltd.

The learned CIT(A) has upheld such disallowance by stating "....it is clear that the expenses relate to West One project and that being so, it cannot be controverted that expenses borne on behalf of West One which is a separate entity in itself, cannot be legitimately claimed under the provisions of Income Tax Act. This expense ultimately benefitted West One and there is no legal bearing for holding it as allowable in the hands of the present assessee."

Respectful submission in this regard before your lordships is that the lower authorities have failed to appreciate that since such expenses were incurred by the assessee for the purposes of business, the same are liable to be allowed. It seems that the lower authorities had adopted a narrow approach while keeping into mind the concept behind section 57(iii).

Your lordships will appreciate that there is clear cut distinction between the scope of section 37(1) and the scope of section 57(iii), in as much as the former talks about the expenses incurred 'for the purposes of the business' and the later talks about the expenses incurred 'wholly and exclusively for the purpose of making or earning such income'.

Your lordships will also appreciate that section 37(1) does not mandate that the expenses incurred for the purposes of business must yield some income to the assessee. For this proposition, the reliance is hereby placed on the judgment in Hughes (inspector of taxes) vs Bank of New Zealand (6 ITR 636) wherein Lord Thankerton held "Expenditure in the course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does require the presence of a receipt on the credit to justify the deduction of an expense".

It is worth clarifying that it is not the case of the lower authorities that (i) such expenses were personal or capital expenses; (ii) such expenses were paid for activities which are offenses or prohibited by law; (iii) such expenses were not paid or accrued in the previous year relevant to AY 2018-19.”

On the other hand, ld. CIT DR supported the orders of lower authority and submits that the expenses incurred by the assessee & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. are related to the project of other company and therefore, the expenses has rightly disallowed by the AO and thus requested for the confirmation of the same.

Heard the parties and perused the material available on record. The assessee is engaged in the business of real estate and developing real estate projects. Assessee was in the process of making some arrangement for developing the project with M/s West One Electronic City Pvt. Ltd. and obtained certain professional consultancy regarding viability of the project as the total exposure of project was quite high. The consultancy expenditure incurred in this regard is wholly and exclusively for the purpose of business and were incurred for the betterment of the business of the assessee. These expenditure were incurred under business expediency and necessity for which the AO cannot step into the shoe of the businessman to verify the necessity or the business expediency.

The hon’ble Gujarat Hogh court in the case of C J Patel & Co. vs. CIT reported in 158 ITR 486 (Guj) has defined the terms Wholly and exclusively as under: Meaning of wholly and exclusively - The adverb "Wholly" in the phrase laid out or expended for business refers to the quantum of expenditure. The adverb "exclusively" has reference to the object or motive of the Act behind guest house expenditure. Unless such motive is solely for promoting the business, the expenditure will not qualify for deduction.

2The hon’ble Calcutta hogh court in the case of D1T vs. Health & Co. (Calcutta) (P) Ltd. reported in 14 1TR 605 (Cal.) held that there must be Connection between Expenditure and object must be & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. real and not remote or illusory. The hon’ble court has observed as under: 1t is well settled by now that all expenditure incurred by the assessee though voluntary i.e. not obligatory, which is ultimately designed to further the objects and purposes of the assessee can be treated as business expenditure so long as the connection between the expenditure incurred and the objects is real and not remote or illusory.”

The hon’ble Surpeme court in the case of Empire Jute Co. Ltd. vii. CIT 124 ITR 1 (SC) has held as under: What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency 31. In the case of SA Builders Vs. CIT reported in 158 Taxman 74 (SC) has held as under: Section 37(1) of the Income Tax Act. 1961 - Business expenditure- Allowability of - Assessment years 1990-91 and 1991-92 – Whether expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency - Held, yes.

The hon’ble Supreme court in the case of Indian Molasses Co. P. Ltd. v. CIT reported in 37 ITR 66 (SC) held that in order to claim deduction of expenditure u/s 37(1) following conditions should be satisfied: (i) The expenditure in question should not be of the nature described under the specific provisions of sections 30 to 36; (ii) The expenditure should not be of the nature of capital expenditure; (iii) It should not. be; a personal expenditure; and (iv) The expenditure should have been laid out or expended wholly and exclusively for the purpose of business or profession.

In the instant case, the assessee fulfils all the conditions laid down by the hon’ble Apex court therefore, expenditure as claimed is & 3351/Del/2025 ACIT Vs. Westcourt Hospitality Pvt. Ltd. allowable in terms of the provisions of section 37(1) of the Act. It is settled law that no addition can be made on the basis of surmises, suspicion and conjectures. Reliance for this proposition is placed on the judgement of hon’ble Supreme court in the case of Uma Charan Shaw & Bros. Co. Vs. CIT reported in 37 ITR 271 (SC).

Since the revenue has filed to controvert the claim of the assessee that these expenditures were incurred in the day-to-day business activity and is wholly and exclusively for the purpose of the business.