JUNIPER HOTELS P.LTD,MUMBAI vs. ADDL CIT WD 10(1)10(1), MUMBAI

O R D E R

Per ASHWANI TANEJA, AM

Being aggrieved by the order passed by the Commissioner of Income-tax (Appeals) - 21 Mumbai (hereinafter referred to as the CIT(A)") your Appellant submits, among them following grounds for your sympathetic consideration :-

1. Ld. CIT(A) erred in confirming the action of the AO of not allowing the depreciation claim of Rs. 16,49,070/- in respect of capital expenditure being technical fee and other expenses, incurred Hotel project.

2. Ld. CIT(A) erred in confirming disallowance of Other Expenses u/s 14A as per Rule 8D at 0.50% of average Investments without appreciating the fact that assessee had made investments in Mutual Funds wherein NAV is calculated after deducting expenses and as such, based on 106 transactions of purchase and sale, assessee had correctly estimated administrative expenses at Rs. 50,000/-. Consequentially AO made similar addition in computation of book profits u/s 11 5JB which also deserves to be restricted to Rs. 50,000/-.

3. Ld. CIT(A) erred in confirming addition of Rs. 53,43,800/- being un- accrued interest on Loan extended to Appellant's wholly owned subsidiary, in the course of carrying on its business, applying the rule of consistency even though the AO had invoked provisions of section 61 for making said addition.”

Ground 1: In this grounds, the assessee challenges the action of Ld. 2. CIT(A) in confirming the action of AO in not allowing the claim of depreciation of Rs.16,49,070/- in respect of capital expenditure incurred on account of technical fee and other related expenses towards setting up of the hotel project.

Tribunal vide its order dt 22-10-2014 in & 4858/Mum/2012 decided this issue as under:

10. We have considered rival contentions and found that some of the expenditure incurred on construction of hotel was not approved by the projectee, therefore, same were neither paid nor booked in accounts in the year of incurring. However, in the previous year relevant to A.Y.2007-08 under consideration, a settlement was reached with the projectee, assessee company approved the same and amount was remitted after deducting required tax at source u/s.195. As the expenses were crystallized during the year itself, the assessee has capitalized the same and claimed depreciation thereon which was disallowed by the AO on the plea that expenses were related to the earlier year. As per our considered view since the expenses were crystallized only during the year under consideration, the assessee was entitled to capitalize the same and claim depreciation thereon. So far as issue of bills in the name of Seajuli Property & Viniyog Pvt. Ltd. is concerned, we find that as per Registrar of Companies’s letter, the name of assessee company was later on changed to M/s Juniper Hotels Pvt. Ltd.. Accordingly, we do not find any merit in the action of the lower authorities for denial of claim of depreciation in respect of expenditure which was crystallized and paid during the year under consideration. It is also not the case of the AO that tax was not deducted at source in respect of such payments. Keeping in view the totality of the facts and circumstances of the case, we restore the matter back to the file of the AO in both the years with a direction to verify the bills of expenditure so incurred and crystallized during the year, and if the AO found after verification of bills that after deduction of tax at source u/s.195, the same has been paid during the year under consideration, he should allow assessee’s claim of depreciation on such capitalized value. We direct accordingly.

6. Thus, it may be noted from the above that the Tribunal decided this issue principally in favour of the assessee and held that assessee was entitled to capitalise the amount and claim depreciation thereon. But for the purpose of verification of facts, this issue was sent back to the file of the AO with the direction to verify the amount of expenditure and allowing depreciation

accordingly. Thus, this year also we send this issue back to the file of the AO with direction to follow the order of the Tribunal for the A.Ys 2007-08 & 2008- 09 and accordingly allow depreciation after verification of requisite facts. With these directions, this issue is sent back to the file of the AO and may be treated as allowed, for statistical purposes.

We have gone through the order of the AO. It is noted by us that 10. assessee made submissions before the AO wherein it was submitted in detail that investment was made only in mutual fund and only for 7 – 8 times during the year which was an automatic process and no heavy expenses were involved and that is why assessee offered a sum of Rs.50,000 for the purpose of disallowance out of indirect expenses. It is noted by us that the AO has not mentioned even a single line in the assessment order as to why he did not accept the disallowance offered by the assessee. He has not recorded any finding that having regard to the books of account and other material, more disallowance was required to be made. Reliance has been placed in this regard by the Ld. Counsel on the judgement of the Hon’ble Delhi High Court in the case of CIT vs I.P. Support Services India Pvt Ltd 378 ITR 240 (Del). We find the following observations of the Hon’ble High Court are worth reproducing hereunder:

“Having heard the learned counsel for the parties, the court finds that the Assessing Officer has indeed proceeded on the erroneous premise that the invocation of section 14A is automatic and comes into operation as soon as the dividend income is claimed exempt. in Maxopp Investment Ltd. (supra) this court held: "30. Sub-section (2) of section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Subsection (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. in both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. In CIT v. Taikisha Engineering India Ltd. [2015] 370 ITR 338 (Delhi), in similar circumstances, the court disapproved of an Assessing Officer invoking section 14A read with rule 8D(2) of the Rules without recording his satisfaction and noted that the recording of satisfaction as to why "the voluntary disallowance made by the assessee was unreasonable and unsatisfactory" is a mandatory requirement of the law. No substantial question of law arises. The appeal is dismissed.”

M/s Mahima Holdings Pvt Ltd. The brief facts of the case are that the assessee had given loan to its 100% subsidiary company, M/s Mahima Holdings Pvt Ltd in the earlier years. The assessee had booked interest income from the said company in the preceding two years. But, in the year under consideration, the assessee did not book any interest income on the ground that during the year, loan was converted into equity and the said company had incurred huge losses and its net worth had been eroded and the said company was not in a position to pay any interest, therefore, there was no chance of recovery and there was uncertainty in realising income and, therefore, no provision was made on account of interest income. But, the AO did not agree with the approach of the assessee and he held that interest becomes accrued with the passage of time and, therefore, till the amount was converted into equity, the assessee was bound to charge interest from the said company and, therefore, assessee should have booked interest income in its P&L Account. Under these circumstances, the AO made addition on account of notional interest for an amount of Rs.53,43,800/-.

Loan given to Subsidiary was substantially utilized for meeting its administrative expenses and working capital. A perusal of the Financial Statements of Mahima would show that loan received from JHPL has been fully utilized in the business of Mahima and not diverted therefrom for any other business. However, the process of converting the long term vision of setting up training institute in to a reality required an elaborate planning among others, in terms of infrastructure, identifying training courses which included market surveys, faculties, marketing and funding which was a long drawn process. In the meantime, since plot of land was at its disposal, it was decided to use the plot for holding functions through hotel and generate revenue. This stream of revenue of the subsidiary also ensured payment of interest on the loans given by Holding company. This continued till the FY 2007-08 It was then realized that for setting up Training Institute, substantial funds would be required through banks/financial institution. The pre condition from the banks and financial institutions was that the borrowing money should have sizeable equity. Appellant company, therefore, decided to convert its loan into equity and as of 31st march 2009, loan was converted into share application money and equity shares were then issued by Mahima during FY 2009-10. During FY 2008-09, there was only marginal increase of around 2% in the amount of loan given by JHPL to Mahima. On justification being sought by AO appellant company believed that the AO is harbouring the view that part of the interest expenditure incurred by JHP calls for disallowance u/s.36(1)(iii). Appellant therefore demonstrated that funding of Mahima was out of owned funds of the JHPL and even otherwise borrowals of JHPL were fully utilized in the hotel business. It was further submitted that funds provided to Mahima have remained utilized in business assets of the company and in fact no loan is given there from to any individual or entity. Business of the subsidiary being business of the holding company, interest paid on borrowals made for the funding of subsidiary deserves to be fully allowed u/s.36(1)(iii) of the Act. For this proposition appellant also relied on the decision of the Hon'ble Apex Court in the case of S. A. builders Ltd. vs. CIT(A) Chandigarh reported in 288 ITR 1 (SC). AO obviously could not make any disallowance of interest u/s.36(i)(ii) on the facts of the case but then invoked provisions of section 61. The appellant had demonstrated how the AO has erred in invoking provisions of sec. 61 and extract of sec. 61, 62 and 63 was also submitted during appellate proceedings. The plain reading of section 61 shows that even if one were to apply section 61 what can be taxed in the hands of transferor is "all income arising to any person by virtue of a revocable transfer of assets." Obviously what can be brought to tax is restricted to income actually arising to the and not any notional or fictitious income. Income must be real making the transferee richer immediately and not presumed income which may arise in future. From the Audited Financial Statements, it can be see that in the hands of Mahima no revenue, whatsoever, accrued during FY 2008-09 and on the debit side of the P&L A/c. it incurred administrative expenses of Rs. 10,164/- and the resultant loss of Rs. 10,164/- was carried forward. The appellant had discussed the meaning of transaction of loan in detail and reliance was also placed in the case of S. A. builders Ltd. vs. CIT 288 ITR 1 (SC). Section 61 is part of the scheme of Income clubbing provisions contained in Chapter V which is designed to meet the situation arising out of tendency on the part of tax payers to endeavour to avoid or reduce the tax liability. In the case of your appellant, loan was never given to transfer income to subsidiary. It also needs to be appreciated that during the succeeding Financial Year i.e. FY 2009-10 said loan as converted into equity and hence is “no more revocable even for FY 2008-09. We would also like to draw your attention to the decision of the Hon'ble Supreme Court in the case of S. P. Jaiswal vs. CIT 224 ITR 619 (SC). Though facts of the decision are quite different (loan given by father to children was routed back for the benefit of father) But it is a case where clubbing provision came under the scanner of the Hon'ble Apex Court and arguments, discussions and case laws referred to in this case favour our case. In view of out above submissions on facts and the law point involved, it is respectfully submitted that AO feel in grave error in invoking provisions of section 61 and consequently addition of Rs.53,43,800/- deserves to be deleted." Ld. CIT(A) did not find force in the submissions of the assessee and 14. upheld the addition made by the AO with following observations:-

5.3 I have considered appellant's submission. The appellant had extended loan of Rs.5,04,70,700/- to a 100% subsidiary company M/s. Mahima Holding Pvt. Ltd. The appellant was charging interest of Rs.53,43,800/- till the last assessment year and this interest was offered for income-tax purposes. However, at the end of this year appellant had converted this loan into equity and not offered any income for the loan which was extended to the subsidiary company for the whole year. The A.O. had added this amount considered it u/s.61 as irrevocable transfer of assets. The A.O. considered transfer of loan into equity as irrevocable transfer of assets and added into income of the appellant. On examination of various details of the appellant and also earlier years assessment it was clear that appellant is offering this income for the income tax purposes for the loan extended to the subsidiary company. However, the loan which was converted into equity this year, at the end of the year appellant had not offered any income. Here it clearly shows that appellant's loan was with the subsidiary company throughout the year, following the rule of consistency as held in the case of CIT vs. Paul Brothers 216 ITR 548 (Born) and CIT vs. Western Outdoor Interactive 80 DTR 246 (Born). Following the above Rule as appellant had failed to offer the interest income which was offered earlier has to be treated as income and A.Os addition of Rs.53,43,800/- is confirmed.

15. Being aggrieved, the assessee filed appeal before the Tribunal. During the course of hearing, it has been submitted by the Ld. Counsel, drawing our attention on the balance-sheet of the subsidiary company that the said company did not make any provision of interest payable to the assessee and its balance-sheet showing continuous losses, the income was not recoverable. Thus, a decision was taken not to credit interest income. An amount can be taxed in the hands of the assessee only if it is in the nature of income. The AO made notional addition on account of interest which was neither recoverable nor has ever been recovered. The AO disregarded the well accepted concept of ‘real income’ theory. He also placed reliance on Accounting Standarde-9 on revenue recognition issued by the Institute of Chartered Accountants of India.

18. Thus from the above it is clear that neither the said company had made any provision of interest nor it had capacity to make payment of interest or repayment of loan to the assessee company. Under these circumstances, the assessee took a decision to not to book any interest income by way of just

creating an accounting entry. It is further noted that during the year under consideration, the loan was converted into share application money. Under these circumstances, we find that merely because the assessee was following mercantile system of accounting and merely because interest accrues with the passage of time, the interest income will not automatically accrue to the assessee in the given facts of the case where neither the liability of interest has been provided by the said company nor are there any chances of recovery of the interest amount in the hands of the assessee company. The income of an assessee must be computed fairly and in accordance with real life facts. The income should be computed on realistic terms and should not be based merely on theoretical ideas or notions. The assessee can be made bound to pay tax only on the amount of income that has been earned by the assessee and not upon any artificial or hypothetical income. In the peculiar facts of this case, the department cannot assess the income of the assessee by ignoring the sound principles of ‘real income theory’. The taxable income of the assessee must be computed in accordance with sound judicial principles. It would be too harsh to ask the assessee to pay tax on the amount of notional interest, which the assessee is apparently not going to receive / recover. In the case of CIT vs Neon Solutions Pvt Ltd, order dt April 5, 2016 in of 2013 & 2300 of 2013, Hon’ble Bombay High Court held that interest income could not be added on notional basis by the AO where the parties had agreed not to make provision for interest. The observations of the Hon’ble High Court are relevant to the issue and, therefore, reproduced below:

which were passed by the company as well as the communication exchanged between the parties would establish on facts that interest has been waived. Further on facts it holds that there is no reason to disbelieve the resolution passed by the Respondent-Assessee waiving interest. The Tribunal further adverted to the fact that subsequently, M/s, Marketing & Brand Solutions (I) Pvt. Ltd. had amalgamated with the Respondent-Assessee which would also establish that the debentures issuing company was in serious financial difficulties which was incidentally a group company of the Respondent. The decision rendered by the Tribunal in the impugned order is a decision on facts and nothing has been shown to us which could warrant interference by this Court on account of any finding being perverse or arbitrary.”

Further, in the case of CIT vs Excel Industries Ltd 358 ITR 295(SC), the 19. revenue raised the question of taxability of benefits accruing to the said assessee on account of duty entitlement passbook benefits arising out of exports made by the assessee. According to the assessee, the amounts of benefits were excluded from its total income since it could not be said to have accrued unless imports were made and raw materials consumed. But the Assessing Officer did not accept the assessee’s claim on the ground that such benefits were covered u/s 28(iv) and, therefore, along with the fulfillment of obligation of export commitment, the assessee gets the benefit of importing raw material duty free. Thus, when exports were made, the obligation of the assessee was fulfilled and the right to receive the benefit became vested and absolute, at the end of the year. However, the CIT(A) did not agree with the Assessing Officer and allowed the relief to the assessee which was confirmed by the Tribunal as well as Hon’ble High Court. The revenue carried the matter before Hon’ble Supreme Court. While answering this question in favour of the assessee and dismissing the plea of the revenue, Hon’ble Apex Court analysed law in this regard and facts of this case and held as under:

"Profits and gains of business or profession 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession" – ………………… (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; ……………. First of all, it is now well settled that income-tax cannot be 17. levied on hypothetical income. In Commissioner of Income Tax v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) it was held as follows:- “Income-tax is a levy on income. No doubt, the Income-tax takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.”

It follows from these decisions that income accrues when it 20. becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. In so far as the present case is concerned, even if it is assumed 21. that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. In Godhra Electricity Co. Ltd. v. Commissioner of Income 22. Tax, [1997] 225 ITR 746 (SC) this Court reiterated the view taken in Shoorji Vallabhdas and Morvi Industries. Godhra Electricity is rather instructive. In that case, it was 23. noted that the High Court held that the assessee would be obliged to pay tax when the profit became actually due and that income could not be said to have accrued when it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date. The High Court however held on the facts of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers. This Court did not accept the view taken by the High Court on 24. facts. Reference was made in this context to Commissioner of Income Tax v. Birla Gwalior (P.) Ltd., [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. Commissioner of Income Tax, [1965] 57 ITR 521 (SC) wherein it was held that income tax is a tax on real income. Finally a reference was made to State Bank of Travancore v.