2004 (6) TMI 589 - AT - Income Tax

Income derives from hotel business - Advances given to subsidiary companies - Commercial expediency and business prudence in advancing loans to a subsidiary - difference of opinion between the Accountant Member and Judicial Member - Third Member Order - Whether, the learned CIT(Appeals) is justified in deleting the addition being disallowance on account of concessional rate of interest charges on advances made to the subsidiary company ? The learned Accountant Member, held that act of giving advances forms integral part of hoteliers business. In that light, no concession was provided with regard to advances made to the subsidiary company, which made investment in shares of other public limited companies having business dealing with the assessee-company. This way the assessee was benefited to a large extent and was compensated for the concession in the rate of interest allowed. Further observed that it was the prerogative of the businessman how to run his business and it was not open to the revenue to prescribe what expenditure the assessee should incur and in what circumstances. Thus, confirmed the order of the learned CIT (Appeals) in his proposed order. The learned Judicial Member did not agree with the view taken by the learned Accountant Member. He took into account the decisions in the case of Shankar Theatres and Doctor Co. 1983 (1) TMI 50 - BOMBAY HIGH COURT with relevant portions extracted in his proposed order. The learned Judicial Member observed that it was not disputed by the assessee that it had diverted borrowed funds to advance loans to its subsidiaries (wrongly stated as sister concern). There is no material on record to support this contention that the assessee was able to earn large operating fees only due to the fact that it advanced monies to its subsidiary for a concessional rate of interest. In absence of such material and nexus, the disallowance made by Assessing Officer amount in question is justified and the CIT(A) was not right in deleting the disallowance..... With the above observations, the learned Judicial Member restored the order of the Assessing Officer in his proposed order. Third Member Order - HELD THAT - In the present case, the assessee has elaborately explained that on account of restrictions on investment in its hands to buy shares of other public limited companies from whom the assessee was receiving operation fees, the subsidiary company was used to buy above shares and for that purpose loan was advanced to the subsidiary. It was a measure of business prudency. The loan advanced helped the assessee to earn substantial amount of operating fees. In fact, it was more than 60% of total receipts. This was besides dividend to be received from the subsidiary. Having regard to all the circumstances and benefits to the parties, it was agreed that interest on advance be charged @ 6% per annum. This advance was made wholly and exclusively for the purpose of business and to earn income. I find lot of force in the above submissions. In fact the revenue authorities did not challenge above facts/background which clearly showed that advance was made for purpose of business. It was a measure of business prudency. Further there is nothing to show that agreement to advance loan was not bona fide entered into or was intended to divert income belonged to the assessee. The Assessing Officer while disallowing and making the addition in dispute, did not keep above legal principles in mind and applied subjective standards. The disallowance made is unjustified. I agree with the learned Accountant Member and uphold the deletion of the disallowance. Thus, I agree with the view taken by the learned Accountant Member. Final Decision The Honourable President, ITAT, sitting as the Third Member, concurred with the views of the learned Accountant Member, answering the referred question in the affirmative. The issue was thus decided in favor of the assessee, and the deletion of the disallowance was upheld.

Issues Involved:
1. Disallowance u/r 6B of I.T. Rules
2. Deduction for proportionate premium on debentures
3. Deduction u/s 32AB on interest income from advances
4. Deletion of addition due to concessional interest rate on advances to subsidiary
5. Calculation of depreciation on assets with central subsidy
6. Deduction u/s 80HHD for services to foreign tourists on business trips

Summary:

Disallowance u/r 6B of I.T. Rules:
The issue pertains to the deletion of disallowance of Rs. 50,000 made u/r 6B of I.T. Rules. The Tribunal held that the issue stands covered in favor of the assessee by previous judgments, including CIT v. Allana Sons (P.) Ltd., First ITO v. French Dyes & Chemicals I. (P.) Ltd., and CIT v. Indian Aluminium Cables Ltd. Consequently, the Tribunal declined to interfere and dismissed this ground.

Deduction for Proportionate Premium on Debentures:
The Tribunal found that the issue of allowing deduction for proportionate premium on debentures is covered in favor of the assessee by previous judgments, including Madras Industrial Investment Corpn. Ltd. v. CIT, National Engg. Industries Ltd. v. CIT, and Universal Cables Ltd. v. CIT. Therefore, the Tribunal dismissed this ground.

Deduction u/s 32AB on Interest Income from Advances:
The Tribunal addressed whether interest income on advances to subsidiaries and other companies should be treated as business profits or income from other sources for deduction u/s 32AB. The CIT(A) had directed to treat the interest as business income, supported by decisions in CIT v. Favre-Leuba & Co. Ltd. and Addl. CIT v. Snam Progetti S.P.A. The Tribunal, however, restored the issue to the Assessing Officer for re-examination in light of the Supreme Court's decision in Apollo Tyres Ltd. v. CIT.

Deletion of Addition Due to Concessional Interest Rate on Advances to Subsidiary:
The CIT(A) deleted the addition of Rs. 25,11,807 for concessional interest rate on advances to the subsidiary, citing business expediency and commercial prudence. The Tribunal upheld this decision, distinguishing it from other cases like Shankar Theatres v. CIT and Doctor & Co. v. CIT. The Third Member also concurred, emphasizing the business purpose and benefits derived from the advances.

Calculation of Depreciation on Assets with Central Subsidy:
The Tribunal held that the issue of whether central subsidy should be deducted from the cost/Written Down Value while calculating depreciation is covered in favor of the assessee by judgments in CIT v. P.J. Chemicals Ltd., CIT v. Goving Poy Oxygen-s, and CIT v. Elys Plastic (P.) Ltd. Thus, the Tribunal dismissed this ground.

Deduction u/s 80HHD for Services to Foreign Tourists on Business Trips:
The Tribunal addressed whether the Assessing Officer was justified in estimating 10% of foreign currency receipts as pertaining to foreigners on business trips and denying the claim u/s 80HHD. The CIT(A) held that the term "foreign tourists" includes visitors on business trips. The Tribunal agreed, citing Butter Worth's "Words and Phrases Legally Defined" and noting that the law does not distinguish between business and pleasure trips for foreign tourists. Therefore, the Tribunal dismissed this ground.

Conclusion:
The appeal filed by the Revenue was allowed in part, with specific issues being dismissed or restored for re-examination as per the detailed judgments.

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