2018 (3) TMI 66 - AT - Income Tax

Disallowance of expenses on temporary suspension of the business - Held that - As during the financial year 2006-07 the assessee was unable to cater the needs of the customers, the business was not yet commenced. We also do not agree with the theory of estoppel proposed by the learned CIT(A) that since the assessee did not claim the expenses relatable to AY 2002-03 for the period subsequent to 31.10.2002, by their own conduct they are estopped from claiming the same for any period subsequent thereto. The assessee purchased the business that had already been commenced and conducted business operations till 31.10.2002, from which date the assessee suspended the business operations till April 2009 for renovation of the hotel building. The period between November 2002 and April 2009 is only the temporary suspension of the Lodhi Hotel business of the assessee, but as a matter of fact, as a business entity, the assessee did not cease to exist or permanently shut down the business. Allowability of interest expense - it is the case of the assessee that in order to expand their business in hospitality in NCR region, it was necessary for them to invest in GGGRL, which was owning and operating a premium 18 hole golf course - Held that - The reasons for disallowance of the expense by the learned AO is that during the relevant previous year the assessee did not carry on any business and that is the reason why such an expense cannot allowed - Held that - where there is nexus between expenditure and purpose of business, interest on borrowed capital whether it is for investment of acquire controlling interest in a subsidiary or towards loan in view of the business expediency, interest on the borrowed capital cannot be disallowed, we hold that the investment in GGGRL and to lend amounts to them for the purpose of strengthening the hospitality business, mere non conduct of hotel business in the previous year due to the temporary suspension thereof by the assessee cannot be a ground to deny the deduction of the interest expense on the borrowed capital - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of expenses during the temporary suspension of business.
2. Deductibility of interest expenses on borrowed capital used for acquiring controlling interest in another company and for business loans.

Detailed Analysis:

1. Classification of Expenses During Temporary Suspension of Business:

The core issue was whether the expenses incurred during the temporary suspension of the Lodhi Hotel business should be treated as capital or revenue expenditure. The assessee argued that the expenses were necessary for the renovation and resumption of the hotel business and should be deductible under section 37(1) of the Income Tax Act as revenue expenditure. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, categorizing these expenses as capital in nature and allowing depreciation instead.

The Tribunal noted that the business was temporarily suspended for renovation and not permanently closed. Citing precedents like CIT vs Vikram Cotton Mills Ltd. and M/s Kalyanji Mavji & Co., the Tribunal held that temporary suspension does not equate to cessation of business. Therefore, the expenses incurred during this period should be allowed as revenue expenditure. The Tribunal directed the AO to verify the quantum of expenses and allow the genuine claims.

2. Deductibility of Interest Expenses on Borrowed Capital:

The second issue was whether the interest expenses on borrowed capital used for acquiring controlling interest in Golden Green Golf Resorts Ltd. (GGGRL) and for business loans should be deductible under section 36(1)(iii) of the Income Tax Act. The assessee contended that these expenses were incurred for business purposes, and thus, should be deductible. The AO and CIT(A) disallowed these expenses, arguing that the borrowed funds were not used for the assessee's business.

The Tribunal referred to several judgments, including CIT vs. Tulip Star Hotels Ltd., CIT vs. Reliance Communications Infrastructure Ltd., and Hero Cycles P. Ltd. vs CIT, which established that interest on borrowed capital used for business purposes or to acquire controlling interest in a subsidiary is deductible. The Tribunal concluded that the investment in GGGRL and the loans given were in furtherance of the assessee's business interests. Thus, the interest expenses should be allowed as business expenditure.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that:
- The expenses incurred during the temporary suspension of business should be treated as revenue expenditure and deductible under section 37(1) of the Income Tax Act.
- The interest expenses on borrowed capital used for acquiring controlling interest in GGGRL and for business loans should be deductible under section 36(1)(iii) of the Income Tax Act.

The appeal of the revenue was dismissed, and the Tribunal directed the AO to verify the quantum of expenses and allow the genuine claims.