2019 (4) TMI 767 - AT - Income Tax

Preoperative expenditure allowability - Allowable expenditure u/s 37 - HELD THAT - Since the expenditure has been capitalized in the books of accounts and claimed only in the computation of income, no deduction thereof including depreciation, in any manner, would be allowable to assessee against the same in any assessment year. The consequential depreciation of 15% as allowed by AO shall stand reversed. AO is directed to allow deduction of the impugned expenditure subject to verification of the fact that depreciation against the stated expenditure has not been allowed to the assessee in the computation of income either in impugned AY or in subsequent years. Disallowance u/s 36(1)(iii) - loan granted by the assessee to its subsidiary company - HELD THAT - Where the funds were diverted for non-business purposes i.e. either to make investments or to advance interest free loans. Therefore, the lower authorities were not justified in disallowing the same particularly in view of the fact that fresh loans granted by the assessee to the said entity during impugned AY was only to the tune of ₹ 88.78 Lacs. Another factor is to be noted that the loan has been granted by the assessee to its subsidiary company and AO has rejected the stand of the assessee on the ground that the business of the subsidiary could not be considered in law as the business of the assessee without controverting the fact that the aforesaid subsidiary was also engaged in the business of running the restaurants and without appreciating the fact that the assessee would derive business benefits out of the same. In such a scenario, the ratio of decision of Hon ble Apex Court rendered in S.A. Builders Vs. CIT 2006 (12) TMI 82 - SUPREME COURT would also become applicable to the facts of the case. Therefore, viewed from any angle, the impugned disallowance, in our opinion, could not be sustained - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 36(1)(iii) amounting to ?28.09 Lacs.
2. Deletion of preoperative expenditure of ?187.54 Lacs by the CIT(A).

Detailed Analysis:

1. Disallowance under Section 36(1)(iii):
The assessee contested the disallowance of ?28.09 Lacs under Section 36(1)(iii), which stemmed from the fact that the assessee advanced an interest-free loan of ?305.70 Lacs to an entity, M/s Joie De Vivre, while claiming interest expenditure of ?28.09 Lacs against borrowed funds. The assessee argued that in the case of mixed funds, a presumption should be drawn in the assessee’s favor that interest-free loans were funded out of own funds/interest-free funds available with the assessee, citing CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340]. Additionally, the assessee claimed that the loans were given to an associate for business purposes, referencing S.A. Builders Vs. CIT [288 ITR 1]. However, the AO disallowed the interest expenditure, and the CIT(A) upheld this disallowance, noting that the business of the assessee could not be considered the business of the subsidiary company in law. The Tribunal, however, found that the assessee’s own funds far exceeded the interest-free loans and that the ratio of the cited decisions applied. Therefore, the disallowance was not justified, and the Tribunal allowed the assessee’s appeal on this issue.

2. Deletion of Preoperative Expenditure:
The assessee claimed a deduction of ?187.54 Lacs as pre-operative expenditure for four units, arguing these were deductible revenue expenditures under Section 37(1) since they were incurred for the expansion of the existing restaurant business. The AO rejected this claim, stating that the expenses were incurred before the commencement of business and thus not allowable following the matching principle. The CIT(A) deleted the addition, noting that similar disallowances in the preceding year (AY 2013-14) were allowed on appeal, recognizing the expenses as revenue in nature. The Tribunal upheld the CIT(A)’s decision, noting that the issue was recurring and had been settled in the assessee’s favor for AY 2013-14. The Tribunal directed that since the expenditure was capitalized in the books and claimed only in the computation of income, no deduction thereof, including depreciation, would be allowable in any assessment year.

Conclusion:
The Tribunal dismissed the revenue’s appeals (ITA Nos. 1177-78/Mum/2018) and allowed the assessee’s appeal (ITA No. 660/Mum/2018), providing relief on both issues: the disallowance under Section 36(1)(iii) and the deletion of preoperative expenditure. The order was pronounced in the open court on 09th April, 2019.