2024 (12) TMI 1417 - AT - Income Tax

Addition u/s 36(1)(iii) - grant of interest free loan to subsidiaries - HELD THAT - In the present case it is admitted position that the Assessee had granted loans to wholly owned subsidiaries in the same line of business. Thus, the Assessee had deep interest in the subsidiaries. CIT(A) has recorded that the wholly owned subsidiaries were operational and running hotels. The fact that the subsidiaries were undertaking projects related to hospitality/restaurant business and that the funds have been used for the same has not been doubted by the authorities below. As in SA Builder 2006 (12) TMI 82 - SUPREME COURT held that in case where an assessee has deep interest in the subsidiary and the same is used by the subsidiary for business purpose, the assessee would be entitled to claim deduction for interest expenses incurred in respect of loans granted to such subsidiary. In our view, the above judgment applied to the facts of the present case and the Assessee would be entitled to claim deduction for interest expenses incurred in relation to loan to subsidiaries. As funds were initially granted for expansion of business undertaken by the wholly owned subsidiaries. Later on the interest was waived to protect the investments in subsidiaries by helping them pull out of financial crunch faced by them. Thus, we are of the view that the Appellant acted on account of commercial expediency - disallowance u/s 36(1)(iii) deleted - Decided in favour of assessee. Addition u/s 68 in respect of cash deposits - HELD THAT - In the remand report, after verification, the Assessing Officer concluded that there was nothing to contradict the claim of the Assessee and therefore, in effect, accepted the explanation of the Assessee regarding cash deposits having been made in the normal course of restaurant/hospitality business admittedly being run by Assessee. CIT(A) also accepted the remand report and deleted the addition after considering the reply/submission filed by the Assessee. Nothing has been brought on record by the Revenue to either controvert the findings of the AO in the remand report and the CIT(A) in the order impugned ; or to support the factual issues raised in the grounds of appeal. No infirmity has been pointed out in the replies/details furnished by the Banks and/or the documents, details, bank certificates etc. said to have been filed by the Assessee before the AO and CIT(A). Decided in favour of assessee. Rental income receipts - addition u/s 24 treating sum as income from house property - difference between the income from house property as per the Income Tax Return and the rental receipts has reflected in Form 26AS - HELD THAT - On perusal of Profit and Loss Account along with Note No.34 dealing with the Revenue from Operations , we find that Room Income and Food And Banquet Income has been included under the head Sale Services and credited to the Profit and Loss Account as Revenue from Operations . It has not been disputed by the Revenue that chart showing details of TDS u/s 194(1)(b) and details of rent earned by the Appellant as per Form 26AS and rent offered by the Appellant as per the Gross Revenue in the Profit and Loss Account were note filed before the Authorities below - we delete the addition made under Section 24 and set aside the issue back to the file of Assessing Officer for denovo adjudication after carried out necessary enquiries/verification. Ground raised by the Assessee are allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment primarily revolves around the following core legal questions:

• Whether the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961, for loans given to wholly owned subsidiaries, was justified.
• Whether the addition made under Section 68 of the Income Tax Act, 1961, concerning unexplained cash deposits during the demonetization period, was appropriate.
• For the Assessment Year 2018-19, whether the addition under Section 24 of the Income Tax Act, 1961, treating certain receipts as income from house property, was correct.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance under Section 36(1)(iii)

• Relevant legal framework and precedents: Section 36(1)(iii) of the Income Tax Act allows the deduction of interest on capital borrowed for business purposes. The case of S.A. Builders Ltd. vs. CIT was referenced, emphasizing that interest-free loans to subsidiaries can be justified if they are for commercial expediency.
• Court's interpretation and reasoning: The Tribunal found that the loans were given to wholly owned subsidiaries engaged in the same line of business and that the waiver of interest was a measure of commercial expediency.
• Key evidence and findings: The Tribunal noted that the subsidiaries were in financial distress and the loans were initially not interest-free. The waiver was to protect investments in subsidiaries.
• Application of law to facts: The Tribunal applied the precedent set by the Supreme Court in S.A. Builders, concluding that the loans were for commercial expediency.
• Treatment of competing arguments: The Revenue's argument that the loans were not for business purposes was rejected based on the evidence of financial distress and the business connection between the parent and subsidiaries.
• Conclusions: The Tribunal deleted the disallowance of interest, allowing the deduction under Section 36(1)(iii).

Issue 2: Addition under Section 68 for unexplained cash deposits

• Relevant legal framework and precedents: Section 68 addresses unexplained cash credits in the books of accounts.
• Court's interpretation and reasoning: The Tribunal relied on the remand report, which found no discrepancies in the cash deposits, supporting the Assessee's claim that these were part of regular business transactions.
• Key evidence and findings: The remand report indicated that cash deposits were consistent with business operations and were not unexplained.
• Application of law to facts: The Tribunal agreed with the CIT(A) that the addition was unwarranted as the deposits were explained through business records.
• Treatment of competing arguments: The Revenue's objections were dismissed as they failed to provide evidence contradicting the remand report.
• Conclusions: The addition under Section 68 was deleted.

Issue 3: Addition under Section 24 for income from house property (Assessment Year 2018-19)

• Relevant legal framework and precedents: Section 24 pertains to deductions from income from house property.
• Court's interpretation and reasoning: The Tribunal noted that the Assessee claimed the income was from business operations, not house property.
• Key evidence and findings: The Tribunal found that the Assessee had included the income in business revenue, supported by documentation.
• Application of law to facts: The Tribunal set aside the addition for reassessment, directing the Assessing Officer to verify the Assessee's claims.
• Treatment of competing arguments: The Tribunal acknowledged the Assessee's evidence but required further verification.
• Conclusions: The issue was remanded for further examination.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business."
• Core principles established: Loans to subsidiaries can be justified under commercial expediency; unexplained cash deposits must be substantiated with evidence; income characterization under the correct head is crucial.
• Final determinations on each issue: The disallowance under Section 36(1)(iii) was deleted; the addition under Section 68 was deleted; the addition under Section 24 was remanded for reassessment.