2021 (12) TMI 22 - HC - Income Tax

Depreciation on intangible assets - denial of depreciation as hotel operation of the appellant was suspended during the year under consideration as per the Auditors Report - HELD THAT - This issue squarely covered by an order passed by this Court TULIP HOSPITALITY SERVICE LTD. 2018 (12) TMI 1338 - BOMBAY HIGH COURT as held both the CIT (A) as well as the Tribunal found on facts that the hotel business cannot be carried out without necessary licenses, permits and approvals. Thus, the proposition canvassed by by the Revenue that intangible assets in the nature of permits, licenses approvals are not required for carrying on the business of hotel not found to be correct by both the CIT(A) and the Tribunal. It is not disputed that the intangible assets viz. permits, licenses and approvals fall within the meaning of intangible assets under Section 32. Addition u/s 40A(2) - disallowance of interest claim of 9% in respect of the fully convertible debentures - AO's opinion is based on the noting made by the auditors in the annual report of respondent that payment of interest at 24% on Fully Convertible Debentures (FCD s) was prejudicial to the interest of the company - ITAT deleted the addition - HELD THAT - As provided under Section 40A (2) (a), the Assessing Officer was duty bound to form a personal opinion, after having regard to the fair market value of the goods, services or facilities for which payment is made, that such expenditure is excessive or unreasonable. As stated earlier, there is no material placed to indicate what would have been the fair market value of interest that would have been payable on the debentures and why such payment was excessive or unreasonable. Simply relying on the auditors finding is not enough. ITAT has rightly concluded that the provisions like Section 40A are meant to check evasion of tax through excessive or unreasonable payment to relatives and associate concerns and should not be applied in a manner which will cause hardship in bonafide cases relying on Section 40A(2) - it is not a case of tax evasion in as much as it is not the Revenue s case if the rate would have been less the assessee s profit would have been more. As could be seen from the assessment order itself respondent had filed return of income for Assessment Year 2010-2011, which is the year in question, declaring loss and the return of income had been processed under Section 143 (1) of the Act. We find support for this view from the judgment Dempo and Co. P. Ltd. 2010 (10) TMI 711 - BOMBAY HIGH COURT - Decided against revenue.

Summary

Issues:
1. Depreciation on intangible assets during suspension of hotel operation.
2. Disallowance of interest claim on debentures due to director's association.

Analysis:
1. The first issue pertains to the allowance of depreciation on intangible assets during the suspension of hotel operations. The Assessing Officer disallowed the depreciation, which was upheld by the CIT(A). However, the ITAT allowed the depreciation claimed by the assessee. The court noted that the Assessing Officer's decision was based on the suspension of hotel operations. The appellant argued that a previous court order covered this issue. The court found that the ITAT's decision was justified based on the circumstances.

2. The second issue involves the disallowance of interest claim on debentures due to the director's association with the debenture holder. The Assessing Officer relied on the auditors' opinion that the interest payment was prejudicial to the company's interest. The appellant's director was associated with the debenture holder, leading to the application of Section 40A(2) of the Income Tax Act. However, the court found that the Assessing Officer did not provide sufficient evidence to show that the interest paid was excessive or unreasonable. The court emphasized the need for a personal opinion based on fair market value, which was lacking in this case. The ITAT's decision to delete the disallowance was upheld, as it was not found to be erroneous or based on incorrect principles.

In conclusion, the court dismissed the appeal, stating that it lacked merit. The judgment highlighted the importance of proper analysis and application of the law in determining substantial questions of law.