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TMI Blog2024 (12) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of the Income Tax Act, 1961 [hereinafter referred to as the Act ]. In the aforesaid appeal, the Assessee has filed cross objections. ITA No.913/Mum/2024 3. The Assessee has raised following grounds of appeal:- I. DISALLOWANCE UNDER SECTION 36(1)(iii) a. Learned CIT(A) erred in disallowing Rs. 24,37,53,214/- being interest under section 36(1)(iii) of the Act both on facts and in law. b. On the facts and circumstances of the case and in law, Learned CIT(A) erred invoking the provisions of Section 36(1)(iii) of the Act to disallow the following amounts out of interest expenditure by holding that the advancing of interest free loan to 100% subsidiaries did not fall within the meaning of for the purpose of the business in Section 36 (1)(iii) of the Act (1) Rs. 24,26,33,040/- proportionate interest relatable to alleged interest free loan given to My Orchid Hotels Pune Private Limited; (OHPPL) (2) Rs. 11.20.175/- proportionate interest relatable to alleged interest free loan given to M/s Mahodadhi Palace Private Ltd. (MPPL) c. Learned CIT (A) erred in failing to appreciate that the loans were given to the said two 100% subsidiaries (OHPPL and MPPL) on the consideration of business exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT(A) does not mention about reconciliation of the total amount of cash deposited during the FY. 2016-17 and the amount of cash deposit made during period from 09.11.2016 to 30.12.2016 by the assessee 3. Whether in the facts and circumstances the Ld.CIT(A) was right in deciding the issue without looking into larger issue of reconciliation of the amounts actually deposited and reflected in the AIR for F.Y. 2016-17. It is pertinent to mention here that the reconciliation was neither the mandate for Remand Report nor it found any mention in the Remand Report 4. Whether in the facts and circumstances the Ld. CIT(A) was right in holding that the cash deposits added in the assessment order was over and above the turnover reported by the appellant, and has not given any finding not has analyzed and justified this in the appellate order and is merely like a comment without any explanation 5. Whether in the facts and circumstances the Ld. CIT(A) was right in deleting the addition without giving proper reasoning and reconciliation of the cash deposits and as a consequence, the issue of unexplained cash deposit of Rs 43,19,29,45.3/- for the entire year and for the period of demonetiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer made, inter alia, (a) Addition of INR.43,19,29,453/- on account of unexplained cash deposits and (b) Disallowance of INR.24,37,53,214/- under Section 36(1)(iii) of the Act. 7. Being aggrieved, the Assessee preferred appeal before the CIT(A) challenging, inter alia, the above additions. Before the CIT(A) it was contended on behalf of the Appellant that the assessment was framed on the Assessee without granting proper opportunity of being heard. The information/documents furnished by the Assessee during the course of assessment proceedings were not taken into consideration by the Assessing Officer. The Appellant also filed additional documents along with application for admission of additional evidence. The CIT(A) called for a report in relation from the Assessing Officer in this regard. The submissions and supporting documents filed by the Assessee were forwarded to the Assessing Officer. Taking the same as additional evidence, the Assessing Officer carried out inquiry/verification. Notice were issued under Section 133(6) of the Act to banks for obtaining details of bank accounts maintained by the Assessee and in response to the same the banks provided bank account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds are directed against the addition made by the Assessing Officer under Section 36(1)(iii) of the Act which was sustained by the CIT(A). 9.1. We have given thoughtful consideration to the rival submissions. The case set up by the Assessee is that it is admitted position that the funds were granted by the Assessee, engaged in hospitality business, to its 100% subsidiaries engaged in the same line of business. The funds were given to Orchid Hotels during previous years relevant to the Assessment Years 2011-2012 to 2013-2014, whereas the funds to MPPL were given during previous years relevant to the Assessment Year 2015-2016. The interest was charged from Orchid Hotels till Assessment Year 2014-2015 and from MPPL till Assessment Year 2017-18 (upto 21/02/2017). In view of the adverse financial conditions being faced by the wholly owned subsidiaries, the proposal to waive interest was accepted by the Board of Directors of the Assessee (a public listed company). The Assessee has filed copy of the loan agreements with Orchid Hotels and MPPL along with the copy of the respective board resolutions approving waiver of interest. Thus, the factual averments made by the Assessee are supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or non business purposes. Therefore, proportionate interest is to be disallowed u/s. 36(1)(ii) of the Act (Emphasis Supplied) 9.2. On perusal of above, it is clear that both the Assessing Officer and the CIT(A) have concluded that grant of loan to subsidiary cannot be held to be for the business purpose. We note that while dealing with the contention raised by the Assessee regarding the use of mixed funds the CIT(A) has, in paragraph 4.3.3. to 4.3.5 of the order impugned, referred to the judgment of the Hon ble Supreme Court in the case of S.A. Builder Vs. CIT(A), Chandigarh Ors.:288 ITR 1 (2006). On perusal of the aforesaid judgment, we find that the Hon ble Supreme Court has held as under: In our opinion, the High Court as well as the Tribunal and other Income Tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. The expression commercial expediency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth-Tax (1995) 215 ITR 582 also does not appear to be correct. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aries 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. The Hon ble Supreme Court has, in the case of SA Builders (supra), 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. The Revenue has failed to bring on record any material to persuade us to take a different view of the matter. 9.4. Further, the findings returned by the CIT(A) that the wholly owned subsidiaries were not facing financial difficulties and/or were making profits is contrary to the material on record. The financial statements of Orchid Hotels (Assessment Years 2012-2013 to 2014-15), financial statements of MPPL (Assessment Years 2015- 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the cash deposits made in the assessment order is over and above the turnover reported by the appellant. During the remand proceedings, nothing contrary to the claim of the appellant has been found. In view of the above, relying on the decision of the assessing officer in the remand report, the addition made by the AO is deleted. Ground No. 2 is allowed. 10.1. During the course of hearing, nothing was placed on record to controvert the above factual findings returned by the CIT(A) by placing reliance on the Remand Report, dated 30/01/2024. On perusal of the Assessment Order, we note that vide notice, dated 28/12/2019, the Assessing Officer had granted final opportunity to the Assessee to provide reconciliation of cash deposits and/or to substantiate with documentary evidences the source of such cash deposits made during the course of demonetization period stating as under: Perusal of the ITS/AIR/SFT details reveal that during demonetization period, you have deposited cash of Rs. 44,21,71,453/-. In this regard, you are requested to substantiate the source of cash deposits with supporting documentary evidence. Repetitive opportunities were accorded to you but you have failed to fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not find any infirmity in the action of the Assessing Officer submitting the aforesaid remand report. 10.4. 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. The 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 Assessing Officer [in the remand report] and the CIT(A) [in the order impugned]; or to support the factual issues raised in the grounds of appeal. Further, 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 Assessing Officer and CIT(A). We have already concluded that the action of the CIT(A) in calling for the remand report was as per the provisions of the Act and rules made there under. 10.5. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess of loan amounts and as such there was no justification for invoking the provisions of Section 36(1)(iii) of the Act. Learned CIT(A) further erred in not appreciating that under the law, in a case when loan is given out of mixed funds and the net owned funds of the assessee are more than the borrowed funds, it is reasonable to presume that the loan was given out of own funds. e. Learned CIT(A) erred in failing to appreciate that the appellant had already disallowed an amount of Rs,5,25,20,407/- out of the interest expenditure of Rs. 14,35,63,696/- debited to the Profit and Loss account and actual claim of interest amount was only Rs. 9,10,43,289/- and disallowance of Rs. 24,16,10,195/-.- out of Rs. 9,10,43,289/- was not only incorrect but unreasonable, excessive and not warranted. f. Learned CIT(A) erred in assuming the average interest rate of 12% for making the above disallowance which is nowhere near the actual average rate of interest of 1.64% paid during the year. g. Learned CIT(A) erred in not considering the submissions made by the appellant during the assessment proceedings, both written and oral. h. In any case, the disallowance is excessive. 2. ADDITION TO INCOME F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Act is deleted. Thus, Ground No. 1(a) to 1(d) raised by the Assessee are allowed and therefore Ground No.1(e) to 1(h) raised by the Assessee are dismissed as being infructuous. Ground No. 2(a) to 2(e) 15. Ground No.2(a) to 2(e) raised by the Assessee pertain to addition made by the Assessing Officer under Section 24 of the Act treating INR.11,39,55,350/- as income from house property. 15.1. The relevant facts for adjudication of the grounds under consideration are that during the assessment proceedings the Assessing Officer noticed that Assessee had received rental income of INR.11,84,13,684/- on which tax was deducted at source under Section 194(I)(b) of the Act. However, in the return of income the Assessee has offered to tax an amount of INR.44,58,334/- as income from house property. Therefore, the Assessee was asked to provide the reconciliation statement and explaining the difference between the income from house property as per the Income Tax Return and the rental receipts has reflected in Form 26AS. According to the Assessing Officer, the Assessee failed to provide necessary explanation/reconciliation and therefore, an addition of INR.11,39,55,350/- was made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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