High Court Of Andhra Pradesh
CIT Vs. Hotel Krishna
L. Narasimha Reddy And Challa Kodanda Ram, JJ.
Section 36(1)(iii)
Assessment Years 1989-90 And 1990-91
I.T.T.A. Nos. 87 & 119 Of 2001
July 1, 2014
JUDGMENT
L. Narasimha Reddy, J. – These two appeals arise out of a common order, dated 20.12.2000, passed by the Income Tax Appellate Tribunal, Hyderabad Bench A (for short the Tribunal) in I.T.A.Nos.1303/Hyd/1994 and 1304/Hyd/1994. The Tribunal was dealing with the matters pertaining to the assessment years 1989-90 and 1990-91 vis-as-vis the respondent.
2. The respondent is a hotel establishment and is assessed to tax. In the assessment years 1989-90 and 1990-91, it claimed certain benefits under the Income Tax Act, 1961 (for short the Tribunal). The first is about treating a sum of Rs. 3,00,000/- as revenue expenditure. The second is about the exemption from payment of interest on the loan borrowed by it. The Income Tax Officer (I.T.O.) took the view that the amount of Rs. 3,00,000/- spent by the respondent was for construction and that it deserves to be treated as capital expenditure. On the second aspect, the I.T.O. took the view that the respondent, no doubt, borrowed the amount, but has passed on the same to its sister concern and thereby, it is not entitled to deduct the interest paid on the loan.
3. The respondent carried the matter in appeals before the Income Tax Commissioner (Appeals)-I, Hyderabad (for short the Commissioner). The appeals were allowed through order, dated 03.03.1994. Aggrieved by that, the Revenue filed two appeals i.e. I.T. A. Nos. 1303/Hyd/1994 and 1304/Hyd/1994 before the Tribunal. Both the appeals were dismissed through common order, dated 20.12.2000.
4. In I.T.T.A.No.87 of 2001, only one substantial question of law is framed, namely;
Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in upholding the deletion of disallowance on account of interest payments in spite of clinching material establishing diversion of the borrowed funds for un-fruitful and non-commercial purposes?
In I.T.T. A. No. 119 of 2001, the following questions are framed:
(A)Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in upholding the deletion of disallowance on account of interest payments in spite of clinching material establishing diversion of the borrowed funds for un-fruitful and non-commercial purposes?
(B)Whether the appellate Tribunal is justified in holding that the amount incurred on construction of building meant for its commercial use, partakes the character of Revenue expenditure and deductable from the income?
(C)Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the disallowance on account of interest payments are liable to be granted in spite of clinching evidence establishing diversion of the borrowed funds for un-fruitful and non-commercial purposes?
5. The only question framed in I.T.T. A. No. 87 of 2001 and Question Nos. A and C framed in I.T.T. A. No. 119 of 2001 pertain to one area of controversy and Question No. B pertains to another.
6. Sri S.R. Ashok, learned Senior Standing Counsel for the Income Tax, submits that the Tribunal did not undertake any discussion on various aspects urged before it and simply on the ground that there is no information as to whether an appeal was preferred by the Revenue against the order passed by the Commissioner, both the appeals were dismissed. He submits that the record discloses that the order, dated 02.12.1993, passed by the Commissioner was the subject matter of I.T. A. No. 811/Hyd/1994 and that the appeal has been allowed through order, dated 02.03.2000. He further submits that the view taken by the Commissioner about the deduction of interest paid on loans cannot be sustained in law, since the assessee failed to establish that the amount was used for the business or profession. It is also urged that the Tribunal erred in treating the order passed by the Commissioner for the assessment year 1982-83 in relation to a construction, as constituting the basis for treating the amount of Rs. 3,00,000/- as Revenue Expenditure. According to him, this runs contrary to Explanation-1 to Section 32 of the Act.
Sri A.V. Krishna Koundinya, learned Senior Counsel for the respondent, on the other hand, submits that the loan was borrowed by the respondent, long ago, and for various years, the interest paid thereon was permitted to be deducted. He contends that the Appellate Commissioner has taken into account, the fact that the amount borrowed was utilised for the business undertaken by the respondent and that the said question of fact cannot be reopened before the Tribunal. He further submits that the expenditure of Rs. 3,00,000/- was only for a temporary alteration of the premises and it cannot be treated as capital expenditure.
7. Two questions arise for consideration. The first is as to whether the respondent was entitled to deduct the interest paid on the loans borrowed by it, in its profit and loss accounts. The second is as to how the sum of Rs. 3,00,000/- spent by the respondent for construction of rooms, be treated.
8. Section 36 of the Act provides for deductions of various categories, from the income. The interest paid on the loans is one such deduction. To qualify for such deduction, the borrowed amount must be spent for the business or the profession of the assessee. The explanation appended to Section 36 (iii) of the Act provides guidance in this behalf.
9. The I.T.O. did not allow the deduction by observing that the borrowed amount was just passed on to the sister concern of the respondent and it was not spent for the business or the profession. The Appellate Commissioner, however, has reversed that finding. In the further appeal preferred by the Revenue, the only factor that weighed with the Tribunal was that an order pertaining to the assessment year 1988-89 passed by the Commissioner may have become final. Even this opinion was not formed after thorough verification of the records. It was almost on the assumptions. Relevant portion reads as under:
10. Both parties have not pointed out at the time of hearing that the Revenue has filed any appeal against the order of the Commissioner (Appeals) for assessment year 1989-90 (there appears to be typographical mistake in this behalf and the correct assessment year is 1988-89), dated 03.03.1994 in I.T. A. No. 291/AC 1 (1)/CIT (A)-I/91-92 in the assessees own case on the basis of which the claim of the assessee has been accepted.
11. The rectification order passed by the I.T.O. under Section 154 of the Act to give effect the order of the Commissioner was also taken note of.
12. During the course of hearing, the learned Senior Standing Counsel has placed before us, a copy of the order, dated 02.03.2000, passed by the Tribunal in I.T. A. No. 811/Hyd/1994. It is in relation to the assessment year 1988-89 and the Tribunal has reversed the order passed by the Commissioner. Had this been taken note of by the Tribunal, when it decided the present appeals before it, things would have been different altogether. We are of the view that the matter needs to be examined by the Tribunal with reference to the relevant record, duly giving opportunity to both the parties.
13. Coming to the second question, the Tribunal has simply concurred with the view expressed by the Commissioner just by taking into account, the claim made by the respondent for the assessment year 1982-83 and the fact that the cost of construction incurred by it be treated as revenue expenditure was accepted. Beyond that, no discussion whatever was undertaken. Things would have been different in case the Commissioner has undertaken any discussion with reference to the relevant provisions of law and the facts pleaded by the parties. There again, he just referred to the claim and treated it as revenue expenditure. The purport of Explanation-1 to Section 32 of the Act was not discussed at all. It was obligatory on the part of the Commissioner, or for that matter, the Tribunal, to examine whether the building in question was owned by the respondent or was taken on lease and whether the construction undertaken by it was permanent or semi-permanent in nature. We feel that even this question needs to be addressed by the Tribunal, in detail.
14. Hence, we allow the appeals and remand the matters to the Tribunal for fresh consideration and disposal after giving opportunity to both the parties. There shall be no order as to costs.
15. The miscellaneous petitions in these appeals shall also stand disposed of.
[Citation : 368 ITR 445]
