Interest On Borrowed Funds. Admittedly, The Assessee v. K.vinod Chandran

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 07TH DAY OF FEBRUARY 2019 / 18TH MAGHA, 1940 ITA.No. 1373 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 285/COCH/2006 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 28-03-2008 APPELLANT/S:/RESPONDENT/REVENUE: THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADVS.SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH SC FOR INCOME TAX RESPONDENT/APPELLANT/ASSESSEE: HOTEL & ALLIED TRADES (P) LTD.,CASINO HOTEL, WILLINGDON ISLAND,, KOCHI-03. BY ADVS.SRI.JOSEPH MARKOSE (SR.)SHRI.ALEXANDER JOSEPH MARKOSSHRI.SHARAD JOSEPH KODANTHARASRI.ABRAHAM JOSEPH MARKOSSRI.ISAAC THOMASSRI.V.ABRAHAM MARKOS THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07.02.2019, ALONG WITH ITA.25/2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITAs1373/09& 25/13 -2- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 07TH DAY OF FEBRUARY 2019 / 18TH MAGHA, 1940 ITA.No. 25 of 2013 AGAINST THE ORDER/JUDGMENT IN ITA 662/COCH/2007 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 27-07-2012 APPELLANT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX,KOCHI. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT/ASSESSEE: M/S. HOTEL & ALLIED TRADES (P) LTD.,C/O.CASINO HOTEL, W/ISLAND, COCHIN-3. BY ADVS.SRI.ABRAHAM JOSEPH MARKOSSRI.ABRAHAM VARGHESE THARAKANSRI.BINU MATHEWSRI.JOSEPH MARKOSE (SR.)SRI.TOM THOMAS (KAKKUZHIYIL)SRI.V.ABRAHAM MARKOS THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07.02.2019, ALONG WITH ITA.1373/2009, THE COURT ON THE SAMEDAY DELIVERED THE FOLLOWING: ITAs1373/09& 25/13 K.VINOD CHANDRAN & ASHOK MENON, JJ. -------------------------------------------ITA Nos. 1373 of 2009 and 25 of 2013------------------------------------------- Dated this the 7[th] day of February, 2019 J U D G M E N T Vinod Chandran, J. Both the appeals are connected, insofar as thedis-allowance of expenditure having been directed in aproceedings under Section 263 of the Income Tax Act,1961 (“Act” for short) which is challenged in ITANo.1373/2009 and the consequential order is challengedin ITA No.25/2013. 2.The question is of dis-allowance of interest on borrowed funds. Admittedly, the assessee had borrowed funds on which there was interestliability. The assessee had also advanced amounts to asubsidiary company, which was interest free. Theassessee's case was that they had sufficient own fundsto advance money to the subsidiary company and that nopart of the borrowed amounts were, in fact, advanced to the subsidiary company. The Assessing Officerdisallowed only a small portion of the interest claimedas expenditure. The Commissioner sought to invokeSection 14A of the Act to disallow proportionateinterest in the borrowed funds of the assessee, by anorder under Section 263. The Tribunal interfered withthe order under Section 263 relying on the decision ofthe Honourable Supreme Court in (2007) 288 ITR 1[M/s.S.A.Builders Ltd. v. Commissioner of Income Tax].3.The questions arising are two fold.Whether there should have been an examination on facts,going by the dictum of M/s.S.A.Builders Ltd.as towhether there was a commercial expediency insofar asthe interest free advances made to the subsidiarycompany and whether Section 14A could have beenapplied. We find that the order under Section 263 waspassed specifically based on Section 14A. As far asthe applicability of Section 14A is concerned, theHonourable Supreme Court in (2018) 401 ITR 445 ITAs1373/09& 25/13 ITAs1373/09& 25/13 [Commissioner of Income Tax v. M/s.Essar TeleholdingsLtd.]held that the machinery provisions having comeonly from the assessment year 2007-08, the applicationof Section 14A would be prospective to that. In suchcircumstances, we reject the appeals and uphold theorders of the Tribunal in both the appeals. No costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENONJUDGE APPENDIX OF ITA 1373/2009 APPELLANT'S EXHIBITS: ANNEXURE-A COPY OF ASSESSMENT ORDER DATED 18/8/2003 FOR THE ASSESSMENT YEAR 2001-02 ANNEXURE-B COPY OF ORDER U/S.263 DATED 13/3/06 OF THE COMMISSIONER OF INCOME TAX. ANNEXURE-C COPY OF THE ORDER DATED 28/3/2008 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.285/COCH/2006. jg [True Copy] ITAs1373/09& 25/13 APPENDIX OF ITA 25/2013 APPELLANT'S EXHIBITS: ANNEXURE-A COPY OF THE ASSESSMENT ORDER U/S.143(3)PASSED BY THE ASSESSING OFFICER ON 18/8/2003 FOR AY 2001-02. ANNEXURE-B COPY OF THE CIT'S ORDER U/S 263 DATED 13/3/2006. ANNEXURE-C COPY OF ITAT'S ORDER NO. ITA NO. 285/COCH/2006 DATED 18/3/2008. ANNEXURE-D COPY OF ORDER U/S.143(3) RWS. 263 OF ITACT DATED 26/4/2006 OF THE ASSESSING OFFICER FOR AY 2001-02. ANNEXURE-E COPY OF ORDER OF THE CIT(A)-II, IN ITA NO. 26/R-1/E/CIT-II/06-07 DATED 19/4/2007. ANNEXURE-F COPY OF THE ITAT'S ORDER IN ITA NO. 662/COCH/2007 DATED 27/7/2012. jg [True Copy]