The Pr. Commissioner Of Income Tax - 3 v. Hotels Limited

Digitally signedby GAURIGAURIAMITAMITGAEKWADGAEKWADDate:2021.11.2714:54:48 +0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1911 OF 2017 The Pr. Commissioner of Income Tax - 3 ….Appellant V/s. V. Hotels Limited ….Respondent ---- Mr. Suresh Kumar for appellant. Mr. P.J. Pardiwalla, Senior Advocate i/b. Mr. Atul K. Jasani for respondent. ---- CORAM : K.R. SHRIRAM & AMIT B. BORKAR, JJ. DATED : 22[nd] NOVEMBER 2021 P.C. : 1In this appeal, the following two substantial questions of law have been proposed : (a) Whether on the facts and in the circumstances of thecase, the Hon’ble ITAT was justified in allowing depreciationon intangible assets amounting to Rs.1,54,43,383/- asclaimed by the assessee when the said disallowance ofdepreciation made by the Assessing Officer had beenconfirmed by the CIT(A) in view of the fact that the hoteloperation of the appellant was suspended during the yearunder consideration as per the Auditors Report? (b) Whether on the facts and in the circumstances of the caseand in law, the Hon’ble ITAT was justified in deleting thedisallowance of interest claim of 9% amounting toRs.1,60,22,465/- in respect of the fully convertibledebentures issued to M/s. Cox and Kings India Ltd. withoutappreciating the fact that Shri Ajay Ajit Peter Kerkar, who isthe son of Shri Ajit B. Kerkar, Chairman of the assesseecompany, was the Director of M/s. Cox and Kings India Ltd.during the relevant period and therefore, the provisions ofSection 40A(2) are applicable and also the comment of theAuditors in the Audit Report that the interest claimed by theassessee company in respect of interest paid @ 24% isprejudicial to the interest of the company and the AO hasreasonably made the disallowance of the excess claim ofinterest of 9%? 2With reference to question no.1, Mr. Suresh Kumar states that itis squarely covered by an order passed by this Court on 17[th] December 2018in Income Tax Appeal No.835 of 2016 with Income Tax Appeal No.836 of2016. 3As regards the second question, in our view, it does not raiseany substantial question of law in as much as, the entire basis of theAssessing Officer’s opinion is based on the noting made by the auditors inthe annual report of respondent that payment of interest at 24% on FullyConvertible Debentures (FCD’s) was prejudicial to the interest of thecompany. 4According to the Assessing Officer, one Mr. Ajay Ajit PeterKerkar, the son of Mr. Ajit B. Kerkar, Chairman of respondent, happens to bea Director of Cox and Kings India Ltd. and working for the said companyfrom 1986. Though he has not said so in so many words, from the questionproposed and the findings of the ITAT, it does appear that the AssessingOfficer was relying upon sub Section 2 of Section 40A of the Income TaxAct, 1961 (the said Act). Even for a moment we proceed on the basis thatCox and Kings India Ltd. would come under the definition of person statedin clause (b) of sub Section 2 of Section 40A, the Assessing Officer has toform an opinion that the expenditure was excessive or unreasonable havingregard to the fair market value of the goods, services or facilities for whichthe payment is made or the legitimate needs of the business or profession of respondent or the benefit derived by or accruing to him therefrom. 5In this case, respondent had issued debentures toCox and Kings India Ltd. amounting to Rs.18 Crores during the AssessmentYear 2005-2006 for a period of 89 days. Due to ongoing litigation,respondent’s hotel was not functional and respondent had huge financialliabilities. In view of this, respondent was unable to redeem the debenturesand requested Cox and Kings India Ltd. to roll over the debentures. Cox andKings India Ltd. agreed but with a condition - enhancing the rate of intereston these debentures. Respondent agreed to pay interest at 24% p.a. on thedebentures. Indisputably, Cox and Kings India Ltd. has disclosed and offeredto tax 24% p.a. that they received on the debentures subscribed to by them. respondent or the benefit derived by or accruing to him therefrom. 5In this case, respondent had issued debentures toCox and Kings India Ltd. amounting to Rs.18 Crores during the AssessmentYear 2005-2006 for a period of 89 days. Due to ongoing litigation,respondent’s hotel was not functional and respondent had huge financialliabilities. In view of this, respondent was unable to redeem the debenturesand requested Cox and Kings India Ltd. to roll over the debentures. Cox andKings India Ltd. agreed but with a condition - enhancing the rate of intereston these debentures. Respondent agreed to pay interest at 24% p.a. on thedebentures. Indisputably, Cox and Kings India Ltd. has disclosed and offeredto tax 24% p.a. that they received on the debentures subscribed to by them. 6In the assessment year, if one considers the assessment order,the Assessing Officer has not placed any material under identical facts andcircumstances to justify that the fair market rate of interest was lower thanwhat respondent has paid. The Assessing Officer has not recorded anyfinding or collected any material to show that the interest paid byrespondent was in excess of the fair market rate. Section 40A (2) (a) reads as under : 40A (2) (a) Where the assessee incurs any expenditure inrespect of which payment has been or is to be made to anyperson referred to in clause (b) of this sub-section, and theAssessing Officer is of opinion that such expenditure isexcessive or unreasonable having regard to the fair marketvalue of the goods, services or facilities for which thepayment is made or the legitimate needs of the business orprofession of the assessee or the benefit derived by orrespect of which payment has been or is to be made to anyperson referred to in clause (b) of this sub-section, and theAssessing Officer is of opinion that such expenditure isexcessive or unreasonable having regard to the fair marketvalue of the goods, services or facilities for which thepayment is made or the legitimate needs of the business orprofession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as isso considered by him to be excessive or unreasonable shallnot be allowed as a deduction: Provided that for an assessment year commencing on orbefore the 1[st] day of April, 2016 no disallowance, on accountof any expenditure being excessive or unreasonable havingregard to the fair market value, shall be made in respect of aspecified domestic transaction referred to in Section 92BA, ifsuch transaction is at arm’s length price as defined inclause (ii) of Section 92F. As provided under Section 40A (2) (a), the Assessing Officer was duty bound to form a personal opinion, after having regard to the fairmarket value of the goods, services or facilities for which payment is made,that such expenditure is excessive or unreasonable. As stated earlier, there isno material placed to indicate what would have been the fair market valueof interest that would have been payable on the debentures and why suchpayment was excessive or unreasonable. Simply relying on the auditors’finding is not enough. 7Moreover, the ITAT has rightly concluded that the provisionslike Section 40A are meant to check evasion of tax through excessive orunreasonable payment to relatives and associate concerns and should not beapplied in a manner which will cause hardship in bonafide cases relying onSection 40A(2) of the Act. Moreover, it is not a case of tax evasion in asmuch as it is not the Revenue’s case if the rate would have been less theassessee’s profit would have been more. As could be seen from theassessment order itself respondent had filed return of income forAssessment Year 2010-2011, which is the year in question, declaring loss at Rs.31,88,44,909/- and the return of income had been processed underSection 143 (1) of the Act. We find support for this view from the judgmentof the Division Bench of this Court (Panaji Bench) in Commissioner of1Income Tax V/s. V.S. Dempo and Co. P. Ltd.. Rs.31,88,44,909/- and the return of income had been processed underSection 143 (1) of the Act. We find support for this view from the judgmentof the Division Bench of this Court (Panaji Bench) in Commissioner of1Income Tax V/s. V.S. Dempo and Co. P. Ltd.. 8In our view, the Tribunal has not committed any perversity orapplied incorrect principles to the given facts and when the facts andcircumstances are properly analysed and correct test is applied to decide theissue at hand, then, we do not think that question as pressed raises anysubstantial question of law. 9The appeal is devoid of merits and it is dismissed with no orderas to costs. (AMIT B. BORKAR, J.) (K.R. SHRIRAM, J.)