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Monday, August 11, 2014

Income tax sec.36 - claimed certain benefits for the years 1989-90 & 1990-91 - Rs.3 lakhs for as revenue expenditure and another claim - exemption from payment of interest on the loan borrowed - ITAO discarded the first as Rs.3 lakhs was spent for constructions, it should be treated as capital expenditure and another claim was rejected as the borrowed amount was spent for sister concern but not this Hotel - Appeal was allowed by commissioner , Tribunal too dismissed the Revenue second appeals - their Lordships held that commissioner and Tribunal both failed to consider that the Building is owned or leased and failed to consider whether the construction work was permanent or semi permanent and failed to consider that whether the assessment becomes final or not and as such remand the case to the Tribunal for fresh disposal = I.T.T.A. Nos. 87 of 2001 and batch 01-07-2014 The Commissioner of Income Tax.... APPELLANT M/s.Hotel Krishna, Lakdikapul, Hyd....RESPONDENT = 2014 - July. Part - http://judis.nic.in/judis_andhra/filename=11595

Income tax sec.36 - claimed certain benefits for the years 1989-90 & 1990-91 - Rs.3 lakhs for as revenue expenditure and another claim - exemption from payment of interest on the loan borrowed - ITAO discarded the first as Rs.3 lakhs was spent for constructions, it should be treated as capital expenditure and another claim was rejected as the borrowed amount was spent for sister concern but not this Hotel - Appeal was allowed by commissioner , Tribunal too dismissed the Revenue second appeals - their Lordships held that commissioner and Tribunal both failed to consider that the Building is owned or leased and failed to consider whether the construction work was permanent or semi permanent and failed to consider that whether the assessment becomes final or not and as such remand the case to the Tribunal for fresh disposal = 

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.=

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.
     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.

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:

       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.    

         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.

      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.
      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.

      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.

2014 - July. Part - http://judis.nic.in/judis_andhra/filename=11595

THE HONBLE SRI JUSTICE L.NARASIMHA REDDY and THE HONBLE SRI JUSTICE CHALLA KODANDA RAM          
               
I.T.T.A. Nos. 87 of 2001 and batch

01-07-2014

The Commissioner of Income Tax.... APPELLANT  
       
M/s.Hotel Krishna, Lakdikapul, Hyd....RESPONDENT  
       
<Gist:

>Head Note:

COUNSEL FOR THE APPELLANT:- Sri S.R.Ashok      

COUNSEL FOR RESPONDENT:-Sri A.V.Krishna Koundinya        


?Cases Referred:

THE HONBLE SRI JUSTICE L.NARASIMHA REDDY        

AND

THE HONBLE SRI JUSTICE CHALLA KODANDA RAM          

I.T.T.A. Nos. 87 and 119 of 2001


COMMON JUDGMENT: (per the Honble Sri Justice L.Narasimha Reddy)    

      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--vis the respondent.

      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.
      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.Nos1303/Hyd/1994 and 1304/Hyd/1994 before the Tribunal. 
Both the appeals were dismissed through common order, dated  
20.12.2000.

      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?

      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.

      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.

      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.

      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.

      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:

       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.  

      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.

      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.

      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.

      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.

      The miscellaneous petitions in these appeals shall also
stand disposed of.
_____________________  
L.NARASIMHA REDDY,J    
_______________________  
CHALLA KODANDA RAM,J      
Dt:01.07.2014 

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