The High Court dismissed the appeal filed by the Assessing Officer. It held that no substantial question of law arose regarding the disallowance of excess interest under Section 40A(2) as the Assessing Officer failed to record a finding on fair market value.
The appeal was dismissed with no order as to costs.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
Digitally signed by GAURI GAURI AMIT AMIT GAEKWAD GAEKWAD Date: 2021.11.27 14:54:48 +0530
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY 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 : 22nd 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 the
case, the Hon’ble ITAT was justified in allowing depreciation
on intangible assets amounting to Rs.1,54,43,383/- as
claimed by the assessee when the said disallowance of
depreciation made by the Assessing Officer had been
confirmed by the CIT(A) in view of the fact that the hotel
operation of the appellant was suspended during the year
under consideration as per the Auditors Report?
(b) Whether on the facts and in the circumstances of the case
and in law, the Hon’ble ITAT was justified in deleting the
disallowance of interest claim of 9% amounting to
Rs.1,60,22,465/- in respect of the fully convertible
debentures issued to M/s. Cox and Kings India Ltd. without
appreciating the fact that Shri Ajay Ajit Peter Kerkar, who is
the son of Shri Ajit B. Kerkar, Chairman of the assessee
company, was the Director of M/s. Cox and Kings India Ltd.
during the relevant period and therefore, the provisions of
Section 40A(2) are applicable and also the comment of the
Auditors in the Audit Report that the interest claimed by the
assessee company in respect of interest paid @ 24% is
prejudicial to the interest of the company and the AO has
reasonably made the disallowance of the excess claim of
interest of 9%?
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2With reference to question no.1, Mr. Suresh Kumar states that it
is squarely covered by an order passed by this Court on 17th December 2018
in Income Tax Appeal No.835 of 2016 with Income Tax Appeal No.836 of
2016.
3As regards the second question, in our view, it does not raise
any substantial question of law in as much as, the entire basis of the
Assessing Officer’s opinion is based on the noting made by the auditors in
the annual report of respondent that payment of interest at 24% on Fully
Convertible Debentures (FCD’s) was prejudicial to the interest of the
company.
4According to the Assessing Officer, one Mr. Ajay Ajit Peter
Kerkar, the son of Mr. Ajit B. Kerkar, Chairman of respondent, happens to be
a Director of Cox and Kings India Ltd. and working for the said company
from 1986. Though he has not said so in so many words, from the question
proposed and the findings of the ITAT, it does appear that the Assessing
Officer was relying upon sub Section 2 of Section 40A of the Income Tax
Act, 1961 (the said Act). Even for a moment we proceed on the basis that
Cox and Kings India Ltd. would come under the definition of person stated
in clause (b) of sub Section 2 of Section 40A, the Assessing Officer has to
form an opinion that the expenditure was excessive or unreasonable having
regard to the fair market value of the goods, services or facilities for which
the payment is made or the legitimate needs of the business or profession of
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respondent or the benefit derived by or accruing to him therefrom.
5In this case, respondent had issued debentures to
Cox and Kings India Ltd. amounting to Rs.18 Crores during the Assessment
Year 2005-2006 for a period of 89 days. Due to ongoing litigation,
respondent’s hotel was not functional and respondent had huge financial
liabilities. In view of this, respondent was unable to redeem the debentures
and requested Cox and Kings India Ltd. to roll over the debentures. Cox and
Kings India Ltd. agreed but with a condition - enhancing the rate of interest
on these debentures. Respondent agreed to pay interest at 24% p.a. on the
debentures. Indisputably, Cox and Kings India Ltd. has disclosed and offered
to 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 and
circumstances to justify that the fair market rate of interest was lower than
what respondent has paid. The Assessing Officer has not recorded any
finding or collected any material to show that the interest paid by
respondent was in excess of the fair market rate. Section 40A (2) (a) reads
as under :
40A (2) (a) Where the assessee incurs any expenditure in
respect of which payment has been or is to be made to any
person referred to in clause (b) of this sub-section, and the
Assessing Officer is of opinion that such expenditure is
excessive or unreasonable having regard to the fair market
value of the goods, services or facilities for which the
payment is made or the legitimate needs of the business or
profession of the assessee or the benefit derived by or
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accruing to him therefrom, so much of the expenditure as is
so considered by him to be excessive or unreasonable shall
not be allowed as a deduction:
Provided that for an assessment year commencing on or
before the 1st day of April, 2016 no disallowance, on account
of any expenditure being excessive or unreasonable having
regard to the fair market value, shall be made in respect of a
specified domestic transaction referred to in Section 92BA, if
such transaction is at arm’s length price as defined in
clause (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 fair
market value of the goods, services or facilities for which payment is made,
that such expenditure is excessive or unreasonable. As stated earlier, there is
no material placed to indicate what would have been the fair market value
of interest that would have been payable on the debentures and why such
payment was excessive or unreasonable. Simply relying on the auditors’
finding is not enough.
7Moreover, the ITAT has rightly concluded that the provisions
like Section 40A are meant to check evasion of tax through excessive or
unreasonable payment to relatives and associate concerns and should not be
applied in a manner which will cause hardship in bonafide cases relying on
Section 40A(2) of the Act. Moreover, it is not a case of tax evasion in as
much as it is not the Revenue’s case if the rate would have been less the
assessee’s profit would have been more. As could be seen from the
assessment order itself respondent had filed return of income for
Assessment Year 2010-2011, which is the year in question, declaring loss at
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Rs.31,88,44,909/- and the return of income had been processed under
Section 143 (1) of the Act. We find support for this view from the judgment
of the Division Bench of this Court (Panaji Bench) in Commissioner of
Income Tax V/s. V.S. Dempo and Co. P. Ltd.1.
8In our view, the Tribunal has not committed any perversity or
applied incorrect principles to the given facts and when the facts and
circumstances are properly analysed and correct test is applied to decide the
issue at hand, then, we do not think that question as pressed raises any
substantial question of law.
9The appeal is devoid of merits and it is dismissed with no order
as to costs.
(AMIT B. BORKAR, J.)(K.R. SHRIRAM, J.)
1. 2011 (336) ITR 209 (Bom.)
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2 issues framed by the court
Whether the Hon'ble ITAT was justified in allowing depreciation on intangible assets when the hotel operation was suspended.
Whether Section 40A(2) applies to delete the disallowance of interest claim on fully convertible debentures issued to an associated concern.
Colour shows how this judgement treated each authority
Commissioner of Income Tax V/s. V.S. Dempo and Co. P. Ltd.Referred¶36
2011 (336) ITR 209 (Bom.)
Income Tax Appeal No.835 of 2016Referred¶20
Income Tax Appeal No.835 of 2016 with Income Tax Appeal No.836 of 2016
3 provisions across 2 enactments
The Pr. Commissioner of Income Tax - 3
V. Hotels Limited
K.R. SHRIRAM
AMIT B. BORKAR
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court