2014 (2) TMI 739 - AT - Income Tax

Tribunal ruling on interest disallowance, management fees taxability, and disallowance under Section 14A

The Tribunal allowed the assessee's appeal in part, concerning the disallowance of interest under Section 36(1)(iii) of the Income Tax Act. The ... Disallowance of interest u/s 36(1)(iii) of the Act – Held that:- The decision in Plaza Hotels Pvt. Ltd. Versus JCIT (OSD), Range 8(2), Mumbai [2014 (1) TMI 1275 - ITAT MUMBAI] followed - there is no question of doubting that the it was not for the purpose of business - the entire interest paid by the assessee was for commercial purposes – matter remitted back to the AO for fresh adjudication. Taxability of Management fees received – Income from house property or business income – Held that:- The decision in CIT Vs. Mohiddin Hotels Pvt. Ltd. [2005 (9) TMI 46 - BOMBAY High CourT ] followed - the assessee has given hotel on lease for exploiting business asset and, therefore, the Tribunal was correct in holding that the income from leasing the hotel was income from business - the receipt from M/s KHIL on account of leasing the hotel was business receipt - There is no dispute that the assessee is owner of the hotel given on lease to M/s KHIL - All the licenses and permissions are in the name of assessee - This is also a fact that the assessee was running its hotel itself before giving to M/s KHIL – thus, the receipts received from KHIL are business receipt – Thus, the AO is directed to treat the business receipt against income from property – Decided in favour of Assessee. Issues Involved:1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.2. Taxability of management fees received from Kamat Hotels (India) Ltd (KHIL) as income from house property versus business income.3. Disallowance under Section 14A read with Rule 8D.Detailed Analysis:1. Disallowance of Interest under Section 36(1)(iii) of the Income Tax Act:Ground 1(i): The Tribunal allowed the appeal in favor of the assessee concerning the disallowance of Rs.12,19,177/- paid to Allahabad Bank for a loan taken for windmill business. The Tribunal relied on its earlier decision in the assessee's case for the assessment year 2003-04, where a similar disallowance was deleted.Ground 1(ii): The Tribunal also deleted the disallowance of Rs.6,22,467/- paid to Satara Sahkari Bank for financing business, following its earlier decision for the assessment year 2003-04.Ground 1(iii): The issue of disallowance of Rs.18,294/- paid to ABN Amro Bank for a vehicle loan was set aside to the file of the AO for a fresh order, following the Tribunal's decision for the assessment year 2005-06.Ground 1(iv): Similarly, the disallowance of Rs.8,67,731/- paid to Satara Sahakari Bank for financing business was set aside to the AO for a fresh order, adhering to the Tribunal's decision for the assessment year 2005-06.2. Taxability of Management Fees from KHIL:The AO treated the management fees received from KHIL as income from house property, relying on the decision of the Hon'ble Supreme Court in Shambhu Investment Pvt. Ltd. The CIT(A) upheld this view, rejecting the principle of consistency and citing that the assessee had no intention to run the hotel, thus treating the income as house property income.However, the Tribunal reversed this decision, emphasizing the principle of consistency since the income was consistently treated as business income from assessment years 1995-96 to 2005-06. The Tribunal noted that the assessee was exploiting the hotel as a business asset, not merely letting out property. The Tribunal relied on the decision of the Hon'ble Bombay High Court in CIT v. Mohiddin Hotels Pvt. Ltd., where similar facts led to the income being treated as business income. The Tribunal concluded that the income from KHIL should be considered business income, not house property income.3. Disallowance under Section 14A read with Rule 8D:The Tribunal noted that Rule 8D is not applicable for the assessment year under consideration, as held by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. Consequently, the issue was set aside to the AO for a fresh decision without applying Rule 8D, ensuring the assessee is given an opportunity to be heard.Appeal of the Department:The department's appeal also raised the issue of disallowance under Section 14A read with Rule 8D. The Tribunal reiterated that Rule 8D is applicable only from the assessment year 2008-09, thus setting aside the issue to the AO for a fresh order.Conclusion:The appeal of the assessee (ITA No.6676/M/2011) was allowed in part and partly for statistical purposes, while the appeal of the department (ITA No.6636/M/2011) was allowed for statistical purposes. The Tribunal pronounced the order in the open court on 13th September 2013.