Revenue's appeals dismissed, assessee's appeal allowed, relief granted on disallowance & preoperative expenditure deletion. Order dated 09/04/2019.

The Tribunal dismissed the revenue's appeals and allowed the assessee's appeal, providing relief on both issues: the disallowance under Section 36(1)(iii) and the deletion of preoperative expenditure. The order was pronounced on 09th April 2019.

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Issues Involved:
1. Disallowance under Section 36(1)(iii) amounting to Rs. 28.09 Lacs.
2. Deletion of preoperative expenditure of Rs. 187.54 Lacs by the CIT(A).

Detailed Analysis:

1. Disallowance under Section 36(1)(iii):
The assessee contested the disallowance of Rs. 28.09 Lacs under Section 36(1)(iii), which stemmed from the fact that the assessee advanced an interest-free loan of Rs. 305.70 Lacs to an entity, M/s Joie De Vivre, while claiming interest expenditure of Rs. 28.09 Lacs against borrowed funds. The assessee argued that in the case of mixed funds, a presumption should be drawn in the assessee’s favor that interest-free loans were funded out of own funds/interest-free funds available with the assessee, citing CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340]. Additionally, the assessee claimed that the loans were given to an associate for business purposes, referencing S.A. Builders Vs. CIT [288 ITR 1]. However, the AO disallowed the interest expenditure, and the CIT(A) upheld this disallowance, noting that the business of the assessee could not be considered the business of the subsidiary company in law. The Tribunal, however, found that the assessee’s own funds far exceeded the interest-free loans and that the ratio of the cited decisions applied. Therefore, the disallowance was not justified, and the Tribunal allowed the assessee’s appeal on this issue.

2. Deletion of Preoperative Expenditure:
The assessee claimed a deduction of Rs. 187.54 Lacs as pre-operative expenditure for four units, arguing these were deductible revenue expenditures under Section 37(1) since they were incurred for the expansion of the existing restaurant business. The AO rejected this claim, stating that the expenses were incurred before the commencement of business and thus not allowable following the matching principle. The CIT(A) deleted the addition, noting that similar disallowances in the preceding year (AY 2013-14) were allowed on appeal, recognizing the expenses as revenue in nature. The Tribunal upheld the CIT(A)’s decision, noting that the issue was recurring and had been settled in the assessee’s favor for AY 2013-14. The Tribunal directed that since the expenditure was capitalized in the books and claimed only in the computation of income, no deduction thereof, including depreciation, would be allowable in any assessment year.

Conclusion:
The Tribunal dismissed the revenue’s appeals (ITA Nos. 1177-78/Mum/2018) and allowed the assessee’s appeal (ITA No. 660/Mum/2018), providing relief on both issues: the disallowance under Section 36(1)(iii) and the deletion of preoperative expenditure. The order was pronounced in the open court on 09th April, 2019.

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