2022 (3) TMI 432 - AT - Income Tax

Tax Tribunal Allows Interest and Expenses Deductions under Section 57(iii)

Hotel Skyline Pvt. Ltd. Versus Income Tax Officer, Ward -1 (1), Bharuch

Hotel Skyline Pvt. Ltd. Versus Income Tax Officer, Ward -1 (1), Bharuch - TMI Issues Involved:1. Disallowance of interest expenses amounting to Rs. 14,74,654/-.2. Disallowance of other expenses amounting to Rs. 9,02,504/-.Issue-wise Detailed Analysis:1. Disallowance of Interest Expenses:The primary issue pertains to the disallowance of interest expenses amounting to Rs. 14,74,654/- for the assessment years 2012-13 and 2013-14. The Assessing Officer (AO) observed that the assessee had advanced an interest-free loan to Affem Rolling Pvt. Ltd., a sister concern, from secured loans availed from the Bank of Baroda. The AO held that the interest-bearing secured loan was diverted for non-business purposes and disallowed the interest expenses due to the lack of a proven nexus between the interest expenses and interest income.Upon appeal, the CIT(A) upheld the AO's decision. The assessee contended that the interest-free loan was advanced from its own funds and the borrowed funds were used for business purposes. The assessee further argued that the interest expenses should be allowed under Section 57, Section 36(1)(iii), or Section 37(1) of the Income Tax Act, 1961.The Tribunal examined the facts and noted that the assessee had indeed incurred the interest expenses and had filed its return of income declaring total income at Rs. 10,58,040/-. The Tribunal found that the investment in Affem Rolling Pvt. Ltd. was made out of the loan taken from Bank of Baroda and that the assessee had demonstrated a complete nexus between the borrowed funds and the investment. The Tribunal concluded that the interest expenses were allowable under Section 57(iii) of the Act, referencing the Supreme Court decision in Rajendra Prasad Moody (115 ITR 519), which held that the expenditure need not result in income to be deductible under Section 57(iii).2. Disallowance of Other Expenses:The second issue concerns the disallowance of other expenses amounting to Rs. 9,02,504/- incurred by the assessee for the assessment year 2012-13. These expenses included fees for accountants, audit fees, and general expenses. The AO disallowed these expenses, and the CIT(A) confirmed the disallowance.The assessee argued that these expenses were incurred to manage the investment in Affem Rolling Pvt. Ltd. and should be deductible under Section 57(iii) of the Act. The Tribunal agreed that these expenses were related to maintaining the investment portfolio and deemed it reasonable to allow 50% of these expenses. Consequently, the Tribunal allowed 50% of the expenses, amounting to Rs. 4,51,252/- for the assessment year 2012-13 and Rs. 5,37,688/- for the assessment year 2013-14.Conclusion:The Tribunal allowed the interest expenses of Rs. 14,74,654/- for the assessment year 2012-13 and Rs. 13,96,831/- for the assessment year 2013-14 under Section 57(iii) of the Income Tax Act. Additionally, it allowed 50% of the other expenses, amounting to Rs. 4,51,252/- for the assessment year 2012-13 and Rs. 5,37,688/- for the assessment year 2013-14. The Tribunal clarified that this adjudication was based on the peculiar facts and circumstances of the case and should not be treated as a precedent for other assessment years. Both appeals by the assessee were allowed to the extent indicated.