TaxTMI 
TaxTMI 
TaxTMI 
2017 (1) TMI 185
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....l - Rs. 19,76,823/- . Aggrieved by the additions made during the assessment proceedings, the assessee filed appeal before the CIT (A) against assessment order dt.25.02.2013. The First Appellate Authority partly accepted the appeal of assessee but denied to interfere with findings of AO with respect to disallowance of bad debts and interest on loan. Against the findings of CIT(A), the assessee is in second appeal before the Tribunal. The assessee has assailed the findings of CIT(A) on the following grounds : 1) Disallowance of the bad debts claim Rs. 2,93,611/-. 2) Disallowance of interest on loan Rs. 16,64,716 and pre-payment charges Rs. 3,12,107/-. 3. Shri Suhas Bora appearing on behalf of the assessee submitted that the assessee had acquired hotel during the period relevant to assessment year 2008-09 against consideration of Rs. 1.27 crores. The assessee paid Rs. 1,24,02,000/- towards the consideration. Further, the assessee paid Rs. 5,91,611/- on account of various charges to MIDC, property tax etc. on behalf of the vendor with an understanding to get the reimbursement of same from vendor. Subsequently, the vendor declined to reimburse the same, the assessee could adjust Rs.....
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....advantage for the enduring benefit of a trade, there is good reason for treating such an expenditure as properly attributable not to the revenue but to capital. But a payment made to remove the possibility of a recurring disadvantage cannot be considered as payment made to secure an enduring advantage. 3. Where the assessee has an existing right to carryon a business, any expenditure made by him during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. Similarly, charges to MIDC and property taxes paid by the Appellant on behalf of the lessor of the property did not result in any benefit of enduring nature to the Appellant. It was made so as to ensure continued availability (without any impediment due to non-payment of property tax on the subject premises) of the lease user for the premis.es, and therefore for the smooth and efficient running of the day-to-day business of th....
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....n though the appellant has acquired leasehold rights, as the same are acquired in F.Y.2007-08 the expenditure incurred on behalf of lessor could not be viewed as capital expenditure because the leasehold rights on the plot of land is put up for the purposes of day to day running of the business and even if one were to view that some enduring benefit is obtained by the appellant, the benefit cannot be said to accrue to the appellant in the capital field. 8. It is submitted that the loss is thus allowable as business loss in terms of section 28 of the Act." Appellant's Submission on ground No. 2 : "1. The Appellant owns and runs a hotel. The Appellant had acquired a property for the expansion of the existing hotel business. Such property was acquired in AY. 2008-09. Further, cost incurred in developing the property was incurred in AY. 2009-10 and the asset was ready for use as per the completion certificate dated 25/7/2008 (Refer pg no. 34 of PB). Appellant's Balance Sheet also reflects the cost of the said property capitalized, leaving no work in progress (Refer pg no. 5 of PB). Since, the asset was ready for use during AY. 2009-10, expenditure incurred after the asset is ....
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....e can be' allowed as a deduction from the profits of a business unless the part of the business to which the expenditure is attributable is capable of producing income or profits liable to be taxed under the Act. Further the above contention is also upheld in: * CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC) * Hughes v. Bank of New Zealand (1938) 6 ITR 636 (HL) * CIT v. Madan Lal Jain (1982) 136 ITR 5409 (Del.) 3. CIT(A) has relied upon the decision of Hori'ble Mumhai High Court in case of Dineshkumar Gulabchand Agarwal Vs CIT (2004) 267 ITR 168 The relevant extract of the above decision is produced as under:- "Learned counsel appearing on behalf of the appellant has raised a question as framed in the appeal memo and tried to contend that even if the vehicle was not actually used but since it was ready for use, the assessee was entitled to claim the benefit of depreciation on such assets. He sought to place reliance on the judgment of this Court in the case of Whittle Anderson Ltd. vs. CIT (1971) 79 ITR 613 (Bom). In the above judgment this Court was concerned with the interpretation of the expression "use" or "used", whereas we are concerned with the interpr....
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....eated as business asset and it was purchased only for the purposes of the business. In the circumstances, the interest paid on the amount borrowed for purchase of such machinery is certainly a deductible amount. Consequently, the view taken by the Tribunal is correct." From the above two decisions it is clear that for claiming the deduction of interest paid, under section 36, it is not necessary that the asset must have been "used" (i.e. put to use) the necessary element is the spending of capital borrowed for purposes of acquisition of business asset, during the relevant accounting year. 5. On applicability of Explanation 8 to section 43(1) relied upon by AO. a. Section 36(1)(iii) has to be read on its own term. It is a code by itself and is attracted when the assessee borrows the capital for purpose of business. Transaction of borrowing is not the same as transaction of investment. b. Explanation 8 to section 43(1) has no relevance to section 36(1)(iii). It has relevance only to section 32, 32A, 33 and 41 which deals with concept like depreciation. c. Provision of section 36(1)(iii) makes not distinction between the money borrowed to acquire capital or revenue asset.....
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....with the provisions of Sec.36(2)(i) of the Act. In first appeal the ld. CIT(A) rejected the claim of the assessee on the premise that the expenditure incurred by the assessee is of capital nature and hence the same cannot be allowed either as bad debt or as expenditure u/s 37 of the Act. 7. It is an undisputed fact that the assessee had paid Rs. 2,93,611/- over and above the agreed consideration for purchase of hotel. It is also not disputed that the said amount was paid on behalf of the vendor to discharge certain liabilities such as MIDC charges, property tax etc., in respect of the hotel building purchased by the assessee. The said amount was paid by the assessee to make the building free from all encumbrances. Thereafter, the assessee could not recover the excess amount paid on behalf of the vendor of the hotel building. Section 36(2) provides that the deduction for bad debts can be allowed only if the amount claimed as bad debt has been offered as income in the earlier years. Before any deduction for bad debts is allowed, one of the following conditions must be satisfied : (i) the debt has been taken into account in computing the income of the assessee of the previous year i....
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....vendor of capital asset has not been received back by the assessee. Ostensibly, the said amount has become irrecoverable, therefore, the same is allowable as business loss under the provisions of section 28 of the Act. The amount paid by assessee to discharge the liability of vendor that has been adjusted against sale consideration partakes the character of capital expenditure. 9. Thus in view of the facts of the case and the decisions discussed above, we are of the considered opinion that although the amount of Rs. 2,93,611/- excess paid by the assessee cannot be allowed to write off as bad debt however, the said amount can be considered as business loss u/s 28 of the Act. Accordingly, we accept the alternative submission of the Ld. A.R. and partly allow ground No.1 raised in the appeal. 10. The second ground in appeal is with respect to disallowance of interest on loan Rs. 16,64,716/- and pre-payment charges to bank Rs. 3,21,107/-. The contention of the assessee is that payment of interest and pre-payment charges are revenue in nature as the hotel was 'ready to use' before accrual of interest and pre-payment charges. The Ld. A.R. has drawn our attention to the building completi....