Case Number: ITA 5895/DEL/2019
Appellant: Moonrock Hospitality (P) Ltd., New Delhi
Respondent: ACIT Circle-17(1), New Delhi
Assessment Year: 2016-17
Order Type: Final Tribunal Order
Date of Order: 2021-09-22
Pronounced On: 2021-09-22
Case Filed On: 2019-07-08
This appeal, filed by the assessee, is directed against the order dated 6th May, 2019 of the CIT(A)-6, New Delhi, relating to the Assessment Year 2016-17. The appellant, Moonrock Hospitality (P) Ltd., is engaged in the business of investments in wholly owned subsidiaries and extending loans to such companies, primarily from funds borrowed from various other companies. The issue at hand involves the disallowance of interest expenses claimed under section 36(1)(iii) of the Income Tax Act, 1961.
The only effective ground raised by the assessee is as follows:
“[2] That on the facts & circumstances of the case the Learned CIT(A), New Delhi, has grossly erred both in law and on facts in confirming the proportionate interest computed at Rs.22,56,750/- by the Ld. AO and making an addition of Rs.20,56,750/- by incorrectly applying the provisions of section 36(l)(iii) of the IT Act, 1961 despite the admitted fact that the funds have been extended to a wholly-owned subsidiary company to pursue its business activities and not for any purpose other than business in furtherance of commercial expediency.”
Moonrock Hospitality (P) Ltd. filed its return of income on 30th August, 2016 declaring a loss of Rs.52,06,669/-. During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had advanced an interest-free loan of Rs.2,49,50,000/- to its subsidiary company, M/s Vinu Promoters Pvt. Ltd., out of its interest-bearing funds. The AO observed that this loan was advanced in previous years, and a sum of Rs.2,52,00,000/- was outstanding against the company at the start of the year. The AO questioned the assessee as to why disallowance of interest expenses should not be made under section 36(1)(iii) of the IT Act.
The assessee explained that the interest expenses were allowable as the funds were extended to the wholly-owned subsidiary for business purposes. However, the AO was not satisfied and computed the proportionate amount of interest on interest-free advances given to subsidiary companies at Rs.22,56,750/-. Since the assessee had claimed total expenses of Rs.54,38,294/-, out of which Rs.41,49,856/- was already disallowed under section 14A, the AO made an additional disallowance of Rs.10,88,438/- under section 36(1)(iii).
Aggrieved by the order of the CIT(A), the assessee appealed before the Tribunal. The counsel for the assessee, Dr. Shaswat Bajpai and Shri Vishal Aggarwal, argued that the Hon’ble Delhi High Court in the case of CIT vs. Tulip Star Hotels Ltd. had held that where the assessee is engaged in the business of owning, running, and managing hotels, and has invested borrowed money in its subsidiary for business purposes, the interest paid on such borrowed capital is allowable under section 36(1)(iii).
The counsel also referred to the main objects of the assessee company as per its Memorandum of Association, highlighting that the funds were extended for business purposes. Further, the counsel cited several judicial precedents, including decisions of the Hon’ble Supreme Court and various High Courts, supporting the contention that interest paid on borrowed funds used for business purposes, even if advanced to subsidiaries, is allowable.
After considering the rival arguments and the evidence on record, the Tribunal found merit in the arguments of the assessee. The Hon’ble Accountant Member, Shri R.K. Panda, noted that the AO’s disallowance was based on the assumption that there was a diversion of interest-bearing funds towards non-interest bearing advances to a related concern. However, the Tribunal observed that the funds were extended to the wholly-owned subsidiary for business purposes, and therefore, no disallowance was warranted under section 36(1)(iii).
The Tribunal also referenced the decision in the case of Tulip Star Hotels Ltd., where it was held that interest paid on borrowed capital is allowable if the funds are invested in subsidiaries for business purposes. The Tribunal concluded that the AO and the CIT(A) had erred in disallowing the interest expenses, and accordingly, the disallowance of Rs.10,88,438/- was deleted.
In conclusion, the appeal filed by Moonrock Hospitality (P) Ltd. was allowed. The Tribunal set aside the order of the CIT(A) and directed the AO to delete the disallowance of Rs.10,88,438/-. The decision was pronounced in the open court on 22nd September, 2021.
Order: The appeal is allowed.
Pronounced on: 22nd September, 2021
Accountant Member: R.K. Panda
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asstt. Registrar, ITAT, New Delhi
Moonrock Hospitality (P) Ltd. vs ACIT Circle-17(1), New Delhi – Disallowance of Interest Expenses
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