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2018 Supreme(Del) 2875
IN THE HIGH COURT OF DELHI AT NEW DELHI
SANJIV KHANNA, CHANDER SHEKHAR, JJ.
The Pr. Commissioner of Income Tax -3 – Appellant
Versus
Dlf Hotel Holding Ltd. – Respondent
Income Tax Appeal No.1012 of 2018
Decided On : 28-09-2018
For the Appellant :Ms. Vibhooti, Advocate
The central legal point established in the judgment is that the expenditure in the nature of interest incurred for the purpose of making investments cannot be disallowed under Section 36(1)(iii) of the Income Tax Act, 1961 if it was incurred on grounds of commercial expediency.
Headnote:
Interest Deduction - Income Tax - Section 36(1)(iii) of the Income Tax Act, 1961 - [36(1)(iii)]
Fact of the Case:
The case involved an appeal by the Revenue regarding the addition of Rs.83,63,03,480 to the opening balance of the paid-up share capital of the respondent-assessee, and the deduction claimed under Section 36(1)(iii) of the Income Tax Act, 1961.
Finding of the Court:
The Tribunal affirmed the findings of the Commissioner of Income Tax (Appeals) and held that the investment in subsidiaries/joint venture companies was one of the main objects of the respondent-assessee, and hence the expenditure in the nature of interest incurred for the purpose of making investments cannot be disallowed under Section 36(1)(iii) of the Act.
Issues: The main issue was whether the interest deduction claimed under Section 36(1)(iii) of the Income Tax Act, 1961 was allowable in the case of the respondent-assessee.
Ratio Decidendi: The court relied on the decisions of the Supreme Court in S.A. Builders Limited v. CIT and Another, and Munjal Sales Corporation v. CIT, which held that the expression 'for the purpose of business' includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The court emphasized that the test for allowability of interest on borrowed funds should be whether the loan was given as a measure of commercial expediency.
Final Decision: The appeal was dismissed as the issue was completely covered by the decisions of the Supreme Court, and no substantial question of law arose for consideration.
SANJIV KHANNA, J.
This appeal by the Revenue in the case of DLF Hotel Holding Limited (“respondent-assessee” for short) arises from the order dated 9th April, 2018 of the Income Tax Appellate Tribunal in ITA No. 1750/DEL/2015 and pertains to the Assessment Year 2010-11.
2. The facts in brief are that during the period relating to the Assessment Year 2010-11 an addition of Rs.83,63,03,480/- was made to the opening balance of the paid up share capital of the respondent-assessee, enhancing the same to Rs.1259,68,00,000/-. The respondent-assessee had invested Rs.1165,23,06,015/- in shares of group companies. The respondent-assessee had also taken unsecured loans of Rs. 223,10,02,165/- on which interest of Rs. 12,83,76,153/- was paid and claimed as a deduction under Section 36(1)(iii) of the Income Tax Act, 1961 (the Act, for short). The respondent-assessee had also given unsecured loans of Rs. 205,20,21,046/- to subsidiary companies. The respondent-assessee had received Rs. 12,83,76,153/- as interest on unsecured loans given to the subsidiary companies and others, which was shown as income.
3. The Assessing Officer in the Assessment Order dated 23rd March, 2013 observed and held that the respondent-assessee had maintained common account for both borrowed funds and capital funds, out of which investment in shares of the group companies was made. The Assessing Officer made an addition of Rs. 5,33,01,263/- on the following working:-
S. No.
Particulars
Amount (in Lacks)
A.
Total interest paid
1,962.04
B.
Total interest income
1,283.76
C.
Net Interest paid (A-B)
678.28
D.
Average investments
1,16,523.06
E.
Total funds as per Books i.e. total of Balance
1,48,282.00
F.
Net Interest allocated to average investment (C*D/E) i.e. addition for (sic)
533.01
4. Before the Commissioner of Income Tax (Appeals) it was pointed out by the respondent-assessee that one of the main objects for which the respondent-assessee was established was to purchase, acquire, hold, trade and further to dispose of any right, stake or controlling interest in shares, stocks, debentures etc. Thus making investment was a part of respondent-assessee’s business. Further, the respondent-assessee was engaged in the business of hospitality, hotel management services and investment in companies dealing with retail business. The respondent-assessee was entitled to borrow capital for purpose of business and interest paid on borrowed capital has to be allowed as a deduction under Section 36(1)(iii) of the Act. The respondent-assessee had made investments in fixed capital net of depreciation of Rs.2,48,64,604/- and they had made investment of Rs.257,56,99,484/- by way of current asset, advances and loans including unsecured loans to subsidiaries of Rs.205,20,21,046/-.
5. Agreeing with the respondent-assessee, the Commissioner of Income Tax (Appeals) vide order dated 7th January, 2015 held that the Assessing Officer had not taken into account crucial evidence in the form the loans extended by the respondent-assessee to subsidiary companies and the interest received/earned on the said loans. The Commissioner of Income Tax (Appeals) had reproduced the following table:-
“S.No.
Name of the Subsidiary Companies
Balance as on 31.03.2010
Gross Interest
1
Bedelia Builders & construction Pvt. Ltd.
37,948,027
2,452,596
2
DLF Aspinwal Hotels Pvt. Ltd.
401,690,735
26,002,425
3
Eila Builders & Developers Pvt. Ltd.
157,558,675
9,348,803
4
DLF Cochin Hotels Pvt. Ltd.
202,659,463
13,121,097
5
DLF Hospitality & Recreational Ltd.
370,210,816
