Dolphin Hotels Limited, R.R.Dist vs Assessee

Dolphin Hotels Ltd., Hyderabad vs. Dy. Commissioner of Income- tax, Circle - 16(2), PAN - AAACD 7740B Hyderabad.

(Appellant) (Respondent)

Assessee by : Shri V. Siva Kumar Revenue by : Shri Ramakrishna Bandi

Date of hearing 03-06-2015 Date of pronouncement 19-06-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the order dated 16/12/2013 of ld. CIT(A)-V, Hyderabad for the AY 2010-11.

2. Assessee has raised four grounds. Ground No. 1 being general ground is not required to be adjudicated upon.

3. In Ground No. 2, assessee has challenged the disallowance of expenditure claimed amounting to Rs. 15,41,696.

4. Briefly the facts relating to this issue are, assessee a company is engaged in hotel business. For the AY under consideration, assessee filed its return of income on 29/09/2010 declaring 'nil' income after set off of brought forward losses. During the assessment proceeding, AO noticed that assessee has debited an amount of Rs.

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38,90,687 towards provision for leave encashment in the P&L A/c. He further noticed that out of the amount so debited, assessee has paid only an amount of Rs. 23,48,991 before the due date of furnishing of return u/s 139(1) of the Act. However, while computing its income assessee has not added back the balance provision of Rs. 15,41,696 either u/s 115JB or u/s 43B(f) of the Act. When AO called upon assessee to indicate the reason for not doing so, assessee relied upon a decision of the Hon'ble Calcutta High Court in case of Exide Industries Ltd. Vs. Union of India, 292 ITR 470 and submitted that since the said provision has been struck down by the Hon'ble High Court, assessee is eligible for claiming deduction. AO, however, did not find merit in the submissions of assessee and observed that special Leave Petition filed by the department against the said judgment of the Hon'ble Calcutta High Court has not only been admitted by Hon'ble Supreme Court but the Hon'ble Supreme Court stayed the operation of the judgment in case of Exide Industries Ltd. Vs. Union of India (supra). Accordingly, AO added back the amount of Rs. 15,41,696 to income of assessee. Being aggrieved of the addition made by AO, assessee preferred appeal before ld. CIT(A). Ld. CIT(A) also confirmed the disallowance by following the decision of his predecessor in assessee's own case for AY 2008-09.

5. Ld. AR reiterated what was stated before the departmental authorities and placed reliance upon the decision of the Hon'ble Calcutta High Court in case of Exide Industries Ltd. Vs. Union of India (supra).

6. Ld. DR, on the other hand, submitted, assessee having not actually paid the amount in question within the due date of furnishing of return u/s 139(1), deduction claimed cannot be granted.

7. Having considered the submissions of the parties and perused the materials on record as well as going through the provisions of section 43B(f), we are of the view that deduction claimed on account 3 ITA No. 659 /Hyd/2014 Dolhin Hotels Ltd.

of payment made by assessee to an employee on leave encashment is allowable as deduction in the previous year in which such sum is actually paid by him. In the present case, admittedly, the amount claimed as deduction has not actually been paid by assessee during the previous year or within the due date of furnishing of return u/s 139(1). Therefore, deduction claimed cannot be allowed in view of section 43B(f). As far as the decision of Hon'ble Calcutta High Court in case of Exide Industries Ltd. Vs. Union of India (supra) is concerned, it is a fact that the Hon'ble Supreme Court has stayed the operation of the said judgment of Hon'ble Calcutta High Court. Therefore, at this stage claim of deduction made by assessee cannot be accepted. Accordingly, this ground is dismissed.

8. The next issue as raised by assessee in ground No. 3 relates to disallowance of an amount of Rs. 1,08,00,000 out of the deduction claimed towards payment of interest to Shri Ramoji Rao (HUF).

9. Briefly the facts relating to this issue are, on verifying the accounts of assessee, AO noticed that assessee has paid an amount of Rs. 3,96,00,000 towards interest on unsecured loan to Shri Ramoji Rao (HUF) during the relevant PY. AO being of the opinion that interest paid by assessee is excessive and unreasonable considering the fact that interest was paid to person as enumerated in section 40A(2) of the Act, deduction claimed cannot be allowed. AO found that on the outstanding principal amount of Rs. 24 crores in the name of Shri Ramoji Rao (HUF), rate of interest payment worked out to 16.5%. AO being of the opinion that reasonable rate of interest is 12%, excessive interest payment of 4.5% computed at Rs. 1,08,00,000 was added back to the income of assessee. Being 4 ITA No. 659 /Hyd/2014 Dolhin Hotels Ltd.

aggrieved of such addition, assessee preferred appeal before ld. CIT(A).

10. In course of hearing of appeal before ld. CIT(A), though elaborate submissions were made by assessee, but, ld. CIT(A) did not find merit in the same. He observed that the rate adopted by AO at 12% is reasonable, hence, rate of 16.5% at which assessee has paid interest is neither justified nor reasonable. Accordingly, he confirmed the addition made by AO.

11. Ld. AR submitted before us, assessee while setting up its hotel at Ramoji Film City has borrowed substantial amount as unsecured loan from Shri Ramoji Rao (HUF) at an agreed interest rate of 16.5%. He submitted, the principal amount of unsecured loan over the years accumulated to Rs. 24 crores and interest thereon amounting to Rs. 36.35 crores was due by assessee company to Shri Ramoji Rao (HUF) as on 31/03/2010. Ld. AR submitted, though, assessee has availed loan at an agreed interest rate of 16.5% on the principal amount, but, considering the fact that over the years no interest amount was paid to Shri Ramoji Rao (HUF), which accumulated to Rs. 36.35 crores, the actual rate of interest effectively works out to only 6.56% on Rs. 60.35 crores comprising of principal unsecured loan of Rs. 24 crores and accrued interest of Rs. 36.35 crores as on 31/03/2010. Ld. AR submitted, assessee while taking loan from Shri Ramoji Rao (HUF) is at an advantageous position compared to the loan taken from bank or financial institutions as banks charge interest on quarterly/monthly basis and either collect such interest immediately or charge compound interest on such interest also. He further submitted, for availing such loan from bank and financial institution, assessee has to give collateral security. Therefore, considering this situation, interest rate agreed upon by assessee at 16.5% cannot be considered to be excessive. Ld. AR submitted, unsecured loan generally carry higher rate of interest due to inherent 5 ITA No. 659 /Hyd/2014 Dolhin Hotels Ltd.

risk in repayment. In support of such contention, he relied upon the following decisions:

1. ITO Vs. Ansilal Gupta, 113 TTJ 898 (ASR)

2. ACIT Vs. Alfa Rubber Industries Ltd., 172 Taxman 35 (ASR)

3. ITO Vs. Chambamal Roopchand, 70 TTJ 43 ASR

4. Hynoup Food & Oil Industries (P) Ltd., Vs. ACIT, 47 TTJ 556 (Ahd.)

5. Kodagu Academy for Education and Culture, 139 ITD 221 (Ban.)

6. CIT Vs. Northern Electronics system (P) Ltd., 38 Taxmann.com 14 (All.)

Ld. AR submitted, assessee had been paying interest at the same rate in the previous assessment years as unsecured loan is continuing from earlier years. However, the department in none of the assessment years has made such disallowance, though assessments were completed u/s 143(3) of the Act. In this regard, he drew our attention to the assessment orders passed for AYs. 2007-08 to 2009-

10. Ld. AR submitted, when the department has accepted the interest payment at 16.5% in the previous assessment years, rule of consistency demands that interest paid at the said rate should also be accepted in the impugned AY. In support of such contention, he relied upon the following decisions:

1. Radhasoami Satsand Vs. CIT, 193 ITR 321 (SC)

2. CIT Vs. Rajeev Trading Mills, 279 ITR 86 (Del.)

3. CIT Vs. Haryana State Industrial Development Corpn. Ltd., 326 ITR 640 (P&H).

4. CIT Vs. Haryana Tourism Corp. Ltd., 327 ITR 26 (P&H).

12. Ld. DR, on the other hand, however supporting the reasoning of AO and ld. CIT(A), submitted before us, assessee's contention that the effective rate of interest of 6.56% cannot be accepted by clubbing the interest component to principal amount. Ld. DR submitted, rate of interest paid by assessee being 16.5% being high and excessive, provisions of section 40A(2) clearly attract as payment has been made to a person related to assessee.

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13. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. On a perusal of facts on record, it is seen that assessee had been availing unsecured loan from Shri Ramoji Rao (HUF) over the years beginning from FY 1994-95. On perusal of the statement of loan account as submitted in the paper book, it is seen that the closing balance amount of loan account for FY 2001-02 was Rs. 27,66,00,000 which continued to be so till FY 2007-08. In FY 2008-09, after payment of an amount of Rs. 3,66,00,000, closing balance of outstanding loan was Rs. 24.00 crores. It is also a fact on record that right from FY 1994-95 assessee had been paying interest @ 16.56% on the said unsecured loan availed from Shri Ramoji Rao (HUF). It is evident from the assessment orders passed u/s 143(3) of the Act for AY 2007-08 to 2009-10, copies of which have been placed on record, AO has accepted interest payment at 16.56% on the closing balance of the unsecured loan in the name of Shri Ramoji Rao (HUF) as was standing in the accounts of assessee. Therefore, when assessee had been paying interest at 16.56% over the years to Shri Ramoji Rao (HUF) on the unsecured loan availed and the department has also accepted such interest payment even in scrutiny assessment, it cannot treat the rate of interest as excessive or unreasonable in the impugned AY. Even though it is accepted that each assessment year is an independent and separate unit, and principle of res-judicata generally do not apply to income-tax proceedings, but, it also requires to be observed, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be appropriate at all to allow the position to be changed in a subsequent year. For such proposition, a reference can be made to the decision of the Hon'ble Supreme Court in case of Radhasoami Satstand Vs. CIT (supra). Even otherwise also, as can be seen, in the assessment order while 7 ITA No. 659 /Hyd/2014 Dolhin Hotels Ltd.

adopting the interest rate of 12% as reasonable, AO has not assigned any reason why he considers it to be so. Neither he has brought any comparable case nor any valid reasons for adopting the rate of 12%. Similarly, he has also not assigned any reason why rate of 16.5% agreed by assessee is not reasonable. It is not disputed that loan availed by assessee is an unsecured loan. Even assuming that 12% rate adopted by AO is on the basis of commercial rate of interest adopted by banks and financial institutions, but, the same cannot be applied to unsecured loan availed by assessee since the conditions on which loan is availed from banks and financial institutions do not apply to unsecured loan. It s a fact that while availing loan from banks and financial institutions, not only the loan has to be secured but assessee has to pay interest periodically at compound rate of interest. Whereas as can be seen from the facts on record, in the present case, assessee has not paid interest amount on the unsecured loan periodically to Shri Ramoji Rao (HUF), on the contrary, interest amount accumulated over the years. Therefore, these advantages to assessee cannot be overlooked. While considering payment of interest on similar facts and circumstances, different benches of the Tribunal in the decisions cited by ld. AR have held that interest rate varying between 15% to 24% on unsecured loan is reasonable. In view of the aforesaid, we do not find any reason to sustain the disallowance made by AO. Accordingly, we delete the addition of Rs. 1,08,00,000.

14. In view of our decision in ground No. 2 & 3, there is no need to adjudicate ground No. 4 separately.

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15. In the result, appeal of assessee is partly allowed.

Pronounced in the open court on 19 th June, 2015.

Sd/- Sd/- (INTURI RAMA RAO) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 19 th June, 2015 kv

Copy to:-

1) Dolphin Hotels Ltd., Hotel Sitara, Ramoji Film City, RR Dt. 2) DCIT, Circle - 16(2), Hyderabad 3 CIT(A)-V, Hyderabad 4) CIT-IV, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.