IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA ‘B’ BENCH, KOLKATA
I.T.A. No. 66/ Kol/2012 ; Assessment year : 2008-2009

Assistant Commissioner of Income Tax( Appellant) vs M/s. Southern Avenue Inn (P) Limited (Respondent)
Date of pronouncing the order : 15-10-2015

ORDER

Per Waseem Ahmad:

This appeal of the Revenue arises out of order of ld. Commissioner of Income Tax (Appeals), Central-III, Kolkata in Appeal No. 74/CC-XXIII/CIT(A)/C-III/10-11 dated 16.11.2011 qua the assessment year 2008-09, which is against the order of assessment passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

1. The short issue which is required to be adjudicated in this appeal is that whether the ld. “Whether the Commissioner of Income Tax (Appeals) was justified or not in deleting the addition of Rs.17,45,918 made under section 36(1)(iii) of the Act on account of interest paid on loan borrowed during the year under consideration. The assessment year involved is 2008-09 and the impugned order was passed by the ld. CIT(Appeals) on 16th November, 2011.

Brief Facts of the Case
2. The assessee is a Private Limited Company, which is engaged in the business of running a hotel. During the year under consideration the assessee started major renovation of the hotel building and incurred an expense of Rs.1,85,75,761/-. From the balance-sheet it was shown that the assessee took fresh unsecured loans from M/s. Devanshi Consultants Pvt. Ltd. as on 31.03.2008 to the tune of Rs.2,50,00,000/- (loan Rs.1,50,00,000/- and as on 31.03.2008 was amounting to Rs.4,00,00,000/-).

The solitary issue arising from the same relates to the addition of Rs.17,45,918/- made by the Assessing Officer, on account of loans received by the assessee treating the same as inclusion for acquisition of an asset for the purpose of extension of its business. On the basis of the above observations, the Assessing Officer held that no new asset was acquired during the year and that there was only an extension of the existing business by stating that provisions of section 36(1)(iii) was not applicable in this case. Hence, disallowed the interest expenses claimed by asssessee.

Appeal Before Ld CIT(A)
3. Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) disputing the addition of Rs.17,45,918/- made by the Assessing Officer. After considering the submissions made by the assessee as well as the material available on record, the ld. CIT (Appeals) summarized his findings on the issue as under:-

“6. I have carefully considered the submission of the appellant and have also perused the assessment order on this issue. The appellant is in the business of running a hotel. During the year the appellant made a capital expenditure of Rs.1,85,75,761/- towards major renovation of the hotel building which is shown in the balance sheet as capital work in progress. The A.O. observed from the balance sheet that the appellant took fresh unsecured loan to the tune of Rs.2,50,00,000/- (loan as on 31.03.2007 was Rs.1,50,00,000/- and as on 31.03.2008 was Rs.4,00,00,000/-). The A.O. also observed that except the capital work in progress there was no significant increase in the value of any other assets or reduction in value of any liability. He, therefore, concluded that the entire capital work in progress was carried out by utilising the fresh loan accepted during the year. The total interest incurred on such loan amounted to Rs.19,70,630/-. He further observed that except the interest amounting to Rs.2,24,712/- payable to M/s. Devansh Consultants Pvt. Ltd. The balance interest of Rs.17,45,918/- was paid/payable on fresh loans taken during the year. He sought an explanation from the appellant that why such interest should not be disallowed as per the proviso to sec.36(1)(iii) of the I.T. Act. 1961. In reply the appellant made a detailed submission which has been stated in the paragraph 7 of the submission of the appellant. Here the appellant has stated that they have not acquired any asset for extension of their existing business. Their business remained confined to the same place and they did not spend any amount to have any other property to extend the circle of their business. In view of this the proviso to sec.36(1)(iii) are not applicable in their case.

7. However, in the assessment order the A.O. has given different version of the appellant's reply which is reproduced as under :-

"It only submitted that no new asset was acquired during the year and that there was only an extension of the existing business. So proviso to sec.36(1)(iii) is not applicable”.

It is clear from the appellant's submission before the A.O. that they never admitted that there was an extension of the existing business. However, the A.O. somehow interpreted that there has been an extension of the existing business and considered the explanation of the appellant as unsatisfactory and with this interpretation disallowed the interest amount. The proviso to sec.36(1)(iii) refers to any amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the Books of A/cs or not). So the determining factor for application of this proviso is - (1) There should be acquisition of an asset and (2) Such acquisition is for extension of existing business. In the instant case expenditure have been incurred for some repair and replacement work which included replacement of flooring and a l ift and such replacements are for the smooth conduct of It he existing business and not for the extension of the existing business. Had there been addition of some new rooms or restaurants or some other new facility then it could have been treated as extension of existing business. The A.O. has not disputed the nature of work undertaken or has made any case that any new facility has been constructed. Therefore, taking all facts and circumstances into consideration, I am of the opinion that the work undertaken by the appellant does not include acquisition of an asset for the purpose of extension of its business. Therefore, proviso to sec.36(1)(iii) is not applicable in this case and the addition is not justified. The A.O. is directed to delete the addition ofRs.17,45,918/-“

4. On the basis of the above findings as well as for the other reasons given in his impugned order, the ld. CIT(Appeals) deleted the addition made by the Assessing Officer observing that the Assessing Officer has not disputed the nature of work undertaken or has made any case that any new facility has been constructed and that the work undertaken by the assessee does not include acquisition of an asset for the purpose of extension of its business. Ld. CIT(Appeals), therefore, deleted the addition made by the Assessing Officer stating that the proviso to section 36(1)(i i i) was not applicable in this case. Aggrieved by the order of the ld. CIT(Appeals), the Revenue has preferred this appeal before the Tribunal.

5. Submissions on behalf of Appellant
It was argued by the Ld D.R. that the work carried out by the Assessee was certainly in the nature of extension of business because the value of business and property would be increased and it amounts to capital expenditure and the Order passed by the ld CIT(A) is bases on conjecture and surmises and therefore liable to be set aside and order passed by the Ld. A.O. is to be confirmed.

6. Submissions on behalf of Assessee
On the contrary it is argued by the Ld Counsel of the Assessee that the work carried by the Assessee is not disputed by the Ld. A.O. and there are no adverse material by which it can be established that the same amounts to extensions of existing business and the Ld. CIT(A) passed an reasoned order therefore liable to be affirmed.

Order with Reasons
5. We have heard the arguments of both sides and also perused the relevant material available on record. The ld. Addl. CIT (D.R.) for the Revenue has contended that some of the findings recorded by the ld. CIT (Appeals) in his impugned order are not correct, inasmuch as, interest income in the hands of the concerned creditor had accrued as assumed by him but the same was not actually received by the party, We find that Ld A.O. erred in interpreting that there has been an extension of the existing business and considered the explanation of the appellant as unsatisfactory and with this interpretation disallowed the interest amount. The proviso to sec.36(1)(iii) specifically deals with two situations first there should be acquisition of an asset and

secondly such acquisition is for extension of existing business. In the instant case expenditure have been incurred for some repairs and replacement works which included replacement of flooring and lift and such replacements are for the smooth conduct of the existing business and not for the extension thereof and even otherwise that can not be construed as Extension of building because it is admitted fact that the Assessee has not constructed or added some new rooms or restaurants or some other new facility and even otherwise the Ld. A.O. has not disputed the nature of work undertaken or has made any case that any new facility has been constructed, therefore the work carried by the Assesses can not be treated as extension of existing business. Contention of Ld D.R that the work carried out by the Assessee was certainly in the nature of extension of business because the value of business and property would be increased and it amounts to capital expenditure having no essence and not tenable under the facts and circumstances as demonstrated and evident. Therefore, taking al l facts and circumstances into consideration, We are of the opinion that the work undertaken by the appellant does not include acquisition of an asset for the purpose of extension of its business therefore, proviso to sec.36 (1)(iii) is not applicable in this case and the addition is not justified. On the aforesaid observation, we are inclined to dismiss the instant appeal without any cost.
Hence it is
ORDERED
The instant appeal be and the same be dismissed but without cost and order passed by the Ld CIT(A) is hereby affirmed .

Pronounced in open Court on 15 day of October, 2015.

Sd/-                                                      Sd/-
Mahavir Singh                          Waseem Ahmed
(Judicial Member)                    (Accountant Member)