Relief to Ceebros Hotels: Madras HC deletes Disallowance as Substantial Activities done to Show Property purchased is Put to Use [Read Order]

In a major relief to Ceebros Hotels, the Madras High Court deleted disallowance as substantial activities done to show property purchased is put to use.

The assessee, Ceebros Hotels was running a Hotel and Real Estate business and offered a total income of Rs.120.27 Crores from Rooms Revenue, Restaurants, and Banquets Revenue, Contract Profits recognized, Other Operating Revenues, Rental Revenue, etc. A major portion of the revenue was received from the Hotel business. For the Assessment Year 2015-16, the assessee had offered income from the Real Estate in respect of the project, namely, ‘Atlantic’ at Egmore. An amount of Rs.41,37,73,978/- was claimed towards “Interest Payable” at 13.75% p.a. on a loan amount of Rs.301.92 Crores, obtained from IFCI Limited, which was outstanding as of 31.03.2015.

The Assessing Officer observed that the said loan was obtained for the specific purpose of purchasing the land to an extent of 90.53 grounds in MRC Nagar. According to the Assessing Officer, the assessee had entered into the business of Real Estate for the first time during the Assessment Year 2015-16, in which, the assessee had offered some income from the Real Estate business.

The division bench of Justice T.S.Sivagnanam and Justice Sathi Kumar Sukumar Kurup observed that the loan which was obtained by the assessee from IFCI Limited is for the purpose of the business of the assessee and having accepted the said fact, the deduction of interest was disallowed only on the ground that the asset purchased by the assessee in MRC Nagar was not put to use in the Assessment Year under consideration for the purpose of the business of the assessee.

The court held that the attempt to apply the proviso to the case of the assessee would lead to wrong interpretation of the law and therefore, the reasons given by the Assessing Officer to disallow the interest expenditure by applying the provisions of Section 36(1)(iii) is not in accordance with the law. Further, the Tribunal noted that the assessee is into the business of Real Estate Development and in the process of executing two projects at different places and the Assessing Officer was not justified in treating the two projects on a stand-alone basis and also that the property in MRC Nagar was not put to use. Further, the Tribunal observed that the purchase of inventory in the course of carrying on business should be reckoned as the continuation of the same business activity in the normal course and cannot be equated or termed as an extension of business activity. Furthermore, the Tribunal noted that the assessee has offered substantial income from the Atlantic project and the attempt to apply the Matching Concept principle is misconceived.