ITA Nos. 5895 and 5713 are cross-appeals preferred both by the Revenue and the assessee against the order of the CIT(A) for the asst. yr.
1987-88 and ITA No. 5714 is preferred by the assessee against the order of CIT(A) for the asst. yr. 1988-89.
2. We first take up the cross-appeals preferred by the assessee as well as the Revenue for the asst. yr. 1987-88. The facts in brief are that the assessee claimed interest at Rs. 1,97,010. On going through the details the AO noted that the interest was paid to M/s Shiv Trust, a sister concern. The interest paid was at the rate of 21 per cent. on outstanding balance of Rs. 9,38,142. The AO noted that interest to other depositors was paid at lower rate in comparison to the interest paid to Shiv Trust. The AO noted that the assessee also paid interest of Rs. 1,36,219 to M/s Shiv Trust in the asst. yr. 1988-89 at the rate of 12 per cent. on the outstanding balance of Rs. 11,35,152. Keeping this in view the AO allowed interest only at the rate of 12 per cent.
which worked out to Rs. 1,12,577 and the balance of Rs. 84,433 found in excess was disallowed.
3. On appeal, it was claimed that neither the trustees nor the beneficiaries of Shiv trust were connected in any manner with the assessee nor the partners of the assessee-firm were beneficiaries of the trust. Therefore, provisions of s. 40A(2)(b) are not attracted. It was also argued that the AO has accepted the fact that the amount was borrowed for business purposes and the same was also utilised for business. The rate of interest was slightly higher because the assessee did not give any security while in the case of loan from the bank security has to be given. It was also claimed that the market rate in fact is much more than 21 per cent. It was also pointed out that in the next asst. yr. 1988-89 the amount was repaid and as per the revised agreement lower rate of interest was paid. The first appellate authority noted that the rate of bank and other institutions was limited at 18 per cent. According to the CIT(A) there was no specified reason for taking loan from this party while the assessee had sufficient assets for guarantee, etc. to the bank and other institutions for securing loan. He, therefore, restricted the interest at the rate of 18 per cent. thereby upholding the disallowance to the extent of Rs. 28,144. The finding so given is challenged by the assessee and the Revenue.
4. The learned counsel for the assessee reiterated the submissions made before the lower authorities and further submitted that admittedly the funds were raised from Shiv Trust for business purposes and it is also not disputed that the interest claimed was not paid. He also submitted that though the bank interest rate was at 18 per cent. but looking to service and other charges that comes to about 21 per cent. and above all the security had to be offered to the bank whereas in the present case the loan was raised without any security. He also submitted that the market interest rate is not less than 24 per cent. The interest paid at the rate of 21 per cent. by the assessee is fairly reasonable.
Moreover, there being no relationship between the assessee and Shiv Trust, provisions of s. 40A(2)(b) could not be invoked for the purposes of making any disallowance out of the interest paid. In support he placed reliance on the decision of Honble Madras High Court in the case of East India Industries vs. CIT (1957) 31 ITR 803 (Mad), Banshidhar Onkarmal vs. CIT (1965) 58 ITR 462 (Ori) and Birla Gwalior (P) Ltd. vs.
CIT (1962) 44 ITR 847 (MP).
5. The learned Departmental Representative, on the other hand, advanced arguments in support of the order of the AO. He further submitted that the assessee paid interest to other parties at lower rate and to Shiv Trust also the interest paid in the succeeding year was at 12 per cent.
and in that view of the matter the AO was fully justified in allowing the interest only at the rate of 12 per cent.
6. We have considered the facts, rival submissions and material on record. The undisputed facts are that the assessee raised the said funds from M/s Shiv Trust for business purpose and the same has been treated as genuine by the Revenue. The payment of interest made at the rate of 21 per cent. to Shiv Trust has also not been disputed by the Revenue. However, the AO considered the interest at 12 per cent. as reasonable and the balance amount was disallowed. It is also not disputed that there is no special relationship between the assessee and Shiv Trust through its trustees or beneficiaries and provisions of s.
40A(2)(b) are not applicable. Having once accepted that the loan raised was genuine and for business purposes and the interest was paid and provisions of s. 40A(2)(b) are not applicable the AO was not justified in considering the reasonableness of the rate at which the interest was paid. Moreover, the market rate of interest is always higher than the bank rate. Looking to the fact that the bank rate was at 18 per cent.
and other service charges were also involved at about 2 per cent., the interest paid at 21 per cent. was not unreasonably high looking to the prevailing market rate which might not had (sic-been) less than 24 per cent. The interest thus paid at the rate of 21 per cent. is in no way unreasonable.
6.1 In the case of East India Industries (supra) the Honble Madras High Court held that as the genuineness of borrowing of capital for the purposes of business and the fact of payment of amount claimed was not disputed the disallowance of interest was not justified. Having considered the facts and ratio of the aforecited decisions, we are of the view that interest claimed at 21 per cent. is fully allowable and disallowance made therefrom is directed to be deleted. This disposes of the ground preferred by both, the Revenue and the assessee in this behalf in their cross-appeals.
7. The second ground raised by the assessee is against not allowing deduction under s. 32AB on fixtures, water cooler, TV set, etc.
installed in hotel. The assessee claimed deduction under s. 32AB at Rs. 19,318 for the amount utilised for the purchase of furniture and fixtures, water cooler, refrigerator, TV set etc. for its hotel business. It was claimed that the assessee utilised the profit earned for the purposes specified under s. 32AB by way of purchasing the above items which were claimed as part of hotel business. The AO noted that the items involved are not plant and as such deduction is not allowable under s. 32AB.8. On appeal, it was claimed that the word "plant" is nowhere defined in the Act but the same has been interpreted by different High Courts.
The Honble Gujarat High Court in the case of CIT vs. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 (Guj) affirmed by the apex Court in Scientific Engg. House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC), held that the word "plant" has been interpreted by different High Courts in different context and the main discussion has been done in the Supreme Court judgment in the case of CIT vs. Tajmahal Hotel (1 (1971) 82 ITR 44 (SC). The word "plant" is of wide import and must be broadly construed having regard to different articles used for running of different types of businesses. This word cannot be confined for mechanical operation or process employed in industrial business. It was also claimed that the said items purchased were used wholly and exclusively for the business and the claim made be allowed. The CIT(A), however, noted that except the items of furniture no other item was wholly and exclusively necessary for running the hotel business.
Fixtures, water coolers, TV set, etc. may increase the reputation of the hotel but in the absence of these items also a person could run hotel business satisfactorily. He also noticed that the idea of giving deduction is to start a new business and to allow some relief to the businessman starting a new business. On these considerations the first appellate authority upheld the order of the AO.9. The learned counsel for the assessee has made a submission that the hotel building has been held as a plant and allowed higher depreciation following the Tribunal decision in the case of the assessee for the asst. yr. 1982-83 in ITA No. 1231/Ahd/1986 and the Gujarat High Court decision in the case of CIT vs. Elecon Engineering Co. Ltd. (supra) wherein it was held that hotel and theatre building are tools of trade of an assessee and such buildings are required to be treated as plant for the purpose of depreciation at higher rate. He also submitted that decision of the CIT(A) in this regard has since been accepted by the Revenue as no second appeal has been filed on this count. Having accepted the hotel building as a plant the said items added therein would obviously warrant deduction under s. 32AB. In support (sic-he) has relied upon the following decisions : (i) CIT vs. Tajmahal (supra) wherein sanitary and pipeline fittings were held as plant entitled to development rebate.
(ii) CIT vs. Tarun Commercial Mills Ltd. (1985) 151 ITR 75 (Guj), wherein air-conditioner and electric fan installed in office premises were held as plant entitled to depreciation and development rebate.
(iii) CIT vs. S. L. M. Maneklal Industries Ltd. (1994) 205 ITR 547 (Guj) wherein wall-clock used in factory was held as plant entitled in development rebate.
(iv) CIT vs. Jagdishchandra Co. (1970) 75 ITR 697 (Mad) wherein it was held that light fittings, ceiling and padestal fans and water pipe fittings in hotel do not cease to be plant merely because they have been fixed to the building and are entitled to development rebate.
10. The learned Departmental Representative, on the other hand, relied upon the orders of the lower authorities and advanced arguments in Revenues favour.
11. We have considered the facts and rival submissions. As per the provisions of s. 32AB where an assessee deriving income from profits and gains of business or profession utilising any amount thereof for the purchase of any plant among others as per terms of the scheme the deduction is to be allowed subject to fulfilment of conditions prescribed. The assessee in the present case derives income from hotel and theatre business and the assessee during the year purchased for the hotel items like TV set, air-conditioner, etc. out of the income of the year. As per the ratio of various decisions cited by the learned counsel for assessee the items purchased are of the nature of plant installed in the hotel building. We also note that the CIT(A) in the year under consideration has treated the hotel building as a plant for the purpose of depreciation. The Department has already accepted the decision of the CIT(A) in this respect. Having regard to the facts and case laws cited we are of the considered opinion that the assessee was entitled to deduction under s. 32AB on the said items and we hold accordingly. The AO is directed to allow the deduction as claimed.
12. The next ground raised by the assessee for the asst. yr. 1987-88 is about charge of interest under ss. 139(8) and 215 of the IT Act. The AO while completing the assessment gave a direction in the assessment order for charge of interest under ss. 139(8) and 215. On appeal, the CIT(A) observed that both the sections are consequential in nature. He further noticed that in appeal proceedings certain relief has been allowed to the assessee. He, therefore, directed the AO to recompute the interest both under ss. 139(8) and 215 while giving effect to the appellate order as per law.
13. Regarding charge of interest under s. 139(8) we find that return in this case was due to be filed on or before 31st July, 1987. The assessee, however, filed the return declaring total income at Rs. 1,20,017 on 20th July, 1988. The return was, therefore, delayed by 11 months. The AO while completing the assessment has thus charged interest under s. 139(8). On hearing both the representatives of the assessee as well as the Revenue, and considering the (sic-facts) we see no infirmity in the direction given by the CIT(A). As regards, the charge of interest under s. 215 the counsel for the assessee made a submission that the assessee filed the return declaring total income of Rs. 1,20,017 on which necessary tax has been paid. The AO, however, assessed the total income at Rs. 3,16,560 by way of making certain additions which the assessee never anticipated at the time of making the advance tax payment. He, therefore, claimed that no such interest is leviable in view of the ratio of the decision of the Honble Gujarat High Court in the case of CIT vs. Bharat Machinery & Hardware Mart (1982) 136 ITR 875 (Guj). The learned Departmental Representative on the other hand has made (sic-the) submission that aforesaid decision of the Honble Gujarat High Court has since been overruled by the Honble (sic-to) Supreme Court in the case of Modi Industries Ltd. & Ors. vs.
CIT (1995) 216 ITR 759 (SC), and that no support is available to the assessee from the decision cited, otherwise the advance tax paid was less than 75 per cent. of the assessed tax and as such the interest under s. 215 is fully justified.
14. We have considered the facts and rival contentions. We find that the aforesaid decision of the Supreme Court is on payment of interest under s. 214 and as such the facts thereof are different and distinguishable from the facts of the decision of the Honble Gujarat High Court in the case of Bharat Machinery & Hardware (supra) and as such the ratio of that decision is not applicable to the facts of the present case. We, however, note that the interest under s. 215 became leviable on account of various additions made in the returned income and that having not been anticipated at the time of payment of advance tax the interest is not leviable in view of the decision of the Honble Gujarat High Court in the case cited supra. In this view of the matter, the interest charged on account of the additions made which could not be anticipated at the time of payment of advance tax is directed to be deleted.
15. We now take up the appeal for the asst. yr. 1988-89 of the assessee in ITA No. 5715. The first ground raised by the assessee is against not allowing deduction under s. 32AB on purchase of fixtures, water cooler, TV sets, etc. for the hotel building. In view of the finding given above for the asst. yr. 1987-88 the AO is directed to allow deduction under s. 32AB as claimed.
16. The second ground raised is against charge of interest under ss.
139(8) and 215. This ground is also disposed of as per the finding given for the asst. yr. 1987-88.
17. In the result, the Revenues appeal for asst. yr. 1987-88 being ITA No. 5895 is dismissed whereas the assessees appeals for both the asst.
yrs. 1987-88 and 1988-89 being ITA Nos. 5713 and 5714 are partly allowed.