2013 (6) TMI 776 - HC - Income Tax

Section 14A invalid without factual basis; Rs.1,14,43,040 disallowed upheld; CDR expenses allowable; waiver not taxable under s.28(iv)/s.41(1); s.115JB deletion confirmed

COMMISSIONER OF INCOME TAX - 1 Versus GUJARAT STATE FERTILIZERS & CHEMICALS LTD

HC held that Section 14A disallowance was impermissible where the factual basis was lacking; however, the Tribunal correctly sustained a Rs. 1,14,43,040 ... Addition u/s 14A - Held that:- When the very basis for employing Section 14A of the Act on factual matrix is lacking, the disallowance to the extent of 10% of dividend income was not permissible. When it transpires from record that the assessee's own funds were at higher, then the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends, the Tribunal committed no error in disallowing the sum of ₹ 1,14,43,040/-. As far as other administrative expenses are concerned, the Revenue had requested to restore the matter back to the Assessing Officer. However, to put an end to the entire dispute with regard to other expenses, the assessee permitted disallowance of ₹ 5 lakh. The Tribunal considering the volume and quantum of investment disallowed the said amount of ₹ 5 lakh, which though is on estimated basis, it is a reasonable base and, therefore, the first question merits no consideration. Allowance of Corporate Debt Restructuring expenses - Held that:- Once the expenditure is held to be revenue in nature incurred wholly and exclusively for the purpose of business, it can be allowed in its entirety in the year in which it is incurred. However, considering the the decision in the case of Madras Industrial Investment Corporation Ltd. (1997 (4) TMI 5 - SUPREME Court ), when the spreading is done for over a period of six years and as the assessee-respondent has no objection to such revenue expenditure being spread out, though it could have insisted for this amount allowed in the year under consideration, with no such objection having been raised, the Revenue would not succeed in this issue as the expenditure is held to be revenue in nature. Waver of principal amount of loan - Held that:- Amount of loan waived by the Financial Institution cannot be brought to tax as appellant's income u/s.28(iv) and/or sec.41(1) of I.T. Act. Addition is deleted Addition under Section 115JB being the expenditure estimated on earning of dividend income under Section 14A - Held that:- The addition under Section 115JB of the Act of a sum of ₹ 1,14,43,040/- when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question No.1, this deletion requires to be confirmed. Issues Involved:1. Disallowance under Section 14A of the Income-Tax Act, 1961.2. Corporate Debt Restructuring (CDR) expenses.3. Exclusion of waived loan amount from total income.4. Addition under Section 115JB of the Act.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income-Tax Act, 1961:The first issue concerns the disallowance of Rs. 1,14,43,040/- under Section 14A of the Act towards interest and other expenses related to exempted dividend income. The Assessing Officer (AO) disallowed 10% of the dividend income, arguing that the respondent-assessee did not prove that investments were made from its own funds and not borrowed ones. The CIT (Appeals) deleted the disallowance, stating the AO failed to show any specific expenditure incurred to earn the exempt income. The Tribunal upheld this view, noting the respondent-assessee had sufficient own funds, thus negating the claim of using borrowed funds for investment. The Tribunal allowed a disallowance of Rs. 5 lakh for administrative expenses, which the respondent-assessee accepted to resolve the dispute. The High Court found no error in the Tribunal's decision, emphasizing that the AO's application of Section 14A was not justified without evidence of borrowed funds being used for investments.2. Corporate Debt Restructuring (CDR) expenses:The second issue pertains to the CDR expenses of Rs. 2.57 crore paid to financial consultants for negotiating loan waivers. The AO treated these as capital expenditure, disallowing the claim. The CIT (Appeals) and the Tribunal, however, held these expenses as revenue in nature, spread over six years as per the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. v. CIT. The High Court upheld this view, stating that the expenses were incurred for business purposes and thus allowable under Section 37(1) of the Act.3. Exclusion of waived loan amount from total income:The third issue involves the exclusion of Rs. 11.63 crore, waived from principal loans, from total income. The AO included this amount as income under Section 28(iv) of the Act, arguing it was a benefit arising from business. The CIT (Appeals) and the Tribunal disagreed, citing the Gujarat High Court's decision in CIT v. Chetan Chemicals Pvt. Ltd., which held that remission of loan does not constitute taxable income if the loan was not obtained in the course of carrying on business. The High Court concurred, stating the facts were similar to the Chetan Chemicals case, and thus the waiver was not taxable.4. Addition under Section 115JB of the Act:The fourth issue relates to the addition of Rs. 1,14,43,040/- under Section 115JB of the Act, linked to the disallowance under Section 14A. The AO added this amount to the book profit, considering it an expenditure related to exempt income. The CIT (Appeals) deleted this addition, consistent with its decision on the first issue. The Tribunal confirmed a Rs. 5 lakh disallowance for administrative expenses under Section 115JB, aligning with its earlier ruling on Section 14A. The High Court found no fault with this approach, affirming the deletion of the Rs. 1,14,43,040/- addition.Conclusion:The High Court dismissed the Tax Appeal, ruling in favor of the respondent-assessee on all issues. The court upheld the Tribunal's findings that the disallowance under Section 14A was unjustified, the CDR expenses were revenue in nature, the loan waiver was not taxable, and the addition under Section 115JB was correctly deleted.