Assessee wins appeal on interest expenditure, revenue's appeal dismissed. Tribunal upholds excess amortization decision.

The appeals filed by the assessee were allowed, and the disallowance of interest expenditure under sections 36(1)(iii) and 40A(2) of the Income Tax Act was deleted. The appeals filed by the revenue were dismissed. Additionally, the Tribunal upheld the CIT(A)'s decision regarding the allowability of excess amortization on rights purchased, emphasizing the consistent accounting method followed by the assessee. The revenue's appeals on this ground were also dismissed.

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Issues Involved:
1. Disallowance of interest expenditure under sections 36(1)(iii) and 40A(2) of the Income Tax Act, 1961.
2. Allowability of excess amortization on rights purchased.

Detailed Analysis:

1. Disallowance of Interest Expenditure:

Facts and Arguments:
- The main issue in both cross appeals for assessment years 2005-06 and 2006-07 was the disallowance of interest expenditure attributable to non-business, interest-free advances/loans.
- The AO disallowed the entire interest of Rs.4,59,54,419/- for A.Y 2005-06, citing the use of interest-bearing borrowed funds for non-business purposes.
- The assessee argued that sufficient own funds were available, and the interest-free advances were made from these funds, not from borrowed funds.
- The CIT(A) partially agreed with the assessee, reducing the disallowance to the interest attributable to non-business advances amounting to Rs.3,27,82,401/-.

Tribunal's Findings:
- The Tribunal noted that the assessee had sufficient interest-free funds to cover the interest-free advances.
- Relying on the Bombay High Court decision in CIT vs. Reliance Utilities & Power Ltd., it was held that if there are sufficient interest-free funds, it should be presumed that the investments were made from these funds.
- The Tribunal found that the AO's disallowance was excessive and not justified.
- The Tribunal agreed with the CIT(A) that only the interest attributable to the amount of Rs.3,27,82,401/- could be disallowed but further concluded that, given the sufficient interest-free funds, even this disallowance was not warranted.
- The Tribunal also dismissed the applicability of section 40A(2), noting that the AO did not provide specific grounds for its application.

Conclusion:
- The appeals filed by the assessee were allowed, and the disallowance of interest expenditure was deleted.
- The appeals filed by the revenue were dismissed.

2. Allowability of Excess Amortization on Rights Purchased:

Facts and Arguments:
- The AO restricted the cost of distribution/exhibition rights to the sale proceeds received during the year, adding Rs.1,30,73,926/- to the assessee's income for A.Y 2005-06.
- The assessee argued that its method of accounting for these rights, which involved writing off the entire cost against sales, was consistent and in line with Rule 9B of the Income Tax Rules, 1962.
- The CIT(A) agreed with the assessee, noting that the method was consistently followed and the AO did not verify its application in earlier and subsequent years.

Tribunal's Findings:
- The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's approach disrupted the consistent method of accounting without adequate reasons.
- The Tribunal noted that the AO's method was not revenue-neutral and failed to consider the impact on earlier and subsequent years.
- The Tribunal cited the Supreme Court decision in CIT vs. Rajendra Prasad Moody, which held that the allowability of expenditure is not dependent on earning income.

Conclusion:
- The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeals on this ground.

Final Order:
- The appeals filed by the assessee were allowed, and the appeals filed by the revenue were dismissed. The Tribunal's order was pronounced in the open court on 19.10.2012.

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