2017 (10) TMI 1523 - AT - Income Tax

Tribunal grants interest deduction, denies depreciation; sets precedent on direct nexus principle

M/s. Triumph International Finance India Ltd. Versus DCIT CENT, CIR 40, Mumbai

The Tribunal partially allowed the assessee's appeals by directing the AO to permit the deduction of interest expenses against interest income and to ... Disallowance u/s. 57(iii) - Disallowance of interest expense against income from other sources - addition as lending bank has discontinued providing for interest effective from lst April, 2003 and hence, there is no liability/ obligation of the appellants to pay to the bank - appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought to have allowed the claim of the said interest expense against income from other sources inspite of the fact that the impugned interest is not debited by the lending bank inasmuch as the appellants are contractually liable to pay the same - HELD THAT:- If the bank later on waives the interest to be paid to them by the assessee, the provisions of section 41(1) shall not be applicable but the provisions of section 59 of the Act which are similar to section 41(1) will be applicable. Since the allowability of interest expenditure are with respect to the details of interest due with the above banks, whereas the one time settlement entered by the assessee for assessment year 2005-06 is with Centurion Bank; hence, the contention of learned DR is not applicable to the facts of the case. Even though assessee has not paid the interest to the bank but as per provisions of Section 145(1), assessee has to compute its income under the head ‘Profit and Gains of business and profession’ or ‘income from other sources’ subject to provisions of sub-section (2) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Thus, the interest expenditure need not be paid in as much as the income chargeable to tax under business income or income from other sources shall be computed in accordance with cash or mercantile basis regularly employed by the assessee. Respectfully following the decision of Tribunal in assessee’s own case [2016 (11) TMI 743 - ITAT MUMBAI] the interest claimed by assessee is to be allowed to the assessee primarily on the basis of consolidated order of the Tribunal for income-tax assessment years 208-09 and 2009-10. We direct accordingly. Disallowance of administrative expenses, depreciation against the other income being mark-to-market valuation of shares - HELD THAT:- We found that since during the year under consideration the business was not in operation and assets were not put to use, the claim of depreciation cannot be allowed. However, when the business again starts, assessee can claim depreciation on the WDV as stood in the year when business was discontinued. We direct accordingly. Addition made u/s.41(1) on account of waiver allowed by the Centurian Bank - HELD THAT:- Tribunal relying on the decision of the Supreme Court in the case of Megraj & Omers v Mst Bayabai [1969 (4) TMI 105 - SUPREME COURT] has expressed a view that in a one-time settlement (OTS) by the borrower with the lender, any repayments by the borrower shall first be adjusted towards the interest component and the balance, if any, shall be adjusted against the principal amount - we direct the AO to delete the addition made on account of waiver allowed by the Centurian Bank. Issues Involved:1. Disallowance of interest expense against income from other sources.2. Disallowance of operating and administration expenses and depreciation.3. Non-allowance of set-off of unabsorbed depreciation and business loss.4. Charging of interest under sections 234A and 234B.5. Addition under section 41(1) on account of loan waiver.Issue-wise Detailed Analysis:1. Disallowance of Interest Expense Against Income from Other Sources:The primary issue was whether the assessee was entitled to claim a deduction for interest expenses against interest income under section 57(iii) of the IT Act. The assessee had claimed a deduction of Rs. 3,28,65,299 as interest payable, restricted to Rs. 1,88,64,396, which was the interest earned on fixed deposits with the National Stock Exchange (NSE). The Assessing Officer (AO) disallowed the claim, arguing that the interest expense was not wholly and exclusively incurred for earning the interest income. The CIT(A) upheld the AO's decision, stating that there was no liability to pay interest to the bank as the bank had stopped providing for interest. However, the Tribunal found that there was a direct nexus between the interest earned and the interest incurred, as established in the assessee's own case for previous years. The Tribunal directed the AO to allow the interest expense as claimed by the assessee.2. Disallowance of Operating and Administration Expenses and Depreciation:The assessee claimed operating and administration expenses of Rs. 1,95,604 and depreciation of Rs. 1,79,143 against the income of Rs. 22,053, being the write-back of mark-to-market valuation of shares. The AO disallowed these expenses, and the CIT(A) upheld the disallowance. The Tribunal noted that since the business was not in operation during the year and the assets were not put to use, the claim for depreciation could not be allowed. However, the assessee could claim depreciation on the written-down value (WDV) when the business recommences.3. Non-allowance of Set-off of Unabsorbed Depreciation and Business Loss:The assessee contended that the set-off of unabsorbed depreciation and business loss, including speculation loss, should have been allowed as claimed in the return of income. The AO and CIT(A) disallowed the set-off. The Tribunal did not provide a specific ruling on this issue in the summarized judgment, focusing instead on the interest expense and depreciation issues.4. Charging of Interest Under Sections 234A and 234B:The AO charged interest of Rs. 7,25,287 under section 234A and Rs. 16,31,897 under section 234B. The assessee argued that the AO did not provide an opportunity to be heard before charging the interest and that the charging of interest was not in accordance with the law. The Tribunal did not specifically address this issue in the summarized judgment.5. Addition Under Section 41(1) on Account of Loan Waiver:The AO made an addition of Rs. 14,45,48,419 on account of loan written off by Centurion Bank, which was confirmed by the CIT(A). The Tribunal, in an earlier order, had set aside the issue to the AO for fresh adjudication. The AO again made an addition of Rs. 10,37,11,957. The Tribunal directed the AO to examine the actual quantum of principal and interest waived by the bank and restrict the addition under section 41(1) to the extent of the interest liability that was claimed as a deduction in the past. The Tribunal relied on the decision of the Supreme Court in Meghraj & Others v. Mst. Bayabai and others, which held that repayments should first be adjusted towards the interest component. The Tribunal directed the AO to delete the addition made on account of the waiver allowed by Centurion Bank.Conclusion:The Tribunal allowed the appeals of the assessee in part, directing the AO to allow the interest expense against interest income and to delete the addition on account of loan waiver. The claims for depreciation were disallowed for the year under consideration but could be claimed in future years when the business recommences. The Tribunal's decisions were based on the principle of direct nexus and the precedence of higher judicial forums.