2016 (8) TMI 515 - HC - Income Tax

Court affirms Tribunal's decision on interest-free advances & pre-operative expenses.

THE COMMISSIONER OF INCOME TAX- I Versus CADILA PHARMACEUTICALS LTD

The court upheld the Tribunal's decision in favor of the assessee on both issues. It confirmed that interest-free advances to sister concerns are ... Disallowance under section 36(1)(iii) - interest free advances given to the sister concern - Held that:- Interest free loan given to the sister concerns is permissible and therefore, the Commissioner (Appeals) has rightly deleted the disallowance made by the Assessing Officer under section 36(1)(iii) of the I.T. Act. See Commissioner of Income-tax v. Raghuvir Synthetics Ltd.[2013 (7) TMI 806 - GUJARAT HIGH COURT] Disallowance of preoperative expenses of new business - Held that:- Entry in the books of account under the Company law is not relevant and in view of the decision of this court in the case of Commissioner of Income-tax v. Nirma Ltd. (2014 (10) TMI 396 - GUJARAT HIGH COURT), the Tribunal has rightly upheld the decision of the Commissioner (Appeal) restricting dis allowance. Issues Involved:1. Disallowance of interest under Section 36(1)(iii) of the Income-tax Act, 1961.2. Restriction of disallowance of pre-operative expenses of new business.Issue-wise Detailed Analysis:1. Disallowance of Interest under Section 36(1)(iii):The primary issue was whether the Appellate Tribunal was correct in law and facts in confirming the order passed by the Commissioner of Income-tax (Appeals) [CIT(A)], which deleted the disallowance of Rs. 34,74,045/- made under Section 36(1)(iii) for interest not charged by the assessee on the advance given to the associate concern. The Assessing Officer (AO) observed that the assessee had not charged interest on advances given to associate concerns and made a disallowance under Section 36(1)(iii) because the interest was not proven to be incurred for business purposes. The CIT(A) allowed the appeal by the assessee, and the Tribunal upheld this decision. The revenue argued that the expenses were capitalized in the books and that the assessee had no surplus funds to provide interest-free loans to sister concerns. However, the court referenced the decision in Commissioner of Income-tax v. Raghuvir Synthetics Ltd., which permits interest-free loans to sister concerns, supporting the Tribunal's decision to delete the disallowance.2. Restriction of Disallowance of Pre-operative Expenses:The second issue was whether the Tribunal was correct in restricting the disallowance of Rs. 1,03,88,194/- to Rs. 11,87,360/- out of pre-operative expenses of new business. The AO disallowed the claim of pre-operative expenses, arguing that the expenses were for divisions not yet operational. The CIT(A) disagreed with the AO, stating that the expenses were revenue in nature and related to the business, thus allowable under Section 37 of the Income-tax Act. The CIT(A) held that the expenses were not for acquiring capital assets or rights of a permanent character but were part of the profit-earning process. The CIT(A) allowed all expenses except Rs. 11,87,360/- related to a new telecommunication business, which was treated as pre-operative expenses of a new business. The Tribunal upheld this decision. The revenue contended that all expenses were for acquiring capital assets, but the court referred to decisions in Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax and Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax, supporting the Tribunal's restriction of disallowance.Conclusion:The court, considering the contentions and relevant case laws, agreed with the Tribunal's view. The first question was answered in favor of the assessee, confirming that interest-free advances to sister concerns are permissible. The second question was also answered in favor of the assessee, affirming that pre-operative expenses, except those related to new business, should be treated as revenue expenses. Consequently, the appeal was dismissed.