2020 (9) TMI 94 - HC - Income Tax

Court allows interest paid to creditors as expenditure under Income Tax Act, emphasizing MAT provisions

M/s. BEST TRADING AND AGENCIES LTD. Versus THE DEPUTY COMMISSIONER OF INCOME-TAX

M/s. BEST TRADING AND AGENCIES LTD. Versus THE DEPUTY COMMISSIONER OF INCOME-TAX - [2020] 428 ITR 52 (Kar) Issues Involved:1. Nexus between interest earned on fixed deposits and interest paid to creditors.2. Allowability of interest paid to creditors as an expenditure.3. Applicability of Minimum Alternative Tax (MAT) under Section 115JB of the Income Tax Act.4. Consideration of indexed cost of acquisition for computing book profits under Section 115JB.5. Tribunal's adherence to the decision of the coordinate Bench regarding Alternative Minimum Tax on Companies.Issue-wise Detailed Analysis:1. Nexus between interest earned on fixed deposits and interest paid to creditors:The Tribunal held that there is no nexus between the interest earned on fixed deposits and the interest paid to creditors. However, the Commissioner of Income Tax (Appeals) found a close nexus between the interest earned and the interest paid, as the surplus from restructuring was deposited in fixed deposits, earning interest which was then used to pay creditors. The court concluded that the interest expenditure was incurred wholly and exclusively for earning the interest income, making it deductible under Section 57(iii) of the Act.2. Allowability of interest paid to creditors as an expenditure:The Assessing Officer disallowed the interest paid to financial institutions, claiming it as capital expenditure. The Commissioner of Income Tax (Appeals) allowed the deduction under Section 57 of the Act, but the Tribunal reversed this decision. The court, referencing Section 57(iii), determined that the interest paid to creditors was an allowable expenditure, as it was incurred for the purpose of earning the interest income.3. Applicability of Minimum Alternative Tax (MAT) under Section 115JB of the Income Tax Act:The Tribunal upheld the applicability of MAT under Section 115JB, assessing the company on book profits without considering the indexed cost of acquisition. The court, however, noted that Section 115JB(5) allows for the application of other provisions of the Act, including the indexed cost of acquisition under Section 48. It concluded that the indexed cost of acquisition should be considered for computing book profits under Section 115JB, as taxing without it would result in taxing non-real income.4. Consideration of indexed cost of acquisition for computing book profits under Section 115JB:The court emphasized that the difference between sale consideration and indexed cost of acquisition represents the actual income of the assessee. It ruled that there is no provision in the Act preventing the assessee from claiming the indexed cost of acquisition when subjected to Section 115JB. The court also highlighted that the Central Board of Direct Taxes' Circular No.762 supports this view, and the Tribunal failed to consider this in its decision.5. Tribunal's adherence to the decision of the coordinate Bench regarding Alternative Minimum Tax on Companies:The court noted that the Tribunal did not follow the decision of the coordinate Bench in 'MSR & Sons Investment Ltd.', which held that if dividends are not paid, the provisions of book profit are not attracted. The court found that the Tribunal failed to appreciate this precedent and the decision of the High Court in similar cases.Conclusion:The court answered the substantial questions of law in favor of the assessee, quashing the Tribunal's orders to the extent they were against the assessee. The appeals were disposed of, emphasizing the importance of considering the indexed cost of acquisition and the correct application of Section 57(iii) and Section 115JB of the Act.