2021 (3) TMI 1030 - HC - Income Tax

Court allows appeal, permits interest deduction on foreign investments, capital work in progress. Provisions clarified.

The court allowed the appeal by the assessee, quashing the tribunal's orders that disallowed interest on borrowed capital for investments in a foreign ... Disallowance of interest on borrowed capital - addition at the rate of 6% as being attributable to investments made by the appellant in its foreign subsidiary - as argued investments had been made to further sales in foreign markets, which is wholly for the purposes of its business and no part of the borrowed capital was utilized for such investment in any event - HELD THAT:- The assessee held its own funds which were far in excess of the investment made in A.N.Coffeeday. Therefore, the presumption in law arises that the investments were made out of non interest bearing funds and burden was on revenue to show that investments were made out of borrowed funds. The revenue has not discharged the aforesaid burden. Therefore, it has to be presumed that the investments were made from interest free funds which were available with the assessee. It is also noteworthy that for Assessment Year 2008-09, the Commissioner of Income Tax (Appeals) had recorded a finding that investments made during the aforesaid Assessment Year including investments in A.N.Coffeeday as on 31.03.2009 were made out of the funds of the assessee, with reference to claim of disallowance under Section 14A read with Rule 8D(ii)of the Rules and therefore, the same conclusion ought to have been applied to Section 36(1)(iii) as well. Therefore, in the fact situation of the case, the remand by the tribunal to the Assessing Officer to examine whether the investments were made out of the funds of the assessee or from borrowed funds, is not warranted as the Assessing Officer for the Assessment Year 2009 10, the Assessing Officer on examination of the details furnished by the assessee had accepted the contention that investment was made by the assessee out of the funds owned by it. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX’ [1991 (11) TMI 2 - SUPREME COURT] has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. For the aforementioned reasons, the substantial question of law No.1 is answered in the negative and in favour of the assessee. Disallowance of interest under Section 36 and disallowance of interest under Section 36(1)(iii) - interest on capital attributable to capital work in progress - HELD THAT:- In the instant case, the assessee has set up new coffee shops, which amounts to expansion of business and therefore, the bar under the proviso Section 36(1)(iii) is not applicable. It is only after the amendment of Section 36(1)(iii) with effect from 01.04.2016 the proviso can be attracted to the case of expansion of business which is not applicable to the facts of the case as the case of the assessee pertains to Assessment Year 2010-11. 14. For the subsequent Assessment Years i.e., 2011-12, 2012-13 and 2013-14, the Commissioner of Income Tax (Appeals) had granted relief to the assessee and had accepted the stand of the assessee that the setting up of new shops is a case of expansion of existing business and not extension of the same. On an appeal being preferred by the revenue, the tribunal though noted that a similar issue was decided in favour of the assessee in another assessee's case allowed the appeal preferred by the revenue following the order passed in case of the assessee for Assessment Year 2010-11. The assessee had funds of ₹ 386.91 Crores as against the capital work in progress of ₹ 59.41 Crores, which leads to a presumption that assessee had used its funds towards the expansion and not for borrowed capital. Therefore, interest on borrowed capital could not have been disallowed. From perusal of the order passed by the tribunal on an application filed by the assessee for rectification of the order, it is evident that tribunal has recorded a finding that there has been no adjudication of the claim for disallowance of processing charges and capitalization of ₹ 9,77,23,650/-. The tribunal has therefore decided the claim of the assessee on merits. Since, the omission on the part of the tribunal was an error apparent on the face of the record, and therefore, the tribunal rightly invoked provisions of Section 254(2) of the Act - On close scrutiny of the order dated 06.12.2017 passed by the tribunal, we find that the tribunal has invoked the jurisdiction to rectify the error apparent on the face of the record. - Decided in favour of assessee. Issues Involved:1. Disallowance of interest on borrowed capital for investments in a foreign subsidiary.2. Disallowance of interest on capital attributable to capital work in progress.3. Tribunal's decision on the rate of interest attributable to capital work in progress.4. Tribunal's remand of the issue of disallowance of interest regarding investments made in a foreign subsidiary.5. Tribunal's contravention of Section 254(2) of the Income Tax Act in its rectification order.Detailed Analysis:1. Disallowance of Interest on Borrowed Capital for Investments in a Foreign Subsidiary:The tribunal upheld the disallowance of interest on borrowed capital at 6% for investments made by the appellant in its foreign subsidiary, AN Coffeeday International Ltd. The appellant argued that the investments were made to further sales in foreign markets and were wholly for business purposes, asserting that no part of the borrowed capital was utilized for such investments. The court noted that the assessee's own funds were far in excess of the investment made in AN Coffeeday, creating a presumption that the investments were made from non-interest-bearing funds. The revenue failed to discharge its burden of proof to show that the investments were made from borrowed funds. Consequently, the court held that the tribunal's remand to the Assessing Officer was unwarranted, as the Assessing Officer for the previous assessment year had already accepted that the investments were made from the assessee's own funds.2. Disallowance of Interest on Capital Attributable to Capital Work in Progress:The tribunal upheld the disallowance of Rs. 7,97,70,326/- as interest on borrowed capital attributable to capital work in progress, relying on the proviso to Section 36(1)(iii). The assessee contended that the capital work in progress represented the setting up of new coffee shops, which constituted an expansion of the existing business, not an extension. The court differentiated between 'expansion' and 'extension,' noting that the proviso to Section 36(1)(iii) applied only to the extension of business and not to expansion. Therefore, the court concluded that the bar under the proviso was not applicable in this case, as the setting up of new coffee shops amounted to business expansion. The court also noted that the assessee had sufficient funds to cover the capital work in progress, leading to the presumption that the borrowed capital was not used for this purpose.3. Tribunal’s Decision on the Rate of Interest Attributable to Capital Work in Progress:The tribunal increased the rate of disallowance of interest on borrowed capital attributable to capital work in progress from 7.6% to 12% without providing any reasons. The court found that the tribunal had not justified this increase and that the assessee had sufficient funds to cover the capital work in progress, negating the need for disallowance of interest on borrowed capital.4. Tribunal's Remand of the Issue of Disallowance of Interest Regarding Investments Made in a Foreign Subsidiary:The tribunal remanded the issue of disallowance of interest regarding investments made in AN Coffeeday to the Assessing Officer, despite the latter's satisfaction in the previous assessment year that no disallowance was warranted. The court found this remand unnecessary, as the facts remained unchanged, and the Commissioner of Income Tax (Appeals) had already determined that the investments were made from the assessee's own funds.5. Tribunal's Contravention of Section 254(2) of the Income Tax Act in Its Rectification Order:The tribunal, in its rectification order dated 06.12.2017, reviewed its earlier order, which the revenue argued was beyond its jurisdiction under Section 254(2) of the Act. The court held that the tribunal had the authority to rectify errors apparent on the record and found that the tribunal had rightly invoked this provision to correct its omission regarding the claim for disallowance of processing charges and capitalization of Rs. 9,77,23,650/-. The court concluded that the tribunal's rectification was justified and within its jurisdiction.Conclusion:The court quashed the tribunal's orders dated 21.06.2017 and 06.12.2017 to the extent they were against the assessee. The appeal preferred by the assessee was allowed, and the appeal preferred by the revenue was dismissed.