2024 (1) TMI 495 - AT - Income Tax

Assessee wins on interest losses, DG set write-off, and Section 36(1)(iii) disallowances using mixed funds doctrine

ITAT Chennai allowed assessee's appeal on multiple grounds. Interest and exchange fluctuation losses on abandoned projects were held allowable as revenue ... Disallowance of interest and Exchange Fluctuation loss on project being capital losses - AO noted that this item of expenditure pertained to earlier assessment years and therefore, the same could not be allowed as revenue expenditure in this year. Accordingly, the same was disallowed and added back as per revisionary directions - HELD THAT:- In this year, the loans have been liquidated and accordingly, the assessee has charged the residual interest and forex fluctuation loss aggregating to Rs. 11627.85 Lacs to the Profit & Loss Account as revenue expenditure. The same is due to the fact that in this year, the assessee has reviewed the feasibility of pending projects / proposal and apparently, due to various business constraints, the assessee has not implemented the pending projects / proposals and accordingly, claimed the deduction thereof. It is clear that with the abandonment of the projects, the amount lying in this account becomes nothing but business loss for the assessee. Provisions of Sec.43A would have no applicability since the assessee has not imported any capital asset and there would be no occasion to capitalize the impugned amount along with the cost of imported assets. What remains in the account is nothing but a business loss for the assessee which would be an allowable loss incurred in ordinary course of business. How the funds have been utilized in earlier years would not have much relevance and would not have any bearing on the claim of the assessee in this year. It is not the case that the funds were obtained for non-business purposes. The ratio of decision of Hon’ble High Court of Madras in the case of B. Nagi Reddy [1991 (6) TMI 9 - MADRAS HIGH COURT] would apply wherein it has been held that the cost of project given up by the assessee would be an allowable expenditure on commercial expediency. Similar is the decision of Hon’ble Court in M/s Chemplast Sanmar [2018 (9) TMI 75 - MADRAS HIGH COURT] wherein the assessee charged expenditure incurred on abandoned projects in Profit & Loss Account which was held by authorities to be capital losses. The Hon’ble Court, distinguishing the decision in the case of Eid Parry (India) Ltd. [2001 (11) TMI 25 - MADRAS HIGH COURT]observed that there may be several permutations and combinations that may arise for determining whether the expenditure is revenue or capital and each case must be dealt with on the broad principles as accepted by various courts. The Hon’ble Court further held that the unity of control, management and common fund is the decisive test and not the nature of two lines of business. Finally the issue was decided in assessee’s favor and the expenditure was allowed as revenue expenditure. Respectfully following the ratio of these decisions, we direct Ld. AO to delete the impugned disallowance and allow the expenditure as claimed by the assesseee. Diesel Generator (DG) Set written-off - assessee wrote-off an amount of under this head and claimed the same as revenue expenditure. The revisionary authority viewed the loss as ‘capital loss’ - assessee submitted that the claim was made as per the provisions of Sec. 32(1)(iii), however, rejecting assessee’s submissions, the same was disallowed by Ld. AO - HELD THAT:- The undisputed position that emerges is that the crankshaft is part of DG set which forms part of block of asset. The provisions of Sec. 32(1)(iii), as rightly held by Ld. CIT(A), are not applicable since the asset has not been demolished / destroyed / sold / discarded. The block of asset still exists in the books of accounts. Therefore, the alternative plea of claim of depreciation is acceptable. The Ld. AO is directed to grant depreciation in accordance with law on block of asset. The assessee is directed to provide the requisite computations. The ground stand partly allowed. Disallowance of proportionate interest u/s 36(1)(iii) - certain interest free advances were made to sister concerns - revisionary authority directed Ld. AO to examine whether the amounts advanced to various sister concerns were out of commercial expediency or not - HELD THAT:- As seen that no new advances have been made during this year. It is trite law that when mixed funds are used in the business, a presumption would arise in assessee’s favor that the interest free funds have been utilized to make the investments unless the nexus of borrowed funds vis-à-vis those investments is establish by Ld. AO. In the absence of such an exercise, the impugned disallowance could not be sustained in the eyes of law. The ratio of decision of Hotel Savera [1997 (11) TMI 37 - MADRAS HIGH COURT]would apply wherein it has been held that when the mixed funds are used, no interest disallowance is called for. In the decision of Reliance Industries Ltd. [2019 (1) TMI 757 - SUPREME COURT] has held that in case interest free funds as available with the assessee are sufficient to meet the investment made in subsidiaries, the deduction of interest expenditure would be allowed to the assessee. Respectfully following the same, the impugned disallowance stand deleted. Whether gross interest is to be considered or net interest is to be considered while computing the interest disallowance? - We find that the assessee has claimed only net expenditure in the Profit & Loss Account., The interest income is not separately assessed as ‘Income from other sources’ which would mean that the interest income has business nexus. In such a case, the ratio of decision of Hon’ble Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. [2012 (2) TMI 101 - SUPREME COURT] would apply. The interest disallowance has to be computed by taking net interest expenditure only. Therefore, the additional disallowance as made by Ld. AO stand deleted. The corresponding grounds raised by the assessee stand allowed. Disallowance of interest on inter-corporate deposits - Assessee placed Inter-Corporate deposits (ICD) and submitted that the same were out of internal accruals and no borrowed funds were utilized for such purposes - HELD THAT:- We find that own funds as available with the assessee are quite sufficient to meet the quantum of ICDs. Further, in that year also, the assessee has used mixed funds. The observation of Ld. AO that there was increase in borrowed funds during AY 2003-04 has no relevance since the ICDs were placed by the assessee during financial year 1999- 2000 and it was impossible to make investment in 1999-2000 out of funds borrowed in subsequent years. Further, the nexus of borrowed funds with the ICDs have not been established by Ld. AO. Therefore, the stand of Ld. AO could not be upheld. Applying the same reasoning with respect to interest disallowance, we delete the impugned disallowance and allow the corresponding grounds raised by the assessee. Disallowance of interest relief given by the bankers - HELD THAT:- From the facts, it emerges that the assessee has accounted interest expenditure at reduced rates only and the separate reporting made by Auditor is part of statutory disclosure only. The Ld. CIT(A) has well appreciated the plea of the assessee and observed that the assessee did not provide the requisite documents and computations to support its stand. Accordingly, Ld. AO has been directed to verify the claim of the assessee. Therefore, no further directions are required in the matter. The directions given in the impugned order are quite apt and sufficient. The corresponding grounds stand dismissed. Issues Involved:1. Disallowance of interest and foreign exchange fluctuation loss on project being capital losses.2. Disallowance of Diesel Generator (DG) set written-off.3. Disallowance of proportionate interest expenditure.4. Addition of interest waiver on Corporate Debt Restructuring (CDR) package.Summary:1. Disallowance of Interest and Foreign Exchange Fluctuation Loss:The assessee contended that the interest and foreign exchange fluctuations were either capitalized or charged off as revenue expenditure in the respective years. The CIT(A) noted that the forex fluctuation loss should be added to the cost of acquisition of the capital asset in the year of repayment. Since the projects were abandoned, the loss was considered capital loss and not allowable as revenue expenditure. However, the Tribunal found that the provisions of Sec.43A were inapplicable as no capital asset was imported. The loss was deemed a business loss and allowable as per commercial expediency. The Tribunal directed the AO to delete the disallowance.2. Disallowance of DG Set Written-Off:The assessee claimed the loss of Rs. 202.42 Lacs as revenue expenditure under Sec. 32(1)(iii). The CIT(A) held that since the asset was not demolished, destroyed, sold, or discarded, the provisions of Sec. 32(1)(iii) were not applicable. The Tribunal agreed with the CIT(A) but allowed the depreciation claim on the block of assets.3. Disallowance of Proportionate Interest Expenditure:The CIT(A) upheld the disallowance of Rs. 129.94 Lacs for interest-free advances to sister concerns due to insufficient non-interest-bearing funds during the relevant years. The Tribunal found that the advances were made from mixed funds, and the presumption was that interest-free funds were used unless the AO established a nexus with borrowed funds. The Tribunal deleted the disallowance following the decision in Reliance Industries Ltd. Regarding the additional disallowance of Rs. 24.80 Lacs, the Tribunal held that only net interest expenditure should be considered, thus deleting the disallowance.4. Addition of Interest Waiver on CDR Package:The CIT(A) directed the AO to verify if the interest was accounted at reduced rates as per the CDR package. The Tribunal upheld this direction, noting that the assessee failed to provide requisite documents. No further directions were deemed necessary.Conclusion:The appeal was partly allowed, with directions to delete certain disallowances and uphold others based on the provided evidence and legal precedents.