2004 (12) TMI 289 - AT - Income Tax

Tribunal Partly Allows Appeals, Orders Further Investigation on Deductions, Interest Levies, and Expense Adjustments.

SHRI RAMA MULTI TECH LTD. Versus ASSISTANT COMMISSIONER OF INCOME TAX.

The Tribunal partly allowed both appeals for statistical purposes. It upheld the CIT(A)'s decisions on several disallowances and deletions, including ... Addition of interest - pre-operative expenses - evidence - Purchase expenses out of total purchases - Eligibility for deduction u/s 36(1) or 37(1) for interest and financial charges​​​​​​​ - Additional grounds - customs duty in closing stock​​​​​​​ - Value of closing stock of imported raw material and imported spare. HELD THAT:- It is settled legal position that agreement can be oral as well as written. If the facts brought on record show that there was certain contract between the parties, the absence of written contract will not affect the damages payable for breach thereof. Moreover, the AO did not dispute the information furnished through letter dt. 11th March, 2003. So, it is not correct to suggest that this issue has been taken by assessee for the first time before the CIT(A). The assessee has all options to elaborate the basis of its claim taken before the AO. A similar view has been taken by Hon'ble Madras High Court in P.L.M. Firm vs. CIT [1967 (1) TMI 34 - MADRAS HIGH COURT]. As far as the issue of expansion is concerned, the prospectus shows that issuing fresh share capital was for the purpose of setting up of two new units and expansion of existing business at Kadi and Motibhoyan, which was given to the AO. Thus, we are of the view that amount received by the assessee had relation with delay caused in execution of contract of construction and supply of plant and machinery as discussed, capital receipt. Accordingly, this ground is allowed. Purchase expenses - It is pertinent to mention here that in case of M.K. Bros. [1985 (10) TMI 15 - GUJARAT HIGH COURT] also investigation was initiated on the basis of action of the ST authorities. Apart from this, assessee (sic-AO) has not taken into consideration the returned goods because purchase from M/s Sai Baba Sales Corporation has been made of Rs. 1,16,20,690, while only purchase of Rs. 83,90,690 was debited. The AO has not taken into consideration the return purchases. So, the Revenue has not justified its stand to falsify the transactions. Thus, we do not concur with the findings of CIT(A) and the addition in question is directed to be deleted. Allowability of interest and financial charges - There is specific provision dealing with interest paid/payable in respect of borrowings incurred for the purpose of business and hence general provisions, viz., s. 37 of the Act cannot come into play. Therefore, where interest is paid for borrowings which is utilized for acquisition of capital asset or which is utilized for revenue purposes loses its distinction. In view of the above, the CIT(A) has rightly held that interest charges is allowable expenditure. As far as financial charges, legal and professional charges and upfront fees are concerned, assessee has mainly relied on the decision in India Cement. In determining the nature of expenditure (revenue or capital) incurred for obtaining loan, it is irrelevant to consider the purpose of loan. The amount spent - stamp duty, lawyer fee, etc., for obtaining loan secured by charge on its fixed assets is as revenue expenditure, because the transaction was entered into directly to facilitate the business of the company and was made on ground of commercial expediency. Upfront fee is also related to loan for expansion of the business. In the facts and circumstances of the case, financial charges, legal and professional charges and upfront fees are allowable expenditure. AO is directed accordingly. Value of closing stock of imported raw material and imported spares - We are of the considered opinion that in view of the decision in Berger Paints, the entire amount of excise duty/customs duty paid by the assessee in particular accounting year is allowable u/s 43B of the Act as deduction in respect of that year, irrespective of the amount of excise duty/customs duty included in value of assessee's closing stock at the end of accounting year as related thereto. So, in the interest of Justice, we restore this issue to the file of AO for deciding the same as per law available at relevant point of time on the issue relevant to the assessment year under consideration after providing reasonable opportunity of hearing to the assessee. In the result, both the appeals are partly allowed for statistical purposes. Issues Involved:1. Addition of Interest Income2. Disallowance of Purchase Expenses3. Disallowance of Provisions for Bad Debts4. Disallowance of Interest Expenses5. Disallowance u/s 35D6. Additional Grounds for Financial, Professional Charges, and Upfront Fees7. Calculation of Deduction u/s 80-IA8. Calculation of Deduction u/s 80HHC9. Levy of Interest u/s 234B and 234C10. Additional Grounds Raised by AssesseeSummary:1. Addition of Interest Income:The assessee contested the addition of Rs. 3,27,90,125 as interest income and its non-allowance for set-off against pre-operative expenses. The Tribunal upheld the CIT(A)'s decision, treating the amount as 'income from other sources' based on the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT.2. Disallowance of Purchase Expenses:The AO disallowed Rs. 83,90,690 as bogus purchases from M/s Sai Baba Sales Corporation. The Tribunal, citing the tax audit report and the Gujarat High Court's decision in CIT vs. M.K. Bros., found no evidence of bogus purchases and directed the deletion of the addition.3. Disallowance of Provisions for Bad Debts:The assessee conceded this ground, and the Tribunal dismissed it as not pressed.4. Disallowance of Interest Expenses:The Tribunal restored the issue of Rs. 32,02,200 disallowed interest expenses to the AO for a detailed probe, considering the assessee's claim that advances were for business purposes.5. Disallowance u/s 35D:The Tribunal restored the issue of Rs. 9,94,421 disallowed u/s 35D to the AO for reconsideration, directing a detailed examination of whether the expenses were capital or revenue in nature.6. Additional Grounds for Financial, Professional Charges, and Upfront Fees:The Tribunal allowed the assessee's claim for financial charges, legal and professional charges, and upfront fees as revenue expenses, directing the AO to allow these expenses under s. 36(1)(iii) and s. 37(1).7. Calculation of Deduction u/s 80-IA:The Tribunal restored the issue to the AO to recalculate the deduction under s. 80-IA, taking into account the correct calculation method as per the law.8. Calculation of Deduction u/s 80HHC:The Tribunal upheld the CIT(A)'s decision to exclude 90% of the gross interest income from the profits for calculating the deduction under s. 80HHC, but restored the issue of netting off interest to the AO for recalculation.9. Levy of Interest u/s 234B and 234C:The Tribunal directed the AO to adjust the levy of interest under ss. 234B and 234C based on the final outcome of the other grounds.10. Additional Grounds Raised by Assessee:The Tribunal admitted additional grounds regarding interest earned on share application money and customs duty included in the closing stock, restoring these issues to the AO for reconsideration as per law.Revenue's Appeal:1. Deletion of Disallowance of Debenture Issue Expenses:The Tribunal upheld the CIT(A)'s deletion of Rs. 14,90,243, citing the Supreme Court's decision in India Cement Ltd. vs. CIT.2. Deletion of Addition for Stamp Duty and Professional Fees for Term Loan:The Tribunal upheld the CIT(A)'s deletion of Rs. 14,00,000, considering these expenses as revenue in nature.3. Direction to Allow Deferred Revenue Expenses:The Tribunal upheld the CIT(A)'s direction to allow Rs. 20,65,537 as deferred revenue expenses, referencing the Supreme Court's decision in India Cement Ltd.4. Deletion of Disallowance of Interest Expenses:The Tribunal upheld the CIT(A)'s deletion of Rs. 14,48,879, noting that the interest charged by the assessee was justified.5. Deletion of Interest Disallowance:The Tribunal upheld the CIT(A)'s deletion of Rs. 2,92,45,670, treating it as revenue expenses.Conclusion:Both appeals were partly allowed for statistical purposes, with several issues restored to the AO for reconsideration.