TaxTMI 
TaxTMI 
2010 (12) TMI 284
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....ircumstances of the present case, especially keeping in view the fact of retrospective amendment to section 115JB regarding adjustment of deferred tax asset/liability brought about by the Finance Act, 2008, w.r.e.f April 1, 2001, the lower authorities erred in not computing the book loss before depreciation of Rs. 122.24 crore and also in not allowing the benefit of carry forward and adjustment thereof to the subsequent years which may be directed to be allowed". 4. The Revenue, in its grounds of appeal, has raised eight grounds, out of which, ground Nos. l, 7 and 8 being general in nature and no specific issues involved, they have become non- consequential. In the remaining grounds, the cruxes of issues raised are reformulated, in a concise manner, as under: (i) the CIT(A) was not justified in deleting the addition of Rs. 211.57 crores made u/s 43B of the Act on account of disallowance of interest including restructuring expenses of Rs. 2 crores; (ii) the CIT (A) was not justified in deleting the addition of Rs.1.89 crores made on account of the disallowance of the amount claimed as irrecoverable interest on intercorporate deposits written off." 5. As the issues cont....
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....ness expenditure', alternatively and without prejudice to its stand, it should be treated as 'capital loss' in accordance with the provisions of the Act. 8.1 The Ld. CIT (A), after giving due weight-age to the assertion of the assessee with was backed with several legal views, for the reasons recorded in the impugned order which is under consideration, had observed thus - (i) except the offer letter, no separate agreements were entered into between the assessee either with Fortune Holdings or with Ace Properties Pvt. Ltd; (ii) no evidence was brought on record which establishes the non-recoverability of the partial advance amount in dispute; (iii) by shifting of its registered office, the assessee would have reduced its operational cost and therefore, write off was expected to give the assessee advantage of enduring nature and on this interpretation also, these amounts could not be treated as business loss but of a capital expenditure; & (iv) with regard to the alternative claim of the said loss as capital loss - - as per s.45 of the Act, it is essential that there was a transfer of capital assets and the said transfer resulted in gain or loss. The assessee's ....
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....n. Ltd. 314 ITR 322 (Guj.) (c) Pik Pen Private Ltd. v. ITO - ITA NO: 6847/Mum/08 9.1 On the other hand, theLd. DR was very emphatic in his urge that the issue in question has been elaborately analyzed -together with various judicial pronouncements by the Ld. CIT (A) and, therefore, pleaded that the stand of the authorities below be sustained. 10. We have carefully considered the rival submissions, meticulously perused the relevant case records, documentary evidences together with various case laws advanced by the Ld. AR in the shape of voluminous paper book. 11. At the outset, we would like to record our apprehension that the issue has not been dealt with by the AO as it was deserved to. To justify our stand, we reproduce the reasoning of the AO as under : "(d) Provision of property advance written off: In the Computation statement, the assessee has claimed a deduction of Rs.17,13,04,431/- as provision of property advance written off. It is explained that the property advances relate to the advances given to contractors in the context of construction of township, which have become irrecoverable. These advances relate to the acquisition of a capital asset. Hence, any loss....
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....ant details and documentary evidences at its possession which will facilitate the AO to carry out the direction of this Bench cited supra in an expeditious manner. It is ordered accordingly. We shall now proceed to deal with the issues raised by the Revenue (ITA No.929/Bang/2009). Deletion of the addition of Rs. 211.57 crores: 12. During the year under consideration the assessee had entered into revised restructuring package (hereinafter refers to 'RRP') with various financial institutions/banks duly approved by corporate debt restructuring cell (hereinafter referred to as 'CDR'). Consequent to which, the outstanding interest liabilities due to Financial Institutions and Banks amounting to Rs.500,27,29,243/- were converted into loans and 10% Redeemable Preference Shares (hereinafter referred to as 'CRPS'). The breakup of Rs.500,27,29,243/- is as under :- Interest converted into loans Rs. 288,70,07,600 Interest converted into CRPS Rs. 211,57,21,643 (Including restructuring expenses of Rs.2,00,21,643) Rs.500,27,29,243 This conversion of outstanding interest into loans and CRPS were claimed by the assessee as actual payment for the purpose of section 43B of the Income Tax A....
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....tively - PB AR] in claiming against the disallowance of interest. To substantiate its claim, the assessee also placed reliance in the case laws (i) Suryalakshmi Cotton Mills Ltd. v. ACIT in ITAS No. 1065/Hyd/2005 and (ii) Lustre Tiles Ltd. v. Addl. CIT reported in 108 ITD 35 (JPR). 13. We have duly considered the rival submissions, thoroughly perused the relevant case records and also the documentary evidences advanced by the Ld. AR in the form of paper book, case laws etc., 13.1 The issue for adjudication is whether the assessee is to be allowed deduction u/s 43B of the Act on conversion of outstanding interest into CRPS having regard to retrospective insertion of Explanation 3C to section 43B of the Act. The relevant extract of section 43B and Explanation 3C to section 43B of the Act reads as follows:- "43B. Notwithstanding anything contained in any other provision of this Act deduction otherwise allowable under this Act in respect of - (a) ........ (b) ........ (c) ........ (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution [or a State Financial Corporation or a State Industria....
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....ender, to the extent of amount converted does not remain a creditor of the borrower. In fact, on allotment of shares, the lender becomes contributors to the capital and participants in the capital of the company. Thus, the conversion of interest into share capital is not hit by Explanation 3C to sec.43B. The Hon'ble Supreme Court in the case of Prakashnath Khanna v. CIT (266 ITR page 1) has held that when a particular expression/definition is omitted under any provision, it cannot be said that the legislature has done so without any purpose or intent and as such, such omission cannot be supplied by the interpretative process. 13.4 Some of the material differences between loans and preference shares are as follows : Loans & Advances Preference Shares Lenders are not owners of the Company Preference share holders are owner of the company. Company gets deduction on interest payment. Company does not get deduction on payment of dividend. Company is not required to pay any tax on payment of interest Company is required to pay DDT on payment of dividend. Interest is taxable in the hands of the lender. Dividend is not taxable in the hands of the shareholders. Expenditure incur....
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....FPS to the institutions. Sec.43B creates a fiction to provide that irrespective of the method of accounting followed by the assessee, certain liabilities would be allowed as deduction only on actual payment. In our view, the assessee has made a constructive payment and discharged its liability by issuing CRPS to the two institutions. They are in the form of shares issued for consideration other than cash. To issue shares otherwise than by cash is a common way of discharging one's liability. The consideration has been received by the assessee in the form of reduction in rates of interest. Therefore, there is no gainsaying that the assessee has not made payment for the concessions received by it. It is not merely the issue of shares that has discharged the assessee from its liability. Incidental to the issue of shares, there are other rights also under the Companies Act, which the assessee will have to grant to the institutions as shareholders. The institutions will be entitled to the fixed rate of dividend. They will also have a right to attend the general meeting of the company and vote on resolutions, directly affecting their interest and on all resolutions if their dividend is in....
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....e that was considered by the Hon'ble High Court of Andhra Pradesh was whether the petitioners, being preferential share holders can call themselves 'creditors' and ask for winding up of the company u/s 433(e) read with section 434(1) and section 439(1)(b) of the Companies Act. The High Court was of the view that the preferential share holders are also shareholders and by no stretch of imagination can they become creditors. 13.8 In view of the judicial stand on the issue, we are not in agreement with the AO's portrayal that the interest payable which was converted into loan and, thus, it doesn't make a difference if the assessee changes the nomenclature whereby we fully endorse the view of the CIT(A) that Though actual cash did not change hands and the transaction was completed through book adjustments and that the interest liability had been paid off through giving the creditor a share in the owner ship of the assessee company and, thus, the assessee was entitled to claim the amount so paid off u/s 43B of the Act as a deduction and also in respect of applicability of restructuring expenses, even then if such expenditure were not to be termed 'interest', it would still be allowable....
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.... its books a sum of Rs.1.5 crores had been received on 24.9.01 resulting in a balance of Rs.37,90,114/-. It appears from a scrutiny of the correspondence that RTPL expressed its inability to clear of its outstanding liability due to prevailing recessionary market conditions and the liquidity crunch in the investment and real estate businesses in which it was mainly engaged in. vide letter dt.24.9.01, RTPL requested that the sum of Rs.1,50,00,000/- be treated as full and final settlement of all their dues and for waiver of the balance amount. 6.3 In view of the foregoing analysis, it seems apparent that the amounts written off totalling to Rs. 1,89,40,966/- represent the interest portion only and since it has been offered for tax as business income in the FY relevant for AY 1995-96, the amount written off should be allowed as bad debts in accordance with the provisions of s.36(l)(vii) r.w. s 36(2) of the I.T.Act." 14.3 Aggrieved by the stand of the CIT (A) on the issue, the Revenue has come up before us with a plea that - - the CIT(A) failed to appreciate that the assessee does not carry on the business of money lending and, therefore, the principal of inter-corporate depos....
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....en off principal of inter-corporate deposits etc., it could be seen from the correspondences between the assessee and the parties concerned [Reference: P 72 to 84 of PB AR] that of (i) MIL in its communication dated: 10.1.2003 [p 73 of PB] to the assessee had referred as ' This refers to your reminders from time to time regarding payment of outstanding dues of Rs.1,51,50,852/-. You shall appreciate that we had taken a loan of Rs.2,00,00,000/- from you against which total payment of Rs.2,09,27,703/- has already been made by us which takes care of your principal amount in full plus balance amount towards interest. The above balance outstanding in the account represents the amount of interest only........' and (ii) RTPL in its communication dated: 24.9.2001 [P 79 of PB] referred that '...After prolonged efforts on our part we have been able to generate some cash inflows and as per our assurances, we are pleaded to enclose herewith cheque No. 103459 dated 24.9.2001 drawn on Vijaya Bank in your favour towards partial repayment of the outstanding unsecured loan availed from you.............While on the subject, considering the severe financial difficulties undergone by us which we have k....