TaxTMI 
TaxTMI 
2017 (5) TMI 1514
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....re, it was not empowered to adjudicate the MA. MA continued to be remained pending. The assessee had filed a Civil Application (OJ) No.657 of 2015 in Tax Appeal No.1220 of 2006. The Hon'ble High Court has decided this application vide order dated 12.10.2015 and directed the Tribunal to dispose of MA filed by the assessee without getting influenced by pendency of appeal before the Hon'ble High Court. On the direction of the Hon'ble High Court, Tribunal heard the MA on 7.10.2016 and decided the MA vide order dated 28.10.2016. The Tribunal found its order suffering from apparent error qua adjudication of ground no.7 taken by the assessee in the present appeal. Therefore, the Tribunal has recalled the order to a limited extent i.e. the findings on ground no.7 were recalled and that ground has been restored for adjudication afresh. In this way, we are called upon to re-adjudicate the ground no.7 taken by the assessee in this appeal. The ground no.7 reads as under: "VII. Disallowance of interest expenditure of Rs. 36,23,43,684 in Soda Ash division and Rs. 6,01,29,222 in LAB Front End division or alternatively disal....
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....9,222/-. These expenditures have been capitalized in the books of accounts, but they have been claimed as revenue expenditure in the return of income. At this stage, it is pertinent to mention that only disallowance of interest expenditure is being disputed in this ground. The interest expenditure claimed by the assessee are related to secured promissory note (SPN). Public Issue was opened by the assessee on 24.8.1996 which was closed on 18.9.1996. By way of this, the assessee has procured funds under NCD/SPN. Scheme has been highlighted in the prospectus and it is pertinent to note major terms and conditions of the instrument which reads as under: Pursuant to the Resolutions passed at the Meeting of the Board of Directors (hereinafter referred to as the Board) of Nirma Limited (hereinafter referred to as " the Company") and at the Annual General Meeting both held on November 30. 1995 it has been decided to make the following offer to the Equity Shareholders of the Company : Issue of 81,41,750 - 17% Secured Non Convertible Debentures (NCDs) and/or Secured Premium Notes (SPNs) of the face value of Rs. 200 each for bash at par aggregating Rs. 162.33,....
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....p; 75 71.60 Public 25 28.40 4. The Company has issued the following Capital to its Promoters Date of Allotment No. of shares Allotted Type of shares Date when shares became fully paid February 27, 1980....
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....from date of allotment at the end of 6th year from date of allotment at the end of 7th year from dale of allotment 50 60 50 60 50 60 &nb....
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.... be disallowed. It was pointed out to the AO that the above interest expenditure are allowable under section 36(1)(iii) of the Income Tax Act because there exists interconnection and interlacing of the management of various units of the assessee-company. Management, administration, finance are common. Accordingly, it is only one business and the expenditure incurred by the assessee is of allowable nature. It was also contended by the assessee that accounting made by it by capitalizing the interest expenditure, as per guidelines of the Institute of Chartered Accountants of India is of no consequence of allowabilty under the Income Tax Act. Assessee further pointed out that these expenditures were claimed in the Asstt.Year 1996-97, 1997-98 and 1998-99. The AO had disallowed the claim of the assessee, but disallowance was deleted by the ld.CIT(A)VII and ld.CIT(A)-XI, Ahmedabad. The ld.AO has observed that in the Asstt.Year 1998-99, this issue was considered in detail by the AO. The assessee had raised a contention that the CIT(A) has deleted the above addition which was not accepted at the end of the Department, because the Department has pref....
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....-promoters of Nirma group. The assessee has pre-poned redemption date of SPNs and it was fixed on 15.3.2000. SPN holders have sold these SPNs. to financial institutions and offered capital gain tax resulted to them. Similarly, on redemption, the financial institutions have shown difference between cost of acquisition of SPN as well as redemption value as their income. Redemption value was fixed at Rs. 361/- per SPN. According to the AO, the assessee has claimed cost roughly around Rs. 163.57 crores. It has claimed it as deduction. Corresponding to it, the interest income ought to have resulted to SPNs. holder or financial institution was not offered for taxation. In his understanding, the following question emerges out and he took cognizance of the following facts in relation to these questions: "4.12 Out of the above mentioned discussion the following questions emerge 1. Whether the interest claimed as expense by Nirma Ltd. on account of interest of SPN is allowable as expenditure since the whole issue of SPN appears to be arranged one with a view to avoid taxes by claiming huge expenditure on this account as discussed above. ....
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....ectly or indirectly to Nirma Ltd. on 15-3-2000. Amount of about Rs. 387 crores was final outflow on a/c. of redemption. Therefore, only Rs. 20 crores was the outflow on account of expenditure on interest on SPN at the time of redemption. In the whole arrangement, therefore, group had an interest burden on Rs. 20 crores only since this was outflow to entities by and large out of the group." 6. In this way, the ld.AO has disallowed the claim of the assessee and made an addition of Rs. 4504 lakhs. 7. Dissatisfied with the addition, the assessee carried the matter in appeal before the ld.CIT(A). It has made elaborate submissions alleging nongranting of proper opportunity of hearing at the end of the AO. The ld.CIT(A) has reproduced the discussion made by the AO in the impugned order. Thereafter, the ld.CIT(A) has formulated the following questions for resolving this issue: a) whether the capital borrowed on which interest was paid related to same business. If the answer is no, the claim cannot be allowed. b) whether interest has accrued during the year or not. If interest has not accrued during the year it cannot be allowed. c) whether ....
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....ma Syntex, reported in 100 ITD 247. He also made reference to the decision of the Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd., 225 ITR 798. According to the ld.CIT-DR, expenditure incurred in connection with the issue of right shares is not revenue expenditure and it cannot be claimed. He also made reference to the decision of the Hon'ble Gujarat High Court in the case of Shree Digvijay Cement Co., 138 ITR 45. He further contended that about 50% of the soda ash produced all over the world is used in glass industry, 26% is used in chemical and only 11% is used in soaps and detergent units. Thus, the assessee might have not used this soda ash exclusively for the purpose of its business. Soda ash factory is situated at Bhavnagar which is isolated from other factories of the assessee. His concern was that it was a new business, and therefore, it cannot be construed that these expenditures were incurred for raising funds for expansion of the existing business. Without pointing out the proposition involved in a particular case, citations of lots of judgments have been mentioned in this note. Whether they are directly....
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....nct facts. There is no discovery of new facts. He observed that staffs of new units are at different places. It could not be stated that staff of various units would be common and person in-charge of the unit is separate. These features or the circumstances were available before the ld.CIT(A) who has decided the appeals for the Asstt.Year 1997-98 and 1998-99. When the dispute travelled to the Hon'ble High Court, the Hon'ble High Court had concurred with the view taken by the Tribunal as well as CIT(A) in A.Y.97-98. Question framed by the Hon'ble High Court reads as under: "Whether the appellate Tribunal is right in law and on facts in confirming the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of soda ash project interest expenses of Rs. 3,33,23,108 and Rs. 12,27,78,792 lab project interest expenses ? 12. Hon'ble High Court has replied this question as under: "6. The sole surviving question No.13, pertains to disallowance of soda ash project interest expenses of Rs. 3.33 crores (rounded off) and lab project interest of Rs. 12..27 crores (rounded off). The Assessing Officer, questioned the assessee on these expe....
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.... of claiming pre-operative expenditure of interest by way of revenue expenditure would arise. However, when the authorities below found that it was an expansion of the existing business, applying the tests laid down by this Court in the case of Alembic Glass Industries Ltd. (supra), in view of the decision of the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), the fact whether the borrowing is capital or revenue expenditure would be of no consequence In the result, Tax Appeal is dismissed." 13. On due consideration of the facts and circumstances of the case, we are of the view that the issue in dispute with regard to the first question formed by the ld.CIT(A) is covered by the decision of the Hon'ble High Court. It has been upheld that soda ash and LAB end projects are part of the existing project. They are expansion of the assessee's business. They are not separate entities. The ld.CIT(A) has not demonstrated any new facts, rather ld.CIT(A)has rephrased and re-arranged the same very facts in a different manner by taking inference of facts from the decision of the Hon'ble High Court in other cases. It is pertinent to....
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....ase of CIT Vs. Dalmia Cement P.Ltd., 254 ITR 377. According to the Hon'ble Supreme Court, once it is established that there is a nexus between expenditure and the purpose of business, the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The ld.counsel for the assessee further took us through paragraph-13 of the judgment and pointed out that the Hon'ble Supreme Court has further observed that businessman cannot be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. He further pointed out that next reason assigned by the AO is that when group has huge funds available to it, why there is a need of bringing public issue. According to the ld.counsel for the assessee, this cannot be justification for denying business expenditure. He made reference to the decision of Hon'ble Supreme Court in the case of Taparia Tools Ltd. 372 ITR 605. The ld.counsel ....
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.... in support of this conclusion. Referring to the judgment of the Hon'ble Supreme Court in the case of Taparia Tools Ltd. (supra), the ld.counsel for the assessee contended that only requirement for the Revenue authorities was to see whether expenditure was incurred for the purpose of business or not. The AO has to consider genuineness of the business borrowings. He cannot take into consideration illusory facts for branding the transaction as colourable. According to the ld.counsel for the assessee facts in the case of Taparia Tools Ltd. (supra) are identical. 18. He further contended that all these facts are available in Asstt.Year 1997-98 also, and the ld.CIT(A) has allowed the expenditure on pro-rata basis in that year. That order was upheld upto the Hon'ble High Court. 19. We have duly considered rival contentions and gone through the record carefully. We find that first grievance of the AO was that raising of funds through SPN appears to be arranged with a view to avoid tax by claiming huge expenses. These SPNs. were issued with pre-mediated and predetermined arrangements. We do not find any basis for harping such a belief. It is a ju....
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....of deductions stipulated in the section, relates to the amount of interest paid in respect of capital borrowed for the purpose of business or profession. This is provided in (iii) of sub-section (1) of Section 36 and reads as under: "36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - ** *** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. - Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed ....
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....requires - (2) "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession"; ** ** As per the aforesaid definition, even if the amount is not actually paid but 'incurred', according to the method of accounting, the same would be treated as 'paid'. Since the assessee was following mercantile system of accounting, the amount of interest could be claimed as deduction even if it was not actually paid but simply 'incurred'. However, in the instant case, it is not in dispute that the amount of interest was actually paid as well in the assessment year in which it was claimed." 10. The only reason which persuaded the AO to stagger and spread the interest over a period of five years is that the term of debentures was five years and that the assessee had itself given this very treatment in the books of account, viz, spreading it over a period of five years in its final accounts by not debiting the entire amount in the first year to the Profit and Loss account and it has, in fact, debited l/5th of the interest paid t....
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....erein the Hon'ble Court has reiterated concept of "commercial expediency" propounded in the judgment of S.A. Builders, 288 ITR 158 and also judgment of the Hon'ble Delhi High Court in the case of CIT Vs. Dalmia Cement P.Ltd. to demonstrate as to how Revenue authorities ought not to have interfered with the decision making process of businessman while conducting its business. The discussion made by the Hon'ble Supreme Court in this aspect reads as under: "8. Further appeal of the Revenue before the High Court filed under Section 260A of the Income Tax Act, however, has been allowed by the High Court vide impugned judgment dated 06.12.2006. Challenging that judgment, special leave petition was filed in which leave was granted and that is how the present appeal comes up for hearing. 9. A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of 10 per cent. 10. On the other hand, the High Court has simply quoted from its own ju....
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.... in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971 82 ITR 166 (SC)], etc." 13. In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd.' [2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman." 22. In the light of these two decisions, if reasons assigned by the AO which ....