TaxTMI 
TaxTMI 
2017 (5) TMI 1514
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....een admitted by the Hon'ble High Court, therefore, 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. 6,01,2....
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....nt end project, it has claimed expenditure of Rs. 6,41,87,190/- which includes interest expenditure of Rs. 6,01,29,222/-. 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 Conver....
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....sp; 75 71.60 Public ^25 28.40 4. The Company has issued the following Capital to its Promote....
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....50 50 50 50 Principal (Rs.) Premium (Rs.) SPN at the end of 4th year from date of allotment at the end of 5th year 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 &....
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....espective Warrants in lieu of payment by cash/cheque/draft 4. In this way, the assessee-company has claimed interest expenditure of Rs. 4,224 lakhs i.e. Rs. 36,23,43,684/- in Soda-ash division and Rs. 6,01,29,222/- in LAB front end division. On scrutiny of the accounts, the ld.AO formed an opinion that since these expenditures have been capitalized by the assessee in the accounts and the assessee could claim only those expenditures, which were incurred as revenue expenditure to such income, he issued a show cause notice inviting explanation of the assessee as to why these expenditures should not 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 A....
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....emplated under SPN. According to the AO, face value of the scheme was of Rs. 200/-. At the end of four years, repayment was being made by the assessee and redemption schedule would be - Period Principal Addl.Amount At the end of 4^th year Rs.50 Rs.60 At the end of 5^th year Rs.50 Rs.60 At the end of 6^th year Rs.50 Rs.60 At the end of 7^th year Rs.50 Rs.70 Total Rs.200 Rs.250 He observed that total number of 107 lakhs SPNs. was issued by the Nirma Limited and out of total number of SPNs. issued, majority of the SPNs. roughly 102 lakhs were held by the promoters and non-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 cl....
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....s. 367 crores were received by promoters on account of sale of SPNs and were directly or indirectly given back to Nirma Ltd. during Feb March 2000 before 153-2000 and Rs. 387 crores were outgo to the holders who were holding SPNs on redemption date i.e. 15-3-2000(including the Banks and financial institutions referred above). Thus, on account of issuance of SPNs of Rs. 205 crores were contributed by trusts & companies of group on which Nirma Ltd. claimed expenses but no corresponding income in form of interest income was disclosed by them. Further, to avoid payment of tax on interest income on the date of redemption, these entities sold SPNs & mobilised Rs. 367 crores and again gave the funds directly 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....
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....terconnection and interlacing of management of various units of the assessee-company. Management, Administration, Finance are common, and accordingly, the Hon'ble High Court has held that it was only one business of the assessee. Thus, according to him, much debate is not required on question no.1 and 2 formulated by the ld.CIT(A). 9. On the other hand, the ld.DR filed synopsis of his contentions. He pointed out that purpose of the transaction was only to raise share capital through right issue, and hence expenditure relating thereto as a capital expenditure. It has rightly been disallowed by the ld.Revenue authorities below. For buttressing his contentions, he made reference to the order of ITAT in the case of Ashima 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 ....
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....expenditure was not incurred for the same business or expansion of the existing business on the basis of inference drawn on the ratio of law laid in the judgments referred by him. It is pertinent to observe that search was carried out at the premises of the assessee in the year 2000. Issue regarding SPN was thoroughly examined by the ld.CIT(A)-IX in the Asstt.Year 1998-99 and the ld.CIT(A) has accepted the claim of the assessee. The ld.CIT(A) in the present assessment year differed with that CIT(A) for the reason that he did not try to ascertain facts in right perspective. We could appreciate the endeavour made by the first ld.CIT(A) for taking a different view, had the ld.CIT(A) pointed out certain distinctive features or distinct 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....
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....als) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called 'lab' for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and 'lab' so produced is used by way of captive consumption. When such facts viewed in light of the findings of the CIT (Appeals) and the Tribunal, we have no reason to interfere with the ultimate conclusion. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question 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 (S....
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....olders. Since promoters were holding 71.60% shares, therefore, maximum investment was at the end of the promoters. How this fact can be construed against the assessee. 15. The next reason assigned by the AO was that whether there was any necessity of issuing any instrument like SPN. According to the ld.counsel for the assessee, the AO has no jurisdiction to take a business decision. In other words, it was not for the AO to decide whether issuing any instrument like SPN would be in the interest of the assessee's business or not. For buttressing his contentions, he made reference to the decision of the Hon'ble Supreme Court in the case of Hero Cycles P.Ltd., 379 ITR 347 wherein the Hon'ble Supreme Court reiterated decision of Hon'ble Delhi High Court in the case 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 h....
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....us method to give benefit to the promoters and sister concerns on one hand, and on the other hand avail claim of expenditure. He made reference to the decision of Hon'ble Supreme Court in the case of Mcdowell & Co. Ltd. v. CIT, 154 ITR 148 and also in the case of Azadi Bachao Andolan, 263 ITR 706. 17. The ld.counsel for the assessee, on the other hand, submitted that it was a public issue. It was open for all shareholders. No information was withheld by the assessee from the public. SEBI or any other institutions has never objected to this scheme. The AO has not recorded statement of any person for harping a belief that directors and group concerns knew about the scheme. Inspite of carrying out search at the premises of the assessee, no evidence was found 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 cann....
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...., we examine the facts of the present appeal before us, we would like to appraise ourselves about the position of law which can goad sub-ordinate authority as how to approach such controversy. The discussion made by the Hon'ble Supreme Court in the case of Taparia Tools (supra) from para 8 to 10 is to be kept in mind. It reads as under: "Section 36 of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') is a residual section in t of certain deductions which are to be made from the income of the assessee while arriving at the taxable income. It is nomenclatured as 'other deductions', as some of the preceding sections provide for certain deductions of specific nature, with which we are not concerned in the present case. One of the deductions, apart from many other kinds 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 wi....
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....hat the non-convertible debentures were issued and money raised for business purposes. The AO did not even dispute the genuineness of clause relating to upfront payment of interest in the first year itself as per the option to be exercised by the debenture holder. In nutshell, the AO did not dispute that the expenditure on account of interest was genuinely incurred. Therefore', there is no dispute that interest has, in fact, been 'paid' during the year of accounting. Definition of 'paid' is contained in Section 43 (ii) of the Act to mean actually paid or incurred according to the method of accounting. To be precise, this definition is couched in the following language: '43. Definitions of certain terms relevant to income from profits and gains of business or profession. - In sections 28 to 41 and in this section, unless the context otherwise 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....
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....ccounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year." 21. At this stage, we would like to further make reference to the decision of the Hon'ble Supreme Court in the case of Hero Cycles P.Ltd. (supra) wherein 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 ....
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....ereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has been repeatedly held by this court that the expression "for the purpose of business" is wider 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 ....