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2013 (2) TMI 555 - ITAT HYDERABADDeemed income u/s 41(1) - interest liability from the remission of loan liability - loan was taken from ING Vysya Bank in the year 2001 was for financing capital assets like buildings, plant and machinery, etc. - assessee submitted that the amount of Rs.8,41,00,728 waived by the bank under the OTS is also only principal component and there is no interest component therein, which could be disallowed u/s. 41(1) of the Act. - Revenue submitted that the facts are not clear as to whether the loan given by the bank was a term loan or working capital loan. - held that:- Mahindra & Mahindra Ltd. (2003 (1) TMI 71 - BOMBAY HIGH COURT), the Hon’ble Bombay High Court, while considering the loan agreement, which was for import of plant and machinery, held that since the loan was for purchase of capital asset, the amount waived cannot be treated as income of the assessee either under S.28(iv) or under S.41(1) of the Act. - merely relying upon the expression ‘principal’ used in the said letter, one cannot conclude that the amount of Rs.8,41,00,728 contains only the principal component of loan, and no element of interest is embedded therein. - AO to verify the facts. Disallowance of expenses u/s 14A - Dividend income exempted u/s 10(34) - held that:- to warrant disallowance in terms S.14A of the Act, there has to be in the first place, certain ‘income which does not form part of the total income’ and certain expenditure should be found by the Revenue authorities, to have been incurred by the assessee in relation to such income. In the present case, what is disallowed by invoking the provisions of S.14A of the Act, is the interest attributable to the investments made in shares by the assessee in M/s. Nagarjuna Oil Corporation Ltd. and the reason for the disallowance of such interest is that the return in the form of dividend, earned if any, from such investments would be exempt from tax. The reasoning given for the impugned disallowance is not correct, since what is liable to be disallowed in terms of S.14A is only the expenditure, if any incurred, by the assessee in relation to the dividends, if any earned, by the assessee from such investments - Matter set aside and remanded back to AO for verification. Disallowance towards interest free advances - held that:- when the assessee itself is having huge interest-bearing debt liability as at the end of the previous year, proportionate interest attributable to interest free advance made to the sister concern has to be disallowed. - The plea of the assessee that the advance was out of internal accruals and not from borrowed money is also not acceptable - Decided against the assessee. Commercial expediency involved to justify the expenditure in question. It has to be borne in mind that if there is mutual benefit in a transaction or mutuality of transactions between the assessee and its sister concern, then only the expenditure can be allowed on grounds of commercial expediency. Then, again the mandate of commercial expediency has to be weighed, taking into account the financial well being of the assessee at the given time.
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