TMI Blog2010 (12) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 as it had been incurred with the objective of squaring off a liability that was on revenue account and would thus acquire the character of a revenue expense. - decided in favor of assessee Irrecoverable interest on inter-corporate deposits - The Revenue’s claim that the assessee does not carry on the business of money lending and therefore, the principal of inter-corporate deposits written off was not allowable as business expenditure - the assessee had made efforts at its command to recover the dues from the above parties - Even with its best efforts to retrieve the balance interests from those parties went astray, the assessee had resorted to write off the balance amount as irrecoverable - Assessee had fulfilled the conditions laid down under the provisions of s.36(l)(vii) r.w. s.36(2) of the Act - Assessee's Appeal is treated as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered and disposed of, for the sake of convenience, in this common order. Let us now take up the issues raised by the assessee for adjudication (ITA No.922/Bang/2009). 6. During the course of hearing, the Ld. A R submitted that the assessee is not pressing the additional ground raised. Considering the plea of the Ld. A.R, the additional ground is dismissed as NOT pressed. 7. Reverting back to the main issue, briefly stated, the assessee company s [ the assessee in short] nature of business being manufacturing and selling of pellets, hot rolled coils, sheets, plates etc., and the assessee had undertaken of setting of an integrated Steel Plant project atBellary and for that project, according to the assessee, it had required a housing complex atBangalore to house its executives/staff members for its effective business operation. In response to its advertisement released in newspapers for 225 residential flats (4 lakhs sft) the offer of Fortune Holdings was accepted which, according to the assessee, met the prescribed specifications of it. Accordingly, the assessee had advanced earnest deposit of Rs. 40 crores to Fortune Holdings in order to acquire rights in and for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the provisions of s.45 of the Act was very remote. 9. Disenchanted with the finding of the Ld. CIT (A), the assessee has come up with the present appeal. During the course of hearing, the elaborate submissions made by the Ld. AR are summarized as under: (i) during the course of assessment proceedings the AO, without seeking any information or providing proper or sufficient opportunity to the assessee, concluded that because the advance which was not recovered related to an advance for acquisition of a capital asset, the non-recovered portion was nothing but a capital expenditure and cannot be allowed as a revenue expenditure; (ii) though various evidences and details in the form of advertisement, offer and acceptance of the proposal etc. were produced to prove that the advance was merely for the purpose of business and, thus, its non-recovery was a loss allowable to the assessee, the Ld. CIT (A), without providing adequate opportunity to the assessee, decided the issue with a terse comment that on account of dearth of documentations etc., it is not possible to conclude the expenditure to be an allowable business expenditure; (iii) the CIT (A) had failed to g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure. Under these circumstances, the claim for write off of Rs.17,13,04,431/- is disallowed. 11.1 Even on a glimpse of the impugned order of the Ld. CIT(A)under dispute, we find that though she had discussed the issue in brief, but, failed to elicit more details from the assessee as to how those amounts have become irrecoverable. 11.2 The Ld. AR, in the midst of hearing beforethis Bench, pleaded that (at the cost of repetition) chiefly, the assessee was not provided with proper or sufficient opportunity to put-forth its view on the very issue either by the AO or by the CIT(A) and, furthermore, the CIT (A) had not apprised what were the further evidences, material or documents required to be placed before her to come to a correct and just conclusion that the assessee was entitled to claim the same as a business loss and, primarily, the assessee was prevented by a reasonable and sufficient cause in not being able to satisfy the lower authorities to allow its claim of loss in the current year. 11.3 Taking into account the reasoning of the AO in rejecting the assessee s claim and also the pleading of the Ld. AR cited supra, we are of the considered view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 43B of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 12.1 The Assessing Officer disallowed the aforesaid claim of the assessee relying on the Explanation 3C inserted in section 43B of the Act by the Finance Bill 2006 with retrospective effect from 1.4.1989 which provided that interest can be claimed u/s 43B of the Act only when it is actually paid, conversion of interest amount into loans or borrowings shall not be deemed as payment of interest. 12.2 On further appeal before the first appellate authority, in respect of conversion of interest into loans and advances, the Hon ble CIT(A) had upheld the order of the AO, relying on the Explanation 3C to sec.43B of the Act. However, the Hon ble CIT(A) had specifically directed the AO that interest paid before filing return of income and also proportionate interest allowable as per clarification issued by the Central Board of Direct Tax vide Circular No.7/2006 datedJuly 07, 2006 should be allowed to the assessee. (It is important to mention here that the assessee had accepted the said findings of the CIT(A) and had not filed an appeal before us on this aspect of the matter). In respect of conversion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation or a State Industrial Investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing, or (e) .. Shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.... Explanation 3C - For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid . 13.2 On perusal of sec.43B, it could be seen that the said section 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. Assessee s case falls under Clause (d) of said section which covers interest payment to certain institution. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest is taxable in the hands of the lender. Dividend is not taxable in the hands of the shareholders. Expenditure incurred for raising loan is revenue expenditure. Expenditure incurred for issuing shares is capital expenditure. ( i ) Further, we would like to mention here that the preference shareholders held voting rights in the company (source page 60 of paper book). ( ii ) Further, on direction of the Bench, the assessee has also filed the stock exchange quotes of CRPS of the assessee to prove that CRPS issued by the assessee were traded on stock exchange. ( iii ) The jurisdictional High Court in the case of Kirloskar Electric Co. Ltd. v CIT (228 ITR 674) has clearly explained the difference between the preference shares and borrowings. The relevant extract is reproduced below. Subscription to preference share is a contribution to the capital of the company by its subscribers or shareholders and is not a borrowing by the company . In view of the above distinctions between loan and preference share capital and the jurisdictional High Court decision, we are of the view that the loan cannot be equated with Prefere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed 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 arrears for not less than two years. In the event of winding up or repayment of capital, the institutions will have a preferential right to be paid the arrears of dividend payable up to the date of such event. They also will have a preferential right in respect of repayment of capital. Thus, besides the issuance of shares, the assessee is also put under incidental obligations in the process, it need to be clarified that with the relief granted by the institutions, it is not that long term benefits will keep on accruing to the assessee. There is merely a reduction in the rates of interest for the remaining period of the loans. Thus, in future, interest liability will keep on accruing to the assessee, albeit at a lower rate. But the part of interest which the institutions have sacrificed by such reduction in the rates, they have asked for their pound of flesh immediately from the assessee. Accordingly, the liability to compensate has arisen in the year under consideration, it has cryst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 as it had been incurred with the objective of squaring off a liability that was on revenue account and would thus acquire the character of a revenue expense. 13.9 To sum up, we decide the issue against the Revenue and affirm the order of the CIT(A) on this aspect. Deletion of the addition of Rs.1.89 crores: 14. The other grievance of the Revenue being that 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 inter-corporate deposits written off. 14.1 The stand of the AO was that the payments made to Monnet Ispet Pvt. Ltd. and Reynold Traders Pvt. Ltd. have to be first appropriated towards the interest payable and the balance, if any, was towards the principle amount and, thus, the payments received in the earlier years towards interest was offered to tax and what remains now was only the principle amount. As the assessee was not in the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deposits written off was not allowable as business expenditure; - that she had further, erred in holding that the amount written off was interest on corporate deposits, without appreciating the reasons recorded by the AO and that the prevailing trade practice of first adjusting the amount received from the debtors against the interest component. 14.4 On his part, the Ld. A R explained the efforts made by the assessee to retrieve the interests on inter-corporate deposits and stoutly refuted the AO s claim that the amounts so written off represented the principal portion since the amounts recovered from the parties concerned should be first appropriated towards interest payable and the balance, if any, had to be appropriated towards the principal amount. To belie the AO s stand, the Ld. AR, during the course of hearing, furnished a voluminous paper book which, among others, contained the prolonged correspondences between the assessee and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 kept you appraised from time to time, we request you to treat this as full and final settlement of all our dues and waive off the balance amount. 15.3 The above narration testifies that the assessee had made efforts at its command to recover the dues from the above parties. As highlighted by the Ld. CIT (A) in her impugned order, the total amounts receivable (principal + interest) were Rs.30,08,47,586/- out of which Rs. 28,19,06,620/- (principal + interest; have since been recovered, leaving a balance of Rs.1,89,40,966/- representing interests payments have become irrecoverable. Even with its best efforts to retrieve the balance interests from those parties went astray, the assessee had resorted to write off the balance amount as irrecoverable. 15.4 As the assessee had fulfilled the conditions laid down under the provisions of s.36(l)(vii) r.w. s.36(2) of the Act as vouched by the Ld. CIT (A) in her impugned order under dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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