TMI Blog2017 (11) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... erest - Held that:- As in the context of project interest expenses of the same two projects, this Court had confirmed the view of the Tribunal that the assessee through its existing administrative mechanism had started a new facility for production of soda ash and lab for its captive consumption for the purpose of its existing business of manufacturing soaps. The Court therefore, held that the expenditure was not in the nature of preoperative expenditure of interest. Accrual of interest liability - Held that:- In the present case, however, the vital fact is that the company, investors, banks and financial institutions and all and sundry were aware that the SPNs would be foreclosed and that the company would pay out a sum of ₹ 361/per SPN. The fact that NCDs and SPNs were both freely transferable is not in dispute. If the promoters SPN holders and the banks and financial institutions therefore, traded in such SPNs, the same would not indicate any colourable device of tax planning. Mere early redemption also would not be enough to hold that from the inception there was a device created by the company to defeat the Revenue's interests. - Tax Appeal No. 1219 of 2006 - - - Dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... io of one NCD/SPN for every two equity shares held by them on 9.8.1996, referred to as the Record Date. NCD would carry interest at the rate of 17% payable half yearly. The redemption would be in four equal parts at the end of 4th,5th,6th and 7th years from the date of allotment. SPN would carry no interest for first three years. At the end of 4th,5th,6th and 7th years, the company would pay premium of ₹ 60/, ₹ 60/, ₹ 60/and ₹ 70/respectively. This would be in addition to return of the principal of ₹ 50/each at the end of 4th,5th,6th and 7th years. Both would carry warrant of share allotment as per which four shares, one each at the end of 4th,5th,6th and 7th years would be allotted upon payment of ₹ 50/per share. The share allotment also came with two options. As per option I, allottee would pay ₹ 50/for the share in cash whereas as per option II, the same would be by way of surrendering that portion of the principal of NCD/SPN which would mature at the end of 4th,5th,6th and 7th years respectively. The terms of payment for NCD/SPN were that the applicant would have to pay ₹ 50/at the time of application, another ₹ 50/at the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of ₹ 36.23 crores (rounded off). The company had also claimed the project expenditure of ₹ 6.41 crores for Lab Front End project which included interest expenditure of ₹ 6.01 crores. The Assessing Officer was of the opinion that such deductions were not allowable. He referred to the order of assessment in case of the same assessee for the assessment year 1998-1999 where such expenditure was disallowed. He noted that CIT(Appeals) had reversed his opinion but the Revenue had carried the matter before the Tribunal and the appeal was pending. He raised additional grounds for disallowance and discussed them with the assessee. He noted that out of 107 lakhs SPNs issued by Nirma, majority were held by the promoters and nonpromoters of Nirma mainly the family members of Shri Karsanbhai Patel, sister concerns of Nirma ltd. and trusts floated by Nirma group. Before 15.3.2000 i.e. the date of early redemption, all these persons transferred the SPNs to financial institutions and banks. In the assessments of these Nirma group entities whose assessments were centralized, it was found that they had not shown the income on year to year basis while Nirma claimed the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st had accrued during the year or not? and; iii) Whether the transaction relating to SPNs was a colourable transaction and was not for the purpose of business? 10. With respect to the first issue, he held that the expenditure for which the amount was borrowed was a capital expenditure and was not for the same business or extension of the existing business and the interest expenditure was therefore, not allowable. Though CIT(Appeals) has not further elaborated this issue, in our understanding, his objections were two folds. One was that if the principal borrowed is for the capital expenditure, the interest cannot be allowed under section 36(1)(iii) of the Act. Second, that if the expenditure is in relation to setting up of a new business, the same would be preoperating expenditure and therefore, not eligible expenditure. 11. With respect to the second aspect, he was of the opinion that while exercising the right of premature redemption of SPN, it could not be stated that the liability of pay out accrued during the year under consideration. If at all, it was a contingent liability. 12. With respect to the third aspect, he confirmed the view of the Assessing Officer but re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50/per share, the market value of the share of the company was ₹ 1000/. The Tribunal was of the opinion that redemption of SPNs even before the first installment of premium fell due meant that there was no accrual of liability and the claim of expenditure was based on contingent liability. The Tribunal was conscious that it was upto the company how to raise funds. However, the company cannot be allowed to design a scheme by which the benefit would flow only to the promoters and relatives. In the nutshell, the Tribunal was of the opinion that the transaction was a nongenuine transaction. In view of such conclusions, the Tribunal did not opine on the question whether the project was part of the same business or extension of existing business of the assessee and whether there was accrual of interest liability. 15. It is against these judgments and orders that the assessee has preferred the present appeal. 16. Learned counsel Shri Soparkar for the appellant raised the following contentions : 1) Whether the setup of soda ash and lab manufacturing plant was part of the existing business or by way of extension of the existing business, is concluded in case of the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible for the company to raise fresh funds from the market at lower rate of interest. This is what precisely the company did by paying off the NCDs and SPNs and thereby saving substantial recurring cost to the company in terms of high interest rate. Under no circumstances, the decision of the company can be stated to be mala fide. It was a decision taken purely in the interest of the company. f) Nothing was brought on record to suggest that the borrowing was not required for the purpose of assessee's business. If the amount was borrowed for the business of the assessee, the interest expenditure had to be allowed in terms of section 36(1)(iii) of the Act, irrespective of the manner in which such interest was treated in the hands of recipients. g) In support of his contentions, counsel relied on the following decisions : i) In case of S.A. Builders Ltd. v. Commissioner of Incometax (Appeals) and another reported in (2007) 288 ITR 1(SC) in which the Supreme Court had observed that the question of liability of interest on borrowed funds should be examined in the context of commercial expediency. It was held that the expenditure may not have been incurred under any legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PNs by the company. This would indicate a premeditated design. 4) Counsel referred to various terms on which SPNS would be issued and submitted that the present was not a genuine case of borrowing by the company for its business purpose and the appeal should therefore, be dismissed. 5) Counsel relied on the following decisions : 1) Judgment in case of Juggilal Kamlapat V. Commissioner of Income Tax reported in (1969) 73 ITR 702, in which the Court examined a certain transaction between the manging agents and the company which were both closely held by the same family under which the managing agency were paid a sum of ₹ 2 lakhs for terminating the agency. The agency had argued that such receipt was in the nature of capital receipt and, therefore, not liable to tax. The appellate Tribunal held that the termination of the managing agency was not a true reason but was merely a fake one and the whole transaction was a hoax for the purpose of evading incometax, a view confirmed by the High Court. The Supreme Court upheld the decisions of the High Court and Tribunal, confirming the conclusion that the termination of the contract of the agency was not genuine and the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income under section 28 of the Act, the deduction of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession would be a deductible expenditure. The first objection of the Revenue is squarely covered by the judgment in case of Core health Care ltd. (supra). While confirming the decision of this Court, it was held that for the said deduction, all that was necessary was that the money i.e. capital must have been borrowed by the assessee, that it must have been borrowed for the purpose of business and lastly, that the assessee must have paid interest on the borrowed amount. All that is germane is whether the borrowing was, or was not, for the purpose of the business. It was held that the provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. 20. The second issue is also concluded against the Revenue in case of this very assessee in judgment in case of Nirma Ltd. (supra). For the earlier assessment year in the appeal filed by the Revenue, the High Court considered the following question : 13. Whether the Appellate Tribunal is right in law and on facts in confirming the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 preoperative 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. 22. It was in the context of project interest expenses of the same two projects, this Court had confirmed the view of the Tribunal that the assessee through its existing administrative mechanism had star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of 4th, 5th, 6th and 7th years. The mode of returning the principal sum of ₹ 200/deposited by NCD/SPN holders was identical so also the share allotment options. c) Approximately 70% of the fund was received from SPN subscribers, the rest 30% from NCD subscribers. The promoters and Nirma group entities had contributed to nearly 96% of the SPN subscription. d) NCDs and SPNs were both redeemed prematurely under the board resolution dated 24.1.2000. The Record Date which was fixed after receiving the consent of the 3/4th of the subscribers was fixed at 10.3.2000. e) NCD holders would receive a sum of ₹ 237/per debenture which would include ₹ 200/of the principal amount, ₹ 15.46 towards interest between 1.10.1999 to 14.3.2010 and ₹ 21.54 as premium for earlier redemption. In case of SPN on the face value of ₹ 200/each, subscribers would receive ₹ 361/which would include principal amount plus ₹ 123.14 towards the premium payable upto 14.3.2000 and ₹ 37.86 towards prepayment premium. f) Almost all the promoters SPN holders sold their SPNs to banks and financial institutions on or around 2.3.2000 at the price ranging from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question is, was there anything hidden in the terms of two options offered by the company to its subscribers? We have noted the two sets of terms and conditions. Broadly, NCDs would carry interest every six months, SPNs would give no return for first four years. Last three years, subscribers would get accumulated higher amounts. This by itself does not make one instrument more favourable than the other. Even if it was so, this was a free option given to all the shareholders. The fact that all promoter shareholders' overwhelming preference of one over the other by itself would not be indicative of any hidden design. Either because of commonality of financial advisors, common thinking or preference which may be different from individual investors, if the entire group behaved in the same fashion, by itself, would not mean that these promoter investors had an insight which the individual investors did not. 28. The Revenue however, would contend that the issue does not rest here. Heavy reliance is placed on developments which took place later on. These developments can be split in two parts. One, the actual events as they unfolded and two, the tax treatment which the different e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgue that the entire plan was devised from inception and did not evolve at a later stage, in the process point out that by overwhelming majority, it was the promoters shareholders who had opted for SPN over NCDs. 30. In the present case, however, the vital fact is that the company, investors, banks and financial institutions and all and sundry were aware that the SPNs would be foreclosed and that the company would pay out a sum of ₹ 361/per SPN. The fact that NCDs and SPNs were both freely transferable is not in dispute. If the promoters SPN holders and the banks and financial institutions therefore, traded in such SPNs, the same would not indicate any colourable device of tax planning. Mere early redemption also would not be enough to hold that from the inception there was a device created by the company to defeat the Revenue's interests. This would be for the following reasons : i) The early foreclosure of the scheme applied as a whole and was not confined to SPN subscribers. ii) The assessee's contentions that over a period of time, the interest rates in the market fell which would enable the assessee to borrow funds at lower interest rate and therefore, e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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