TMI Blog2013 (2) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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. Disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring nil income from business and a loss of Rs.18,51,52,647 under the head capital gains. In the course of scrutiny assessment, the Assessing Officer noticed that there was remission of loan liability of Rs.8,41,00,728 by ING Vysya Bank, which has not been offered to tax by the assessee. The Assessing Officer, vide letter dated 11.8.2006, asked the assessee to explain the nature of the receipt. In response to the query of the Assessing Officer, the assessee submitted that it has not claimed any tax benefit on the amount of Rs.8,41,00,728, which was waived by the ING Vysya Bank. The assessee submitted that the remission was of principal amount, as a result of one time settlement of assessee s loan account. The assessee submitted that the remission of the assessee s liability, being of principal, it is capital in nature and hence not taxable. The assessee submitted that Section 41(1)(a) covers only cases of cessation of loss/expenditure or benefit/trading liability in respect of which benefit was claimed. In response to the further query of the Assessing Officer, as to why the amount should not be added u/s. 28(iv) of the Act, the assessee in its letter dated 13.10.2006 submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Helios Food Improver P. Ltd. V/s. DCIT (14 SOT 546). The assessee by way of further clarification submitted that the loan was raised for the purpose of financing capital expenditure such as building, plant and machinery, etc. the total debt outstanding was restructured under corporate restructuring programme. The ING Vysya Bank has given remission of loan which was credited to the Profit Loss Account under CDR Scheme. 7. The CIT(A), considering the submissions of the assessee in the context of the ratio laid down in the case of Mahindra Mahindra V/s. CIT (supra); Chetan Chemicals P.Ltd. (supra) and APR Ltd V/s. DCIT (87 ITD 618), held that the principal amount of loan waived by the lender, viz. ING Vysya Bank is not chargeable to tax. The CIT(A) further relied upon the decision of the Income-tax Appellate Tribunal Chennai Bench in Fidelity Textiles P. Ltd. V/s. ACIT (305 ITR (AT) 97), wherein it was held that the sum received as waiver of loan, when loan was obtained for purchase of capital asset, does not constitute income within the meaning of S.2(24) of the Act. The CIT(A) also relied upon the decision of the Income-tax Appellate Tribunal, Hyderabad Bench in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kage for corporate debt restructuring also includes working capital. In this context, the learned Departmental Representative referred to the notes on account at page 36 of the paper book. The learned Departmental Representative further submitted that the decision of the Ho ble Bombay High Court in the case of Mahindra Mahindra V/s. CIT (supra), cited by the assessee and relied upon by the CIT(A), is no longer good law because of subsequent decision of the Hon ble Bombay High Court in Solid Container Ltd. V/s. DCIT (308 ITR 417), wherein the decision in the case of Mahindra Mahindra Ltd. (supra) was reviewed. The learned Departmental Representative has further relied on the following decisions also- (a) Logitronics Pvt. Ltd. V/s. CIT(333 ITR 386)-Del. (b) Rollatainrs Ltd. V/s. CIT (339 ITR 54)-Del. 11. We have heard the rival submission and perused the materials on record. We have also examined the decisions relied upon by the parties. The issues before us are as to whether the remission of liability of ING Vysya Bank amounting to Rs.8,41,00,728 can be treated as income of the assessee either under S.28(iv) of the Act or under S.41(1) of the Act and whether the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Bombay High Court has not made any such comment. After going through the decision in the case of Solid Containers Ltd. (supra), we find that the facts involved in that case are different from the facts involved in the case before us. In the case of Solid Containers (supra), the specific finding of fact is that the loan was taken for trading activity and ultimately, upon waiver of the loan, the amount was retained in the business by the assessee, and therefore, it became assessee s income and therefore, was held as assessable. The other decisions cited by the learned Departmental Representative are also factually distinguishable, since in the facts of the present case, it is quite clear that the loan taken was a term loan, utilised for the purpose of acquiring capital asset, like building, plant and machinery, etc. 13. In the light of the judicial pronouncements discussed above, we are of the considered view that the remission of liability, insofar as it relates to principal amount cannot be made taxable in the hands of the assessee either under S.28(iv). However, in the event of the assessee, securing any relief or benefit by way of deduction, in any of the earlier y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer has also to verify whether the assessee, in any of the earlier years, has claimed any deduction or relief with regard to the sum of Rs.8,41,00,728 viz. the amount under remission. In case any such deduction or relief has been obtained by the assessee in the earlier years, to that extent, such relief or deduction has to be treated as income for the year under appeal, in terms of S.41(1) of the Act. 14. In the facts and circumstances of the case and the in the light of the foregoing discussion, we find that the matter needs re-examination at the end of the Assessing Officer, to ascertain the composition of the amount of Rs.8,41,00,728, and relief/deduction obtained by the assessee with regard to that amount in the earlier years, so as to arrive at the amount of disallowance that has to be made in relation to the amount under remission, viz. Rs.8,41,00,728. We accordingly set aside the impugned order of the CIT(A), and restore the matter to the file of the Assessing Officer, for reexamination of the matter, keeping in mind our observations hereinabove, and in accordance with law, after giving reasonable opportunity of hearing to the assessee. Consequently, grounds of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer, relying upon the decision of the ITAT Kolkata Bench in DCIT V/s. SG Investments and Industry Ltd.(89 ITD 44) held that the assessee, on one hand would get incentive by way of exemption with regard to dividend income, and on the other would claim expenditure attributable to such investment, in order to claim exempted income against its taxable income. The Assessing Officer came to the conclusion that the interest attributable to the assessee s investment of Rs.18.71 crores made in shares of M/s. Nagarjuna Oil Corporation Ltd. has to be disallowed. The Assessing Officer worked out such interest at Rs.2.80,65,000 by calculating at the rate of 15%. 17. In the course of hearing of the appeal before the first appellate authority, the assessee contended that the assessee identified oil refinery business as a green field project, likely to have good return on investment in future. Further, a bye-product (Naphtha) of the oil refinery will become a raw material for the existing fertilizer unit at Kakinada. Keeping in view the aforesaid fact, the assessee invested Rs.18.71 crores in the shares of M/s. Nagarjuna Oil Corporation Ltd. The assessee further submitted before the CIT(A) tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese circumstances do not suggest that there was immediate business purpose or expediency in making such investment in shares of Nagarjuna Oil Corporation Ltd. The CIT(A), while dealing with the contention of the assessee that the investment was made out of internal accruals, observed that as at 31.3.2003 the outstanding loans from banks and financial institutions stood at Rs.1700 crores. The Balance Sheet filed with the return for assessment year 2004-05 also reflected huge outstanding loans from banks and financial institutions. In view of such huge outstanding loan liability, the assessee s contention that the investment in shares was made out of the profits of the company was not acceptable to the CIT(A). The CIT(A) further observed that the assessee has also not established the fact that at the time of advancing the amount towards investment in shares, it was having sufficient non-interest bearing own funds. The CIT(A) relying upon a decision of Income-tax Appellate Tribunal Mumbai Bench in the case of Sanghvi Swiss Refills V/s. ITO(85 ITD 59) held that the primary burden is on the assessee to prove that on the dates when interest free loan was given, there was sufficient non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout utilising the borrowed funds. The learned Authorised Representative for the assessee submitted that since there is no nexus between the borrowed funds and the investments, no notional disallowance could be made towards interest on investments made in Nagarjuna Oil Corporation Ltd.. In support of this contention, the learned Authorised Representative for the assessee relied on the decision of Hon ble Bobay High Court in the case of CIT V/s. Reliance Utilities and Power Ltd.(313 ITR 340) and the Third Member decision of the Bombay Bench of the Tribunal in the case of Visen Industries Ltd. V/s. Additional. CIT(136 ITD 309)(TM) 21. The learned Departmental Representative, on the other hand, submitted that the investments in shares have been made to earn dividend income which is exempt under the Income-tax Act. Hence, disallowance of expenditure attributable to earning of such income has to be made under S.14A of the Act. The learned Departmental Representative submitted that business consideration or commercial expediency is not an issue to be taken into account in the context of disallowance to be made under S.14A of the Act. The learned Departmental Representative in support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fortified in this behalf by the case-law relied upon by the learned Departmental Representative. The coordinate bench of this Tribunal in the case of Maheswari Plaza and Resorts Ltd. (supra) has considered the decision of the Hon ble Punjab and Haryana High Court in the case of CIT V/s. Hero Cycles Ltd. (323 ITR 518), wherein the Hon ble High Court held as follows:- 4. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. As can be seen from the ratio laid down in the aforesaid decision, the Hon ble High Court negated the contention of the Revenue that directly or indirectly some expenditure was always incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accruals and not from borrowed funds. The Assessing Officer however, did not accept such plea of the assessee by noting that the assessee did not have any reserves or brought forward balances to advance such loan. The Assessing Officer, opining that the assessee was heavily indebted to financial institutions, the interest free advance to M/s. Nagarjuna Oil Corporation Ltd. has to be treated as having been given out of borrowed funds, and hence the interest attributable to that amount has to be disallowed. He accordingly disallowed an amount of Rs.29,95,000, being interest worked out at 15% on Rs.199.69 lakhs. 27. The assessee, being aggrieved by the disallowance made as above, challenged the same before the CIT(A). In the course of hearing of the appeal, the assessee contended before the CIT(A) that the assessee being a holding company of M/s. Nagarjuna Oil Corporation Ltd. had to subscribe to the extent of 51% of the share-holding. Hence, the advances would ultimately be converted into equity shares on allotment. It was submitted by the assessee that the investment and the advances are likely to yield results, which would be received by the assessee in due course, over a period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorised Representative for the assessee further submitted that the Assessing Officer having failed to establish the nexus between the borrowed funds and the interest free advances, was not correct in presuming that the interest advances were made out of the borrowed funds. 31. The learned Departmental Representative, reiterating the contentions urged before us in relation to ground Nos.5 and 6 of this appeal on the aspect of commercial expediency,, strongly supported the orders of the lower authorities. He submitted that since interest free advances were made to a sister concern, when the assessee has huge interest-bearing loan liability, it cannot be said that the advances were for commercial expediency. Relying upon the decision of Punjab and Haryana High Court in the case of Abhishek Industries (supra) and of the Kerala High court in the case of V.I. Baby and Co.(254 ITR 248), the learned Departmental Representative submitted that proportionate has been rightly disallowed in this case. 32. We have heard rival submissions and perused the material available on record. We have also applied our mind to the decisions cited at the bar by either party. The disallowance of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. In the facts of the present case, though it is true that there must be nexus between the borrowed funds and the interest free advance made, at the same time, it cannot be ignored that the assessee is incurring huge interest burden on account of heavy interest-bearing debt liability as at the end of the year. Had the assessee not made the interest-free advance in question to the sister concern, then the debt liability would have been reduced to that extent, which, in turn, would have resulted in incurring lesser amount of interest or the assessee could at least have invested it in such a manner which would have generated income. In the facts of the present case, considering the precarious financial position of the assessee, which has huge interest-bearing debt liabilities, it cannot be said that commercial expediency, in the form of reaping benefits in the form of bye-product which is its raw-material, besides shares on conversion of the advance amount into shares, involved cannot be said to be so overwhelming, as to justify interest-free lending. We are supported in this behalf, by the decisions of the Hon ble Punjab and Haryana High court in the case of Abhishek Indu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs without any business purpose. The Assessing Officer was of the view that when the assessee was paying interest on borrowed funds to financial institutions and banks, there was no justification on his part to advance such a huge amount without charging any interest. The Assessing Officer therefore, calculated the interest at the rate of 15% on the advance of Rs.234.37 crores, and worked out the interest attributable to such advances at Rs.35,15,55,000 and disallowed the same. The Assessing Officer for this purpose relied upon the decision of the Hon ble Madras High Court in the case of CIT V/.s. Indian Express (Madurai) Ltd. (128 Taxman 514). 36. The assessee challenged the above disallowance in appeal before the CIT(A). In the course of hearing before the CIT(A) the assessee furnished the details with regard to the interest free advance of Rs.234.37 crores, which is as follows- (1) Nagarjuna Finance Ltd. Rs.146.37 crores (2) VIPL Rs. 80.92 crores (3) Others Rs. 7.08 crores Explaining the advance made to M/s. Nagarunja Finance Ltd., the assessee submitted that it was one of the group entities started several years ago. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) held that when the assessee was having substantial borrowed funds from banks and financial institutions and it was paying interest on the same during the previous year, the interest attributable to the interest free advance has to be disallowed. While dealing with the advance of Rs.80.92 crores to VIPL, the CIT(A) observing that the assessee has not filed any evidence before him to prove the fact that the advance was given for purchase of pesticides, held that the advance amount was not for business purposes of the assessee, and hence interest attributable to such advance needs to be disallowed. Similarly, in the case of advances of Rs.7.08 crores to others, the CIT(A) observed that in the absence of any details furnished by the assessee in this regard, it cannot be said that the interest free advance to different parties is concerned, it is for commercial expediency. On the aforesaid conclusions, the CIT(A) sustained the entire disallowance of Rs.35.15 crores. 38. Being aggrieved by the order of the CIT(A) as above, assessee is in appeal before us on this issue. 39. The learned Authorised Representative for the assessee, reiterating the stand taken before the CIT(A), submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the context of grounds No.7 and 8 hereinabove. 42. So far as the advance of Rs.80.92 crores to VIPL is concerned, the stand of the assessee was that this interest-free advance was towards purchase of pesticides, and it was to ensure continuity in supply of pesticides in all seasons. It is only on account of absence of any evidence furnished by the assessee to substantiate its claim in this behalf, that the disallowance of interest claimed by the assessee proportionate to this amount was disallowed. Similar is the case of the interest free advances of Rs.7.02 made by the assessee to others, details of which are furnished before us at page 57 of the paper-book, as interest attributable to these advances was also disallowed only on account of absence of any evidence furnished by the assessee to prove the commercial expediency that warranted the said advances being made by the assessee. As already noted above, the commercial expediency has to be examined on the facts and circumstances of each case, and overwhelming nature of the 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 mutua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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