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TMI Blog2013 (2) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee challenges the direction of the CIT(A) to disallow the interest liability from the remission of loan liability. On this very issue, it is pertinent to mention here, the Revenue has also raised grounds in its appeal, ITA No.475/Hyd/2009, contesting the relief granted by the CIT(A). 4. Briefly, the facts are that the assessee is engaged in manufacturing as well as trading activities of fertilizers and chemicals. For the assessment year under dispute, the assessee filed its return of income declaring '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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the remission has to be in respect of the very same, i.e. loss, expenditure or trading liability to attract the provisions of S.41(1). The assessee further submitted that since remission of Rs.8,41,00,728 is in respect of principal portion of the loan, the same is not chargeable to tax either under s.41(1) or under S.28(iv) of the Act. In this regard, the assessee relied upon the decisions in the cases of Mahindra & Mahindra Ltd V/s. CIT (supra); CIT V/s. Chetan Chemicals P. Ltd. (267 ITR 770) and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. In this context, the learned Authorised Representative for the assessee referred to the certificate issued by the bank, which is at page 64 of the paper-book, which states that the entire amount was adjusted towa4ds principal portion of the liability. 10. The learned Departmental Representative submitted that the facts are not clear as to whether the loan given by the bank was a term loan or working capital loan. Since the notes on account forming part of the audit report states that the package 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of a capital asset do not constitute income within the meaning of S.2(24) of the Act and therefore, will not be taxable either under S.28(iv)or under S.41(1) of the Act. We are not in agreement with the contentions of the learned Departmental Representative that the Hon'ble Bombay High Court that the decision in the case of Mahindra & Mahindra Ltd. (supra) is no longer good law in view of the subsequent decision of the Hon'ble Bombay High court in the case of Solid Containers Ltd. (supra), as in the said later decision, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remains outstanding in the form of 'principal' so as to result in accrual of interest even after remission. Therefore, 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. In the circumstances, the factual aspect as to the composition of the amount under remission, viz. Rs.8,41,00,728, needs to be examined from the records by the Assessing Officer. The Assessing 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/deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial institutions and banks. In the aforesaid circumstances, the Assessing Officer observed that the profit, if any, earned by the assessee would have gone to reduce the borrowed amount and there would not be any free reserves left with the assessee to contribute for the shares in Nagarjuna Oil Corporation Ltd. The Assessing Officer held that interest attributable to the investments made in the shares of the Nagarjuna Oil Corporation Ltd. constitute indirect expenditure incurred to earn exempted income. The Assessing Officer, 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 cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinery project was found to be for having presence in core sector areas. The CIT(A) observed that it is only a matter of coincidence that Naphtha an usual bye-product of oil refinery, may be available as a rawmaterial for user by the assessee in its fertilizer plant. The CIT(A) further observed that the contention of the assessee also may not be tenable considering the fact that Naphtha was supplied by Hindustan Petorleum Corporation Ltd. from its Kakinada Terminal through pipeline. The CIT(A) was of the view that these 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereat Schedule 3 to the Balance sheet has been furnished. Referring to the note on page 32 of the paperbook, he submitted that the shares were also pledged with banks and financial institutions, which prove the fact that the investments were for commercial expediency. The learned Authorised Representative for the assessee, referring to Schedule 2 of the Balance Sheet at page 30 of the paper-book, submitted that the assessee was having sufficient reserves and surplus to invest in Nagarjuna Oil Corporation Ltd. Without 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 Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in M/s. Nagarjuna Oil Corporation Ltd. 23. We are 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 alwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being attributable towards interest free advances. 26. Briefly, the facts in relation to this issue are that in the course of assessment proceedings, the Assessing Officer found that during the relevant previous year, the assessee had given advances amounting to Rs.199.69 lakhs to M/s. Nagarjuna Oil Corporation Ltd. without charging any interest. The Assessing Officer therefore, asked the assessee to explain as to why proportionate interest thereon should not be disallowed out of the interest paid by it to the financial institutions. The assessee in its reply submitted that the loan was given out of its internal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. 30. The learned Authorised Representative for the assessee reiterating the contentions urged before the lower authorities and in relation to ground Nos.5 and 6 of this appeal on the aspect of commercial expediency, submitted that since the interest free advances were out of the internal accruals and had no connection with the borrowed funds, the disallowance made is not justified. He further contended that the investments were also made out of commercial expediency and hence no disallowance could be made in view of the ratio laid down by the Apex Court in the case of S.A. Builders (supra). The learned Authorised 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 conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established, the interest free advance has been made, looking to the future benefits that the assessee could derive from M/s. Nagarjuna Oil Corporation Ltd., since a bye-product (Naphtha) of the oil refinery, is the raw material for the existing fertilizer unit at Kakinada, apart from the fact that such interest-free advance would be converted into shares of that company in due course. This justification for the expenditure, interest, incurred on the grounds of the commercial expediency has to be examined, looking to the overwhelming nature of the commercial expediency vis-à-vis the financial position of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case in relation to these grounds are that In the course of assessment proceedings, the Assessing Officer noticed that as per the details of loans and advances shown at Rs.448.16 crores, an amount of Rs.234.37 crores pertain to loans and advances to others. The Assessing Officer, therefore, in his letter dated 15.12.2006 called for furnishing the names and addresses of the persons to whom such advances were made. Since the assessee did not submit any specific reply on the query raised by the Assessing Officer, the Assessing Officer held that the amount of Rs.234.37 crores was advanced by the assessee to others 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the M/s. Nagarjuna Finance Ltd. to different banks to for settling bank loans and depositors' balance, the assessee has not explained as to how such advancing of funds made to M/s. Nagarjuna Finance Ltd. was for commercial expediency. The CIT(A) observed that the assessee has not stated as to how the assessee would be benefited from the advancing of the said amount of Rs.146.37 crores to M/s. Nagarjuna Finance Ltd. The CIT(A) therefore, relying upon the decision of the Hon'ble Punjab and Haryana High Court in the case of CIT V/s. Abhishekh Industries (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutions and public deposit holders, has not stated as to how the advance was for the purpose of assessee's business. It was not demonstrated before us as to how and in what manner the advance made to M/s. Nagarjuna Finance Ltd. has benefited the assessee or enhanced its profitability. In the aforesaid circumstances, it cannot be held that the interest free advance was for the purpose of business of the assessee. The plea of the assessee that the advance was out of internal accruals and not from borrowed money is also not acceptable for the reasons discussed in 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 befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultural Research and Development Institute to whom the amount in question was paid was not approved by the CBDT. It is the contention of the learned Authorised Representative for the assessee before us that the aforesaid Institute was approved by the CBDT in the earlier years and the application for renewal of approval for the year under consideration was pending with CBDT and during the pendency of this application, assessment has been completed disallowing the expenditure claimed on R&D. The learned Authorised Representative for the assessee submitted that in the meanwhile, the CBDT has renewed the approval granted earlier. In view of this submission of the learned Authorised Representative for the assessee, we deem it proper to set aside the orders of the lower authorities on this issue, and restore the matter to the file of the Assessing Officer for fresh examination of this issue, duly verifying the contention of the assessee that the Institute in question to which payment has been made by the assessee has been approved by the CBDT for the year under consideration. He shall accordingly redecide the issue in accordance with law and after giving reasonable opportunity of hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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