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2016 (5) TMI 102 - ITAT HYDERABAD

2016 (5) TMI 102 - ITAT HYDERABAD - [2016] 46 ITR (Trib) 1 - Disallowance of expenditure - existence of business expediency - taking over of the loan or discharge of the loan of RIL due to ICICI Bank - capital loss - Held that:- The loan from ICICI Bank Ltd. to RIL has been advanced as a term loan for working capital requirements of RIL and the same has been discharged by the assessee in view of the debt restructuring scheme. The debt restructuring scheme is pursuant to transfer of the cement bu .....

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the date of repayment of the loan. The sum of ₹ 12 crores has been offered by RIL as "the liability no longer required and written back" but in the hands of the assessee, it is an expenditure to safeguard its interests or its investment in the subsidiary company. Therefore, it is for the business purpose of the assessee and, hence, revenue in nature and cannot be treated as a capital loss - Decided in favour of assessee

Interest-free advance to its subsidiary company in the U.S .....

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s between the interest-free loan and the interest-free advance is concerned, we are satisfied that the nexus has been established by the assessee and when there is no interest burden on the assessee by virtue of the loan advanced to its subsidiary, we are of the opinion that no such interest income can be attributed in the hands of the assessee - Decided in favour of assessee - I. T. A. Nos. 988, 989, 1066 and 1067/Hyd/2014 and 953/Hyd/2012 - Dated:- 22-1-2016 - P. Madhavi Devi (Judicial Membe .....

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2007-08, i.e., in the case of Rain Commodities Ltd. I. T. A. No. 988/Hyd/2014 (Revenue's appeal)-assessment year 2006- 07 I. T. A. No. 1066/Hyd/2014 (assessee's appeal)-assessment year 2006- 07 (in the case of Rain Commodities Ltd.) 2. Brief facts relating to the above assessee are that Rain Industries Ltd. ("RIL") was a 100 per cent. subsidiary of Rain Commodities Ltd., the assessee herein, which was engaged in the business of cement. The cement business was transferred with .....

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effect from July 1, 2006, and, hence, for the relevant assessment year 2006-07, the assessee's business was cement business. During the assessment year 2006-07, the assessee had filed its return of income originally on November 20, 2006, declaring a total loss of ₹ 12,32,83,565. Subsequently, on March 23, 2007, the assessee filed revised return declaring a total loss of ₹ 15,50,69,761. During the assessment proceedings under section 143(3) of the Income-tax Act, 1961, the Assessi .....

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L. 3. The Assessing Officer asked the assessee to justify and explain as to why the amount paid to ICICI Bank Ltd., on behalf of its subsidiary, should not be disallowed in the hands of the assessee. The assessee explained that the payment was done to ICICI Bank due to business/commercial expediency and, therefore, the same is allowable. However, the Assessing Officer held that the assessee did not substantiate such business expediency and that the loan was availed of by the subsidiary company f .....

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re. Aggrieved, the assessee is in further appeal before us. 4. Learned counsel for the assessee submitted that grounds 2(a) and 2(b) are on the allowability of the expenditure of ₹ 12 crores claimed by the assessee while ground No. 3 is an alternative ground that since the said amount of ₹ 12 crores has already been offered to tax by RIL for the assessment year 2006-07, disallowing the same in the hands of the assessee and adding to the assessee's income would result in double ta .....

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her income" includes "liability no longer required written back of ₹ 15,29,71,500". Thus, he has sought to explain that RIL had offered the sum of ₹ 15,29,71,500 as its income for the relevant assessment year and that this amount of ₹ 15 crores includes a sum of ₹ 12 crores also and, therefore, bringing to tax a sum of ₹ 12 crores in the hands of the assessee would result in double taxation of the same amount. 5. Learned counsel for the assessee has f .....

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ok, wherein the related party disclosures are made, showing that RIL has been shown as a subsidiary company of the assessee. He has also drawn our attention to pages 9, 10 and 14 of the paper book to demonstrate that the scheme of arrangement between the assessee-company and RIL, a subsidiary company, was approved by the hon'ble High Court of Andhra Pradesh and also by the lenders of the company through a credit restructuring package and that the liability accepted by the company for ₹ .....

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d., extended to RIL, as per the loan letter received from ICICI Bank Ltd., on June 12, 2005. It was submitted that the loan was taken over considering the commercial or business expediency of the assessee. It was stated therein that the assessee has taken over the liability of ₹ 12 crores payable to ICICI Bank Ltd. to protect its investment of ₹ 76.75 crores in RIL and that the expenditure is allowable as the same is incurred out of commercial expediency and to protect the commercial .....

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pediency of taking over of the loan of RIL due to ICICI Bank Ltd., and, therefore, the loan amount was allowable as an expenditure under section 37 of the Income-tax Act as it was expended wholly and exclusively for the business purposes of the assessee. In support of his contention, he has also placed reliance upon the following judgments : 1) CIT v. Dalmia Cement Bharat Ltd. [2011] 330 ITR 595 (Delhi) ; 2) J. K. Industries Ltd. v. CIT [2011] 61 DTR 153; 3) J. K. Synthetics Ltd. v. CIT [2014] 3 .....

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en by RIL, i.e., subsidiary of the assessee-company was for the purposes of its business and does not pertain to the assessee. He submitted that the assessee has not been able to establish the business expediency of taking over the loan of the subsidiary company and even if it is to be considered as the liability of the assessee-company, the loan being in the capital field, the loss arising is a capital loss and cannot be allowed as an expenditure under section 37 of the Income-tax Act. He has d .....

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the Income-tax Act and, therefore, are distinguishable on facts and are not applicable to the assessee's case. 7. Having regard to the rival contentions and material on record, we find that the taking over of the loan or discharge of the loan of RIL due to ICICI Bank is on account of the restructuring scheme between the assessee and RIL. It is also not in dispute that RIL is the 100 per cent. wholly owned subsidiary of the assessee-company. The fact that RIL has offered a sum of ₹ 12 c .....

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cause the brought forward losses are from the earlier assessment years and the said company, i.e., RIL, is eligible to set off any income arising during the year against such brought forward losses and that alone cannot be a good reason to disallow the same in the hands of the assessee. Further, the question before us is the allowability of the expenditure of ₹ 12 crores claimed by the assessee under section 37 of the Income-tax Act. To allow an expenditure under section 37 of the Income-t .....

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pose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. Therefore, in the case before us, in order to examine the business or commercial expediency, the purpose of taking over of the loan is to be examined. According to the assessee, the purpose of taking over of the lo .....

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f the assessee-company that there was a scheme of arrangement between the assessee-company and its subsidiary which was approved by the hon'ble High Court of Andhra Pradesh, by the respective shareholders of the said companies ; and also by the lenders of the company through a credit restructuring package by virtue of which, the business of cement manufacturing was transferred to RIL with effect from April 1, 2003, and the effective date of the scheme was August 30, 2014, and, accordingly, t .....

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y in terms of debt restructuring scheme and the said amount has been considered as "interest and finance charges". Thus, we find that the debt restructuring scheme is pursuant to the transfer of the cement business from RIL to the assessee and any transfer of the liability is also to be considered as part of the transaction of transfer of the business to the assessee. 8. The judgments relied upon by learned counsel for the assessee, though are all on the issue of allowability of expend .....

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any to its subsidiary without there being any personal benefit to any of its directors, then such portion of the interest paid by the assessee on its borrowed funds cannot be disallowed. The hon'ble Supreme Court in the case of Hero Cycles P. Ltd. (cited supra), was dealing with the case of an assessee which had advanced a sum of ₹ 1,16,26,128 to its subsidiary company and this advance did not carry any interest and the assessee therein had borrowed money from the banks and paid the in .....

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he case before us also, we find that the loan from ICICI Bank Ltd. to RIL has been advanced as a term loan for working capital requirements of RIL and the same has been discharged by the assessee in view of the debt restructuring scheme. The debt restructuring scheme is pursuant to transfer of the cement business from RIL to the assessee herein. Thus, the business expediency of the transaction is established. Further, as regards the learned Commissioner of Income-tax (Appeals)'s finding that .....

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enditure to safeguard its interests or its investment in the subsidiary company. Therefore, it is for the business purpose of the assessee and, hence, revenue in nature and cannot be treated as a capital loss. The assessee's grounds of appeal 2(a), 2(b) and 3 are, accordingly, allowed. 9. As regards ground No. 4, the brief facts are that the assessee-company had advanced interest-free advance to its subsidiary company in the U.S.A. The Assessing Officer observed that the assessee has not off .....

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er of Income-tax (Appeals) holding that the interest on loan advanced to the associated enterprise is to be computed by adopting LIBOR +, the Revenue is in appeal before us and against the learned Commissioner of Income-tax (Appeals) orders holding that the interest is to be computed on the advances given by the assessee to its subsidiary in the U.S.A., the assessee is in appeal before us. 10. Learned counsel for the assessee submitted that the assessee had obtained zero per cent. interest loan .....

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the assessee on this loan of ₹ 10,67,33,000. Learned counsel for the assessee has also drawn our attention to the "reserves and surplus" of the assessee which were to the tune of ₹ 42,14,32,524 to demonstrate that the assessee had sufficient reserves and surplus to advance interest-free advances to its subsidiary in the U.S.A. He submitted that the nexus between the interest- free loan taken by the assessee and the interest-free advance given by the assessee to its subsidi .....

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to tax the interest on the loan advanced by the assessee to its subsidiary but as far as the learned Commissioner of Income-tax (Appeals)'s direction that the interest rate should be at LIBOR + is concerned, he has submitted that the interest being advanced from India, the rate of interest charged by the banks in India should be adopted as rightly done by the Assessing Officer. He further submitted that the case law relied upon by the assessee relate to domestic transactions whereas the tran .....

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pril 1, 2002, as inserted by the Finance Act of 2012. Therefore, during the relevant period, i.e., financial year 2006-07, when the said transaction was not an international transaction, no such imputation can be made. As far as the nexus between the interest-free loan and the interest-free advance is concerned, we are satisfied that the nexus has been established by the assessee and when there is no interest burden on the assessee by virtue of the loan advanced to its subsidiary, we are of the .....

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he same, the Revenue's ground is also dismissed. 14. In the result, I. T. A. No. 988/Hyd/2014 of the Revenue is dismissed and I. T. A. No. 1066/Hyd/2014 of the assessee is allowed. I. T. A. No. 1067/Hyd/2014 (Assessee appeal)-assessment year 2007-08 I. T. A. No. 989/Hyd/2014 (Revenue Appeal)-assessment year 2007-08. 15. Brief facts relating to these appeals are that the assessee filed its return of income for the assessment year 2007-08 declaring nil income. During the assessment proceedings .....

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section 37 of the Income-tax Act. The assessee also furnished a deed of agreement for deferred sales tax payment wherein it was stated that the sales tax was deferred without any interest. Therefore, holding that there is no interest at all that is due to be paid on sales tax deferment and that it is only the sales tax deferment that is deferred, the payment of which starts from 2012, he held that the interest on such sales tax deferment is not allowable. He, accordingly, disallowed a sum of &# .....

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that during the assessment year 2006-07, RIL had raised ₹ 112.78 crores from/by issuance of debentures at a discount of ₹ 12.78 crores which were redeemable in 10 annual instalments and that RIL had debited one-fifth of the discount, i.e., ₹ 2,55,60,000 in its books and claimed the balance of ₹ 10,22,40,000 while computing this total income and that the Assessing Officer had held that only the proportionate amount was allowable during the year. The assessee also submitte .....

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ot made any claim in this regard in its return of income and the Assessing Officer has also not made any reference to this issue in his assessment order. Therefore, holding that this is not the issue arising from the assessment order, the learned Commissioner of Income-tax (Appeals) dismissed the same as not maintainable under section 246A of the Income-tax Act. Against the learned Commissioner of Income-tax (Appeals) order in not admitting the additional grounds of appeal raised by the assessee .....

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ent Ltd., formerly known as Rain Industries Ltd. (RIL) during the assessment year 2006-07 and this Tribunal has held that the same is not allowable entirely in the year of issue but has to be amortised over the period of debentures, i.e., in this case 5 years. Learned counsel for the assessee has relied upon the judgment of the hon'ble Supreme Court in the case of Taparia Tools Ltd. v. Joint CIT [2015] 372 ITR 605 (SC) (Civil Appeals Nos. 6946-6948 of 2004, dated March 23, 2015) to contend t .....

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1, 2006, and, therefore, the amortisation of discount on the issue of debentures has to be allowed in the hands of the assessee in proportion to the period of its holding the debentures during the relevant financial year. Therefore, we are of the opinion that the assessee was prevented by reasonable cause in not making a claim before the Assessing Officer during the assessment proceedings and has, accordingly, raised an issue before the learned Commissioner of Income-tax (Appeals) on account of .....

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l purposes. 19. As regards the Revenue's appeal in I. T. A. No. 989/Hyd/2014 is concerned, we find that the Government of Andhra Pradesh has allowed the deferment of sales tax in the case of the assessee and learned counsel for the assessee has filed a copy of the said order before us. However, we find that the Assessing Officer has disallowed "the interest paid on sales tax deferment" whereas, it is the case of the assessee that the assessee has not paid any interest on sales tax .....

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copy of the VAT assessment order dated August 30, 2006, is filed before us to demonstrate that the actual sales tax liability of the subsidiary was ₹ 38,25,48,170 whereas it was ₹ 29,45,89,703 as recorded in the books of the subsidiary on the date of transfer of business, i.e., July 1, 2006. It was submitted that the differential sales tax was debited to the profit and loss account under the nomenclature "interest on sales tax deferment". It is stated that the Assessing Off .....

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by the Assessing Officer. In view of the same, we deem it fit and proper to remit this issue also to the file of the Assessing Officer for verification and assessment in accordance with law. 20. In the result, I. T. A. No. 989/Hyd/2014 of the Revenue is treated as allowed for statistical purposes. I. T. A. No. 953/Hyd/2012-assessment year 2007-08 : 21. This is the assessee's appeal for the assessment year 2007-08. In this appeal, the assessee is aggrieved by the order of the learned Commiss .....

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