TMI Blog2017 (5) TMI 1514X X X X Extracts X X X X X X X X Extracts X X X X ..... ot offered for tax in the hands of the applicants. To our mind, it cannot be reason for disallowing the claim of the assessee. If earning of equal amount of income is considered as basic principle for allowance of expenses, then no assessee would suffer any loss. Incidence of taxability has occurred in the hands of the applicants in a different manner. They were investors. They have shown capital gain on their investment. Therefore, if incidence of interest income not resulted to them cannot be a ground to doubt the business expenditure of the assessee. Other reasons assigned by the AO would indicate that the AO tried to take business decision in the case of the assessee. He was of the view that there was no necessity of issuing any instrument like SPN, because other associate companies of the assessee had their own surplus funds from which they can finance Bhavnagar project. Similarly, according to the AO, claim of issuance of SPN should not be formulated in this manner. To our mind both these reasons are contrary to the principle laid down by the Hon’ble Supreme Court in the case of Hero Cycles Pvt.Ltd. [2015 (11) TMI 1314 - SUPREME COURT OF INDIA] as well as Taparia To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecalled and that ground has been restored for adjudication afresh. In this way, we are called upon to re-adjudicate the ground no.7 taken by the assessee in this appeal. The ground no.7 reads as under: VII. Disallowance of interest expenditure of ₹ 36,23,43,684 in Soda Ash division and ₹ 6,01,29,222 in LAB Front End division or alternatively disallowance of premium on Secured Premium Notes (SPNs) amounting to ₹ 4,504 lacs. The learned CIT(A) has erred in law and on facts in: i) not dealing appropriately with the submission of the assessee that no enough opportunity has been provided by the assessing officer for hearing and for giving submissions and in ii) holding and confirming the action of assessing officer for disallowance of the aforesaid expenditure, iii) holding that the expenditure was not for the purposes of same business or extension of business, (iv) holding mat the expenditure was of a capital nature, and mat even if it is held to be of a revenue nature, the expenditure in question is wholly allowable in the year of completion of the project, (v) holding that the expenditure did not accrue during the year, (vi) ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Meeting both held on November 30. 1995 it has been decided to make the following offer to the Equity Shareholders of the Company : Issue of 81,41,750 - 17% Secured Non Convertible Debentures (NCDs) and/or Secured Premium Notes (SPNs) of the face value of ₹ 200 each for bash at par aggregating ₹ 162.33,50,000 alongwith four Detachable Warrants attached, to each NCD/SPN to the Shareholders of the Company on rights basis in the ratio of c ne NCD / SPN for every two Equity Shares held by them on August 9, 1996 ( Record Date ) . xxxx PRESENT ISSUE: 81,41,750 NCD s and/or SPNs of ₹ 200/- each for cash at par (with our Detachable Warrants attached to each of the NCD/SPN) to the Shareholders of the Company on rights basis in the ratio of one NCD/SPN for every two Equity Shares held by them on August 9, 1996 (Record Date) 3256.70 16283.50 xxxx 3. The present holding of the Promoters, relatives and associates in the paid-up Equity Share Capital of the Company is 75%. The Promoters of the Company hold 63.08% of the Equity Capital of NCL. Upon the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TERMS OF THE INSTRUMENTS Instrument NCD or SPN with Warrants attached (The Shareholder will have an option to choose either NCD and/or SPN as per their requirement.) Face Value (Rs.) Rs.200 Interest (p.a.) on NCD 17% payable half yearly Terms of Payment On application On allotment On First Final Call (within a period of 12 months from the date of issue) ₹ 50 ₹ 50 ₹ 100 Redemption Rs. NCD at the end of 4th year from date of allotment at the end of 5th year from date of allotment at the end of 6th year from date of allotment at the end of 7th year from date of allotment 50 50 50 50 Principal (Rs.) Premium (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above interest expenditure are allowable under section 36(1)(iii) of the Income Tax Act because there exists interconnection and interlacing of the management of various units of the assessee-company. Management, administration, finance are common. Accordingly, it is only one business and the expenditure incurred by the assessee is of allowable nature. It was also contended by the assessee that accounting made by it by capitalizing the interest expenditure, as per guidelines of the Institute of Chartered Accountants of India is of no consequence of allowabilty under the Income Tax Act. Assessee further pointed out that these expenditures were claimed in the Asstt.Year 1996-97, 1997-98 and 1998-99. The AO had disallowed the claim of the assessee, but disallowance was deleted by the ld.CIT(A)VII and ld.CIT(A)-XI, Ahmedabad. The ld.AO has observed that in the Asstt.Year 1998-99, this issue was considered in detail by the AO. The assessee had raised a contention that the CIT(A) has deleted the above addition which was not accepted at the end of the Department, because the Department has preferred further appeal to the ITAT on this very issue for the Asstt.Year 1996-97 and 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Rs.250 He observed that total number of 107 lakhs SPNs. was issued by the Nirma Limited and out of total number of SPNs. issued, majority of the SPNs. roughly 102 lakhs were held by the promoters and non-promoters of Nirma group. The assessee has pre-poned redemption date of SPNs and it was fixed on 15.3.2000. SPN holders have sold these SPNs. to financial institutions and offered capital gain tax resulted to them. Similarly, on redemption, the financial institutions have shown difference between cost of acquisition of SPN as well as redemption value as their income. Redemption value was fixed at ₹ 361/- per SPN. According to the AO, the assessee has claimed cost roughly around ₹ 163.57 crores. It has claimed it as deduction. Corresponding to it, the interest income ought to have resulted to SPNs. holder or financial institution was not offered for taxation. In his understanding, the following question emerges out and he took cognizance of the following facts in relation to these questions: 4.12 Out of the above mentioned discussion the following questions emerge 1. Whether the interest claimed as expense by Nirma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corresponding income in form of interest income was disclosed by them. Further, to avoid payment of tax on interest income on the date of redemption, these entities sold SPNs mobilised ₹ 367 crores and again gave the funds directly or indirectly to Nirma Ltd. on 15-3-2000. Amount of about ₹ 387 crores was final outflow on a/c. of redemption. Therefore, only ₹ 20 crores was the outflow on account of expenditure on interest on SPN at the time of redemption. In the whole arrangement, therefore, group had an interest burden on ₹ 20 crores only since this was outflow to entities by and large out of the group. 6. In this way, the ld.AO has disallowed the claim of the assessee and made an addition of ₹ 4504 lakhs. 7. Dissatisfied with the addition, the assessee carried the matter in appeal before the ld.CIT(A). It has made elaborate submissions alleging nongranting of proper opportunity of hearing at the end of the AO. The ld.CIT(A) has reproduced the discussion made by the AO in the impugned order. Thereafter, the ld.CIT(A) has formulated the following questions for resolving this issue: a) whether the capital borrowed on which interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has rightly been disallowed by the ld.Revenue authorities below. For buttressing his contentions, he made reference to the order of ITAT in the case of Ashima Syntex, reported in 100 ITD 247. He also made reference to the decision of the Hon ble Supreme Court in the case of Brooke Bond (India) Ltd., 225 ITR 798. According to the ld.CIT-DR, expenditure incurred in connection with the issue of right shares is not revenue expenditure and it cannot be claimed. He also made reference to the decision of the Hon ble Gujarat High Court in the case of Shree Digvijay Cement Co., 138 ITR 45. He further contended that about 50% of the soda ash produced all over the world is used in glass industry, 26% is used in chemical and only 11% is used in soaps and detergent units. Thus, the assessee might have not used this soda ash exclusively for the purpose of its business. Soda ash factory is situated at Bhavnagar which is isolated from other factories of the assessee. His concern was that it was a new business, and therefore, it cannot be construed that these expenditures were incurred for raising funds for expansion of the existing business. Without pointing out the proposition involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain distinctive features or distinct facts. There is no discovery of new facts. He observed that staffs of new units are at different places. It could not be stated that staff of various units would be common and person in-charge of the unit is separate. These features or the circumstances were available before the ld.CIT(A) who has decided the appeals for the Asstt.Year 1997-98 and 1998-99. When the dispute travelled to the Hon ble High Court, the Hon ble High Court had concurred with the view taken by the Tribunal as well as CIT(A) in A.Y.97-98. Question framed by the Hon ble High Court reads as under: Whether the appellate Tribunal is right in law and on facts in confirming the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of soda ash project interest expenses of ₹ 3,33,23,108 and ₹ 12,27,78,792 lab project interest expenses ? 12. Hon ble High Court has replied this question as under: 6. The sole surviving question No.13, pertains to disallowance of soda ash project interest expenses of ₹ 3.33 crores (rounded off) and lab project interest of ₹ 12..27 crores (rounded off). The Assessing Officer, questioned th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue, a serious question of claiming pre-operative 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 In the result, Tax Appeal is dismissed. 13. On due consideration of the facts and circumstances of the case, we are of the view that the issue in dispute with regard to the first question formed by the ld.CIT(A) is covered by the decision of the Hon ble High Court. It has been upheld that soda ash and LAB end projects are part of the existing project. They are expansion of the assessee s business. They are not separate entities. The ld.CIT(A) has not demonstrated any new facts, rather ld.CIT(A)has rephrased and re-arranged the same very facts in a different manner by taking inference of facts from the decision of the Hon ble High Court in other cases. It is pertinent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court, once it is established that there is a nexus between expenditure and the purpose of business, the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The ld.counsel for the assessee further took us through paragraph-13 of the judgment and pointed out that the Hon ble Supreme Court has further observed that businessman cannot be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. He further pointed out that next reason assigned by the AO is that when group has huge funds available to it, why there is a need of bringing public issue. According to the ld.counsel for the assessee, this cannot be justification for denying business expenditure. He made reference to the decision of Hon ble Supreme Court in the case of Taparia Tools Ltd. 372 ITR 605. The ld.counsel for the assessee also contended that with the help of proviso appended section 36(1)(iii) of the Act, it was co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the Revenue authorities was to see whether expenditure was incurred for the purpose of business or not. The AO has to consider genuineness of the business borrowings. He cannot take into consideration illusory facts for branding the transaction as colourable. According to the ld.counsel for the assessee facts in the case of Taparia Tools Ltd. (supra) are identical. 18. He further contended that all these facts are available in Asstt.Year 1997-98 also, and the ld.CIT(A) has allowed the expenditure on pro-rata basis in that year. That order was upheld upto the Hon ble High Court. 19. We have duly considered rival contentions and gone through the record carefully. We find that first grievance of the AO was that raising of funds through SPN appears to be arranged with a view to avoid tax by claiming huge expenses. These SPNs. were issued with pre-mediated and predetermined arrangements. We do not find any basis for harping such a belief. It is a just rephrasing and re-construing the same transaction in different manner with different prose. There is no disclosure of facts by the AO. He has not made reference to any individual circumstances which has come to his noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - ** *** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. - Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; ** 9). Ignoring the proviso and the Explanation in clause (iii) above, with which we are admittedly not concerned in this case, it is clear that as per the aforesaid provision any amount on account of interest paid becomes an admissible deduction under Section 36 if the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d', according to the method of accounting, the same would be treated as 'paid'. Since the assessee was following mercantile system of accounting, the amount of interest could be claimed as deduction even if it was not actually paid but simply 'incurred'. However, in the instant case, it is not in dispute that the amount of interest was actually paid as well in the assessment year in which it was claimed. 10. The only reason which persuaded the AO to stagger and spread the interest over a period of five years is that the term of debentures was five years and that the assessee had itself given this very treatment in the books of account, viz, spreading it over a period of five years in its final accounts by not debiting the entire amount in the first year to the Profit and Loss account and it has, in fact, debited l/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of 'Matching Concept' to support this conclusion. 20. Similarly, discussion made by the Hon ble Supreme Court in para 14 and 15 is also w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on making process of businessman while conducting its business. The discussion made by the Hon ble Supreme Court in this aspect reads as under: 8. Further appeal of the Revenue before the High Court filed under Section 260A of the Income Tax Act, however, has been allowed by the High Court vide impugned judgment dated 06.12.2006. Challenging that judgment, special leave petition was filed in which leave was granted and that is how the present appeal comes up for hearing. 9. A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of 10 per cent. 10. On the other hand, the High Court has simply quoted from its own judgment in the case of 'Commissioner of Income Tax-I, Ludhiana v. M/s. Abhishek Industries Limited, Ludhiana' [ITA No. 110/2005 decided on 04.08.2006]. On that basis, it has held that when loans were taken from the banks at which interest was paid for the purposes of business, the interest thereon could not be cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Cement (B.) Ltd.' [2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose 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 or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. 22. In the light of these two decisions, if reasons assigned by the AO which met approval of the ld.CIT(A) are considered, then it would reveal that basically, the ld.AO was aggrieved with the claim of deduction without offering interest income in the hands of the SPN applicants. The AO observed that the assessee has claimed huge interest expenses, whereas, the applicants who should have sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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