TMI Blog2018 (2) TMI 1903X X X X Extracts X X X X X X X X Extracts X X X X ..... e far in excess of the amounts given as deposits, then as per the decision of Hon ble Bombay High Court in the case of Reliance Utilities [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] a presumption arises that the deposits are out of interest free funds and no interest bearing funds are utilized for making the deposits. The ratio of the aforesaid decision of Hon ble Bombay High Court in the case of Reliance Utilities (supra) has been followed by the various benches of Pune Tribunal. Before us, Revenue has not brought on record any contrary binding decision in its support. We therefore following the ratio of the aforesaid decision rendered in the case of Reliance Utilities (supra) hold that in the present case, no disallowance of interest is called for. Thus, the grounds of the assessee are allowed. Disallowance of depreciation on non compete fees - Assessee had claimed depreciation on WDV of non compete fee treating the same as intangible asset - HELD THAT :- As no change in facts has be pointed out by Revenue. We therefore following the order of Co-ordinate Bench of the Tribunal in assessee s own case for A.Y. 2007-08 hold that assessee is eligible for depreciation. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned CIT (A) erred in confirming the disallowance of ₹ 17 ,00630 out of interest paid on account of interest free deposits given to the owners of premises. On the facts and in the circumstances of the case the said disallowance be cancelled. 2.2 The learned CIT (A) failed to appreciate that as no rent was paid/payable, the amount of interest free deposit considering the location could not be regarded as excessive or unreasonable. 2.3 WITHOUT PREJUDICE the disallowance should be restricted to a nominal amount considering the fact that the appellant had owned funds and the cost of borrowing was around 6% p.a. only. 3. Disallowance of ₹ 10,20,000 out of interest paid 3.1 The learned CIT (A) erred in confirming the disallowance of ₹ 1 0,20,000 out of interest paid on the ground of alleged excessive unreasonable interest free deposit to Jain Bros. Industries and Drip and Pipe Suppliers in the F. Y. 2001-02. 3.2 The learned CIT (A) failed to appreciate that the estimation of reasonable' deposit by the AO was the result of guess work and surmises and as such no disallowance was called for. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for the A.Y.199394, to A. Y. 1999-2000 viz. ₹ 1,31,63,54,679. 3. Before us, at the outset, Ld.A.R. submitted that assessee does not wish to press ground No.6. In view of the aforesaid submission, ground No.6 is dismissed as not pressed. 4. First ground is with respect to disallowance of premium paid on redemption of preference shares. 4.1. AO noticed that assessee had claimed expenditure of ₹ 4,94,72,088/- being premium on account of redemption of 4% redeemable preference shares. AO noticed that identical issue arose in assessee s own case in A.Y. 2007-08 and the order of AO was upheld by Ld.CIT(A). He therefore, following the order of his Predecessor, disallowed the expenses of ₹ 4,94,72,088/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who confirmed the action of AO. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us. 5. Before us, at the outset, Ld.A.R. submitted that on identical facts in assessee s own case in A.Y. 2007-08 the issue was decided against the assessee. He pointed to the relevant findings in ITA No.982/PUN/2013 dt.09.06.2017 for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l held that premium paid in respect of Secured Premium Notes (SPNs) is in the nature of interest and allowable as deduction. There is a clear distinction between preference shares and SPNs. The SPNs are debt instruments whereas the preference shares are in the category of equity capital. Therefore, the reliance of the appellant on the said decision is of no use. In view of this, the argument that preference share capital is in the nature of a long-term debt is also not acceptable. The appellant also relied on the Accounting Standard 31 regarding the Financial Instruments - Presentation. A perusal of the said Accounting Standards show that the preference shares are not equated with debt instruments. They are to be shown as a liability under the head capital . The deduction has to be considered under the Income-tax provisions and Accounting Standards cannot supersede the Income-tax provisions. The appellant relied on various decisions regarding the nature of meaning of interest and its allowability. The liability of interest is no doubt allowable expenditure, whereas in the present case the premium on preference shares cannot be equated with interest for the reasons mentioned above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular the forms and contents of its balance-sheets are extremely rigid and by reason of the specific compartments in such accounts it is not possible to convert an item of capital into an item of loan as has been suggested on behalf of the assessee. In the instant case, it is the assessee who is claiming a relief or advantage by way of an allowable deduction in respect of an expenditure incurred by it. Therefore, it is strictly for the assessee to establish that the expenditure in respect of which deduction is being claimed is not an expenditure in the nature of a capital expenditure and the assessee cannot claim any benefit of ambiguity or doubt in its favour. Hence the legal charges incurred on the issue of a prospect us, underwriting commission and brokerage paid for the issue of redeemable preference shares are not revenue expenditure. As the above decision clearly applies to the facts of the present case, the appellant s claim is not acceptable and the action of the A.O. is confirmed. Therefore, the ground of appeal raised by the appellant in this regard is dismissed and the A.O. is directed accordingly. 6. Accordingly, Ground No.2 raised by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to disallowance of ₹ 10,20,000/-. 10.1. AO noted that assessee had taken premises belonging to Jain Bros. Industries (deposit of ₹ 80 lacs) and Drip and Pipe suppliers (deposit of ₹ 20 lacs) on rental basis against the interest free deposits given to them. AO was of the view that the reasonable deposit to the aforesaid parties was ₹ 10 lacs and ₹ 5 lacs respectively and thus the aggregate balance deposit of ₹ 85 lacs was unreasonable. On such deposit of ₹ 85 lacs, which was considered as unreasonable, he worked out the excess interest @ 12% to be unreasonable and accordingly disallowed ₹ 10,20,000/-. 11. Ground No.4 is with respect to disallowance of ₹ 28,87,625/- 11.1. AO noted that assessee had taken premises belonging to the directors / relatives of directors on rental basis for which assessee had given interest free deposits. The rent was adjusted against the deposits. AO was of the view that assessee had given excess deposits. He thereafter worked out the excess deposits paid to the various persons as under : Shri B.H.Jain ₹ 3,06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the appellant to it related concerns and directors. The appellant's calculation of cost of borrowing @ 5.3% is therefore, found contrary to the facts given above. There is no doubt whatsoever, that the appellant has used borrowed funds for non-business purposes and hence claim of interest on those funds u/s 36(1)(iii) is not tenable. The Hon ble ITAT Hyderabad in the case of Ravindra Singh Arora Vs. ACIT (2012) 53 SOT 124 (Hyderabad) in regard to disallowance of interest u/s 36(1)(iii) has held as under : 37. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case. 40. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act. On the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars back. In addition, rent was also payable which is being adjusted against the said deposits. The appellant has made the same arguments as made against the disallowance of interest of ₹ 10,20,000 referred to in the preceding paras. The identical issue has been discussed in detail in para 4.5 and 4.9 above. The facts are identical. The AO has calculated interest at 12% on the amount of estimated excess deposit of ₹ 40,63,544/- and worked out the disallowance out of interest paid at ₹ 28,87,625/-. Keeping in view my decision in para 4.5 and 4.9 in regard to rate of interest i.e. @ 12% the addition of ₹ 28.87.625/- is confirmed. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us. 15. Before us, Ld.AR reiterated the submissions made before lower authorities and further submitted that no disallowance on account of excessive interest was made in earlier years even though the substantial deposits were given by assessee in earlier years. In support of the aforesaid contention that no disallowance was made in earlier years, he placed on record the copy of the assessments framed u/s 143(3) of the Act for AY 2006-07 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of Hon ble Bombay High Court in the case of Reliance Utilities (supra), a presumption arises that the deposits are out of interest free funds and no interest bearing funds are utilized for making the deposits. The ratio of the aforesaid decision of Hon ble Bombay High Court in the case of Reliance Utilities (supra) has been followed by the various benches of Pune Tribunal. Before us, Revenue has not brought on record any contrary binding decision in its support. We therefore following the ratio of the aforesaid decision rendered in the case of Reliance Utilities (supra) hold that in the present case, no disallowance of interest is called for. Thus, the grounds of the assessee are allowed. 17. Ground No.5 is with respect to disallowance of depreciation on non compete fees. 17.1. Assessee had claimed depreciation of ₹ 18,28,125/- on WDV of non compete fee of ₹ 73,12,500/- treating the same as intangible asset. Ld.CIT(A) in para 4.12.1 of the order has noted that no view on depreciation was taken by the AO in the assessment order. Ld.CIT(A), relying on the decision of Hon ble Delhi High Court in the case of Sharp Business System Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation was allowed to the assessee in A.Y. 2006-07 and the intangible assets had entered into block of assets in A.Y. 2006-07. In A.Y. 2007-08, the claim of depreciation was disallowed by Ld.CIT(A). When the matter was carried before the Co-ordinate Bench of the Tribunal, the issue was decided in favour of assessee by the Coordinate Bench of the Tribunal by observing as under : 36. Second issue is relating to withdrawal of depreciation on noncompete fee. Ld. Counsel for the assessee narrated the facts that the assessee allowed the payment of non-compete fee (in short NCF ) as allowable Revenue expenditure. In the earlier assessment year, 200607, the Revenue authorities allowed the same and treated the same as Capital asset, However, they included the same in the block of assets and allowed depreciation. Thus this part of non-compete has taken a shape of depreciable asset which is duly included in the block of assets in the current Assessment Year 2007-08. However, during the assessment proceedings in the year under consideration, the assessing authorities continued to allow the depreciation in the lines of decision in Assessment Year 2006-07. However, during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is eligible to claim depreciation on the payment of lumpsum amount paid by assessee to Shin Etsu for the supply of raw material (preform) at the reduced rate? It is an undisputed fact that the lumpsum payment of 285 million Japanese Yen was made by the assessee in the period relevant to assessment year 2004-05 and the assessee had capitalized the same in the very first year itself. The assessee had claimed depreciation on the said amount in the assessment years 200405, 2005-06 and 2006-07. The Revenue had accepted the claim of assessee in each of the said assessment years. In the impugned assessment year, the Assessing Officer disallowed the claim on the ground that no capital asset was acquired by the assessee. No intangible asset, like technical knowhow, had come into existence, therefore, the assessee cannot claim depreciation on the payments made to Shin Etsu. In the first appeal, the Commissioner of Income Tax (Appeals) rejected the claim of assessee with following observations: 14. I have carefully considered the facts of the case as well as reply of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department in the assessment year 2000-01 and 2002- 03 and also in the subsequent assessment years. Once the depreciation has been allowed on Block of Assets , the same cannot be disallowed in this year on the written down value. Thus, without going into the aspects as to whether marketing data base and facility for use of network and human resources are in the nature of business or commercial rights of similar nature in the nature of intangible assets within the meaning of section 32(1)(ii), we set aside the impugned order passed by the learned Commissioner (Appeals) and direct the Assessing Officer to allow the depreciation on such assets as it has been allowed in the earlier year and is part of block of assets . Consequently, ground no.4, raised by the assessee is treated as allowed. 13. Thus, in view of the facts of the case, we are of the considered view that the assessee is eligible to claim depreciation on the written down value of intangible assets in the impugned assessment year. The appeal of the assessee is allowed, accordingly. 39. From the above contents, it is settled princi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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