TMI Blog2022 (4) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... e out from any material evidences, rather out of assumption that the assessee would have earned interest out of such payment and advances were made out of interest bearing fund. But where is the proof to make such an assumption - We are unable to accept this view of the department in the absence of any piece of evidence. The assessee all through contended that the advances were made out of interest free funds, and because of substantial delay in execution and likely non-performance of the deal, the assessee has to forgo the interest, and accept return of money advanced. It is trite law that AO cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee. It is for the assessee to decide, whether the expenses should be incurred in the course of his business. Therefore, the action of both the authorities has no legal justification. In view of the above, and after considering the facts in entirety, we do not find any merit in the action of the Revenue authorities in making addition of interest charge on the impugned advances made to the seller. Accordingly, we delete the impugned addition, and allow this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inning in the past was allowed by the department, and there was no addition during the year, cannot be said unjustifiable. Thus, we are not inclined to reverse the order of the ld.CIT(A) on this issue. This ground of appeal is also dismissed. Disallowance of interest on Foreign Currency Convertible Bonds ( FCCB ) - HELD THAT:- We are of the view that both debentures or loan fall within the ambit of loan, and therefore, the assessee is entitled for deduction of the expenditure/loss incurred on redemption of bonds. Further, as recorded by the ld.CIT(A) in his impugned extracted that in the year 2009-10 and 2010-11, when the assessee company redeemed a FCCB, it has earned income and shown the same in the statement of income and offered to tax, which the department has accepted as income. However, when the assessee redeemed the balance bond in the year 2011-12, it has incurred loss and when the same was claimed as deduction in the statement of income, the same was rejected by the AO by treating the same as capital loss. Thus, the AO has taken different and inconsistent stand, which is not permissible in law. After going through the well-reasoned order of the ld.CIT(A), we do not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income-tax (Appeals)-1, Ahmedabad [for short Ld.CIT(A)] in appeal No.CIT(A)-1/DCIT, Cir.1(1)(1)/738/2014-15 relating to the assessment year 2012-13. We dispose of both the appeals by this common order. 2. First we take assessee s appeal in ITA No.993/Ahd/2016. 3. In this appeal, the assessee has raised three grounds. Ground no.1, included five sub-grounds which are descriptive and argumentative in nature. Admittedly, only effective issue involved in this ground is that the ld.CIT(A) has erred in law and on facts in confirming addition of interest amounting to ₹ 1,97,17,500/-, which was paid as advance to one Shri Ravindersingh Mital for purchase of land. 4. Facts in brief, as emerging out from the relevant orders of the Revenue authorities, the assessee company is engaged in manufacturing of fabrics, cotton yarn and power generation (wind mill power plant). The assessee has filed return of income on 28.9.2012 declaring total income of ₹ 13,35,69,580/-. The return was processed under section 143(1), and thereafter the case of the assessee was selected for scrutiny assessment by issuance of notice under section 143(2), which was served upon the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that aggregate amount of capital and free reserves as on 31.3.2007 was at ₹ 181,37,29,753/-, and the AO failed to point out any nexus between interest bearing funds and the advances given for the purchase of land. Further, the issue of charging of interest has not been raised in earlier years or in the subsequent year where assessments were completed under section 143(3) of the Act. It was further submitted that opening balance of advances as on 1.4.2011 was ₹ 13,31,50,000/-, out of which the assessee has received ₹ 9,70,00,000/- in the month of march, 2012, and the balance amount advance of ₹ 3,61,50,000/- was received in the month of April, 2012 in terms of mutual agreement between the parties for cancellation of agreement of sale. Therefore, the decision of the ld.AO in making addition on account of interest expenditure was not based on the facts and figure on record, rather on some extraneous consideration, which has no reason or justification. However, the assessee made an alternative claim that even notional interest charged by the AO at 15% was very much on higher side, as the AO has charged on the basis of legal notice dated 4.3.2010 issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has demonstrated before the appellate authority that the assessee has sufficient interest free funds available with it so as to make such dealing, which was not denied by the authority. Even in the earlier years the department has never questioned business advances shown in the books of accounts. In fact, the assessee did make such advances out of the interest free funds in the financial years 2007-08 and 2008-09 for the purchases of the land for the business expansion, which fact has also not been denied by the Department. We are of the view that the case of the department was not borne out from any material evidences, rather out of assumption that the assessee would have earned interest out of such payment and advances were made out of interest bearing fund. But where is the proof to make such an assumption ? We are unable to accept this view of the department in the absence of any piece of evidence. The assessee all through contended that the advances were made out of interest free funds, and because of substantial delay in execution and likely non-performance of the deal, the assessee has to forgo the interest, and accept return of money advanced. It is trite law that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee as per the amendment to section 80IA(2) of the Act, once the assessee has opted for initial year, he is entitled to claim deduction under section 80IA for ten consecutive years out of fifteen years slab chosen by him, and losses of the years starting from the initial assessment year alone are to be brought forward as stipulated in section 80IA(5) of the Act. The ld.AO did not accept this contention of the assessee, he inter alia held that the assessee was required to set off losses of the eligible business against the subsequent year income of the eligible business even though these were set off in earlier years. Therefore, the quantum of deduction under section 80IA has to be computed after deduction of the notional brought forward loss, even though they have been set off against earlier years income. Accordingly, the ld.AO worked out amount available for deduction under section 80IA at NIL. Aggrieved by the action of the AO, the assessee preferred appeal before the ld.CIT(A), who after considering the claim of the assessee, and relying upon various case laws, allowed the claim of the assessee. Not satisfied with the order of the ld.CIT(A) is Revenue is now bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Leave Petition NO.33475 of 2016. 16. In the light of the above, we find that the ld.CIT(A) while allowing the claim of deduction under section 80IA of the Act, has also considered the judgment of Hon ble Madras High Court cited (supra). Further more, the CBDT vide Cir.No.1/2016 dated 15.2.2016 put to rest this issue and directed the DR s not to pursue this issue in pending cases. Therefore, we do not find any infirmity in his order, which is upheld, and this ground of Revenue is dismissed. 17. Now we would take ground no.2: In this ground, the grievance of the Revenue is that the ld.CIT(A) has erred in deleting addition of ₹ 15,22,527/- made on account of disallowance under section 40(a)(ia) of the Act. 18. In this regard, briefly stating, the assessee-company has made a payment of ₹ 15,22,527/- to one Naroda Enviro Projects Ltd. towards land fill charges of solid waste. The ld.AO sought for furnishing of TDS details. From the details, the ld.AO noticed that the assessee has not deducted TDS while making payment to the said concern. Assessee submitted that the said concern is a non-profit making concern and registered under section 12AA of the Act, and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that as per rates prescribed in Appendix-1 to Rule 5 of the Income Tax Rules, the applicable rate of depreciation for the computer software is 60%, as it was not intangible assets. Accordingly, the ld.CIT(A) allowed the claim of the assessee and directed the AO allow 60% depreciation on the computer software of the assessee. Not satisfied with the order of the CIT(A), Revenue has come before the Tribunal in appeal. 22. Having heard both the sides, we have perused orders of authorities below on this issue. The claim of the assessee is that computer software purchased by it is eligible for depreciation at the rate of 60%. However, the ld.AO was of the view that software purchased by the assessee was not integral part of the computer system, but it was a license for use of software, and therefore assessee was not entitled for depreciation at the rate of 60%. He accordingly applied depreciation at 25%. However, the ld.CIT(A) allowed the claim of depreciation by holding that the software purchased by the assessee is tangible assets, and therefore, as per Appendix-1 to Rule 5 of the IT Rules, assessee is entitled for depreciation at the rate of 60%. While holding so, he also observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t adopted in its books of accounts in this behalf. However, the explanation of the assessee was not found acceptable to the AO. The AO maintained his stand that the assessee should have debited the financial charges on account of redemption of FCCB to profit loss account instead of just showing the same in the statement of income. Further, the loss on account of redemption was a capital loss, and therefore not allowable. The AO thus disallowed the claim of the assessee and added the same to the total income of the assessee. Aggrieved against this addition, the assessee approached the ld.CIT(A). Before the ld.CIT(A), the assessee while reiterating the submissions made before the AO, also submitted that FCCB investors enjoyed option to exercise for receiving equity. The said FCCB was a liability on the assessee-company and the company was bound to discharge the liability on due date, if the bond holders do not exercise their option to convert into equity. The claim for deduction of financial charges was towards loan liability which was repaid with interest, and now exist no liability. Therefore, interest on liability was revenue in nature, and was fully allowable. Assessee further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that disallowance of FCCB interest will result in enhanced profit and deduction under section 80-IA would be justified. However, since I have held that disallowance is not justified considering the same system accepted in past when the appellant disclosed income due to the above method , the alternative submission for enhanced deduction u/s 80IA if the amount is disallowed become academic. In the result this ground of appeal is allowed. 25. Aggrieved by the action of the ld.CIT(A), Revenue is before the Tribunal. 26. Before us, the ld.DR supported the order of the AO. On the other hand, the ld.counsel for the assessee besides relying on the finding of the ld.CIT(A) further submitted that the Foreign Currency Convertible Bonds issued by the assessee-company was a liability for the purpose of business. These bonds were liable to be redeemed at the end of certain period alongwith specified rate of interest, if the bond holder does not exercise the option of converting the same into equity. The company was also having option to buy back the bonds at the prevailing market-rate and as a result the company may decide accordingly considering commercial expediency, if it was profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned extracted (supra) that in the year 2009-10 and 2010-11, when the assessee company redeemed a FCCB, it has earned income of ₹ 7,72,95,808/- and ₹ 75,30,574/- respectively and shown the same in the statement of income and offered to tax, which the department has accepted as income. However, when the assessee redeemed the balance bond in the year 2011-12, it has incurred loss of ₹ 41,21,439/- and when the same was claimed as deduction in the statement of income, the same was rejected by the AO by treating the same as capital loss. Thus, the AO has taken different and inconsistent stand, which is not permissible in law. After going through the well-reasoned order of the ld.CIT(A), we do not find any merit in the ground of revenue, which we dismiss, and confirm the impugned order. 28. Ground no.5 is against the action of the ld.CIT(A) in deleting addition of ₹ 1,12,263/- made by the AO under section 41(1) of the Act in respect of cessation of liabilities. 29. With the help of ld.representatives, we have gone through the orders of the Revenue and also perused material available on record. We find that in the balance sheet of the assessee for the last ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case in this behalf is that in the balance sheet the assessee has shown capital work-in-progress at ₹ 794.45 lakhs. The assessee was asked to furnish the details and to state whether interest on account of the said capital work-in-progress has been capitalized or not. Assessee furnished details thereof and contended that no interest bearing loan was utilized for the capital work-in-progress, but acquired out of cash profit generated during the year, which amounted to ₹ 47,88,11,656/- before tax and depreciation. However, the ld.AO has not satisfied with the explanation of the assessee, and disallowed the interest of ₹ 18,89,259/- by stating that material placed during the assessment proceedings did not reflect that no amount of interest bearing fund have been utilized in respect of capital work-in-process. Assessee preferred appeal before the ld.CIT(A), who after going through the submissions of the assessee and examining availability of interest free funds with the assessee, allowed claim and deleted the disallowance of interest. Aggrieved, Revenue is now before the Tribunal. 32. The ld.DR supported the order of the AO. On the other hand, the ld.c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions of the appellant. The AO has made disallowance by applying proviso to section 36(1)(iii) on the ground that the appellant had interest bearing and interest free funds. He therefore worked out ratio of interest bearing funds to total funds and applied the same on the work in process. Strongly objecting to the said approach, the Id AR submitted that this type of approach is not permitted as there has to be specific finding that assets comprising of work in process were purchased or acquired out of interest bearing funds on which interest was paid. He submitted that the nexus of acquisition of assets being from interest bearing funds had to be established by AO and once it is shown that the assessee had huge amount of interest free funds in the form of capital and reserve as well as current year's profit which is more than the cost of work in process, proviso to section 36(1)(Hi) cannot be applied as presumption in such a case is that acquisition is out of interest free funds available with the assessee. Having regard to the judgments of the Supreme Court in the case of Supreme Court in the case of Munjal Sales Corp vs. CIT 298 ITR 298 in which it was observed that where t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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