2006 (8) TMI 331 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest paid on bridge loans.
2. Set-off of interest income against public issue expenses.
3. Rejection of deduction under section 80-I.
4. Disallowance of amortization of public issue expenses under section 35D.
5. Interest charged under section 234B.

Detailed Analysis:

1. Disallowance of Interest Paid on Bridge Loans:

The assessee company had incurred interest expenses of Rs. 39.27 lakhs on bridge loans taken for public issue expenses. The assessee initially set off this interest against public issue expenses and did not show it in the Profit & Loss Account. The Assessing Officer (AO) disallowed this set-off, treating the interest expenditure as capital in nature and not incurred for earning the interest income.

The CIT(A) upheld the AO's decision, noting that the interest expenses were not debited to the Profit & Loss Account and were not incurred for earning the interest income. The CIT(A) observed that the bridge loan was taken for public issue expenses, making the interest expenditure a capital expenditure.

The Tribunal confirmed the CIT(A)'s order, citing the Supreme Court judgment in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798, which classified share issue expenses as capital expenditure. The Tribunal also noted that there was no direct nexus between the interest paid on the bridge loan and the interest income earned, as required under section 57(iii) of the Income-tax Act.

2. Set-off of Interest Income Against Public Issue Expenses:

The assessee earned interest income of Rs. 51.55 lakhs on share application money deposited in the bank. The AO treated this interest income as "income from other sources" under section 56. The assessee's claim to set off this interest income against public issue expenses was rejected.

The Tribunal upheld this decision, stating that the interest income was rightly taxed under section 56 and that the share issue expenses were capital in nature and could not be adjusted against the interest income. The Tribunal referred to the legal principles established in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) and other relevant cases.

3. Rejection of Deduction Under Section 80-I:

The assessee claimed deduction under section 80-I for profits derived from its industrial undertaking. The AO and CIT(A) rejected this claim, noting that the assessee had acquired an existing printing unit and reconstructed it, which did not qualify for deduction under section 80-I.

The Tribunal found that the CIT(A) had not fully examined the conditions under section 80-I(2) and the relevant explanations. The Tribunal remanded the issue back to the AO for a fresh decision, directing the AO to examine the eligibility of the assessee for deduction under section 80-I de novo.

4. Disallowance of Amortization of Public Issue Expenses Under Section 35D:

The assessee sought amortization of public issue expenses under section 35D. The AO and CIT(A) denied this claim, stating that the expenses were not incurred in connection with the extension of the industrial undertaking or setting up a new industrial unit, as required under section 35D(1)(b).

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had not provided evidence to show that the issue expenses were incurred for the extension of the industrial undertaking or setting up a new unit. The Tribunal confirmed the factual and legal findings of the Departmental authorities.

5. Interest Charged Under Section 234B:

The assessee contested the interest charged under section 234B. The Tribunal noted that the levy of interest under section 234B is mandatory and automatic. However, the Tribunal directed the AO to recompute the interest chargeable under section 234B based on the income finally determined.

Conclusion:

The appeal filed by the assessee was partly allowed. Ground Nos. 1, 4, 5, and 6 were dismissed, while Ground Nos. 2 and 3 were remanded to the AO for a fresh decision. The Tribunal provided specific directions for the AO to follow in reassessing the eligibility for deductions and recomputing interest under section 234B.