2009 (4) TMI 543 - AT - Income Tax

Interest on borrowed capital, Expenditure incurred in relation to income not includible in total income

Summary

Issues Involved:
1. Deletion of additions regarding premium payable on secured premium notes under Section 36(1)(iii).
2. Disallowance of expenses related to exempt income under Section 14A.
3. Validity of reassessment proceedings under Section 147 read with Section 148.

Issue-wise Detailed Analysis:

1. Deletion of Additions Regarding Premium Payable on Secured Premium Notes:
The revenue contended that the CIT(A) erred in deleting the addition of Rs. 13.26 crores in respect of premium payable on secured premium notes claimed as a deduction under Section 36(1)(iii). The premium was appropriated against the statutory reserve, which was neither taxable nor had any provision in the books of the assessee. The revenue argued that the security premium notes were for expansion and modernization, thus capital in nature. However, the assessee cited a previous ITAT decision in its favor, where it was held that the premium paid is in the nature of interest for borrowings and should be allowed as a deduction. The ITAT upheld this view, referencing the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. v. CIT, which allowed spreading the liability over the period of debentures. Consequently, the ITAT dismissed the revenue's grounds and decided in favor of the assessee.

2. Disallowance of Expenses Related to Exempt Income Under Section 14A:
The revenue's third ground was that the CIT(A) erred in restricting the disallowance to 1% of exempt income, amounting to Rs. 5 lakhs, and deleting the balance disallowance of Rs. 36,10,680. The assessee argued that the proviso to Section 14A, inserted by the Finance Act, 2002, effective from 11-5-2001, ousted the jurisdiction of the Assessing Officer to reassess under Section 147 or pass an order enhancing the assessment for any assessment year beginning on or before 1st April 2001. The ITAT agreed with the assessee, referencing detailed discussions and decisions in similar cases, and decided this ground against the revenue.

3. Validity of Reassessment Proceedings Under Section 147 Read with Section 148:
The assessee raised an additional ground challenging the validity of the reassessment proceedings initiated under Section 147 read with Section 148. The assessee argued that the reassessment was bad in law, as the proviso to Section 14A, effective from 11-5-2001, prohibited reassessment for any assessment year beginning on or before 1st April 2001. The ITAT examined the legislative intent and statutory provisions, concluding that the Assessing Officer lacked jurisdiction to reopen the assessment for the year 1998-99. The ITAT cited the jurisdictional ITAT decision in Thacker & Co. Ltd. v. ITO, which held that the Assessing Officer is prohibited from reassessing income for years covered by the proviso to Section 14A. Consequently, the ITAT set aside the reassessment order and decided in favor of the assessee.

Conclusion:
The ITAT dismissed the revenue's appeal and allowed the assessee's appeal, ruling that the premium payable on secured premium notes is deductible under Section 36(1)(iii), disallowance of expenses related to exempt income should be restricted as per the CIT(A)'s order, and the reassessment proceedings under Section 147 read with Section 148 were invalid.