1999 (1) TMI 530 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of interest u/s 36(1)(iii) of the Income-tax Act.
2. Allocation of interest on capital borrowed and utilized for investments.
3. Disallowance of expenses related to debenture issue.
4. Disallowance of commitment charges.
5. Disallowance of depreciation, salaries, and food expenses for guest houses.
6. Various other disallowances including share issue expenses, prospecting and survey expenses, AGM expenses, entertainment expenses, Delhi office expenses, foreign travel expenses, payments to Tata Sports Club, Fort Medical Society, and Sarva Dharma Maitri Pratisthan.
7. Restriction of profits for the purpose of section 80HHC.

Summary:

1. Disallowance of Interest u/s 36(1)(iii):
The Assessing Officer (AO) disallowed interest of Rs. 35,13,55,815 related to the fertilizer plant at Babrala, considering it a separate business not carried on during the relevant previous year. The Tribunal examined whether the fertilizer business was part of the assessee's existing business by applying tests of inter-connection, inter-lacing, and inter-dependence. The Tribunal concluded that the fertilizer unit at Babrala, the chemical unit at Mithapur, and the detergent business at Pithampur constituted one composite business. Therefore, the disallowance of interest was deleted.

2. Allocation of Interest on Capital Borrowed for Investments:
The AO allocated interest of Rs. 31,30,32,000 to investments, disallowing Rs. 20,35,30,690 as it was attributed to tax-free bonds. The Tribunal held that investments were made in the course of business and the fact that they were tax-free did not warrant disallowance of interest. The Tribunal deleted the disallowance, directing that the interest should be considered under the head "Business."

3. Disallowance of Debenture Issue Expenses:
The AO disallowed expenses of Rs. 16,99,497 incurred for the issue of debentures, arguing it was for a distinct business not carried on during the previous year. The Tribunal, following its view on the composite nature of the business, allowed the deduction of debenture issue expenses.

4. Disallowance of Commitment Charges:
The AO disallowed commitment charges of Rs. 2,37,52,000 paid to financial institutions for loans related to the fertilizer project. The Tribunal, consistent with its earlier findings, deleted the disallowance, allowing the commitment charges as a deduction.

5. Disallowance of Depreciation, Salaries, and Food Expenses for Guest Houses:
The Tribunal, following the decision in Mahindra & Mahindra Ltd. v. Dy. CIT, held that depreciation cannot be disallowed u/s 37(4). The disallowance of salaries and food expenses was not pressed by the assessee.

6. Various Other Disallowances:
The assessee did not press grounds related to share issue expenses, prospecting and survey expenses, AGM expenses, entertainment expenses, Delhi office expenses, foreign travel expenses, payments to Tata Sports Club, Fort Medical Society, and Sarva Dharma Maitri Pratisthan due to the smallness of the amounts involved.

7. Restriction of Profits for Section 80HHC:
The ground related to restricting profits for section 80HHC by reducing 90% of the interest was not pressed by the assessee.

Conclusion:
The appeal was partly allowed, with significant relief granted on the major issues of interest disallowance and allocation, debenture issue expenses, and commitment charges.