2011 (2) TMI 1460 - AT - Income Tax

Assessment done u/s 143(3) - Claim u/s 41(1) - HELD THAT - the circular dated 22.4.1999 issued by the CBDT allowing tax payers not to be taxed u/s 41(1) if they are BIFR Companies is a beneficial circular and is binding on the Income Tax Authorities. Here admitted facts are that the assessee has written off the liabilities u/s.41(1) of the Act and it is not the case of the Revenue that he has introduced back this amounts in this very year. we uphold the order of CIT(A) and this issue of Revenue s appeal is dismissed. In this appeal Revenue is against the order of CIT(A) in deleting the addition made by AO on account of unexplained credits amounting to Rs. 2, 73, 501/-. the assessee has failed to substantiate its claim and failed to prove the genuineness of the credit entry and onus is on the assessee to prove the genuineness of each and every entry appearing in its books of account with necessary evidence to the satisfaction of the AO. Accordingly AO made addition of Rs. 2, 73, 501/-. Aggrieved assessee preferred appeal before CIT(A). The CIT(A) deleted the addition made by AO on the ground that the creditors are old in respect of which purchases were made in earlier years and therefore if the creditors are bogus the same can be added only in the year in which they are introduced by reopening the assessment of the relevant year. With regard to cessation of liability application of Section 41(1) of the Act the basis on non-service of notice u/s 133(6) is not enough. Aggrieved Revenue came in appeal before the Tribunal. HELD THAT - Considering the facts and circumstances of the case. We find that admittedly creditor are old and pertains to earlier years. In the eventuality of the creditor are bogus the same can be added only in the year of arisen not in any other year. We find the findings of CIT(A) quite reasonable and uphold the same. This issue of revenue s appeal is dismissed. Next issue in this appeal of Revenue is against the order of CIT(A) in deleting the addition made by AO on account of interest liability on term loan amounting to Rs. 5.82 lakh - According to facts and circumstances of the case. We find that the claim of the assessee is that entire financial restructuring pertains to converting 10% cumulative redeemable preference shares of Rs. 100/- face value to term loan/NCD and it was done for the purpose of business as it would substantially reduce liability of the company. The CIT(A) allowed the claim by holding that 10% preference shares also puts a liability on assessee company to give a fixed amount of dividend every year failing which if the preference shareholders are not given fixed amount of dividend continuously for two years then preference shareholders get voting right equal to equity shares. That means the assessee had actually reduced its liability and this issue is covered by the decision of Hon ble Apex Court in the case of India Cements Ltd. (supra) wherein it is held that if loans are used for the purpose of business consequential interest is to be allowed. We find that the assessee has carried out financial restructuring due to the reason that there will be substantial reduction of interest liability and that has been done with the business concern in mind. Accordingly we fully agree with the view of CIT(A) and we uphold the same. Issue regarding cash discount - HELD THAT - We find from the findings of CIT(A) as well as AO and the arguments of both the sides that sales in respect of which discount was given pertains to assessment year 2004-05 and this discount was due to prompt payment of cash this discount cannot be allowed in the present a i.e. 2005- 06. Accordingly we agree with the findings of CIT(A) and this issue of assessee s appeal is dismissed. Disallowance of expense including depreciation - HELD THAT - We direct the AO to disallow the expense relating to growing of saplings through clonal routes which are non-agricultural operation expenses. Whether the upfront fee and syndicate fee paid to the banks is capital or revenue expenditure - HELD THAT - the facts of the present case that the syndicate fee is paid for the restructure of financial liabilities and this is one time additional payment of syndicate fee and upfront fee in connection replacement of high cost loans with low cost loan pertaining to earlier years and the assessee has not derived any benefit of enduring nature and even there is no capital asset came into existence which give enduring benefit to the assessee. The upfront fee and syndicate fee paid by the assessee to the bank as one time payment is nothing but bank charges and same cannot be construed as capital expenditure . Accordingly the upfront fee and syndicate fee paid by the assessee to various banks for implementing restructuring plant for replacement of high cost loans with low cost loans even though pertaining to earlier years which are crystallized during the year is allowable as revenue expenditure. Accordingly this issue of assessee s appeal is allowed. Payment allowable u/s.37((1) - HELD THAT - According to facts of the case that the assessee has made payments prepayments of loans in the current year but even the consent of financial institutions and banks to the assessee s proposal was received during the current year and therefore the liability has been crystallized i.e. for the payment of one time payment of additional interest during the year under consideration. We find that the said payment incurred by assessee-company was purely for business purposes and by incurring the said expenditure no capital asset was created. The said payment is fully allowable u/s.37((1) it being a revenue expenditure incurred fully and exclusively for the purpose of appellant s business and not for creating any capital asset. we allow the claim of assessee and this issue of assessee s appeal is allowed. deduction under Explanation to Sec. 115JB(2) - HELD THAT - The fact that Section 10 11 and 12 are mentioned in clause-f of Explanation but not Section 14A even though they deal with similar type of expenditure i.e. relating to exempted income gives clear indication that legislatures have not intended to disallow and consequently add to the book profit expenditure relating to exempted income and debited in profit and loss account prepared as per Companies Act. But in the present case neither AO nor CIT(A) has examined explanation to Section 115JB of the act with the facts of this case hence this require verification at the level of the AO. Accordingly we set aside this issue to the file of the AO. This issue of assessee s appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Addition under Section 41(1) of the Income-tax Act, 1961.
2. Addition on account of unexplained credits.
3. Addition on account of interest liability on term loan.
4. Disallowance of expenses including depreciation.
5. Addition under Section 145A of the Income-tax Act, 1961.
6. Addition of closing process stock declared to the bank.
7. Syndicate and upfront fees as capital or revenue expenditure.
8. Disallowance of additional interest paid to financial institutions and banks.
9. Computation of book profit under Section 115JB of the Income-tax Act, 1961.
10. Interest under Sections 234B and 234C of the Income-tax Act, 1961.

Detailed Analysis:

1. Addition under Section 41(1) of the Income-tax Act, 1961:
The CIT(A) deleted the addition of Rs. 19,56,645/- made by the Assessing Officer under Section 41(1) on the grounds that similar issues were decided in favor of the assessee in previous years. The Tribunal upheld the CIT(A)'s decision, finding that the issue was covered by previous Tribunal decisions and CBDT circulars binding on the Income Tax Authorities.

2. Addition on account of unexplained credits:
The Assessing Officer added Rs. 2,73,501/- as unexplained credits due to the assessee's failure to furnish confirmations for old outstanding balances. The CIT(A) deleted the addition, stating that the creditors were old and any addition should be made in the year they arose. The Tribunal upheld the CIT(A)'s decision, agreeing that the addition should be made in the year of origin.

3. Addition on account of interest liability on term loan:
The Assessing Officer disallowed Rs. 5.82 crores of interest liability on term loans, stating that the financial restructuring did not introduce new funds. The CIT(A) deleted the addition, citing the Supreme Court's decision in India Cements Ltd. v. CIT, which allows interest on loans used for business purposes. The Tribunal upheld the CIT(A)'s decision, finding the restructuring was for business purposes and reduced liability.

4. Disallowance of expenses including depreciation:
The Assessing Officer disallowed Rs. 71,47,539/- (including Rs. 3,24,285/- of depreciation) related to agricultural activities. The Tribunal directed the Assessing Officer to disallow expenses related to growing saplings through clonal routes, as these were non-agricultural operations, following principles from previous Tribunal decisions.

5. Addition under Section 145A of the Income-tax Act, 1961:
The Tribunal upheld the addition made by the Assessing Officer under Section 145A, requiring adjustments for excise duty on raw materials in opening and closing stock. The Tribunal directed that the assessment of subsequent years be revised accordingly.

6. Addition of closing process stock declared to the bank:
The Tribunal set aside the issue to the Assessing Officer for re-examination, following principles from previous Tribunal decisions. The Assessing Officer was directed to verify stock statements and make adjustments based on quantity differences.

7. Syndicate and upfront fees as capital or revenue expenditure:
The Assessing Officer disallowed Rs. 3,09,08,839/- as capital expenditure. The CIT(A) confirmed the disallowance. The Tribunal allowed the assessee's appeal, holding that the fees were revenue expenditure, as they did not create a capital asset and were incurred for business purposes, following the Madras High Court's decision in CIT v. Sri Meenakshi Mills Ltd.

8. Disallowance of additional interest paid to financial institutions and banks:
The Assessing Officer disallowed Rs. 20,66,43,839/- as prior period and capital expenditure. The CIT(A) confirmed the disallowance. The Tribunal allowed the assessee's appeal, finding the expenditure was for business purposes and not capital in nature, following the Delhi High Court's decision in CIT v. Gujarat Guardian Ltd.

9. Computation of book profit under Section 115JB of the Income-tax Act, 1961:
The Tribunal allowed the assessee's appeal, holding that expenditure relating to exempted income cannot be added back while computing book profit under Section 115JB, following principles from previous Tribunal decisions.

10. Interest under Sections 234B and 234C of the Income-tax Act, 1961:
The Tribunal dismissed the assessee's appeal, holding that interest under Sections 234B and 234C is applicable to income computed under Section 115JB, following the Karnataka High Court's decision in Jindal Thermal Power Co. Ltd. v. DCIT.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on several issues, including the deletion of additions under Sections 41(1) and 145A, and the disallowance of unexplained credits and interest liability on term loans. The Tribunal allowed the assessee's appeals on syndicate and upfront fees, additional interest paid, and computation of book profit under Section 115JB. The Tribunal dismissed the assessee's appeal on interest under Sections 234B and 234C.