2017 (5) TMI 1514 - AT - Income Tax

Raising of funds through SPN - business expenditure allowability - whether capital borrowed on which interest was paid related to same business or not and if the answer is NO, then claim cannot be allowed. - Held that - The transaction which has taken place in this manner, according to the AO, was not in accordance with law. But he failed to point out which provision of the Income Tax Act has been violated by the assessee or which guidelines of the SEBI has not been adhered to. According to the assessee, treatment made by the investor is of no consequences as far as allowance of expenditure in the case of assessee-company is concerned. As far as fact that this capital was raised for the purpose of business is concerned, nobody has denied it because in earlier years, this fact has been approved by the Hon ble High Court, the AO has not discovered any new facts. He considered this exercise at the end of the assessee as a colourable exercise only under the impression that the assessee has claimed deduction of interest expenditure, whereas corresponding equal amount was not offered for tax in the hands of the applicants. To our mind, it cannot be reason for disallowing the claim of the assessee. If earning of equal amount of income is considered as basic principle for allowance of expenses, then no assessee would suffer any loss. Incidence of taxability has occurred in the hands of the applicants in a different manner. They were investors. They have shown capital gain on their investment. Therefore, if incidence of interest income not resulted to them cannot be a ground to doubt the business expenditure of the assessee. Other reasons assigned by the AO would indicate that the AO tried to take business decision in the case of the assessee. He was of the view that there was no necessity of issuing any instrument like SPN, because other associate companies of the assessee had their own surplus funds from which they can finance Bhavnagar project. Similarly, according to the AO, claim of issuance of SPN should not be formulated in this manner. To our mind both these reasons are contrary to the principle laid down by the Hon ble Supreme Court in the case of Hero Cycles Pvt.Ltd. 2015 (11) TMI 1314 - SUPREME COURT OF INDIA as well as Taparia Tools Ltd (2015 (3) TMI 853 - SUPREME COURT). Thus, steps at the end of the AO amounts to interference in taking business decision, which is not permissible to him. AO cannot contend that how much finance and at which rate would be sufficient for the assessee for running its business. His area would be whether the assessee has incurred any undue expenditure, which was not required for the purpose of business or not. Thus in our view, there is no disparity of facts from the earlier years, which can persuade ld.Revenue authority to take a different view. Issue in dispute is squarely covered in favour of the assessee

Issues Involved:
1. Disallowance of interest expenditure in Soda Ash and LAB Front End divisions.
2. Whether the interest expenditure was for the same business or extension of the business.
3. Whether the expenditure was of a capital or revenue nature.
4. Whether the expenditure accrued during the year.
5. Necessity and genuineness of issuing Secured Premium Notes (SPNs).
6. Whether the transaction was for benefiting the promoters and directors or for the business purposes.
7. Opportunity of hearing provided to the assessee.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure in Soda Ash and LAB Front End Divisions:
The assessee, a private limited company, claimed interest expenditure of ?36,23,43,684 in the Soda Ash division and ?6,01,29,222 in the LAB Front End division as revenue expenditure. The Assessing Officer (AO) disallowed these expenditures, treating them as capital expenditures in the books of accounts. The Tribunal noted that the issue was previously adjudicated and required re-examination due to an apparent error in the Tribunal's earlier order.

2. Whether the Interest Expenditure was for the Same Business or Extension of the Business:
The AO formed an opinion that the expenditures were not for the same business or its extension. However, the Tribunal referred to the Hon'ble Gujarat High Court's decision, which confirmed that there was an interconnection and interlacing of management among various units of the assessee-company. The High Court held that the business was a continuation of the existing business, not a new one.

3. Whether the Expenditure was of a Capital or Revenue Nature:
The AO argued that the interest expenditure was of a capital nature, while the assessee contended it was revenue expenditure under section 36(1)(iii) of the Income Tax Act. The Tribunal, referring to the High Court's decision, upheld that the expenditures were allowable as revenue expenditures since they were incurred for the expansion of the existing business.

4. Whether the Expenditure Accrued During the Year:
The AO questioned the accrual of the expenditure during the year. The Tribunal noted that the Hon'ble High Court had previously allowed similar expenditures on a pro-rata basis in earlier years, thereby supporting the assessee's claim for the current year.

5. Necessity and Genuineness of Issuing Secured Premium Notes (SPNs):
The AO questioned the necessity of issuing SPNs, suggesting it was a pre-mediated exercise to avoid taxes. The Tribunal, however, found no evidence to support this claim. The Tribunal emphasized that the AO should not interfere with business decisions unless there is clear evidence of tax avoidance. The Tribunal referred to the Hon'ble Supreme Court's decisions in Hero Cycles P. Ltd. and Taparia Tools Ltd., which stated that the Revenue cannot question the business decisions of the assessee if they are genuine and for business purposes.

6. Whether the Transaction was for Benefiting the Promoters and Directors or for the Business Purposes:
The AO alleged that the SPN issuance was primarily for benefiting the promoters and directors. The Tribunal found no basis for this claim, noting that the SPNs were issued as a public offer and were subscribed by the promoters due to their substantial shareholding. The Tribunal concluded that the transaction was genuine and for business purposes.

7. Opportunity of Hearing Provided to the Assessee:
The assessee argued that it was not given adequate opportunity to present its case. The Tribunal acknowledged this issue but focused on the substantive legal and factual aspects, ultimately deciding in favor of the assessee based on the merits of the case.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the disallowance of interest expenditure. The Tribunal's decision was heavily influenced by the Hon'ble Gujarat High Court's earlier rulings in favor of the assessee, confirming that the expenditures were for the expansion of the existing business and were allowable as revenue expenditures. The Tribunal also emphasized that the AO should not interfere with genuine business decisions and should focus on the legality and genuineness of the transactions.

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