2010 (12) TMI 284 - AT - Income Tax

Disallowance Set off and carry forward of loss - Book profit u/s 115JB Applicability of section 43B Addition - the assessee had advanced earnest deposit of Rs. 40 crores to Fortune Holdings in order to acquire rights in and for development of the said property as per the terms and conditions reduced in the Memorandum of agreement - since there has been no proper investigation of the matter nor has been any examination of genuineness of business loss claimed and in the interests of natural justice to mitigate the assessee s grievance that it was not provided with proper or sufficient opportunity to put-forth its view on the issue either by the AO or by the CIT(A) the matter is remitted back on the file of the AO with a specific direction to look into the issue afresh of course by providing a reasonable opportunity to the assessee of being heard and to take appropriate action in accordance with the provisions of the Act Restructuring of loan - section 43B - Though actual cash did not change hands and the transaction was completed through book adjustments and that the interest liability had been paid off through giving the creditor a share in the owner ship of the assessee company and thus the assessee was entitled to claim the amount so paid off u/s 43B of the Act as a deduction and also in respect of applicability of restructuring expenses even then if such expenditure were not to be termed interest it would still be allowable as it had been incurred with the objective of squaring off a liability that was on revenue account and would thus acquire the character of a revenue expense. - decided in favor of assessee Irrecoverable interest on inter-corporate deposits - The Revenue s claim that the assessee does not carry on the business of money lending and therefore the principal of inter-corporate deposits written off was not allowable as business expenditure - the assessee had made efforts at its command to recover the dues from the above parties - Even with its best efforts to retrieve the balance interests from those parties went astray the assessee had resorted to write off the balance amount as irrecoverable - Assessee had fulfilled the conditions laid down under the provisions of s.36(l)(vii) r.w. s.36(2) of the Act - Assessee s Appeal is treated as allowed

Issues Involved:
1. Rejection of the assessee's claim for deduction of the write-off of an advance of Rs. 17.13 crores.
2. Deletion of the addition of Rs. 211.57 crores made under section 43B of the Act on account of disallowance of interest including restructuring expenses.
3. Deletion of the addition of Rs. 1.89 crores made on account of the disallowance of the amount claimed as irrecoverable interest on inter-corporate deposits written off.

Detailed Analysis:

1. Rejection of the Assessee's Claim for Deduction of the Write-off of Advance of Rs. 17.13 Crores:
The assessee, JSW Steel Limited, advanced Rs. 40 crores to Fortune Holdings for acquiring residential flats. Due to business exigency, the project was shelved, and Rs. 17.13 crores became irrecoverable and was written off. The AO disallowed the claim, treating it as capital expenditure. The CIT(A) upheld the AO's decision, stating:
- No separate agreements were entered.
- No evidence of non-recoverability.
- The write-off gave an enduring advantage, thus a capital expenditure.
- The loss did not involve a transfer of capital assets under section 45.

The Tribunal found that the issue was not properly handled by the AO or CIT(A). It was remitted back to the AO for fresh examination, instructing the AO to provide a reasonable opportunity to the assessee to present evidence.

2. Deletion of the Addition of Rs. 211.57 Crores Made Under Section 43B:
The assessee converted outstanding interest liabilities into loans and Cumulative Redeemable Preference Shares (CRPS) under a revised restructuring package. The AO disallowed the claim based on Explanation 3C to section 43B, which states that interest converted into loans is not considered paid. The CIT(A) allowed the claim, distinguishing between loans and preference shares, stating:
- Preference shareholders are owners, not creditors.
- The conversion of interest into CRPS does not fall under Explanation 3C.

The Tribunal upheld the CIT(A)'s decision, noting:
- Explanation 3C applies to loans, not preference shares.
- Preference shares confer ownership rights, not creditor status.
- The conversion of interest into share capital is not hit by Explanation 3C.

3. Deletion of the Addition of Rs. 1.89 Crores Made on Account of Irrecoverable Interest on Inter-corporate Deposits Written Off:
The AO disallowed the write-off, arguing that the amounts received should first be appropriated towards interest. The CIT(A) allowed the claim, noting:
- The amounts written off represented the interest portion.
- The assessee had made efforts to recover the dues.
- The conditions under section 36(1)(vii) read with section 36(2) were fulfilled.

The Tribunal agreed with the CIT(A), confirming that the write-off was justified and allowable as bad debts under the provisions of the Act.

Conclusion:
- The assessee's appeal was allowed for statistical purposes, and the matter regarding the write-off of the advance was remitted back to the AO for fresh examination.
- The Revenue's appeal was dismissed, upholding the CIT(A)'s decisions on the deletion of additions under section 43B and the write-off of irrecoverable interest on inter-corporate deposits.

← Previous Next →