2013 (2) TMI 66 - AT - Income Tax

Disallowance of interest expense - Interest free advances to associate concerns Held that - As concluding from the fact of the case what was given by the assessee to its associate concern was a total sum of Rs.4.42 crores for A.Y. 2005-06. Out of the said amount a sum of Rs.1.55 crore pertained to the deposits given to various directors and related parties as advance against office premises which was utilized by the assessee for the purpose of business. Therefore disallowance sustained only to the extent of interest pertaining to interest free loans and advances In favour of assessee Disallowance of interest expense Interest on borrowed fund - Interest free advances to associate concerns Assessee contended that they have enough interest free funds Held that - Following the decision in case of Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - HIGH COURT BOMBAY) that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. Share capital and share application money can well be said to be available as own funds with the assessee and it cannot be said that since it was utilized in the assets, it lost its character of own funds Delete the addition In favour of assessee Addition on account of excess amortization - assessee has purchased video rights / other copy rights - 100% cost of such rights, if any part of such right is sold during the year, are claimed as revenue expenditure as per accounting method consistently adopted A.O. argued that assessee has not valued the pendancy of rights as its closing stock, therefore, the cost to the extent it could be allowed should be restricted to the sale receipts on partial sale of total bundle of rights A.O. after reducing the revenue received by the assessee against those rights has added the balance amount to the income of the assessee Held that - Without properly valuing the opening as well as closing stock of the assessee, the AO could not adopt such course of action. As decided in case of Rajendra Prasad Moody (1978 (10) TMI 133 - SUPREME COURT) that if the expenditure has been laid out or expended wholly and exclusively for the purpose of making or earning income, the allowability thereof is not dependent upon the making or earning income. The portion of bundle of rights which were standing on 1st Day of the relevant accounting year has not been taken into consideration, similarly closing stock has not been valued probably on account of difficulty to be faced in this respect - In favour of assessee

Summary

Issues Involved:
1. Disallowance of interest expenditure under sections 36(1)(iii) and 40A(2) of the Income Tax Act, 1961.
2. Allowability of excess amortization on rights purchased.

Detailed Analysis:

1. Disallowance of Interest Expenditure:

Facts and Arguments:
- The main issue in both cross appeals for assessment years 2005-06 and 2006-07 was the disallowance of interest expenditure attributable to non-business, interest-free advances/loans.
- The AO disallowed the entire interest of Rs.4,59,54,419/- for A.Y 2005-06, citing the use of interest-bearing borrowed funds for non-business purposes.
- The assessee argued that sufficient own funds were available, and the interest-free advances were made from these funds, not from borrowed funds.
- The CIT(A) partially agreed with the assessee, reducing the disallowance to the interest attributable to non-business advances amounting to Rs.3,27,82,401/-.

Tribunal's Findings:
- The Tribunal noted that the assessee had sufficient interest-free funds to cover the interest-free advances.
- Relying on the Bombay High Court decision in CIT vs. Reliance Utilities & Power Ltd., it was held that if there are sufficient interest-free funds, it should be presumed that the investments were made from these funds.
- The Tribunal found that the AO's disallowance was excessive and not justified.
- The Tribunal agreed with the CIT(A) that only the interest attributable to the amount of Rs.3,27,82,401/- could be disallowed but further concluded that, given the sufficient interest-free funds, even this disallowance was not warranted.
- The Tribunal also dismissed the applicability of section 40A(2), noting that the AO did not provide specific grounds for its application.

Conclusion:
- The appeals filed by the assessee were allowed, and the disallowance of interest expenditure was deleted.
- The appeals filed by the revenue were dismissed.

2. Allowability of Excess Amortization on Rights Purchased:

Facts and Arguments:
- The AO restricted the cost of distribution/exhibition rights to the sale proceeds received during the year, adding Rs.1,30,73,926/- to the assessee's income for A.Y 2005-06.
- The assessee argued that its method of accounting for these rights, which involved writing off the entire cost against sales, was consistent and in line with Rule 9B of the Income Tax Rules, 1962.
- The CIT(A) agreed with the assessee, noting that the method was consistently followed and the AO did not verify its application in earlier and subsequent years.

Tribunal's Findings:
- The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's approach disrupted the consistent method of accounting without adequate reasons.
- The Tribunal noted that the AO's method was not revenue-neutral and failed to consider the impact on earlier and subsequent years.
- The Tribunal cited the Supreme Court decision in CIT vs. Rajendra Prasad Moody, which held that the allowability of expenditure is not dependent on earning income.

Conclusion:
- The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeals on this ground.

Final Order:
- The appeals filed by the assessee were allowed, and the appeals filed by the revenue were dismissed. The Tribunal's order was pronounced in the open court on 19.10.2012.