2013 (2) TMI 555 - AT - Income Tax

Deemed income u/s 41(1) - interest liability from the remission of loan liability - loan was taken from ING Vysya Bank in the year 2001 was for financing capital assets like buildings, plant and machinery, etc. - assessee submitted that the amount of Rs.8,41,00,728 waived by the bank under the OTS is also only principal component and there is no interest component therein, which could be disallowed u/s. 41(1) of the Act. - Revenue submitted that the facts are not clear as to whether the loan given by the bank was a term loan or working capital loan. - held that - Mahindra & Mahindra Ltd. (2003 (1) TMI 71 - BOMBAY HIGH COURT), the Hon ble Bombay High Court, while considering the loan agreement, which was for import of plant and machinery, held that since the loan was for purchase of capital asset, the amount waived cannot be treated as income of the assessee either under S.28(iv) or under S.41(1) of the Act. - merely relying upon the expression principal used in the said letter, one cannot conclude that the amount of Rs.8,41,00,728 contains only the principal component of loan, and no element of interest is embedded therein. - AO to verify the facts. Disallowance of expenses u/s 14A - Dividend income exempted u/s 10(34) - held that - to warrant disallowance in terms S.14A of the Act, there has to be in the first place, certain income which does not form part of the total income and certain expenditure should be found by the Revenue authorities, to have been incurred by the assessee in relation to such income. In the present case, what is disallowed by invoking the provisions of S.14A of the Act, is the interest attributable to the investments made in shares by the assessee in M/s. Nagarjuna Oil Corporation Ltd. and the reason for the disallowance of such interest is that the return in the form of dividend, earned if any, from such investments would be exempt from tax. The reasoning given for the impugned disallowance is not correct, since what is liable to be disallowed in terms of S.14A is only the expenditure, if any incurred, by the assessee in relation to the dividends, if any earned, by the assessee from such investments - Matter set aside and remanded back to AO for verification. Disallowance towards interest free advances - held that - when the assessee itself is having huge interest-bearing debt liability as at the end of the previous year, proportionate interest attributable to interest free advance made to the sister concern has to be disallowed. - The plea of the assessee that the advance was out of internal accruals and not from borrowed money is also not acceptable - Decided against the assessee. Commercial expediency involved to justify the expenditure in question. It has to be borne in mind that if there is mutual benefit in a transaction or mutuality of transactions between the assessee and its sister concern, then only the expenditure can be allowed on grounds of commercial expediency. Then, again the mandate of commercial expediency has to be weighed, taking into account the financial well being of the assessee at the given time.

Issues Involved:
1. Disallowance of interest liability from the remission of loan liability.
2. Disallowance of notional interest attributable to investments made in shares of a subsidiary company.
3. Disallowance of interest attributable to interest-free advances.
4. Disallowance of R&D expenditure paid to a research institute.

Issue-wise Detailed Analysis:

1. Disallowance of interest liability from the remission of loan liability:
The assessee challenged the CIT(A)'s direction to disallow the interest liability from the remission of loan liability. The assessee argued that the remission was of the principal amount, which is capital in nature and not taxable under Section 41(1)(a) or Section 28(iv) of the Income Tax Act. The CIT(A) agreed with the assessee that the principal amount of loan waived by the lender is not chargeable to tax. However, the CIT(A) noted that the waived amount included an interest component, which is taxable under Section 41(1). The Tribunal found that the matter needs re-examination by the Assessing Officer to ascertain the composition of the amount waived and whether the assessee obtained any benefit in earlier years. The Tribunal set aside the CIT(A)'s order and restored the matter to the Assessing Officer for re-examination.

2. Disallowance of notional interest attributable to investments made in shares of a subsidiary company:
The Assessing Officer disallowed notional interest on investments made in shares of Nagarjuna Oil Corporation Ltd., attributing it to the assessee's outstanding loans. The assessee argued that the investment was made out of profits and not borrowed funds, and for business purposes. The CIT(A) upheld the disallowance, noting the assessee's significant outstanding loans and lack of reserves. The Tribunal found that the disallowance under Section 14A requires finding of actual expenditure incurred in relation to exempt income. Since the records did not clarify whether exempt income was earned or expenditure incurred, the Tribunal set aside the CIT(A)'s order and restored the matter to the Assessing Officer for fresh examination.

3. Disallowance of interest attributable to interest-free advances:
The Assessing Officer disallowed interest on interest-free advances made to Nagarjuna Oil Corporation Ltd., attributing it to the assessee's borrowed funds. The assessee argued that the advances were made out of internal accruals and for business purposes. The CIT(A) upheld the disallowance, citing the assessee's significant borrowed funds and lack of immediate business purpose. The Tribunal found that commercial expediency must be examined based on the facts of each case. It upheld the disallowance for advances to Nagarjuna Finance Ltd. but set aside the disallowance for advances to VIPL and others, directing the Assessing Officer to re-examine the matter for business connection and commercial expediency.

4. Disallowance of R&D expenditure paid to a research institute:
The Assessing Officer disallowed R&D expenditure paid to Nagarjuna Agricultural Research and Development Institute, citing lack of CBDT approval for the year under consideration. The assessee argued that the institute was approved in earlier years and the renewal application was pending. The Tribunal set aside the orders of the lower authorities and restored the matter to the Assessing Officer for fresh examination, directing verification of the institute's approval status for the relevant year.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes and partly allowed the assessee's appeal for statistical purposes, directing re-examination and fresh decisions by the Assessing Officer on the specified issues.

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