2013 (6) TMI 186 - AT - Income Tax

Setting up expenses relating to another division - Expenses incurred on HRC division included in the capital work -in- progress - CIT(A) deleted the addition - Disallowance of fees paid to financial institution for loan, Floating Rate Note (FRN) restructuring expenses and HBI Plant repairs and maintenance - Held that - It is a settled legal position that whether two businesses are one and the same business will not depend upon the nature of business or the product but on the fact whether there is unity of control and integration of the two businesses by common management, administration and finance etc. This view is supported by the judgment of Prithvi Insurance Co. Ltd. (1966 (10) TMI 49 - SUPREME Court) and in case of Veecumsees (1996 (4) TMI 6 - SUPREME Court) which have been relied upon by the CIT(A). In this case, there is clear finding by the CIT(A) that there was integration, interlacing, interdependence and dovetailing of the two division which has not been controverted before us. Therefore we have to hold that HRC project has to be taken as part of the existing business. In view of the above position all expenditure incurred in connection with new project which is of revenue in nature has to be allowed. Debenture issue expenses - CIT(A) confirmed the disallowance on the ground that the debentures were convertible in shares and thus expenditure was for expanding the capital base - Held that - As out of total expenditure of ₹ 16,48,90,000/- only ₹ 2,64,34,555/- which related to optionally convertible debentures. In the present case the debentures are not compulsorily convertible into shares. These were optionally convertible and therefore the conversion would depend upon option if any exercised by the debenture holders. Therefore it could not be said that intention was clearly to issue shares. Obviously the intention was to raise loan which could be converted into shares in future if any option was exercised. Therefore the debenture issue expenses considering the judgments of Secure Meters Ltd. case 2008 (11) TMI 66 - HIGH COURT RAJASTHAN and South India Corporation (2006 (8) TMI 153 - MADRAS High Court) have to be allowed. Respectfully following the decision uphold the order of the CIT(A). Disallowance made on account of lease rent for equipment - CIT(A) deleted the addition - Held that - The lease rent is allowable fully for the year as in the earlier years relating to same assets. There is no revaluation done for purpose of deduction of same under IT Act. The change in the method of treatment of entries in the books will not alter the character of revenue expenditure. Moreover, this change in the method of treatment has not resulted in excess allowance than normally allowable. Therefore, no prejudice is caused to revenue. During the A.Y 1995-96, the entire lease rent was allowed by the Assessing Officer thus direction to delete the addition holding that appellant s treatment of deferred payment will not alter the character of the expenditure. Interest payable on external borrowings - AO has disallowed the same u/s 40(a)(ia) stating that no TDS has been made from this interest - Assessee has submitted that the interest on the above loan was exempted under section 10(15)(iv)(c) thus no TDS was required to be made - CIT(A) deleted the addition - Held that - Where the utilization is for purchase outside India of raw material, components or Plant & Machinery, so long as exemption granted is valid, the interest received by the other party is not covered by the IT Act and by virtue of exemption granted by the Central Govt., the question of TDS on the above amount does not arise at all. Since there is no requirement of TDS, question of disallowance under section 40(a)(ia) for non deduction of tax also does not arise. Moreover, as seen from the correspondence with the Ministry of Finance by the assessee company way back in December, 1996 and February, 1997 it can be noticed that the CBDT also insisted on verifying the deployment of funds and assessee vide the letter enclosed the Auditor s certificate certifying the attached statement showing the deployment of funds equivalent to USD 40.22 million and corresponding invoices for import of capital goods for the hot rolled coils project of the company out of Euro Convertible Bonds issue of USD 75.00 million. Also approval of the RBI for the purpose of financing the Put Option under Euro Convertible Bonds issue of USD 75 Million. After examining the relevant certificates the CBDT Foreign Tax Division granted the approval under section 10(15)(iv)(c). Thus the issue of utilization of the funds was already examined by the CBDT at the time of granting exemption. As already stated once the interest income is not taxable in the hands of recipient and was exempted by the Govt. of India, question of TDS on the interest paid by assessee does not arise. Therefore, the ground has no merit and accordingly rejected. Disallowance of depreciation by reducing the WDV by the amount of principal loan waived - CIT(A) held it to be unjustified - Held that - As decided in Akzo Nobel Coatings India (P.) Ltd. case 2013 (1) TMI 311 - ITAT BANGALORE only way by which the written down value on which depreciation is to be allowed as per the provisions of section 32(1)(ii) can be altered is as per the situation referred to in section 43(6)(c)(i) A and B. Neither was there purchase of the relevant assets during the previous year nor was there sale, discarding or demolishing or destruction of those assets during the previous year. Thus, the recourse by the revenue to those provisions on the facts and circumstances of the instant case, it is held, cannot be sustained. Appeal of revenue dismissed.

Summary

Issues Involved:
1. Deletion of additions on account of expenses incurred on HRC division included in the capital work-in-progress.
2. Deletion of disallowance of fees paid to financial institutions, restructuring expenses, and repairs and maintenance shown under deferred revenue expenditure.
3. Deletion of disallowance made on account of lease rent for equipment.
4. Deletion of disallowance of interest payable on external borrowings under section 40(a)(i).
5. Disallowance of interest on proportionate basis under section 36(1)(iii).
6. Disallowance of depreciation consequent to adjustments made by AO reducing the cost of plant & machinery due to waiver of loan.

Detailed Analysis:

1. Deletion of Additions on Account of Expenses Incurred on HRC Division Included in the Capital Work-in-Progress
The assessee company started commercial production of Hot Rolled Coils (HRC) from 1.4.96. The entire revenue expenditure for this year was debited in the Profit & Loss A/c except for a portion shown under Capital Work In Progress (CWIP). For income-tax purposes, this was claimed as revenue expenditure. The AO disallowed this, stating it was capital expenditure. The CIT (A) allowed the claims as revenue expenditure, following his predecessor's orders in earlier years. The ITAT upheld this decision, referencing the Tribunal's earlier decisions in the assessee's own case for AY 1994-95, 1996-97, and 1998-99, confirming that such expenses are revenue in nature.

2. Deletion of Disallowance of Fees Paid to Financial Institutions, Restructuring Expenses, and Repairs and Maintenance Shown Under Deferred Revenue Expenditure
The AO disallowed the assessee's claim for fees paid to financial institutions for loans, Floating Rate Notes (FRN) restructuring expenses, and HBI plant repairs and maintenance, stating these were capital expenditures. The CIT (A) allowed the claims as revenue expenditure, following his predecessor's orders. The ITAT upheld this decision, referencing the Tribunal's earlier decisions in the assessee's own case, confirming that such expenses are revenue in nature.

3. Deletion of Disallowance Made on Account of Lease Rent for Equipment
The AO disallowed the lease rent for equipment, stating that the amount was not charged in the P&L Account. The CIT (A) allowed the claim, and the ITAT upheld this decision, referencing the Tribunal's earlier decisions in the assessee's own case for AY 1996-97 and 1998-99, confirming that the treatment in the books of account does not alter the character of the expenditure.

4. Deletion of Disallowance of Interest Payable on External Borrowings Under Section 40(a)(i)
The AO disallowed the interest expenditure on external commercial borrowing, stating that no TDS was deducted. The assessee contended that the interest was exempt under section 10(15)(iv)(c), and thus no TDS was required. The CIT (A) allowed the claim, and the ITAT upheld this decision, referencing the approval granted by the CBDT and confirming that the interest income was not taxable in the hands of the recipient, thus no TDS was required.

5. Disallowance of Interest on Proportionate Basis Under Section 36(1)(iii)
The AO made an addition of notional interest on advances to M/s High Grade Pellets Ltd and alternatively disallowed proportionate interest. The CIT (A) allowed the assessee's contention that interest was charged, and the ITAT upheld this decision, referencing the Tribunal's earlier decision in the assessee's own case for AY 2001-02, confirming that advances were made for commercial reasons and no part of interest can be disallowed.

6. Disallowance of Depreciation Consequent to Adjustments Made by AO Reducing the Cost of Plant & Machinery Due to Waiver of Loan
The AO disallowed depreciation by reducing the cost of plant and machinery to the extent of waiver of amounts, stating that the borrowed funds were utilized for acquisition of plant and machinery. The CIT (A) allowed the claim, referencing judicial decisions that waiver of loan cannot be reduced from the WDV of plant & machinery. The ITAT upheld this decision, referencing the Coordinate Bench decision in the case of Akzo Nobel Coatings India (P) Ltd. vs. DCIT, confirming that the disallowance of depreciation cannot be sustained.

Conclusion:
All four appeals filed by the Revenue were dismissed, with the ITAT upholding the CIT (A)'s decisions on all grounds, confirming that the expenses claimed by the assessee were revenue in nature and that the disallowances made by the AO were not justified.