2013 (7) TMI 113 - AT - Income Tax

Expenses incurred on substitution of high interest bearing NCD s - revenue v/s capital - explanation of the assessee that there was a programme of debt re-structuring by the company, therefore an expenditure was incurred on pre-payment of NCDs of Bank of Baroda, hence there was reduction in interest rate which had improved the profitability of the company thus allowable as a deduction u/s.37(1) Held that - There is no provision in the act which subscribe the claim of deferred Revenue Expenditure in one year. Amortization of certain expenses are allowable only u/s.35D, 35DD & 35DDA. Otherwise an expenditure is allowable in the year expended wholly and exclusively for the purpose of business. With this legal background,that for AY 2002-03 the Tribunal has also commented that the assessee-company had not deferred the payment rather the entire payment was made in that year. Due to this reason, hereby held that by reducing the liability of interest as claimed by the assessee on account of restructuring of debt the assessee has gained the commercial benefit, therefore the incurring of the expenditure in question can be said to be expended wholly and exclusively for the purpose of the business. The same is allowable u/s.37(1). The assessee has to establish the evidence in respect of the payment of the amount of ₹ 5 lacs claimed to have been made in full on 29/07/2002, therefore restore this ground back to the stage of the AO for the limited purpose of verification of the fact of date of full payment, so as to allow the same in that year as per law. Cost incurred on replacement of core engine of Captive Power Plant - revenue v/s capital - assessee was not the owner of the machinery in question but was used as a leased hold property - Held that - As decided in CIT vs. Madras Auto Service (P) Ltd. 1998 (8) TMI 1 - SUPREME Court a leased assets cannot be held as a property belonging to the assessee, therefore the expenditure incurred on that property is in the nature of Revenue Expenditure - not in agreement with the view taken by the AO & CIT(A) considering the nature of the business carried on by the assessee as demonstrated from the flow diagram and hereby hold that the replacement expenditure was in respect of one of the part of the machinery, being required to be replaced after every 24000 running hours, hence nothing but a revenue expenditure and to be fully allowed in the year expended by the assessee - in favour of assessee. Deduction u/s.80HHC while computing book profit in accordance with provisions of section 115JB - MAT - disallowance of claim - Held that - As decided in Bhari Information Technology 2011 (10) TMI 19 - Supreme Court of India deduction claimed by the assessee under Section 80HHE has to be worked out on the basis of adjusted book profit under Section 115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business - in favor of assessee. Depreciation in respect of leased out vehicles - Held that - As decided in Shaan Finance (P) Ltd. 1998 (3) TMI 8 - SUPREME Court where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of business. In the present case, it is worth to mention that GNFC Ltd. has shown the lease rent as income in its hand under the head business income . In the case of the lessor, i.e. GNFC Ltd. the issue has been consistently decided that the assets being under the ownership of GNFC Ltd., hence entitled for claim of depreciation and that the lease rent received from the assessee is required to be assessed as business income . Thus the lease rent paid is in the normal course of business of the assessee on the leased assets, hence required to be allowed as deduction - in assessee s favour.

Summary

Issues Involved:
1. Disallowance of expenses incurred on substitution of high-interest bearing NCDs.
2. Classification of expenditure on replacement of the core engine of Captive Power Plant as capital or revenue in nature.
3. Deduction under section 80HHC while computing book profit under section 115JB.
4. Inclusion of excise duty and sales tax in total turnover and reduction of job work charges and interest income from profit of the business.
5. Disallowance of lease rent paid during the year.
6. Deduction of debt restructuring expenses.
7. Interest charged under section 234B.

Detailed Analysis:

1. Disallowance of Expenses on Substitution of High-Interest Bearing NCDs:
The Assessee claimed a deduction of Rs. 5 lacs for incidental expenditure incurred on substituting high-interest NCDs, arguing it was a revenue expenditure under section 37(1) of the IT Act. The AO allowed only 1/5th of the expenditure, adding Rs. 4 lacs to the returned income, citing that the benefit of reduced interest would be enjoyed over time. The CIT(A) confirmed this disallowance. The Tribunal noted that the entire payment was made in the year under consideration and held that the expenditure was wholly and exclusively for business purposes. The matter was remanded to the AO for verification of the payment date.

2. Replacement of Core Engine of Captive Power Plant:
The Assessee claimed Rs. 4,16,93,695/- as a revenue expenditure for the replacement of the core engine of a leased Captive Power Plant, which was amortized over three years in the books. The AO treated it as a capital expenditure, allowing depreciation and disallowing the remaining amount. The CIT(A) affirmed this view. The Tribunal, however, held that since the Captive Power Plant was leased, the replacement cost was a revenue expenditure and allowed the full deduction in the year expended.

3. Deduction under Section 80HHC while Computing Book Profit under Section 115JB:
The Assessee claimed a deduction of Rs. 1,98,98,439/- under section 80HHC while computing book profit under section 115JB. The AO and CIT(A) disallowed this deduction, stating it could only be claimed under normal provisions. The Tribunal, referencing the Supreme Court's decision in Ajanta Pharma Ltd., held that the deduction should be allowed based on book profit and remanded the computation to the AO for verification.

4. Inclusion of Excise Duty and Sales Tax in Total Turnover:
The Assessee argued that excise duty and sales tax should not be included in total turnover and that job work charges and interest income should not be reduced from business profits for section 80HHC deduction. The CIT(A) did not adjudicate this issue. The Tribunal restored the matter to the CIT(A) for proper adjudication.

5. Disallowance of Lease Rent Paid:
The Assessee paid Rs. 7,48,28,546/- as lease rent for assets taken on lease from its holding company. The AO treated the transaction as a financing arrangement, disallowing the lease rent and allowing depreciation instead. The CIT(A) affirmed this view. The Tribunal, referencing the Supreme Court's decision in I.C.D.S. Ltd. vs. CIT, held that the lease rent was a business expenditure and allowed the deduction.

6. Deduction of Debt Restructuring Expenses:
The Assessee claimed Rs. 1,50,000/- as a part of the deferred debt restructuring expenses incurred in AY 2002-03. The Tribunal noted that the entire expenditure had already been allowed in AY 2002-03 and dismissed this ground.

7. Interest Charged under Section 234B:
The Assessee contested the interest charged under section 234B. The Tribunal deemed this issue consequential and dismissed it without further adjudication.

Conclusion:
The Assessee's appeal was partly allowed, with specific issues remanded for further verification and adjudication. The Tribunal provided detailed reasoning for each decision, ensuring adherence to legal precedents and statutory provisions.