2013 (7) TMI 701 - HC - Income Tax

Disallowance u/s 14A - Expenditure for dividend income - Tribunal cancelled disallowance since no expenditure proved - Held that - It transpires from record that the assessee s own funds were at higher than the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends - Both the CIT (Appeals) and the Tribunal have noted that the assessee had sufficient funds available with it which was more than the amount it invested for earning the dividend income both these authorities have correctly approached the issue by setting aside the order of disallowance under Section 14A of the Act in respect of interest expenditure - Decided against Revenue. Deduction u/s 10(2)(xv) - Corporate Debt Restructuring - Tribunal deleted disallowance - Held that - For the waiver of the loan the payment has been made to the financial consultants. This was for the purpose of business and the same was held to be allowable under Section 37(1) of the Act - Once the expenditure is held to be revenue in nature incurred wholly and exclusively for the purpose of business it can be allowed in its entirety in the year in which it is incurred - when the spreading is done for over a period of six years and as the assessee respondent has no objection to such revenue expenditure being spread out though it could have insisted for this amount to be allowed in the year under consideration with no such objection having been raised the Revenue would not succeed in this issue as the expenditure is held to be revenue in nature - Following decision of Madras Industrial Investment Corporation Limited Versus Commissioner of Income-Tax 1997 (4) TMI 5 - SUPREME Court - Decided against Revenue. Income u/s 28(iv) - Held that - If an amount is received in the course of a trading transaction even though it is not taxable in the year of receipt as being of revenue character the amount changes its character when the amount becomes the assessee s own money because of limitation or by any other statutory or contractual right. When such a thing happens common sense demands that the amount should be treated as income of the assessee - As the assessee company was not found to be carrying on the business of obtaining loan the Court held that the remission of such loan by the creditors was not a benefit arising out of such business and therefore such remission of unsecured loan was not taxable at the ends of the assessee - Following decision of CIT v. Chetan Chemicals Pvt. Ltd. 2001 (10) TMI 12 - GUJARAT High Court - Decided against Revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act towards interest and other expenses incurred in relation to exempted income of dividend.
2. Allowance of Corporate Debt Restructuring expenses as revenue expenditure.
3. Exclusion of waived principal loan amount from total income.

Detailed Analysis:

1. Disallowance under Section 14A:
The first issue concerns the disallowance made by the Assessing Officer (AO) of Rs.91.80 lakh under Section 14A of the Income Tax Act towards interest and other expenses incurred in relation to exempted income of dividend. The AO disallowed these expenses on the grounds that the respondent assessee utilized interest-bearing borrowed funds for non-business purposes and failed to establish that the investments made for earning dividends were from their own funds. The CIT (Appeals) overturned this decision, emphasizing that the AO did not pinpoint specific expenses incurred towards earning the exempt income and relied on the Delhi ITAT decision in ACIT v. Eicher Ltd., which necessitates factual evidence of incurred expenses. The Tribunal upheld the CIT (Appeals) decision, noting that the assessee had sufficient own funds exceeding the investments made, thus negating the use of borrowed funds for investment. The Tribunal confirmed a disallowance of Rs.5 lakh for administrative expenses as a compromise to end the dispute. The High Court found no error in the Tribunal's decision, agreeing that the assessee's own funds were higher than the investments and the AO's application of Section 14A was incorrect.

2. Allowance of Corporate Debt Restructuring (CDR) Expenses:
The second issue pertains to the allowance of CDR expenses of Rs.2.57 crore paid to financial consultants. The AO treated these expenses as capital expenditure, arguing they provided an enduring benefit by reducing the interest burden. The CIT (Appeals) and the Tribunal, however, classified these expenses as revenue in nature, referencing the Supreme Court decision in Madras Industrial Investment Corporation Ltd. v. CIT, which allows spreading such expenses over a period. The Tribunal upheld the CIT (Appeals) decision to spread the CDR expenses over six years, which was not objected to by the assessee. The High Court agreed, noting that the expenses were incurred wholly and exclusively for business purposes and were correctly spread over six years.

3. Exclusion of Waived Principal Loan Amount:
The third issue involves the exclusion of Rs.60.13 crore waived from principal loans from the total income. The AO considered this waiver as income under Section 28(iv) of the Act, arguing it made the assessee richer by that amount. The CIT (Appeals) and the Tribunal disagreed, relying on the Gujarat High Court decision in CIT v. Chetan Chemicals Pvt. Ltd., which held that remission of loan does not constitute taxable income if the assessee is not in the business of obtaining loans. The Tribunal emphasized that the waiver of principal loan was not a trading transaction and thus not taxable under Section 28(iv) or Section 41(1). The High Court found no error in this reasoning, affirming that the remission of loan was not taxable as income.

Conclusion:
The High Court dismissed the Revenue's appeal, concluding that no substantial question of law arose from the Tribunal's findings. The decisions on all three issues were upheld, affirming the CIT (Appeals) and Tribunal's interpretations and applications of the relevant legal provisions.