2013 (9) TMI 437 - AT - Income Tax

Business loss or Bad Debts - written off of advances advances given for material supply Held that - Losses incidental to business are allowable as deduction despite there being no specific provision for the same. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as without the business operation and all that is incidental to it, no profit can be earned Remachandar Shivnarayan v. CIT 1977 (11) TMI 2 - SUPREME Court - Case of the appellant falls under the business loss and not under the bad debts - The parameters for claim of business loss and the bad debts are different. - Decided in favor of assessee. Disallowance of interest expenditure u/s 36(1)(iii) of the Income Tax Act Held that - No interest bearing funds were utilized for advancing the sum to the subsidiary company or its related company on account of share application money - It was also noticed by the CIT(A) that the assessee has sufficient reserves i.e. Rs. 62.23 crore with the assessee - The finding of the CIT(A) remained uncontroverted that the Assessing Officer failed to prove the nexus between borrowings and subsequent advancing of loan to subsidiary company Therefore relying upon the decision in the case of S.A.Builders 2006 (12) TMI 82 - SUPREME COURT , the expenditure of interest has not been allowed Decided against the Assessee. Depreciation on leased assets u/s 32(1) of the Income Tax Act Held that - Relying upon the decision of Supreme Court of India in the case of Shaan Finance (P) Ltd. v. CIT 1998 (3) TMI 8 - SUPREME Court , it was held that the ownership of the machines remained with the assessee and there is no scope for transferring the machines to the parties - Assessee-company fulfilled all the conditions laid down u/s 32 of the Act, therefore, the claim for depreciation is to be allowed Decided in favor of Assessee. Interest income against bank guarantee or letter of credit Held that - Interests had been directly linked with the commercial activity of the assessee. When there is a commercial activity established, then, earning of interest or incurring of expenditure for earning the interest is to be treated as for business expediency Therefore, the interest expenditure or interest income is treated for the purpose of business. Depreciation in respect of Time Sharing Unit Held that - Time sharing unit is intangible asset or an asset which make the assessee entitled for deduction on account of depreciation - If it is found that this is a capital asset then depreciation is allowable u/s 32 - Accordingly, issue is remanded back to the file of A.O. to examine the issue afresh.

Summary

Issues Involved:
1. Depreciation Disallowance
2. Provision for Doubtful Debts / Loans and Advances
3. Proportionate Interest Expenditure Disallowance
4. Depreciation on Leased Assets
5. Unutilized Modvat Credit
6. Classification of Interest Earned
7. Depreciation on Time Sharing Unit

Issue-wise Detailed Analysis:

1. Depreciation Disallowance:
- The assessee did not press the issue of depreciation disallowance of Rs. 1,755 due to its small amount, leading to its dismissal.

2. Provision for Doubtful Debts / Loans and Advances:
- The A.O. added Rs. 13,52,374 and Rs. 58,541 to the income as provision for doubtful debts / loans and advances, invoking sections 41(1)(a) and 28(iv).
- The CIT(A) deleted Rs. 5,82,265, confirming Rs. 8,28,620 as not eligible for bad debt deduction but considered as business loss due to lack of evidence.
- The Tribunal upheld the CIT(A)'s deletion of Rs. 5,82,265, citing the Supreme Court decision in T.R.F. Limited Vs. CIT.
- However, the Tribunal allowed the assessee's claim for Rs. 8,28,620 as business loss, directing the A.O. to modify the order accordingly.

3. Proportionate Interest Expenditure Disallowance:
- The A.O. disallowed Rs. 53,72,376 under section 36(1)(iii) for interest on advances to sister concerns, arguing they were not for business purposes.
- The CIT(A) deleted the disallowance, noting sufficient reserves and lack of nexus between borrowings and advances.
- The Tribunal confirmed the CIT(A)'s decision, citing the Supreme Court's decision in S.A. Builders and other case laws.

4. Depreciation on Leased Assets:
- The A.O. disallowed depreciation on leased assets, arguing they were not used by the assessee.
- The CIT(A) allowed the claim, noting the leasing activity as part of regular business and citing the Delhi High Court decision in CIT v. Durrant Refrigeration Pvt. Ltd.
- The Tribunal upheld the CIT(A)'s decision, confirming the assessee's eligibility for depreciation under section 32.

5. Unutilized Modvat Credit:
- The A.O. added Rs. 26,94,819 to the closing stock for unutilized Modvat credit.
- The CIT(A) directed the A.O. to adjust the value of opening stock, purchases, sales, and closing stock per section 145.
- The Tribunal found no infirmity in the CIT(A)'s directions and advised the A.O. to follow them accordingly.

6. Classification of Interest Earned:
- The A.O. treated Rs. 1,53,69,775 interest earned as income from other sources, rejecting the assessee's claim of business income.
- The CIT(A) upheld the A.O.'s decision, referencing various Supreme Court decisions.
- The Tribunal directed the A.O. to verify the nexus between interest earned and business activity, allowing the assessee's claim if a direct nexus is established.

7. Depreciation on Time Sharing Unit:
- The A.O. disallowed Rs. 43,22,245 depreciation on Time Sharing Unit.
- The Tribunal set aside the issue to the A.O. for fresh examination, directing to determine if it is a capital asset eligible for depreciation under section 32.

Conclusion:
- The appeals of the Revenue are dismissed, and the assessee's appeals are allowed in part for statistical purposes. The Tribunal provided specific directions for the A.O. to follow, ensuring compliance with legal standards and proper verification of facts.