2013 (10) TMI 1122 - AT - Income Tax

Expenditure in relation to demerger - Whether expenditure, being related to pharma division and specifically agreed upon, is allowable as deduction u/s.37 Held that - The assets and liabilities of that pharma division, which was transferred, did not contain the OFCD. Meaning thereby, in a situation when an asset and the connected liability in demerger is not transferred by the Demerged Company to a Resulting Company then naturally the Resulting Company shall not in any way be concerned about that asset, so even can not claim expenditure. On account of these facts, it is held that the premium on redemption of debenture was not the liability of the assessee. Hence, it was wrongly claimed for year under consideration. The provision of Section 37(1) are unambiguous that an expenditure is allowable only if the expenditure is laid out or expanded wholly and exclusively for the purpose of business of the assessee - Alleged expenditure in question did not pertain or relate to the assessee Decided against the Assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 42,94,240/- being premium on redemption of debentures.
2. Applicability of Section 37(1) of the Income Tax Act.
3. Interpretation of the Scheme of Demerger sanctioned by the Hon'ble Gujarat High Court.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 42,94,240/- being premium on redemption of debentures:
The assessee company, engaged in manufacturing and trading pharmaceutical products, claimed an expenditure of Rs. 42,94,250/- as "premium on redemption of debentures" under "Misc. Expenses." The AO noted that this expenditure was related to fully convertible debentures (OFCDs) issued by Unimed Technologies Ltd., which were not transferred to the assessee's balance sheet during the demerger. The AO disallowed the expenditure, stating it was not incurred for the assessee's business purposes.

2. Applicability of Section 37(1) of the Income Tax Act:
The AO disallowed the expenditure under Section 37(1) of the Income Tax Act, reasoning that the expenditure was not for earning any income accrued to the assessee. The CIT(A) upheld this disallowance, stating that the liability on account of debentures was not transferred to the appellant (assessee) during the demerger. The CIT(A) emphasized that the payment made by the appellant on account of premium on redemption of debentures was not for the appellant's business but for another entity, rendering it gratuitous in nature.

3. Interpretation of the Scheme of Demerger sanctioned by the Hon'ble Gujarat High Court:
The Scheme of Demerger, approved by the Hon'ble Gujarat High Court, transferred the pharmaceutical business division of Unimed Technologies Ltd. to Milmet Pharma Ltd. The name of the resulting company was changed to Unimed Technologies Ltd., and the demerged company was renamed Unimed Investments Ltd. The scheme specified that only the pharmaceutical undertaking was transferred to the appellant, and no debenture liability was allocated to the appellant. The CIT(A) and the Tribunal noted that the OFCDs remained with Unimed Investments Ltd., and the appellant could not claim the expenditure as it was not their liability.

Detailed Analysis:

Facts and Arguments:
The assessee argued that the liability of redemption premium was agreed upon by the Board of Directors before the demerger, and the expenditure was related to the pharma division, making it deductible under Section 37(1). The assessee cited the decision of Madras Industrial Investment Corp. 225 ITR 802 (S.C.) to support the claim that the premium on redemption is allowable.

Findings and Conclusion:
The Tribunal reviewed the Scheme of Demerger and the balance sheets, noting that the OFCDs were not transferred to the assessee. The Tribunal held that the premium on redemption of debentures was not the liability of the assessee but of Unimed Investments Ltd. The expenditure did not pertain to the assessee's business, and thus, it was not allowable under Section 37(1). The Tribunal affirmed the findings of the lower authorities and dismissed the appeal.

Result:
The appeal of the assessee was dismissed, upholding the disallowance of Rs. 42,94,240/- being premium on redemption of debentures.