2014 (1) TMI 75 - AT - Income Tax

Disallowance of Interest on Inter Company Deposit u/s 36(2)(iii) of the Act Held that - Unsecured loans on which assessee had paid interest were carried over from the earlier year and in the earlier year interest was claimed - A part of the unsecured loans which was outstanding in the beginning of the year was reduced during the year - between the period from April, 2004 to 31st March 2005 the company had raised a significant amount in the form of equity shares and as on 31.3.2005 it had a cash and bank thus, the assessee had sufficient interest free funds which were placed as an ICD without interest - This fact is further strengthened from the fact that unsecured loans raised by assessee raised in earlier years were already invested into business assets Following CIT v. Reliance Utility & Powers Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - assessee was having a mixed pool of interest bearing funds and non interest bearing funds and since the unsecured loans were carried over from earlier years, it can safely be concluded that interest bearing funds raised in the earlier years and brought forward in the current year were for deployed in the business of the company which means that interest free ICDs were made out of interest free funds of the company Decided in favour of Assessee. Disallowance of amount paid to ROC towards expenses Expenses incurred for increasing authorized share capital of the Company Held that - Following CIT v. Multi Metals Ltd. 1990 (10) TMI 55 - RAJASTHAN High Court - expenditure to be eligible u/s 35D(2)(c)(iv) of the Act being allowable as 1/10th of the expenditure for a period of ten years thus, the assessee can claim only 10% of such expenditure in this year u/s 35D Decided partly in faovur of Assessee.

Summary

Issues:
1. Disallowance of interest on Inter Company Deposit under section 36(2)(iii) of the Income Tax Act, 1961.
2. Disallowance of expenses paid to Registrar of Companies for increasing authorized share capital.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue 1: Disallowance of Interest on Inter Company Deposit:
The Assessing Officer disallowed Rs.14,22,219 as interest on inter corporate deposit taken by the assessee, reasoning that the company, being a Non Banking Finance Company (NBFC), should earn interest on such deposits. The company's explanation that it was mainly dealing in shares and incurred losses was deemed vague. The CIT(A) upheld the disallowance, emphasizing the failure to prove commercial expediency for interest-free loans. Citing precedents, the Tribunal affirmed the disallowance, emphasizing the need to prove funds' utilization for business. However, the Tribunal allowed the appeal, noting the company's mix of interest-bearing and non-interest-bearing funds, concluding that the interest-free ICDs were made from interest-free funds.

Issue 2: Disallowance of Expenses for Increasing Authorized Share Capital:
The Assessing Officer disallowed Rs.94,900 spent on enhancing the company's capital base, following Supreme Court decisions. The CIT(A) upheld the disallowance, considering the expense capital in nature. However, the Tribunal partially allowed the appeal, citing a High Court ruling allowing such expenses under section 35D, permitting 10% of the expenditure for that year.

Issue 3: Initiation of Penalty Proceedings:
The appellant contended that penalty proceedings under section 271(1)(c) were unwarranted, as there was no concealment or inaccurate particulars in income reporting. The Tribunal noted that the penalty issue was premature as the Assessing Officer had not yet passed the penalty order, hence not adjudicating on it.

In conclusion, the Tribunal partly allowed the appeal, overturning the disallowance of interest on ICD due to the company's mix of funds and permitting a portion of the capital enhancement expense. The penalty issue was deferred pending the Assessing Officer's decision.