2014 (2) TMI 309 - AT - Income Tax

Addition u/s 41(1) r.w.s. 28(iv) - Waiver of old loans - Held that - Relying upon the decision in CIT vs. Tata Iron & Steel Co. Ltd. 1997 (12) TMI 5 - SUPREME Court - The cost of an asset is independent of the loan obtained to acquire it, so that it would not in any manner alter with the manner and mode of repayment of the loan, or its non-repayment. That is, the raising of capital - borrowed or otherwise, is a matter distinct and separate from its application, so that the waiver of a loan should bear the same character irrespective of the asset wherein the same stands deployed - The issue has been restored for fresh adjudication. Disallowance u/s 14A - Held that - Even though the assessee may have had adequate funds for investment in shares in the year of their acquisition, depletion of capital over time, as on account of continuing losses, may result it in being financed wholly or partly in time by borrowed capital - The onus to establish its claim is on the assessee, failing which rule 8D would apply - The issue has been restored for fresh adjudication. Deduction u/s 43B - Held that - No break-up of the waiver had been provided by IDBI - If the entire outstanding having been considered as a single outstanding sum, the various components thereof, and resultantly of the amount paid, would need to be ascertained on some reasonable basis - If no deduction on account of interest has been claimed or allowed, no income on its write back in accounts on waiver shall arise - The issue has been restored for fresh adjudication. Loss on fire - Capital or revenue - Held that - The loss apart from that in respect of stock-in-trade, is in respect of capital assets destroyed in fire - The loss of capital asset would be a capital expenditure by definition - The assessee has incurred expenditure in restoring the asset/s destroyed to its normative working condition, the said expenditure, as reduced by the insurance claim received/receivable in its respect, would be a revenue expenditure arising in the normal course of business - The issue has been restored for fresh adjudication.

Issues Involved:
1. Addition under Section 41(1) read with Section 28(iv) of the Income Tax Act.
2. Disallowance under Section 14A.
3. Deduction under Section 43B on payment of interest to IDBI.
4. Disallowance of loss on fire as capital expenditure.
5. Assessment of interest received as income from other sources.

Issue-wise Detailed Analysis:

1. Addition under Section 41(1) read with Section 28(iv) of the Income Tax Act:
The first issue concerns the addition of Rs.28,04,95,352/- under Section 41(1) read with Section 28(iv) of the Income Tax Act due to the waiver of old loans by IDBI under a one-time settlement. The assessee argued that the addition was made without considering the details of the various loans involved. Of the nine loans waived, only two were for working capital purposes, and the rest were term loans for acquiring capital assets. The Revenue's assumption that none of the loans were for acquiring capital assets was incorrect. The court noted that the waiver of term loans used for acquiring capital assets is a capital receipt and not income, whereas the waiver of working capital loans is assessable as business income. The matter was remanded to the assessing authority for re-adjudication in accordance with the law.

2. Disallowance under Section 14A:
The second issue pertains to the disallowance under Section 14A. The assessee contended that no disallowance towards interest should arise as the investment in shares was made when it had sufficient capital. The Revenue, however, applied rule 8D, arguing that the onus was on the assessee to prove its claim. The court held that funds are fungible and dynamic in a commercial entity, and the onus to establish the claim is on the assessee. The matter was remanded to the Assessing Officer (A.O.) to address the assessee's grievances and re-adjudicate the issue.

3. Deduction under Section 43B on payment of interest to IDBI:
The third issue is the assessee's alternate claim for allowing deduction under Section 43B on payment of interest to IDBI. The entire waiver of Rs.2804.95 lacs was considered as towards principal. The assessee argued that the interest on term loans should be allowed as a deduction if no deduction was claimed or allowed previously. The court found the argument valid and remanded the matter to the A.O. for adjudication along with the first issue.

4. Disallowance of loss on fire as capital expenditure:
The fourth issue concerns the disallowance of loss on fire as capital expenditure. The loss included capital work-in-progress, WDV of plant and machinery, and loss on the sale of a structure. The first appellate authority upheld the disallowance due to inadequate details provided by the assessee. The court noted that the total loss claimed was Rs.2.67 crores, and the insurance claim received was Rs.99,53,155/-. The court held that the loss of capital assets is capital expenditure, and any insurance claim received should reduce the loss. The matter was remanded to the A.O. for fresh adjudication.

5. Assessment of interest received as income from other sources:
The fifth issue relates to the assessment of interest received at Rs.1,48,318/- as income from other sources, contrary to the assessee's claim of it being business income. The court found no material to establish that the interest earned was on deposits made due to business exigencies. Following the precedents, the court upheld the assessment as income from other sources under Section 56.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes. The court remanded several issues back to the A.O. for fresh adjudication, ensuring that the assessee is given a reasonable opportunity to present its case. The order was pronounced in the open court on February 05, 2014.

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