2014 (4) TMI 659 - AT - Income Tax

Allowability of gross loss incurred in financing activity Held that - The activity of borrowing and lending is not representing the assessee s business, being in fact barred from being so - rather than the activity being income driven (which would require necessary approvals, of which there is no reference at any stage), so that the assessee incurs the necessary expenditure toward the same, i.e., earning income, the assessee has availed of loans for financing working capital of its non-existing business - in fact, even not deciding on it, and which (funds), being surplus for the time being, are lent to sister concerns, with a view to therefore park the same - Would the assessee have done so, if it did not have a whole range of sister concerns, or is it a part of a scheme to act as a conduit for funds for them - Though the borrowings are on secured loan basis, which, bearing a lower risk, attract a lower rate of interest, it yet receives a lower rate of interest on its lending, which is on unsecured basis - No basis or justification for the payment at interest rates, charged ostensibly at prevailing rates by the assessee, in excess of that charged, stands furnished there is a deficit in the amount of borrowing relent as well thus, the order of the CIT(A) upheld Decided against Assessee. Disallowance of stamp duty Loan from Bank No business activity carried on during the year - Held that - The loan advanced by the Bank of America is for funding working capital in the main, while no trading or manufacturing activity stands undertaken, for and toward which the said capital could be said to have been availed of there was no reason as to why it has been considered as secured, which perhaps is also the reason for it being classified as an unsecured loan by the assessee in its audited balance-sheet, while at the same time claiming expenses on stamp duty, which is only toward the registration of the hypothecation agreement - the assesse to have not carried out any business - No part of the borrowed capital could be said to be availed of for business purposes, so as to validate the assessee s claim u/s. 37(1) of the Act. The assessee has abysmally failed to show that the same stood incurred toward making or earning any income - the activity to be not income driven at all - No basis or algorithm or model of its operations stood furnished, so that even the direct expenses by way of interest incurred on the corresponding borrowed capital, stood confirmed for disallowance in part, i.e., to the extent of the short fall in the interest realized, in the absence of the requisite details/facts thus, the disallowance is upheld Decided against Assessee. Disallowance of 50% of staff expenses Held that - The assessee has during the year disposed of almost its entire machinery, besides other fixed assets, save immoveable property - it did not generate any business by way of processing, which would presumably require plant and machinery, nor any explanation toward the same stands furnished at any stage - the expenditure incurred at almost the same level appear to be independent thus, the disallowance is effected at 50%, and not for the total expense claimed Decided against Assessee.

Summary

Issues Involved:
1. Allowability of the gross loss incurred in financing activity.
2. Disallowance of stamp duty expenses.
3. Disallowance of staff expenses.

Issue-wise Detailed Analysis:

1. Allowability of the Gross Loss Incurred in Financing Activity:
The assessee, a company engaged in manufacturing diagnostic reagents and finance activity, reported no sales for the year and only interest income of Rs.8.56 crores against interest expenditure of Rs.8.84 crores, resulting in a net loss. The first issue concerns the allowability of the gross loss of Rs.27,97,676/- incurred in financing activity. During assessment, no details were provided, leading to disallowance of the loss. In remand proceedings, the assessee furnished interest rate details, showing wide variations, but no comparative data to match borrowing and lending rates was provided. The lending rates were lower than borrowing rates. The clauses 29 and 30 of the assessee's Memorandum of Association (MOA) governing money lending fell under 'objects incidental or ancillary to the advancement of the main objects,' thus not considered as the assessee's business. Consequently, the income was assessed under 'income from other sources' (Chapter IV-E). The assessee did not respond to the assessing authority's findings, leading to confirmation of disallowance.

The Tribunal found the assessee's case unsubstantiated, agreeing with the Revenue's view that no business was carried out during the relevant year. The interest income was rightly assessed as 'income from other sources,' and only interest expended wholly and exclusively for earning the said income was deductible. The assessee failed to prove its case, and the disallowance of excess interest paid over interest received was upheld.

2. Disallowance of Stamp Duty Expenses:
The second issue concerns the disallowance of Rs.10 lacs incurred as stamp duty for a loan from Bank of America. The Revenue disallowed the expense as the assessee had not carried out any business activity during the year. The Tribunal confirmed this, finding that the borrowing and lending activity did not constitute the assessee's business. The loan was for working capital, but no trading or manufacturing activity was undertaken. The terms of the loan provided for security against inventories and book debts, which were not maintained. The Tribunal upheld the disallowance under section 37(1) of the Income Tax Act, as no business was carried out, and under section 57(iii), as the expense was not incurred for earning income.

3. Disallowance of Staff Expenses:
The third issue involves the disallowance of 50% of staff expenses. The assessee claimed the expenses were for the processing unit, but the Tribunal noted that the company had disposed of almost its entire machinery and other fixed assets. No rent expense was recorded for the year, and no processing work was undertaken. The Tribunal found the expenditure independent of any business activity and upheld the 50% disallowance, finding no reason for interference.

Conclusion:
The Tribunal dismissed the assessee's appeal, confirming the disallowances of the gross loss in financing activity, stamp duty expenses, and 50% of staff expenses. The order was pronounced in the open court on 31.12.2013.