2014 (7) TMI 758 - AT - Income Tax

Non-payment of interest liability on sugar development fund loan u/s 43B Held that - It is the Government of India which is the principal and that being so, its agent, IFCI, according to Section 182 of the Indian Contract Act, 1872, cannot be taken to be a person employed to do any act as such principal - the IFCI did not receive any interest - The interest was on the SDF loan taken from the Government of India - As per the terms and conditions of the SDF loan, the charge on the immovable and movable properties of the company operates as security, inter alia, for due payment by the company to the President of India for term loan together with interest, additional interest, liquidated damages and all other monies payable by the company to the President of India - the AO obviously went wrong in concluding that the SDF loan was from IFCI and not from the Government of India - CIT (A) has duly taken into consideration all these facts while rightly deleting the disallowance/addition Decided against Revenue. Cane cess and bonus payable u/s 43B Held that - The assessee had paid ₹ 6 lacs towards cane cess payable and ₹ 18,59,947/- towards bonus liabilities - Both the liabilities pre-existed on the first day of the previous year - the assessee filed vouchers as evidence for payment of bonus and challans showing payment of cess - the entire amount is an allowable expenditure under the provisions of Section 43B of the Act, according to which, a deduction otherwise allowable under the Act shall, notwithstanding anything contained in any other provision of the Act, be allowed in computing the income referred to in Section 28 of the Act, of that previous year, in which such sum is actually paid by the assessee. In the Tax Audit Report of the assessee, both these amounts have duly been reported as allowable expenditure - CIT (A) correctly allowed the payment on account of cane cess and bonus paid during the year by the assessee out of pre-existing liabilities Decided against Revenue. Income taxed twice Held that - The Profit & Loss Account, the depreciation chart, the computation of income and all the other connected documents were duly taken into consideration by the CIT (A) and it was on the basis of this documentary evidence, that the CIT (A) arrived at the opinion that the amount had been taxed twice - the AO was rightly directed to reduce this amount from the assessee s business income Decided against Revenue. Advances paid out of internal generation of funds Held that - The working capital created had also been deployed in inventories, debtors and liquid assets in an appropriate manner assessee contended that the interest on the debit balance of the directors for the years ended 31.3.03 and 31.3.04, amounted to ₹ 19.34 lacs only This was inclusive of the tentative impact of interest @ 6% per annum, of 9.6%, for the year ended 31.3.04 - even after setting off the debit impact of interest for the years ended 31.3.03 and 31.3.04, the assessee company had a benefit of more than ₹ 124 lacs Relying upon Munjal Sales Corporation vs. CIT 2008 (2) TMI 19 - Supreme Court - where opening balance of profit and loss account and the profits are sufficient to cover the loans given, such loan is to be treated as given out of the assessee s own funds and no disallowance of the interest paid on borrowed funds for business, is called for thus, the grievance of the assessee is justified Decided in favour of Assessee.

Issues Involved:
1. Deletion of addition on account of disallowance of interest liability for "Sugar Development Fund Loan" under Section 43B of the IT Act.
2. Deletion of addition on account of disallowance of cane cess and bonus payable under Section 43B of the IT Act.
3. Allowance of assessee's claim that income was taxed twice.
4. Disallowance of interest claimed as paid to the bank on borrowed funds.
5. Deletion of addition on account of disallowance of extra depreciation on computer peripherals.

Issue-wise Detailed Analysis:

1. Deletion of addition on account of disallowance of interest liability for "Sugar Development Fund Loan" under Section 43B of the IT Act:
The AO disallowed Rs. 29,34,000 under Section 43B, arguing the loan was from IFCI and not the Central Government, thus attracting Section 43B(d). The CIT (A) deleted this disallowance, stating the loan was from the Government of India, administered through IFCI as a nodal agency. The Tribunal upheld this, emphasizing the loan's origin from the Ministry of Food and Civil Supplies, with IFCI acting merely as an agent. The documentation, including the hypothecation deed and sanction letters, supported this conclusion, leading to the rejection of the department's appeal.

2. Deletion of addition on account of disallowance of cane cess and bonus payable under Section 43B of the IT Act:
The AO disallowed Rs. 24,59,447 for cane cess and bonus, citing the need for a revised return. The CIT (A) allowed the claim, noting the payments were made during the year and supported by vouchers and challans. The Tribunal confirmed this, stating the amounts were allowable under Section 43B, which permits deductions on actual payment. The department's reliance on the Goetze (I) Ltd. case was rejected, as the CIT (A) correctly allowed the payment based on the evidence presented.

3. Allowance of assessee's claim that income was taxed twice:
The assessee claimed Rs. 1,90,70,843 was taxed twice, once as business income and again as long-term capital gain. The AO rejected this due to the lack of a revised return. The CIT (A) accepted the claim, supported by the Profit & Loss Account and other documents, showing the amount was included in both business income and capital gains. The Tribunal upheld this decision, directing the AO to reduce the amount from the business income, thus rejecting the department's appeal.

4. Disallowance of interest claimed as paid to the bank on borrowed funds:
The AO disallowed Rs. 9,61,952, later reduced to Rs. 2,52,000 by the CIT (A), for interest-free loans to directors while paying interest on bank loans. The Tribunal found the assessee had sufficient internal funds and interest-free loans from directors, negating the need for borrowed funds for advances. Citing precedents, it was held that the advances were from internal funds, not borrowed capital, and the disallowance of Rs. 2,52,000 was deleted.

5. Deletion of addition on account of disallowance of extra depreciation on computer peripherals:
The AO disallowed extra depreciation on computer peripherals, limiting it to 60% for computers and software. The CIT (A) deleted this addition, following the Delhi High Court's decision in BSES Rajdhani Powers Ltd., which allowed higher depreciation for peripherals integral to the computer system. The Tribunal upheld this, rejecting the department's appeal for lack of contrary decisions.

Conclusion:
The Tribunal dismissed the department's appeals in ITA Nos. 1819/Del/11, 1906/Del/11, and 1965/Del/11, while allowing the assessee's appeal in ITA No. 877/Del/2011. The order was pronounced in the open court on 23.05.2014.

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