2014 (12) TMI 981 - HC - Income Tax

Ground not raised before Tribunal - Disallowance on interest u/s 36(1)(iii) deleted - diversion of interest bearing funds to interest free advances or not Held that - No such ground was taken or argument was advanced before the Tribunal - the AO, who is the author of the assessment order, dated 29th March, 1994 represented the Department before the FAA and it is not possible to accept that attention of FAA was not drawn to this factual discrepancy thus, as such no substantial question of arises for consideration Decided against revenue. Receipt by way of gain on cancellation of foreign exchange contracts - revenue v/s capital - Held that - Following the decision in As decided in The DY. CIT. Versus Gujarat Narmada Valley Fertilisers Co. Ltd. 2013 (5) TMI 760 - GUJARAT HIGH COURT wherein the decision in DCIT(Assessment) vs. Garden Silk Mills Ltd. 2009 (2) TMI 95 - GUJARAT HIGH COURT relied upon wherein it was held that the surplus received on cancellation of forward foreign exchange contract was a capital receipt not liable to tax and that it did not fall under section 28(iv) - Thus the Tribunal was right in holding that the receipt by way of gain on cancellation of foreign exchange contracts is a capital receipt not liable to tax and was accordingly justified in directing the AO to make necessary adjustment to the cost of the acquisition/WDV of the plant and machinery to which the receipt pertains and to make consequential adjustment to the depreciation granted Decided against revenue.

Summary

Issues Involved:
1. Investment Allowance under Section 32A.
2. Disallowance of Interest under Section 36(1)(iii).

Issue-wise Detailed Analysis:

1. Investment Allowance under Section 32A:

The core issue was whether the Income Tax Appellate Tribunal (ITAT) was justified in confirming the CIT (Appeals) order, which allowed the claim of investment allowance under Section 32A for an amount of Rs. 30,48,14,442, despite the Revenue's contention that the machineries were not fully installed before 31.03.1990, some were on lease and not owned by the assessee, and some were defective.

The Tribunal and the first appellate authority found that the Assessing Officer (AO) did not dispute that plant and machinery aggregating to Rs. 108.84 crores for the Nitro Phosphate project and Rs. 37.05 crores for the Methanol project were installed by 31.03.1990. The Tribunal considered these findings and concluded that the claim of investment allowance was valid. The High Court observed that no substantial question of law arose from the Tribunal's order on this issue since the findings were based on undisputed facts and no new arguments were presented before the Tribunal.

2. Disallowance of Interest under Section 36(1)(iii):

The second issue pertained to the ITAT's decision to delete the disallowance of Rs. 9,01,29,502 made under Section 36(1)(iii) for interest on funds allegedly diverted to interest-free advances. The Revenue questioned whether the Tribunal was justified in setting aside the matter to the AO with a condition to establish a nexus between borrowings and interest-free advances.

The High Court referred to its previous decision in Tax Appeal No. 401/2000, where similar issues were addressed. The Tribunal had found that the assessee had sufficient own funds to make the advances, and there was no clear evidence of diversion of interest-bearing loans for non-business purposes. The Tribunal noted that the share capital and reserves far exceeded the loans and advances, and no direct nexus was established between the interest-bearing loans and the interest-free advances.

The High Court reiterated that the Supreme Court's decision in S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals) Chandigarh and Another, which emphasized the test of commercial expediency for interest-free loans, did not apply here because the Tribunal had found that the advances were made from the assessee's own funds. Consequently, the Tribunal's deletion of the disallowance under Section 36(1)(iii) was upheld.

Conclusion:

The High Court dismissed the appeal regarding the investment allowance under Section 32A, finding no substantial question of law. For the disallowance of interest under Section 36(1)(iii), the High Court upheld the Tribunal's decision, noting that the issue had been conclusively resolved in favor of the assessee in previous judgments. Thus, the appeal was dismissed, and the questions were answered in favor of the assessee and against the Revenue.