2015 (7) TMI 865 - AT - Income Tax

Disallowance of repayment of gold loan to SBI - Held that - There is no doubt to the fact loan as per the scheme was not in terms of cash but in terms of gold. Therefore, the gold obtained under the loan scheme form part of the stock-in-trade of the erstwhile firm and was converted into ornaments for trading purpose. Therefore, the purpose of loan is for the working capital for conducting business. When assessee took over assets and liabilities of erstwhile firm along with the loan, cost incurred by assessee at the time of closure of account on account of appreciation of gold value is an allowable expenditure since it is linked to the trading activity. In other words, the amount incurred by assessee is part of cost of loan to assessee. It is to be noted that one of the reason on which AO has disallowed the deduction claimed is since assessee is following mercantile system of accounting, the expenditure incurred for prior period cannot be allowed. In this regard, we are of the view that though the amount has been termed as interest but it is not interest in strict sense of the term. As far as interest payment is concerned, definitely they have accrued to assessee in the respective AYs. However, as far as the repayment of principal amount is concerned, as per the terms of the agreement with bank it has to be on the basis of value of gold as on the date of repayment. Therefore, the liability on that account cannot be an ascertained liability, which could be said to have accrued to the firm in the respective AYs when the loan continued. As the payment has to be made by assessee company on the basis of market value of the gold on the date of closure of account, excess expenditure incurred on such date of payment, in our view, is allowable expenditure. In view of the aforesaid, we allow the claim of assessee by deleting the addition of ₹ 28,80,338. - Decided in favour of assessee.

Summary

Issues involved:
- Disallowance of an amount towards repayment of gold loan to SBI
- Allowability of the additional ground raised by the assessee
- Dispute over whether the excess payment to the bank constitutes interest or repayment of principal
- Whether the excess payment qualifies as a revenue expenditure

Analysis:

Issue 1: Disallowance of an amount towards repayment of gold loan to SBI
The Assessing Officer (AO) disallowed an amount claimed by the assessee company as a deduction for repayment of a gold loan to SBI. The AO contended that the liability pertained to a period prior to the incorporation of the company and, therefore, could not be claimed as a deduction in the current assessment year. The AO observed that the expenditure related to almost two and a half years and, being against the mercantile system of accounting, could not be allowed in a single year. The AO also noted that the company did not provide necessary documents to support the claim. The Commissioner of Income Tax (Appeals) upheld the disallowance by emphasizing the principles of the mercantile system of accounting.

Issue 2: Allowability of the additional ground raised by the assessee
The assessee raised an additional ground seeking the allowance of a higher amount as a deduction related to the gold loan repayment. The Tribunal decided to consider this additional ground along with the main issues raised in the appeal. The Tribunal analyzed the facts of the case, including the amalgamation of the partnership firm with the company and the appreciation in the value of gold leading to an increased repayment amount. The Tribunal examined the nature of the expenditure claimed by the assessee and whether it qualified as a revenue expenditure.

Issue 3: Dispute over whether the excess payment constitutes interest or repayment of principal
During the proceedings, a dispute arose regarding whether the excess payment made by the assessee to the bank constituted interest or repayment of the principal amount. The Tribunal clarified that the excess amount paid was towards the repayment of the principal and not interest. The Tribunal noted that the deduction claimed by the assessee was linked to the appreciation in the value of gold and the repayment terms of the loan agreement.

Issue 4: Whether the excess payment qualifies as a revenue expenditure
The Tribunal examined whether the excess payment made by the assessee due to the appreciation in the gold value could be considered a revenue expenditure. The Tribunal concluded that since the loan was utilized for trading purposes and the excess payment was part of the cost of the loan to the assessee, it qualified as an allowable expenditure. The Tribunal considered the purpose of the loan, the amalgamation of the partnership firm, and the trading activities of the assessee in allowing the deduction claimed.

In conclusion, the Tribunal allowed the appeal of the assessee, deleting the addition made by the AO towards the repayment of the gold loan. The Tribunal reasoned that the excess payment constituted an allowable expenditure linked to the trading activity of the assessee, considering the specific circumstances of the case and the nature of the transaction.