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2018 (2) TMI 1903 - AT - Income TaxDisallowance of premium paid on redemption of preference shares - nature of expenses - revenue or capital expenditure - loan and redeemable preference shares - HELD THAT - We find that identical issue arose in assessee s own case in A.Y. 2006-07 and 2007-08. The Co-ordinate Bench of the Tribunal while deciding the issue in A.Y. 2006-07 in favour of Revenue had relied on the decision of Hon ble Calcutta High Court in the case of Hindustan Gas Vs. CIT 1978 (8) TMI 58 - CALCUTTA HIGH COURT WHEREIN wherein clear distinction has been made between a loan and redeemable preference shares and held that any expenses incurred for issue for redeemable preference shares cannot be allowed as they are in the nature of capital expenditure. The decision in A.Y. 2006-07 was followed in A.Y. 2007-08. Disallowance of interest - no or low interest bearing advances given - excessive interest was made in earlier years even though the substantial deposits were given by assessee in earlier years - HELD THAT - When the availability of interest free funds are far in excess of the amounts given as deposits then as per the decision of Hon ble Bombay High Court in the case of Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT a presumption arises that the deposits are out of interest free funds and no interest bearing funds are utilized for making the deposits. The ratio of the aforesaid decision of Hon ble Bombay High Court in the case of Reliance Utilities (supra) has been followed by the various benches of Pune Tribunal. Before us Revenue has not brought on record any contrary binding decision in its support. We therefore following the ratio of the aforesaid decision rendered in the case of Reliance Utilities (supra) hold that in the present case no disallowance of interest is called for. Thus the grounds of the assessee are allowed. Disallowance of depreciation on non compete fees - Assessee had claimed depreciation on WDV of non compete fee treating the same as intangible asset - HELD THAT - As no change in facts has be pointed out by Revenue. We therefore following the order of Co-ordinate Bench of the Tribunal in assessee s own case for A.Y. 2007-08 hold that assessee is eligible for depreciation. Therefore the ground is allowed.
Issues Involved:
1. Disallowance of premium on redemption of preference shares. 2. Disallowance of interest paid on account of interest-free deposits given to the owners of premises. 3. Disallowance of interest paid on the ground of alleged excessive unreasonable interest-free deposits to Jain Bros. Industries and Drip and Pipe Suppliers. 4. Disallowance of interest paid on the ground of alleged excess interest-free deposits to directors/relatives of directors. 5. Disallowance of depreciation on non-compete fee. 6. Carry forward of losses (not pressed by the assessee). Detailed Analysis: 1. Disallowance of Premium on Redemption of Preference Shares: The Assessee claimed an expenditure of ?4,94,72,088 as premium on redemption of 4% redeemable preference shares. The AO disallowed this expenditure, following the precedent set in the assessee’s own case for A.Y. 2007-08, which was upheld by the CIT(A). The Tribunal found that the issue was identical to the previous years, where it was decided against the assessee based on the decision of the Hon’ble Calcutta High Court in the case of Hindustan Gas Vs. CIT (11 ITR 549) (Cal). The Tribunal upheld the CIT(A)’s order, reiterating that the premium paid for redemption of preference shares is of a capital nature and not an allowable expenditure. 2. Disallowance of Interest Paid on Account of Interest-Free Deposits Given to Owners of Premises: The AO disallowed ?17,00,630 out of the interest paid, reasoning that the interest-free deposits given to the owners of premises were not for commercial expediency but rather a favor to them. The CIT(A) upheld this disallowance, noting that the assessee failed to prove any nexus between interest-free funds and the interest-free advances or security deposits. The CIT(A) emphasized that the cost of borrowing was around 12.50%, contrary to the assessee’s claim of 5.3%. The Tribunal upheld the CIT(A)’s decision, agreeing that the assessee had used borrowed funds for non-business purposes. 3. Disallowance of Interest Paid on Alleged Excessive Unreasonable Interest-Free Deposits to Jain Bros. Industries and Drip and Pipe Suppliers: The AO disallowed ?10,20,000 out of interest paid, considering the deposits given to Jain Bros. Industries and Drip and Pipe Suppliers as excessive. The CIT(A) upheld this disallowance, citing the same reasons as in the previous issue, emphasizing the cost of borrowing and the lack of a direct nexus between the interest-free funds and the deposits. The Tribunal, however, found that the assessee had sufficient interest-free funds in the form of share capital and reserves, far exceeding the deposits given. Following the Bombay High Court decision in CIT Vs. Reliance Utilities and Power Ltd. (313 ITR 340), the Tribunal held that no disallowance of interest was called for, as the deposits were presumed to be out of interest-free funds. 4. Disallowance of Interest Paid on Alleged Excess Interest-Free Deposits to Directors/Relatives of Directors: The AO disallowed ?28,87,625 out of interest paid, considering the deposits given to directors and their relatives as excessive. The CIT(A) upheld this disallowance, again emphasizing the cost of borrowing and the lack of a direct nexus between the interest-free funds and the deposits. The Tribunal, applying the same reasoning as in the previous issue, held that the assessee had sufficient interest-free funds, and therefore, no disallowance of interest was warranted. 5. Disallowance of Depreciation on Non-Compete Fee: The AO did not take a view on depreciation on non-compete fee in the assessment order. The CIT(A), relying on the Delhi High Court decision in Sharp Business System Vs. CIT, held that non-compete fee is neither a revenue expenditure nor an intangible asset, and therefore not subject to depreciation. The Tribunal, however, noted that depreciation on non-compete fee was allowed in A.Y. 2006-07 and the asset had entered the block of assets. Citing the principle that once an asset enters the block of assets, it cannot be taken out, the Tribunal allowed the claim of depreciation, following its own decision in the assessee’s case for A.Y. 2007-08. 6. Carry Forward of Losses: The assessee did not press this ground, and it was dismissed as not pressed. Conclusion: The appeal was partly allowed. The Tribunal upheld the disallowance of the premium on redemption of preference shares and the disallowance of interest paid on account of interest-free deposits given to the owners of premises. However, it allowed the claims related to the disallowance of interest paid on alleged excessive interest-free deposits and the depreciation on non-compete fee.
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