2024 (1) TMI 1278 - AT - Income Tax

Disallowance u/s 43B of interest converted into loans by financial institutions - actual payment of interest or not? - HELD THAT - The amendment brought in by Finance Act 2006 was squarely applicable to the facts of the case. The newly inserted explanations (3C) and (3D) provide that mere conversion of interest into loan would not be deemed to be actual payment of interest. Therefore, the same has rightly been disallowed and confirmed by lower authorities considering the provisions of Sec.43B. The assessee is free to make the claim of the same whenever it is eligible to claim the deduction in accordance with law. The corresponding grounds stand disposed-off accordingly. Addition of Contract receipts not recognized - AO held that the companies / projects figuring in the list, from whom contracts receipts were received by the assessee, did not tally with the break-up of contractee as per TDS certificates - HELD THAT - The assessee is executing composite contracts of varied nature which would involve supply of material as well as services. The assessee is following definite accounting policy to recognize the revenue in the books of accounts. No defect in the books has been pointed out by lower authorities. The revenue shown by the assessee is way above than the revenue shown in the TDS certificates. The assessee is a corporate entity and would receive contract payments through banking channels only. The assessee has already provided copies of bills, TDS certificates and relevant ledgers from books of accounts. No discrepancy is noted in the same. Therefore, the impugned addition is merely on suspicion and nothing more. By deleting the addition, we allow the corresponding grounds raised by the assessee. Disallowance of Electricity Tax under normal provisions and u/s 115JB - HELD THAT - The constitutional validity of the state levy is sub-judice before Hon ble High Court of Madras 2001 (9) TMI 45 - MADRAS HIGH COURT The Hon ble Court has stayed the recovery of demand subject to deposit of Rs. 200 Lacs by the assessee. The same has been deposited by the assessee. The assessee has also computed additional liability of Rs. 98.67 Lacs as per applicable computations. Both these items have been debited in the Profit Loss Account. However, it remains a fact that this liability has not yet crystallized and the same is merely in the nature of contingent and an unascertained liability only which may or may not arise. Undoubtedly, the same is covered under the provisions of Sec.43B. Therefore, the same has to be disallowed in normal computations u/s 43B as well as while computing Book Profits u/s 115JB. Therefore, we confirm the stand of lower authorities and dismiss the grounds raised by the assessee in both the appeals. Interest disallowance - assessee claimed interest expenditure against loan liabilities - as noted by Ld. AO that the assessee advanced various sums to group entities against which no interest was received during the year - HELD THAT - From the facts, it emerges that impugned advances have been given by the assessee in the ordinary course of business to all these entities. The investments have been made in joint venture entities though the projects may not have fructified for the assessee. SFCL, FZE is 100% subsidiary of SFCL Mauritius in which the assessee owns stake of 83.54%. The investment made by the assessee was for expansion of assessee s business. This business of this entity is stated to be having direct nexus with the assessee s main business of manufacturing of Urea and fertilizers etc. The assessee has undertaken to buy back the entire production of Urea from this entity. The ministry of chemicals and fertilizers, vide its letter dated 03.12.1998, informed the assessee that import of urea by assessee from this entity will be given preference. The aforesaid facts substantiate the arguments that investments made by the assessee had direct business nexus and therefore, the test of commercial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business interest and the ratio of decision of Hon ble Supreme Court in the case of CIT V/s S.A. Builders 2006 (12) TMI 82 - SUPREME COURT would favor the case of the assessee, wherein as held that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable. To allow the expenditure, it would not be necessary that the project should fructify. Considering all these facts, we would hold that impugned disallowance against this entity could not be sustained. Investments made in IJCL were made as a joint venture investment. This entity was to manufacture phosphoric acid and the entire production was to be sold to the assessee. The assessee made 60% contribution in this entity. The venture was to ensure supply of critical raw material for the assessee. Simply because the project could not fructify would not disentitle the claim of the assessee that it had business connection with this entity. The investment made by the assessee has RBI approval. This being so, disallowance of interest either u/s 37(1) or u/s 36(1)(iii) could not be said to be justified. The advances given to SPEL have been given by the assessee as a promoter entity to meet its debt obligations and capital expenditure. The advances were given by the assessee to this entity only up-to financial year 2000-01. During impugned year, the advances made by the assessee have been converted into equity shares. In earlier years, when the advances were given, the assessee is having sufficient own interest free funds to make these investments - the assessee s ground would succeed to that extent both on commercial expediency as well as on the ground of having sufficient own funds. M/s NAPCL is a joint venture entity of the assessee to produce Benzene, orthoxylene, paraxylene and PTA. However, the project has failed to commence production which has led to impugned disallowance. Nevertheless, there is direct business nexus of making the investment. The reason for delay in execution of the project is the fact that there was delay in getting regulatory approvals which is beyond the control of the assessee. The assessee has entered into MOU with Chennai Petroleum Corporation Limited to establish a large petrochemical plant near Chennai. The plant was to produce raw material for the assessee. The same has resulted into formation of this entity. As per the terms of MOU, the expenses of the joint venture are to be shared equally by the joint venture entities. Considering the same, the assessee has advances sum to this entity towards it share of the expenditure of the project. The investment would ultimately convert into equity shares. All these facts would establish the claim of the assessee that the investment had direct business nexus and therefore, no disallowance could have been made for this investment. Regarding investment in SPC, it could be noted that the assessee has, in fact, charged interest from this entity. The outstanding loan amount including interest has been converted into equity and bonds which is evident from assessee s financial statements. Therefore, there is no question of disallowing interest against this investment. The interest disallowance on inter-corporate deposits has been deleted by us in assessee s own case 2024 (1) TMI 495 - ITAT CHENNAI for AY 2003-04 on the ground that in the year when these deposits were placed, the assessee had sufficient own funds to make the investments. Taking consistent view, no disallowance is called for against these ICDs. Assessment of interest income offered in earlier years - HELD THAT - The submissions of Ld. AR are that during AY 2003-04, the assessee provided for interest receivable for Rs. 20036.32 Lacs and Rs. 10573.31 Lacs from SPIC petro in the earlier years but did not claim the deduction of the same in the return of income. The same was settled in AY 2004-05. Hence, the provisions made in the earlier (but not allowed in those years) was reversed and credited to Profit Loss Account. The same is, therefore, reduced from the income since it is only a reversal provisions disallowed in earlier years. We are of the considered opinion that the income, if already taxed, could not be taxed twice. The Ld. AO is directed to verify the aforesaid facts as stated by Ld. AR and re-adjudicate this issue keeping in mind the fact that there would be no double taxation of the same income notwithstanding the accounting methodology being followed by the assessee. The corresponding grounds stand allowed for statistical purposes. MAT computation - Adjustment of provision of bad and doubtful debts u/s 115JB - AO to disallow the provision for bad and doubtful debts while computing the Book Profits u/s 115JB on the ground that the same was unascertained liability - HELD THAT - The provision made by the assessee towards bad and doubtful debt was towards unascertained liability only. The same is also evident from the fact that provision made against SSIL was reversed in subsequent years and full amount due against that entity was claimed as deduction. The amendment brought in by Finance Act, 2009 with retrospective effect was clearly applicable to the facts of the case. The remaining provisions were against marketing debts which were mostly due from government departments. As rightly held, the dues from government departments could not be considered to be doubtful. The aforesaid provision could also not be considered as any diminution in value of assets since these are mere provisions which may or may not crystallize for the assessee in future and therefore, these are nothing but mere provisions for unascertained liabilities. The Bad Debts claimed by the assessee is clearly a double claim. Therefore, on both the issues, the impugned order does not require any interference on our part. This appeal stands dismissed.

Summary

Issues Involved:
1. Disallowance under Section 43B of the Income Tax Act.
2. Addition of Contract Receipts Not Recognized.
3. Disallowance of Electricity Tax under normal provisions and Section 115JB.
4. Interest Disallowance.
5. Assessment of Interest Income Offered in Earlier Years.
6. Adjustment of Provision for Bad and Doubtful Debts under Section 115JB.
7. Disallowance of Bad Debts Written Off.

Summary:

Disallowance under Section 43B of the Income Tax Act:
The assessee's claim of interest expenditure converted into loans was disallowed under Section 43B. The Tribunal upheld this disallowance, referencing the Finance Act 2006 amendments and the Madras High Court decision, confirming that mere conversion of interest into loans does not equate to actual payment.

Addition of Contract Receipts Not Recognized:
The Tribunal found that the addition of Rs. 608.29 Lacs for unrecognized contract receipts was based on suspicion and not on concrete evidence. The assessee had provided sufficient documentation, including TDS certificates and ledgers, showing that the income was recognized. Thus, the addition was deleted.

Disallowance of Electricity Tax under normal provisions and Section 115JB:
The Tribunal confirmed the disallowance of Rs. 298.67 Lacs for electricity tax under both normal provisions and Section 115JB. The liability was deemed contingent and unascertained as the constitutional validity of the levy was still sub-judice.

Interest Disallowance:
The Tribunal found that the advances made by the assessee to various entities were in the ordinary course of business and had a direct business nexus. The disallowance of Rs. 5519.30 Lacs was deleted as the assessee had sufficient interest-free funds and the investments were made for business purposes.

Assessment of Interest Income Offered in Earlier Years:
The Tribunal directed the AO to verify the assessee's claim that the interest income of Rs. 10573.31 Lacs, already offered to tax in earlier years, should not be taxed again to avoid double taxation. The issue was remanded for re-adjudication.

Adjustment of Provision for Bad and Doubtful Debts under Section 115JB:
The Tribunal upheld the adjustment of Rs. 1690.09 Lacs for provision for bad and doubtful debts under Section 115JB, considering it an unascertained liability. The amendment by the Finance Act 2009 was applicable, and the provision could not be considered as diminution in value of assets.

Disallowance of Bad Debts Written Off:
The Tribunal confirmed the disallowance of Rs. 84.09 Lacs for bad debts written off, as it resulted in a double deduction. The provision was already added back under normal provisions, and the same claim was made again under Section 115JB.

Conclusion:
- ITA No. 204/Chny/2023: Partly allowed.
- ITA No. 205/Chny/2023: Dismissed.