2016 (5) TMI 102 - AT - Income Tax

Disallowance of expenditure - existence of business expediency - taking over of the loan or discharge of the loan of RIL due to ICICI Bank - capital loss - Held that - The loan from ICICI Bank Ltd. to RIL has been advanced as a term loan for working capital requirements of RIL and the same has been discharged by the assessee in view of the debt restructuring scheme. The debt restructuring scheme is pursuant to transfer of the cement business from RIL to the assessee herein. Thus, the business expediency of the transaction is established. Further, as regards the learned Commissioner of Income-tax (Appeals) s finding that the loan is in the capital field and, therefore, the resultant loss is capital loss and is not allowable under section 37(1) of the Income-tax Act, we find that the sum of ₹ 12 crores is not towards payment of interest but it is for the repayment of the principal as well as the interest as on the date of repayment of the loan. The sum of ₹ 12 crores has been offered by RIL as the liability no longer required and written back but in the hands of the assessee, it is an expenditure to safeguard its interests or its investment in the subsidiary company. Therefore, it is for the business purpose of the assessee and, hence, revenue in nature and cannot be treated as a capital loss - Decided in favour of assessee Interest-free advance to its subsidiary company in the U.S.A - Held that - The transaction of capital financing including any type of long- term or short-term borrowing, etc., has become an international transaction with retrospective effect by virtue of clause (i)(c) of the Explanation to section 92B with effect from April 1, 2002, as inserted by the Finance Act of 2012. Therefore, during the relevant period, i.e., financial year 2006-07, when the said transaction was not an international transaction, no such imputation can be made. As far as the nexus between the interest-free loan and the interest-free advance is concerned, we are satisfied that the nexus has been established by the assessee and when there is no interest burden on the assessee by virtue of the loan advanced to its subsidiary, we are of the opinion that no such interest income can be attributed in the hands of the assessee - - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of expenditure of Rs. 12 crores paid to ICICI Bank on behalf of the subsidiary.
2. Interest-free advance to the subsidiary in the U.S.A.
3. Disallowance of interest on sales tax deferment.
4. Deduction for discount on the issue of debentures.

Detailed Analysis:

1. Disallowance of Expenditure of Rs. 12 Crores Paid to ICICI Bank on Behalf of the Subsidiary
The assessee, Rain Commodities Ltd., claimed an expenditure of Rs. 12 crores paid to ICICI Bank on behalf of its subsidiary, Rain Industries Ltd. (RIL). The Assessing Officer disallowed this expenditure, arguing it was not substantiated as business expediency and was a capital expenditure. The Commissioner of Income-tax (Appeals) upheld this disallowance. However, the Tribunal allowed the appeal, noting that the payment was made to protect the assessee's investment in RIL and was part of a debt restructuring scheme. The Tribunal cited several judgments, including the Supreme Court's decision in Hero Cycles P. Ltd. v. CIT, to support the claim that such expenditure, incurred out of commercial expediency, is allowable under section 37 of the Income-tax Act.

2. Interest-Free Advance to the Subsidiary in the U.S.A.
The assessee advanced an interest-free loan to its U.S. subsidiary. The Assessing Officer taxed the imputed interest on this loan, which was partly upheld by the Commissioner of Income-tax (Appeals) at the LIBOR rate. The Tribunal found that the transaction was not an international transaction during the relevant period and that the assessee had sufficient reserves to justify the interest-free advance. Consequently, the Tribunal allowed the assessee's appeal, holding that no interest income could be attributed to the assessee.

3. Disallowance of Interest on Sales Tax Deferment
The assessee claimed an amount of Rs. 8,79,58,467 as interest on sales tax deferment, which the Assessing Officer disallowed, arguing that no interest was due on the deferred sales tax. The Commissioner of Income-tax (Appeals) allowed the claim, but the Tribunal remitted the issue back to the Assessing Officer for verification. The Tribunal noted that the actual sales tax liability was higher than recorded in the subsidiary's books and required verification of the differential amount.

4. Deduction for Discount on the Issue of Debentures
The assessee sought a deduction for the discount on debentures issued, which was disallowed by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals). The Tribunal referred to its earlier decision in the case of Rain Cement Ltd., holding that the discount should be amortized over the period of the debentures. The Tribunal admitted the additional ground of appeal and remitted the issue to the Assessing Officer to allow the deduction on a proportionate basis.

Summary of Judgments:
- ITAT No. 988/Hyd/2014 (Revenue's Appeal): Dismissed.
- ITAT No. 1066/Hyd/2014 (Assessee's Appeal): Allowed.
- ITAT No. 1067/Hyd/2014 (Assessee's Appeal): Allowed for statistical purposes.
- ITAT No. 989/Hyd/2014 (Revenue's Appeal): Allowed for statistical purposes.
- ITAT No. 953/Hyd/2012 (Assessee's Appeal): Allowed for statistical purposes.

Order Pronounced: January 22, 2016.