2016 (5) TMI 478 - HC - Income Tax

Disallowance on discount and interest on borrowing through commercial papers and Non-Convertible Debentures (NCDs) - Held that - In the present year, there was no re-structuring and/or purchase of shares. All that had happened in the preceding year. As on 01.04.2007 itself, which was the first day of the year under consideration, A & M Publications Limited stood merged with and into the respondent / assessee. All the funds available at that point of time with the respondent / assessee were, in the course of the year, deployed in the business of the respondent/assessee. Therefore, the Assessing Officer could not have disallowed the discount and interest on borrowing through commercial papers and non-convertible debentures. Consequently, the Commissioner of Income Tax (Appeals) and the Tribunal have come to the correct conclusion and have deleted the addition made by the Assessing Officer. - Decided against revenue

Summary

Issues:
Disallowance of expenditure on discount and interest on borrowing through commercial papers and Non-Convertible Debentures for the assessment year 2008-09.

Analysis:
1. The Assessing Officer disallowed expenditure of &8377; 10,79,75,982/- on discount and interest on borrowing through commercial papers and NCDs, stating it was not for business purposes. The discount on commercial paper was &8377; 8,45,75,982/-, and the interest on NCDs was &8377; 2.34 crores. The disallowance was based on the acquisition of shares and the merger of companies.

2. The Commissioner of Income Tax (Appeals) disagreed with the Assessing Officer's findings. He noted the merger of companies and the utilization of borrowed funds for business purposes. The Commissioner held that the entire borrowed funds were used for business, and the disallowance was unjustified.

3. The Income Tax Appellate Tribunal affirmed the Commissioner's decision. The Tribunal observed that after the merger, all funds were deployed for business, as evidenced by the balance sheet. It was found that the borrowed funds were utilized for business activities, leading to the dismissal of the Department's appeal.

4. The High Court upheld the Tribunal's decision, emphasizing that there was no restructuring or share purchase in the relevant assessment year. The merger had already taken place, and all funds were utilized for business. Therefore, the disallowance of discount and interest was unwarranted. The Court concluded that the Tribunal and the Commissioner had correctly deleted the addition made by the Assessing Officer.

5. Consequently, the Court answered the substantial question of law by affirming that the Tribunal and the Commissioner did not err in law or fact in deleting the disallowance on discount and interest on borrowing through commercial papers and NCDs. The appeal was dismissed with no costs awarded.