2016 (9) TMI 599 - HC - Income Tax

Addition u/s 41 - whether Tribunal was justified in holding that the amount raised by the assessee by way of loan and interest expenditure pertaining thereto is for the purpose of business of the assessee being in nature of commercial expediency? - Held that - It is not disputed before us in the present facts that issue of debenture was a loan and discount, was in the nature of interest / expenditure for the loan. We find that the decision of the Apex Court in S.A. Builders (supra) still holds field as its operation has not been stayed. Therefore, the Tribunal was justified in relying upon a binding decision of the Apex Court in S.A. Builders (2006 (12) TMI 82 - SUPREME COURT ) to examine the case of the respondent assessee before it to determine whether the expenditure was on account of commercial expediency and on facts held it to be so. This on account of undisputed position that the debentures were issued to a sister concern in the same line of business having business connection with each other. Disallowance u/s 14A read with Rule 8D - Held that - The issue stands concluded against the Revenue by the decision of this Court in Godrej & Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT ). In the above case, this Court has held that disallowance under Section 14A of the Act on application of Rule 8D of the Rules would only apply from A.Y. 2008-09, prior thereto it has to be by a reasonable method.

Summary

Issues:
1. Whether the Tribunal was justified in holding that the amount raised by the assessee by way of loan and interest expenditure is for the purpose of business?
2. Whether the Tribunal was justified in setting aside the issue of disallowance u/s 14A read with Rule 8D?

Analysis:

Issue 1:
The respondent assessee issued Zero Coupon Secured optionally convertible redeemable debentures at a discount, which were amortized and claimed as business expenditure. The Assessing Officer disallowed the claim, considering it as capital expenditure. The First Appellate Authority disallowed the claim on the grounds of interest-free advances to a sister concern. The Tribunal held that the debentures issue was a loan, and the discount was a business expenditure, citing commercial expediency and a business connection with the sister concern. The Revenue challenged the reliance on a Supreme Court decision, but the Court upheld the Tribunal's decision based on the binding precedent. Thus, the Tribunal's decision was justified, and the appeal was dismissed.

Issue 2:
The Assessing Officer disallowed expenditure under Section 14A of the Act using Rule 8D. The Commissioner of Income Tax (Appeals) upheld the disallowance, and the Tribunal allowed the appeal of the respondent assessee based on the non-applicability of Rule 8D for the relevant assessment year. The impugned order held that Section 14A of the Act would not apply on merits. The Revenue accepted the decision based on a previous Court ruling that Rule 8D would only apply from a specific assessment year. As no appeal was filed on this aspect, the Court did not entertain this question as it did not raise any substantial question of law. Therefore, the appeal was dismissed without costs.