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2016 (10) TMI 807 - AT - Income TaxNature of loss on sale of joint venture - allowability of the interest on borrowed funds - assessee borrowed the fund from the bank and lent it to its sister-concern, which is a wholly owned subsidiary - Held that - The DRP for the assessment year 2008-09, held that loss arising out of transfer of 50% interest in the joint venture was a capital loss. Hence, subsequent reduction in this sale consideration from ₹ 13 crores to ₹ 9.5 crores would take the same character as capital loss only and it cannot take a different character to say it is a business loss in terms of sec.28(va) of the Act. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest-free loan to its sister-concern and later converted into share capital. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister-concern as a measure of commercial expediency. The Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. 2001 (9) TMI 48 - DELHI High Court is applicable to the facts of the present case, wherein it was held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. If the money was borrowed for purchase of shares of subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of thebusiness of the assessee and it resulted in promote the business of the assessee as well as helpful to the assessee for having management control oversaid such subsidiary company, then the interest expenditure should be allowed u/s.36(1)(iii) of the Act.
Issues Involved:
1. Disallowance of management fee. 2. Carry forward of capital loss. 3. Classification of income from letting out of building. 4. Treatment of preference share issue expenses. 5. Disallowance under Section 14A. 6. Claim of relief under Section 90. 7. Disallowance of interest expenditure under Section 36(1)(iii). 8. Transfer pricing adjustments for corporate guarantees. 9. Treatment of losses from cancellation of forward contracts. Detailed Analysis: 1. Disallowance of Management Fee: The assessee claimed an expenditure of ?28,15,18,658 as management fees paid to India Offshore Inc. The AO disallowed this amount, questioning the genuineness and business necessity of the payment. The DRP confirmed the AO's decision due to the lack of evidence provided by the assessee regarding the nature of services rendered. However, the Tribunal allowed the assessee's claim, noting that the agreement was approved by the Central Government and the Reserve Bank of India, and the payment had been subjected to withholding taxes. 2. Carry Forward of Capital Loss: The assessee claimed a capital loss of ?3,47,00,000 due to the sale of a joint venture. The AO proposed to disallow this loss and bring the sale consideration to tax as long-term capital gains. The DRP directed that the loss should be considered as a long-term capital loss, aligning with the CIT(A)'s decision for the previous assessment year. The Tribunal upheld the DRP's decision, confirming that the loss should be treated as a long-term capital loss. 3. Classification of Income from Letting Out of Building: The assessee offered the income from letting out of a building under "Income from Business," but the AO and DRP classified it under "Income from House Property." The Tribunal dismissed this ground as not pressed by the assessee. 4. Treatment of Preference Share Issue Expenses: The assessee incurred ?3,75,00,000 towards arranger's fee for preference shares. The AO treated this as capital expenditure, which was upheld by the DRP. However, the Tribunal allowed the claim under Section 35D, considering the expenditure as revenue in nature, following the Tribunal's earlier decision in the assessee's case for the assessment year 2007-08. 5. Disallowance under Section 14A: The AO disallowed ?1,44,50,789 under Section 14A read with Rule 8D, attributing it to expenses incurred for earning exempt income. The DRP confirmed this disallowance. The Tribunal remitted the issue back to the AO for fresh consideration, directing the AO to consider the availability of the assessee's own funds and investments in subsidiaries while applying Rule 8D. 6. Claim of Relief under Section 90: The AO disallowed the assessee's claim of relief under Section 90, amounting to ?17,63,24,330, ignoring the DRP's directions. The Tribunal remitted the issue back to the AO to verify the facts and allow the tax credit if the income was subjected to tax in the hands of the assessee. 7. Disallowance of Interest Expenditure under Section 36(1)(iii): The AO disallowed ?57,46,43,700 as interest expenditure, considering it as capital expenditure related to investments in a subsidiary. The DRP confirmed this disallowance. The Tribunal remitted the issue back to the AO, directing a fresh examination in light of the commercial expediency and the interest being allowable under Section 36(1)(iii). 8. Transfer Pricing Adjustments for Corporate Guarantees: The TPO made an upward adjustment for the value of service charges on corporate guarantees issued by the assessee on behalf of its AEs. The DRP deleted this adjustment, following the Tribunal's decision in the case of Redington India Ltd., which held that providing corporate guarantees does not constitute an international transaction. The Tribunal upheld the DRP's decision. 9. Treatment of Losses from Cancellation of Forward Contracts: The AO treated the loss from cancellation of forward contracts as speculative. The DRP disagreed, considering it as a business loss. The Tribunal remitted the issue back to the AO for fresh consideration, directing to examine the nature of the transactions and their relation to the assessee's business. Conclusion: The Tribunal provided detailed directions on each issue, emphasizing the need for proper verification and adherence to legal precedents. The matters were largely remitted back to the AO for fresh consideration, ensuring that the assessee's claims are examined thoroughly in light of the Tribunal's observations.
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