2018 (4) TMI 554 - AT - Income Tax

Addition to interest income - computation of differential interest income - Held that - The tax authorities are justified in computing interest income by adopting higher rate of interest. Since, the assessee has borrowed loans at interest rate of 9% & 10%, we are of the view that the differential interest rate should be computed by adopting cost of funds to the assessee, which in our view may be taken as 9.5% - perusal of the balance-sheet would show that the assessee has also made investments in other assets and further the assessee has also failed to prove the nexus between the own funds and amount advanced. Accordingly, we are unable to agree with this contention of the assessee. We modify the order passed by the learned CIT(A) and direct the Assessing Officer to compute differential interest income by adopting interest rate at 9.5%. Disallowance of expenses relating to IPR - Held that - We agree with the contentions of the assessee that concept of prior period expenses cannot be applied in the instant case, since the assessee has acquired the rights over the IPR over a period. Under revenue cost matching principle, all the expenditure incurred in acquiring IPR have to be treated as revenue expenditure irrespective of the year in which it was incurred and has to be allowed against sales revenue of IPR. With regard to the remaining disallowance, the learned AR submitted that the assessee would be in a position to satisfy the Assessing Officer with relevant evidences, if opportunity is given. We find merit in the said plea of learned AR. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer with the direction to examine various evidences furnished by the assessee

Summary

Issues:
1. Addition to interest income
2. Disallowance of expenses relating to IPR

Analysis:

Issue 1: Addition to interest income
The appeal pertains to the assessment year 2009-10, where the assessee declared income from a money lending business. The Assessing Officer observed discrepancies in the interest rates charged by the assessee on loans given and loans taken. The AO added an amount to the interest income, computed at a higher rate, leading to a dispute. The CIT(A) provided partial relief by directing the AO to compute interest using a different rate. The tribunal considered arguments from both sides. It was noted that the interest rates charged by the assessee were significantly lower than the rates at which the assessee borrowed funds. The tribunal found the assessee's explanations unconvincing and ruled in favor of the tax authorities. The tribunal directed the AO to compute differential interest income using a rate of 9.5%.

Issue 2: Disallowance of expenses relating to IPR
The second issue involved expenditure claimed by the assessee against the sale proceeds of an IPR asset. The AO disallowed a portion of the claimed expenses, citing prior period items and lack of evidence. The CIT(A) upheld the disallowance, leading to the appeal. The tribunal noted that the concept of prior period expenses was not applicable in this case due to the gradual acquisition of IPR rights. It was argued that all expenses related to acquiring IPR should be allowed as revenue expenditure. The tribunal agreed with the assessee's contention and set aside the CIT(A)'s decision. The tribunal directed the AO to re-examine the evidence provided by the assessee and make a decision in accordance with the law.

In conclusion, the tribunal partly allowed the appeal for statistical purposes, addressing both the issues raised by the assessee.