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2019 (12) TMI 759 - AT - Income TaxDisallowance of interest u/s.36(1)(iii) - interest paid on borrowed capital - HELD THAT - Assets acquired by the assessee were only stock in trade and not any plant and machinery warranting installation of the same and correspondingly putting use of the same would require some time. From the list of assets taken over by the assessee as tabulated above, we find that even the fixed assets taken over by the assessee company comprised predominantly of Goodwill to the tune of ₹ 582.25 Crores and very miniscule operation of fixed assets of ₹ 1.27 Crores were taken over by the assessee which admittedly was paid out of equity funds and the borrowed funds were not utilized at all for the same. This fact is not controverted by the revenue before us. Hence, it could be safely concluded that the borrowed funds were used for acquiring only stock in trade by the assessee and hence, the same were meant only for the purpose of business of the assessee. Accordingly, the proviso to Section 36(1)(iii) of the Act would not come into operation at all. Once, the borrowing has been made for the purpose of business, interest paid thereon would become eligible for deduction u/s.36(1)(iii) Merely because the assessee company had not claimed any depreciation on Goodwill during the year under consideration, it would not make any difference or alternatively it would not change the character of the assets taken over by the assessee company which are purely in the form of liquid assets such as finance receivables, trade receivables and claims receivables thereby forming part of stock in trade of the assessee. We direct the ld. AO to grant deduction of interest paid on borrowed capital in the sum u/s.36(1)(iii) of the Act in the A.Y.2015-16. Accordingly, the ground raised by the assessee is allowed. Disallowance of expenses being the cost of arranger fees, credit rating fees and loan processing fees to obtain loan funds - HELD THAT - There is no dispute that the entire payments were made by the assessee company in connection with raising loan funds for the purpose of business. As rightly observed by the assessee, the allowability of the expenses incurred for raising loan funds would not depend on the utilisation of the loan funds for the purpose of procured assets. What is to be seen is whether the loans have been borrowed for the purpose of business by the assessee. In the instant case, there is absolutely no dispute that the loans have been borrowed by the assessee for the purpose of its business. The expenses payments of ₹ 15.35 Crores are only payments made to various parties who had assisted in procuring those loans and loan processing fees paid to banks. Hence, this is linked with the liabilities i.e. loans borrowed by the assessee. We also find that the ld. CIT(A) has also placed reliance on the CBDT Circular No.56 dated 09/03/1971. Accordingly, the said expenses are squarely allowable as deduction - Grounds raised by the revenue are dismissed.
Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961. 2. Disallowance of expenses related to arranger fees, credit rating fees, and loan processing fees under Section 37(1) of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Disallowance of Interest under Section 36(1)(iii) Facts and Arguments: - The assessee, a company acquired by Tata Motors Finance Ltd (TMFL), incurred an interest expenditure of ?7,66,86,750 for various borrowings used to finance the purchase of a loan portfolio under a slump sale agreement. - The Assessing Officer (AO) disallowed the interest expenditure, arguing that it was incurred for acquiring a capital asset that was not put to use, and thus not allowable under the proviso to Section 36(1)(iii) of the Income Tax Act. - The AO also contended that the loan portfolio acquired was a capital asset and not stock-in-trade, and hence, the interest expenditure was not deductible. - The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance but allowed the capitalization of interest cost to the corresponding asset, permitting depreciation on the same. Tribunal's Findings: - The Tribunal noted that the borrowed funds were used for the purpose of business, mainly to acquire stock-in-trade, and thus, the proviso to Section 36(1)(iii) did not apply. - The Tribunal observed that the assets acquired were liquid in nature, such as finance receivables and trade receivables, which did not require being put to use in the traditional sense. - The Tribunal dismissed the revenue's argument that the capital asset was not put to use because the assessee did not claim depreciation on Goodwill, noting that the assets acquired were liquid assets forming part of stock-in-trade. - The Tribunal relied on judicial precedents, including decisions from the Supreme Court and High Courts, to support its conclusion. Conclusion: - The Tribunal directed the AO to grant the deduction of interest paid on borrowed capital amounting to ?7,66,86,750 under Section 36(1)(iii) for the Assessment Year 2015-16, allowing the assessee's appeal. Issue 2: Disallowance of Expenses under Section 37(1) Facts and Arguments: - The assessee incurred expenses totaling ?15,35,00,000 for raising loan funds, including arranger fees, credit rating fees, and loan processing fees. - The AO disallowed these expenses, arguing that they were capital in nature since the loans were utilized for purchasing assets under the slump sale agreement, thereby expanding the capital base. - The CIT(A) deleted the disallowance, observing that the expenses were incurred for raising loans, which are liabilities and not assets, and hence could not be considered capital expenditure. Tribunal's Findings: - The Tribunal agreed with the CIT(A) that the expenses incurred for raising loan funds were allowable as deductions under Section 37(1), irrespective of the usage of the loan proceeds. - The Tribunal emphasized that the loans were borrowed for the purpose of business, and the related expenses were linked to liabilities, not capital assets. - The Tribunal also noted the CBDT Circular No. 56 dated 09/03/1971, which supports the allowability of such expenses. Conclusion: - The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?15,35,00,000, dismissing the revenue's appeal. Cross Objection: - The assessee's cross-objection regarding the claim of depreciation was rendered infructuous following the dismissal of the revenue's appeal. Final Order: - The assessee's appeal was allowed, the revenue's appeal was dismissed, and the assessee's cross-objection was dismissed. Order Pronounced: - The order was pronounced in the open court on 06/12/2019.
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