2020 (9) TMI 94 - HC - Income Tax

Deduction u/s 57 - disallowance of expenses against interest income being interest paid to the financial institutions - HELD THAT - Purpose of expenditure is relevant in determining the applicability of Section 57(iii) and the purpose must be making or earning of income. Assessee in order to cover the cost of interest payable to the creditors for the unpaid period, invested the surplus in fixed deposits and earned interest. The amount earned by way of interest was paid to the lenders and creditors. There is a nexus between the interest paid to the creditors on the unpaid balance and interest earned on the deposits. The interest expenditure was incurred wholly and exclusively for the purpose of earning the interest income and therefore, the assessee is entitled to deduction of the interest income under Section 57(iii) of the Act. Computation of MAT u/s 115JB - Book Profit - Long term capital gains - Held that - The indexed cost of acquisition is a claim allowed by Section 48 to arrive at the income taxable under the income from capital gains. The difference between the sale consideration and indexed cost of acquisition represents the actual cost of the assessee, which is taxable as per Section 45 at the rates provided under Section 112 of the Act. There is no provision in the Act to prevent the assessee from claiming indexed cost of acquisition on the sale of asset in case, where the assessee is subjected to Section 115JB - In any case, since, the indexed cost of acquisition is subjected to tax under a specific provision viz., Section 112 of the Act, therefore, the provisions of Section 115JB of the Act, which is a general provision cannot be made applicable to the case of the assessee. For yet another reason, the assessee has to be given the benefit of indexed cost of acquisition as considering the profits on sale of land without giving the benefit of indexed cost of acquisition results in taxing the income other than actual / real income. In other words, a mere book keeping entry cannot be treated as income. Provisions of Section 115JB of the Act are not applicable as the assessee has not declared any dividend. It is also noteworthy that the Tribunal has failed to appreciate the decision of this court in case of MSR Sons Investment Ltd. 2011 (9) TMI 1127 - KARNATAKA HIGH COURT where the order of the Tribunal was upheld by which the Tribunal has held that if dividends are not paid by the company the provisions of book profit are not attracted. Assessee had not paid the dividends. The profit itself was not attracted and the question of applicability of Section 115JB did not arise. However, the Tribunal failed to consider the decision of this court while passing the impugned order. The submission made by the revenue in the light of decision rendered in the case of Apollo Tyres 2002 (5) TMI 5 - SUPREME COURT does not deserve acceptance as Section 115J with which the aforesaid decision deals does not contain a provision like Sub- Section (4) of Section 115JA or Sub-Section (5) of Section 115JB. Similarly, the submission made on behalf of the revenue that in the absence of the scheme, it cannot be held that the assessee was holding the funds as conduit and therefore, the matter deserves to be remitted to the Income Tax Appellate Tribunal for decision afresh also does not deserve acceptance as in paragraph 10 of this order, this court has noticed that the AO as well as the CIT (Appeals) has taken note of the scheme and has held that assessee was utilized as a special purpose vehicle for purposes of distribution of surplus, if any, after clearance of debts of Kirloskar Electric Company. - Decided in favour of assessee.

Issues Involved:
1. Nexus between interest earned on fixed deposits and interest paid to creditors.
2. Allowability of interest paid to creditors as an expenditure.
3. Applicability of Minimum Alternative Tax (MAT) under Section 115JB of the Income Tax Act.
4. Consideration of indexed cost of acquisition for computing book profits under Section 115JB.
5. Tribunal's adherence to the decision of the coordinate Bench regarding Alternative Minimum Tax on Companies.

Issue-wise Detailed Analysis:

1. Nexus between interest earned on fixed deposits and interest paid to creditors:
The Tribunal held that there is no nexus between the interest earned on fixed deposits and the interest paid to creditors. However, the Commissioner of Income Tax (Appeals) found a close nexus between the interest earned and the interest paid, as the surplus from restructuring was deposited in fixed deposits, earning interest which was then used to pay creditors. The court concluded that the interest expenditure was incurred wholly and exclusively for earning the interest income, making it deductible under Section 57(iii) of the Act.

2. Allowability of interest paid to creditors as an expenditure:
The Assessing Officer disallowed the interest paid to financial institutions, claiming it as capital expenditure. The Commissioner of Income Tax (Appeals) allowed the deduction under Section 57 of the Act, but the Tribunal reversed this decision. The court, referencing Section 57(iii), determined that the interest paid to creditors was an allowable expenditure, as it was incurred for the purpose of earning the interest income.

3. Applicability of Minimum Alternative Tax (MAT) under Section 115JB of the Income Tax Act:
The Tribunal upheld the applicability of MAT under Section 115JB, assessing the company on book profits without considering the indexed cost of acquisition. The court, however, noted that Section 115JB(5) allows for the application of other provisions of the Act, including the indexed cost of acquisition under Section 48. It concluded that the indexed cost of acquisition should be considered for computing book profits under Section 115JB, as taxing without it would result in taxing non-real income.

4. Consideration of indexed cost of acquisition for computing book profits under Section 115JB:
The court emphasized that the difference between sale consideration and indexed cost of acquisition represents the actual income of the assessee. It ruled that there is no provision in the Act preventing the assessee from claiming the indexed cost of acquisition when subjected to Section 115JB. The court also highlighted that the Central Board of Direct Taxes' Circular No.762 supports this view, and the Tribunal failed to consider this in its decision.

5. Tribunal's adherence to the decision of the coordinate Bench regarding Alternative Minimum Tax on Companies:
The court noted that the Tribunal did not follow the decision of the coordinate Bench in 'MSR & Sons Investment Ltd.', which held that if dividends are not paid, the provisions of book profit are not attracted. The court found that the Tribunal failed to appreciate this precedent and the decision of the High Court in similar cases.

Conclusion:
The court answered the substantial questions of law in favor of the assessee, quashing the Tribunal's orders to the extent they were against the assessee. The appeals were disposed of, emphasizing the importance of considering the indexed cost of acquisition and the correct application of Section 57(iii) and Section 115JB of the Act.

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