2022 (7) TMI 1088 - AT - Income Tax

Taxability of Interest received u/s.244A - Whether CIT (A) erred in confirming that the interest received u/s 244A is taxable when the right to receive is under dispute in view of the appeals filed by the department? - CIT (A) held that the interest under Section 244(A) is taxable, pending final determination of the assessments by the Income-Tax Authorities / Appellate Authorities - HELD THAT - Undisputed facts are that the assessee has received interest u/s.244A of the Act on refund and total interest is Rs.48,46,557/-. The ld.counsel for the assessee stated that this taxability of interest u/s.244A of the Act was allowed in favour of assessee by ITAT in assessment year 1984-85 but he very fairly conceded that this issue is covered against assessee in assessee s own case 2009 (3) TMI 901 - ITAT CHENNAI for assessment year assessment years 2001-02 2002-03. Since, the issue is covered in favour of Revenue and against assessee, respectfully following the Tribunal s decision for assessment years 2001-02 2002-03, we dismiss this issue of assessee s appeal. Disallowance of business expenditure to the extent of 75% and allowing only 25% - CIT-A disallowing the claim for extra-ordinary business expenditure as it is incurred out of commercial expediency and for the purpose of the business of the appellant - HELD THAT - We noted that the CIT(A) has not doubted the purpose of business i.e., purposes but he has estimated for the reason that the assessee has not maintained separate accounts in respect of these expenditures and the details of employees or visiting officials are not provided. Accordingly, he restricted the allowance of expenditure at 25% and confirmed disallowance of 75% of expenditure. Even now before us, the assessee could not substantiate its claim beyond allowing of expenditure at 25% as allowed by CIT(A). Hence, we dismiss this issue of assessee s appeal and confirm the order of CIT(A). Nature of expenditure - addition of write off of investments made in Ponni Sugars (Orissa) Ltd, claimed by assessee as commercial expediency and business compulsion but authorities below considered this as capital in nature - assessee has made investment in Ponni Sugars (Orissa) Ltd. in the equity capital, non-convertible debentures and zero coupon redeemable preference shares - HELD THAT - From the above facts and the decision of Hon ble Madras High Court in the case of Tamilnau Industrial Investment Corp. Ltd. 2017 (7) TMI 1048 - MADRAS HIGH COURT and Electronic Corporation of Tamilnadu Ltd., 2018 (12) TMI 47 - MADRAS HIGH COURT we are also of the view that the claim of loss accruing or arising as investment in equity shares, non-convertible debentures and zero coupon redeemable preference shares is not capital loss but eligible for deduction in computation of business income as business loss, as held by Hon ble Madras High Court in the case of Electronic Corporation of Tamilnadu Ltd., for the sale of shares and amount advanced by assessee to various industries towards working capital, the real character of the transaction was those akin to loans and not equity investment. Respectfully following Hon ble Madras High Court decision in the above two cases, we reverse the orders of lower authorities and allow this issue of assessee s appeal.

Summary

Issues Involved:
1. Taxability of interest received under Section 244A of the Income Tax Act.
2. Disallowance of business expenditure.
3. Write-off of investments in Ponni Sugars (Orissa) Ltd.

Issue-wise Detailed Analysis:

1. Taxability of Interest Received under Section 244A of the Income Tax Act:
The primary issue revolves around whether the interest received under Section 244A is taxable when the right to receive it is under dispute. The assessee contended that the interest should not be taxed until the final determination by appellate authorities, referencing several precedents including "Godhra Electricity Co Ltd. Vs. CIT" and "CIT Vs Hindustan Housing and Land Development Trust Ltd." However, both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the interest is taxable in the year of receipt, citing the decision of the Hon'ble Madras High Court in "CIT vs. MKKR Muthukaruppan Chettiar," which states that interest accrues de die in diem. The Tribunal upheld this view, noting that the issue had already been decided against the assessee in previous years (AY 2001-02 & 2002-03). Therefore, the interest received under Section 244A amounting to Rs.48,86,557/- was added to the total income of the assessee.

2. Disallowance of Business Expenditure:
The second issue pertains to the disallowance of business expenditure claimed by the assessee. The AO and CIT(A) noted that the assessee incurred Rs.16,04,118/- under extraordinary circumstances for interactions with various government departments. The AO disallowed the expenditure, arguing it did not fall under any regular head of expenditure. The CIT(A) allowed only 25% of the expenditure, citing the lack of separate accounts for these expenses. The Tribunal upheld this decision, agreeing that the assessee could not substantiate its claim beyond the 25% allowed by the CIT(A).

3. Write-off of Investments in Ponni Sugars (Orissa) Ltd.:
The final issue concerns the write-off of investments in Ponni Sugars (Orissa) Ltd., which the assessee claimed as business expenditure due to commercial expediency. The AO treated these investments as capital in nature, a view upheld by the CIT(A). However, the Tribunal reversed this decision, referencing the Hon'ble Madras High Court's rulings in "Electronic Corporation of Tamilnadu Ltd." and "Tamilnadu Industrial Investment Corp. Ltd." The Tribunal noted that the investments were made for business purposes and commercial expediency, and the losses should be treated as business losses eligible for deduction under Section 37 of the Income Tax Act.

Conclusion:
The Tribunal dismissed the assessee's appeal on the taxability of interest received under Section 244A and the disallowance of business expenditure but allowed the appeal regarding the write-off of investments in Ponni Sugars (Orissa) Ltd., treating the losses as business expenditure. The appeal was thus partly allowed.