2023 (9) TMI 371 - AT - Income Tax

Capitalization of interest on FDRs earned during the period of construction - as argued funds (ECB) were completely free from any encumbrances as there was neither any legal requirement nor any compulsion on the part of the assessee company to make the FDR - assessee acquired an existing hotel from State Bank of India under SARFEASI Act and was in the process of renovating this hotel in the year under consideration - HELD THAT - Since, the foreign currency loan was disbursed in single tranche, the assessee invested some part of the foreign currency loan, not immediately required for business activities, in fixed deposits and earned interest income - After netting of the interest income against the interest cost, the assessee declared finance cost - While examining the issue in course of assessment proceedings, the AO was of the view that the interest income earned on the FDRs has to be treated as income from other sources, as it is not related to assessee s business activities. Following the decision taken by him in assessee s case in assessment years 2012-13 and 2013-14, the Assessing Officer added the interest income as income from other sources. The assessee contested the aforesaid addition before Commissioner (appeals). Having taken note of the fact that the Tribunal and the Hon ble High court has decided identical issue in favour of the assessee in assessment years 2012-13 and 2013-14, learned Commissioner (appeals) deleted the addition. Addition u/s 56(viia)(ii) - assessee has received an amount as share premium - HELD THAT - The value of shares, for which the money was received from the holding company was substantiated by a valuation report obtained from a registered valuer, wherein the value was determined by applying DCF method, an approved method under rule 11UA. As rightly observed by learned first appellate authority, the transaction relating to purchase and sale of shares is between a holding company and its subsidiary and no third party is involved. Therefore, no undue benefit has been derived by a third party. Even otherwise also, the valuation of share as per DCF method has been determined by a registered valuer, which is in terms of section 56(2)(viib) of the Act read with Rule 11UA. Even, the alternative method adopted by the assessee for valuation of share was found as per FMV. The aforesaid factual findings of the first appellate authority remain uncontroverted before us, as the Revenue has failed to bring on record any contrary material. Another pertinent fact, which the learned Commissioner (Appeals) has rightly observed, is, the share application money was received in financial year 2012-13 and the terms and conditions of allotment were also decided in the said year. No addition can be made in the impugned assessment year. Accordingly, we uphold the decision of learned Commissioner (Appeals). Appeal of revenue dismissed.

Summary

Issues Involved:
The judgment involves issues related to capitalization of interest on FDRs and addition of share premium in the assessment year 2014-15.

Capitalization of Interest on FDRs:
The assessee incurred expenses for renovating a hotel using foreign currency ECB loans and earned interest income on fixed deposits from the surplus loan amount. The Assessing Officer treated the interest income as income from other sources, but the Commissioner (Appeals) deleted the addition based on previous Tribunal and High Court decisions in favor of the assessee for earlier assessment years. The Tribunal upheld the Commissioner's decision, citing consistency with previous rulings and dismissed the Revenue's appeal.

Addition of Share Premium:
The Assessing Officer added back the share premium amount received by the assessee under section 56(viia)(ii) of the Act, alleging failure to provide the fair market value (FMV) of shares. The Commissioner (Appeals) deleted the addition after considering the valuation report and submissions provided by the assessee, which demonstrated that the share premium was in line with the FMV of shares. The Tribunal upheld the Commissioner's decision, emphasizing that the share application money was received from the holding company with a valuation report based on the discounted cash flow method, approved under Rule 11UA. The Tribunal found no merit in the Revenue's grounds and upheld the Commissioner's decision.

Conclusion:
The Tribunal dismissed the appeal, upholding the decisions of the Commissioner (Appeals) on both issues of capitalization of interest on FDRs and addition of share premium. The judgment highlighted the importance of consistent application of legal principles and supporting evidence in tax assessments.