1995 (11) TMI 117 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest expenditure.
2. Denial of 100% depreciation on deferred interest balance.
3. Disallowance of capital issue expenses.
4. Interest levied under Section 217.
5. Deletion of disallowance of bonus paid in excess of the minimum payable under the Bonus Act.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The primary issue revolved around the disallowance of interest expenditure by the Assessing Officer (AO). The AO noted that the assessee had unsecured loans amounting to Rs. 41,23,999 from a related company, AP Industries Investment Pvt. Ltd., and had invested Rs. 40,01,600 in two subsidiary companies, Virarch Holding Pvt. Ltd. and Vikrant Holding Pvt. Ltd. The AO concluded that these investments were not made to earn income but were a scheme to reduce tax liability by claiming interest on borrowed amounts. Consequently, the AO disallowed interest at the rate of 18% on Rs. 40 lakhs, totaling Rs. 7,20,000.

The CIT(A) partially agreed with the AO but restricted the disallowance to Rs. 81,906, which was the interest paid to AP Industries Investment Pvt. Ltd., considering it a colorable device.

Upon appeal, the Tribunal found that the loan from AP Industries Investment Pvt. Ltd. had a direct nexus with the investment in the subsidiaries. The Tribunal also noted that the transactions between the assessee and its subsidiaries and AP Industries Investment Pvt. Ltd. were genuine and had been accepted in their respective assessments. Therefore, the Tribunal directed the AO to delete the entire disallowance of Rs. 7,20,000.

2. Denial of 100% Depreciation on Deferred Interest Balance:
The assessee claimed 100% depreciation on a deferred interest balance of Rs. 1,30,500. However, the learned counsel for the assessee admitted that this claim was not tenable in light of Explanation 8 to Section 43(1) of the IT Act. Consequently, this ground was rejected.

3. Disallowance of Capital Issue Expenses:
The assessee incurred Rs. 6,000 as capital issue expenses, which the AO and CIT(A) treated as capital expenditure. The Tribunal upheld this view, noting that issue expenses for raising capital are capital expenditures. The assessee did not contest this point further.

4. Interest Levied Under Section 217:
The assessee challenged the interest levied under Section 217. The learned counsel for the assessee argued that this issue would be academic if the Revenue's appeal was dismissed. Since the Tribunal dismissed the Revenue's appeal, resulting in an assessed loss, the provisions of Section 217 would not apply. The AO was directed to grant consequential relief.

5. Deletion of Disallowance of Bonus Paid in Excess of Minimum Payable Under the Bonus Act:
The Revenue challenged the deletion of a disallowance of Rs. 45,127 made by the CIT(A) regarding bonus payments exceeding the minimum payable under the Bonus Act. The CIT(A) observed that the assessee had consistently paid a 20% bonus since the assessment year 1980-81, and such payments were allowed in previous assessments. The CIT(A) directed the AO to allow the bonus payment if it met the conditions laid down in the second proviso to Section 36(1)(ii).

The Tribunal found no infirmity in the CIT(A)'s view and upheld the decision, noting that the CIT(A) had merely restored the issue to the AO to verify compliance with the conditions.

Conclusion:
- The Tribunal directed the deletion of the entire disallowance of Rs. 7,20,000 made out of interest expenditure.
- The claim for 100% depreciation on the deferred interest balance was rejected.
- The disallowance of capital issue expenses was upheld.
- The AO was directed to grant consequential relief concerning the interest levied under Section 217.
- The deletion of the disallowance of bonus paid in excess of the minimum payable under the Bonus Act was upheld.

The Revenue's appeal was dismissed, and the assessee's appeal was partly allowed.