2013 (2) TMI 601 - AT - Income Tax

Proportionate interest attributable to the advances given to subsidiary/group companies at concessional interest rate or interest free - disallowance - Held that - As decided in assessee s case in 2004 (6) TMI 589 - MUMBAI BENCH B (THIRD MEMBER) the relevant advances having been made by the assessee to its subsidiary company wholly and exclusively for the purpose of its business, the disallowance of interest attributable to the said advance was not justified - in favour of assessee. Disallowance of interest on share application money - CIT (A) allowed the claim - Held that - As decided in assessee s own case for previous years there being no diversion of interest bearing funds for non business purpose as alleged by the AO, there was no justification in making any disallowance on account of interest paid on the borrowed funds. It was also noted that the share application money was finally refunded to the assessee with interest at the rate of 19% and the interest so received was duly offered to tax by the assessee in the relevant year - in favour of assessee. Addition on account of notional gain on conversion of foreign exchange deposit placed with its wholly owned subsidiary company relying on AS-11 - Held that - As per the classification made in AS-11, monetary items mainly include amounts held on current account, such as, cash receivables, payables etc. while non-monetary items include amounts held on capital account, such as, fixed assets, investment in shares etc. In the present case, the shareholders deposit represented the amount held by the assessee on capital account inasmuch as it was convertible into equity shares within a period of 10 years and if not so converted, it was liable to be refunded to the assessee company only after a period of 10 years thus the said amount thus was in the nature of non-monetary item which was required to be reported/recognized at the exchange rate prevailing on the date of relevant transaction even as per AS-11 as rightly held by the CIT(Appeals) - no infirmity in the impugned orders of the CIT(Appeals) deleting the additions made by the AO on this issue and upholding the same -in favour of assessee. Deduction u/s 80HHC with regard to meals supplied by its flight kitchen units to foreign airlines - Held that - Claim of the assessee for deduction allowed holding that the same constituted export eligible for deduction u/s 80HHC relying on earlier year case. Claim for deduction on account of expenditure incurred on replacement of carpets - Held that - Decided in favour of assessee relying on CIT vs. Lake Palace Hotels and Motels 2002 (4) TMI 29 - RAJASTHAN HIGH COURT - in favour of assessee. Interest levied u/s 234D cancelled by CIT(A) - Held that - As section 234D has been amended by the Finance Act, 2012 with retrospective effect from 01-06-2003 whereby Explanation 2 has been inserted declaring that the provisions of section 234D shall also apply to assessment year commencing before the first day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date. In the present case, the assessment year involved in assessment year 2001-02 which is commencing before the first day of June, 2003 and since the assessment for the same has been completed on 22-03-2004 i.e. after 1st June, 2003, the provisions of section 234D are clearly applicable and the assessee is liable to pay interest u/s 234D as per the amendment made by the Finance Act, 2012 with retrospective effect from 01-06-2003 - set aside the impugned order of the CIT(Appeals) cancelling the interest levied by the AO u/s 234D and restore that of the AO charging such interest - against assessee. Addition made on account of reversal of interest claimed in the earlier years by crediting the same in the books of account for the year under consideration - Held that - The accounting entries passed by the assessee in its books of account reversing interest debited in the earlier year and including the same in the cost of relevant fixed asset did not result in any remission or cessation of any liability and it cannot be said that there was any such remission or cessation of any liability by universal act by the assessee so as to invoke Explanation 1 to section 41(1). It is just a case of capitalizing the interest expenditure to comply with the monetary requirements of AS-10 by passing the necessary entries in the books of account which has not resulted in any advantage or benefit to the assessee either by way of remission or cessation of any liability or in any other manner. The addition made by the AO and confirmed by the CIT(Appeals) on this issue thus is not sustainable and deleting the same, allow assessee s appeal.

Summary

Issues Involved:
1. Deletion of disallowance on account of proportionate interest attributable to advances given at concessional/interest-free rates.
2. Deletion of disallowance on account of interest on share application money.
3. Deletion of addition on account of notional gain on conversion of foreign exchange deposit.
4. Deduction under section 80HHC for meals supplied to foreign airlines.
5. Deduction on account of expenditure incurred on replacement of carpets.
6. Deduction on account of expenditure incurred on replacement of linen.
7. Interest levied under section 234D.
8. Addition on account of interest capitalized in the books treating it as income.

Detailed Analysis:

1. Deletion of Disallowance on Account of Proportionate Interest:
The Revenue's appeals for all six years involved the deletion of disallowance made by the AO on account of proportionate interest attributable to advances given by the assessee to its subsidiary/group companies at concessional interest rates or interest-free. The Tribunal noted that similar disallowance was made in earlier years and consistently decided in favor of the assessee, holding that the advances were made wholly and exclusively for business purposes. Following the earlier decisions, the Tribunal upheld the CIT(Appeals) order deleting the disallowance. The relevant grounds of the Revenue's appeal for all six years were dismissed.

2. Deletion of Disallowance on Account of Interest on Share Application Money:
The AO disallowed interest attributable to share application money, considering it a diversion of borrowed funds. The CIT(Appeals) accepted the assessee's contention that the share application money was paid out of non-interest bearing funds. The Tribunal, following its earlier decisions, upheld the CIT(Appeals) order, noting that there was no diversion of interest-bearing funds for non-business purposes and the interest received on refunded share application money was offered to tax. The relevant grounds of the Revenue's appeals were dismissed.

3. Deletion of Addition on Account of Notional Gain on Conversion of Foreign Exchange Deposit:
The AO added notional gain on foreign exchange deposits with a wholly-owned subsidiary, considering it income on revenue account. The CIT(Appeals) held that the deposits were on capital account and akin to equity, thus not taxable until realized. The Tribunal upheld this view, noting that the deposits were non-monetary items as per AS-11, and gains were taxable only upon realization. The relevant grounds of the Revenue's appeals were dismissed.

4. Deduction Under Section 80HHC for Meals Supplied to Foreign Airlines:
The AO denied the deduction under section 80HHC for meals supplied by the assessee's flight kitchens to foreign airlines, considering it not an export. The CIT(Appeals) allowed the deduction, and the Tribunal, following its earlier decisions, upheld this view, treating the sale proceeds as export eligible for deduction under section 80HHC. The relevant grounds of the Revenue's appeals were dismissed.

5. Deduction on Account of Expenditure Incurred on Replacement of Carpets:
The AO disallowed the expenditure on replacement of carpets, treating it as capital expenditure. The CIT(Appeals) allowed the deduction, and the Tribunal, following its earlier decisions and judicial pronouncements, upheld this view, treating the expenditure as revenue in nature. The relevant grounds of the Revenue's appeals were dismissed.

6. Deduction on Account of Expenditure Incurred on Replacement of Linen:
Similar to the issue of carpet replacement, the AO disallowed the expenditure on replacement of linen. The CIT(Appeals) allowed the deduction, and the Tribunal, following its earlier decisions, upheld this view, treating the expenditure as revenue in nature. The relevant grounds of the Revenue's appeals were dismissed.

7. Interest Levied Under Section 234D:
The AO levied interest under section 234D, which was cancelled by the CIT(Appeals) based on the decision of the Delhi Special Bench of ITAT. The Tribunal noted the retrospective amendment to section 234D by the Finance Act, 2012, making it applicable to assessments completed after 1st June 2003. Since the assessment was completed after this date, the Tribunal set aside the CIT(Appeals) order and restored the AO's order charging interest. The relevant ground of the Revenue's appeal for assessment year 2001-02 was allowed.

8. Addition on Account of Interest Capitalized in the Books:
The AO added the interest capitalized in the books, treating it as income. The CIT(Appeals) confirmed the addition, relying on section 41(1). The Tribunal, however, noted that the reversal of interest was done to comply with AS-10 and did not result in any benefit or cessation of liability. Therefore, the provisions of section 41(1) were not applicable. The Tribunal deleted the addition, allowing the relevant ground of the assessee's appeal for assessment year 1994-95.

Conclusion:
The appeals of the Revenue for assessment years 1994-95, 1998-99, 1999-2000, 2000-01, and 2002-03 were dismissed. The appeal of the Revenue for assessment year 2001-02 was partly allowed. The appeal of the assessee for assessment year 1994-95 was partly allowed, and all the cross objections of the assessee were dismissed.