2013 (11) TMI 225 - AT - Income Tax

Disallowance of Expenditure - Investment in subsidiary company - CIT upheld disallowance - Held that - Assessing Officer and the CIT(A) erred in not considering the allowance of expenditure, which has a direct nexus with the investments made in subsidiary companies by way of redeemable non-convertible debentures. Out of Rs.508.72 crores received from M/s. Platex Ltd. Mauritius from issue of 14.5% redeemable fully convertible debentures of Rs.1 lakh each, assessee has invested Rs.410.85 crores in subsidiaries as stated earlier. As there is direct nexus to the interest earned, which was brought to tax, assessee s claim of for corresponding proportionate interest and incidental expenditure has to be allowed, not only on facts, but also under the provisions of S.57. Accordingly, we allow grounds No.11 and 12 of the assessee, and direct the Assessing Officer to allow proportionate interest, out of Rs.5,30,31,148, paid to M/s. Platex Ltd. and also any other incidental expenditure that might have been incurred towards legal and corporate expenditure allowable under S.57(1)(iii) of the Act - Decided in favour of assessee. Reopening of assessment - Change in effective date for calculation of interest - Held that - there is no basis for changing the effective date for calculation of interest from 26th February, 2007, when the funds are not provided to the other company, prior to that date. Since there is no dispute with reference to the date of funds being made available to the subsidiary company, i.e. only from 26.2.2007, we agree with the assessee s contention that the interest accrued only from 26.2.2007, though the debentures were dated 21.2.2007. Unless the funds are made available, no body would pay interest. Therefore, the assessee s calculation of interest is upheld and the addition made by the Assessing Officer in this behalf is deleted. Since it is one of the basic issue on facts, we do not intend to consider the legal issues raised by the parties, on various principles of law. The Assessing Officer is directed to delete the addition so made on this count - Decided in favour of assessee. The issue relating to validity of reopening of assessment has become academic. However, for the sake of record, the original assessment under S.143(3) was completed by the Assessing Officer, after due examination of the interest received on the redeemable debentures. It is already on record, that the assessee has received share premium and it was disclosed in the Balance Sheet. Assessing Officer after noticing that the assessee has not offered any income, which was in fact adjusted in the pre-operative expenses, brought to tax interest as income from other sources. Since he has examined the issues in detail, including the investments made thereon, it cannot be said that the Assessing Officer has not applied his mind while considering the amounts he intend to bring to tax. Therefore, reopening of the assessment on the reason that some of the accrued income was not offered to tax does not arise, as the assessee has validly accounted interest from the time monies were placed at the disposal of the subsidiary company. Therefore, reopening of assessment per se is bad in law. On this reason also, the assessee gets relief - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction issue regarding assessment on a non-existing company.
2. Classification of interest income as 'income from other sources.'
3. Deduction of proportionate interest and incidental expenditure.
4. Validity of reassessment proceedings under S.147.
5. Addition of accrued interest on debentures.
6. Addition of share premium as income from other sources.
7. Charging of interest under S.234B.

Issue-Wise Detailed Analysis:

1. Jurisdiction Issue:
The assessee contested the jurisdiction of the Assessing Officer (AO) to make assessments on a non-existing company due to amalgamation. The Tribunal upheld the AO's and CIT(A)'s decisions, noting that the assessment pertained to the period before amalgamation and that the assessee did not raise objections until late in the proceedings. The Tribunal dismissed the grounds relating to jurisdiction.

2. Classification of Interest Income:
The assessee did not press the issue of treating interest income under 'income from other sources.' Consequently, the Tribunal upheld the AO's classification of interest income under this head.

3. Deduction of Proportionate Interest and Incidental Expenditure:
The Tribunal found merit in the assessee's claim for deduction of proportionate interest and incidental expenditure related to the investments made in subsidiary companies. The Tribunal directed the AO to allow the proportionate interest and any incidental expenditure, citing a direct nexus between the interest earned and the investments made.

4. Validity of Reassessment Proceedings:
The Tribunal considered the reassessment proceedings under S.147 to be invalid. It was noted that the AO had already examined the interest received on redeemable debentures and the share premium during the original assessment. Therefore, reopening the assessment on the grounds of unoffered accrued income was deemed unnecessary and invalid.

5. Addition of Accrued Interest on Debentures:
The AO added Rs.50,94,958 as interest accrued on debentures, calculating interest from 21.2.2007 instead of 26.2.2007. The Tribunal agreed with the assessee that interest should be calculated from 26.2.2007, the date when funds were made available to the investee company. The Tribunal directed the AO to delete the addition.

6. Addition of Share Premium as Income from Other Sources:
The AO treated the share premium of Rs.7,73,27,003 as income from other sources, doubting its genuineness. The Tribunal disagreed, noting that share premium is a capital receipt and not taxable as income. The Tribunal highlighted that the premium was justified due to the proposed amalgamation with a listed company. The Tribunal directed the AO to delete the addition, as the share premium cannot be considered income under the existing legal framework.

7. Charging of Interest under S.234B:
The Tribunal directed the AO to charge interest under S.234B as per the provisions of the Act while giving effect to the order.

Conclusion:
The Tribunal partly allowed the appeal arising from the original assessment proceedings, allowing the deduction of proportionate interest and incidental expenditure, and dismissing the jurisdiction issue. The reassessment proceedings were deemed invalid, and the additions of accrued interest and share premium were deleted. The stay application was dismissed as infructuous.

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