2015 (5) TMI 727 - AT - Income Tax

Disallowance of diminution in value of fertilizer bonds - Held that - The assessee company was compelled to receive fertilizer s bonds in lieu of cash fertilizers subsidy by the Government of India. The AO has not brought out any allegation that the assessee company bought fertilizers bonds for the purpose of making investment and thus, the bonds were to be given the same treatment which was to be given to cash in hand, foreign currency or cash in bank as current trading assets. In this situation, we respectfully take cognizance of decision of Hon ble Apex Court in the case of Patnaik & Company (1986 (7) TMI 6 - SUPREME Court) and CIT vs. D.S. Bisht, (2000 (2) TMI 83 - DELHI High Court ) wherein it was held that the loss on investments which were made under commercial expediency did not bring an asset of a capital nature and losses thereon, therefore, is allowable as business losses. The dispute remains on the loss booked by the assessee on diminution of fertilizers bonds which were remained unsold at the end of the year. Thus the fertilizer bonds received by the assessee in lieu of cash subsidy also deserves to be given the same treatment as foreign exchange because foreign exchange is also received in lieu of cash/Indian National Rupee (INR) and the same is also shown as current trading assets in the books of accounts as per well accepted accounting principles.CIT(A) was right in holding that the difference in the amounts of loss/profit on actual sale of points has been duly accounted for in the books of accounts of the relevant assessment year and the loss of ₹ 9.52 crores on account of diminution in the market value of the fertilizers bonds held at the end of the year as business assets cannot be disallowed and such disallowance cannot be sustained on facts or in law. - Decided against revenue. Disallowance u/s 14A on account of interest expenditure - Held that - the Department has accepted this contention of the assessee that the assessee has not diverted his interest bearing funds for the purpose of investments or any other manner for making investment which accrue tax free income for the assessee. In the same manner, we are further inclined to hold that the Revenue authority has not brought out any fact to establish this fact that the assessee diverted his interest bearing funds for making investments for earning tax free income. In this situation, we are fully agree with the approach of the CIT(A) for A.Y. 2010-11, wherein the CIT(A) has made disallowance only u/s 14A read with Rule 8D(iii) of the I.T. Rules, 1962 by making total disallowance of .5% of aggregate of opening and closing value of investments and the CIT(A) was also right in directing the AO to deduct the amount of suomoto disallowance already made by the assessee. Hence, the sole ground of the assessee is allowed with a direction to the AO that the disallowance u/s 14A read with Rule 8D(iii) of the I.T. Rules should also be made for the year under consideration in this appeal i.e. for A.Y. 2008-09 and the AO is also directed to give set off of amount of suomoto disallowance already made by the assessee in the computation of returned income. - Decided in favour of assesse as directed

Summary

Issues Involved:
1. Disallowance of Rs. 9,52,14,000 on account of diminution in the value of fertilizer bonds.
2. Disallowance of Rs. 75 lacs under Section 14A of the Income Tax Act on account of interest expenditure.

Issue 1: Disallowance of Rs. 9,52,14,000 on Account of Diminution in Value of Fertilizer Bonds

The primary issue in ITA No. 1836/D/2012 revolves around whether the CIT(A) was correct in deleting the disallowance of Rs. 9,52,14,000 made by the AO on account of diminution in the value of fertilizer bonds. The AO noted that the claimed loss of Rs. 9.52 crores was neither suffered by the assessee company during the year nor was there a provision for any ascertainable liability accruing during the year. The AO suspected that the claim was made to suppress taxable income, leading to the disallowance.

The Departmental Representative (DR) argued that the AO was correct in disallowing the claimed loss since it was neither suffered nor any liability accrued during the year. On the other hand, the Assessee's Representative (AR) contended that the company had received fertilizer bonds in lieu of cash subsidy from the Government of India due to a shortage of funds. The bonds were shown as "current assets" and not as investments, and the loss was accounted for based on their realizable value as on 31/03/2008.

The AR supported their argument by citing various judicial decisions, including Patnaik & Company Limited vs. CIT and CIT vs. D.S. Bisht & Sons, which held that losses on investments made under commercial expediency should be treated as revenue losses, not capital losses. The CIT(A) had granted relief to the assessee, observing that the bonds were shown as "other current assets" and the loss was allowable as a business loss.

The Tribunal, after careful consideration, held that the assessee was compelled to receive fertilizer bonds under commercial expediency. The Tribunal noted that the bonds were shown as current assets and not investments. It was also observed that the loss on diminution in the value of bonds should be treated similarly to foreign exchange fluctuations, as per the decision in Reliance Industries Ltd. vs. CIT. Therefore, the Tribunal upheld the CIT(A)'s decision to delete the disallowance, concluding that the loss on diminution in the value of fertilizer bonds was allowable as a business loss.

Issue 2: Disallowance of Rs. 75 Lacs Under Section 14A on Account of Interest Expenditure

In ITA No. 1447/D/2012, the assessee challenged the disallowance of Rs. 75 lacs made by the AO under Section 14A of the Income Tax Act on account of interest expenditure. The AO had made a disallowance of Rs. 90 lacs, but the CIT(A) directed the AO to verify and allow the set-off of Rs. 14,94,750, which the assessee had already disallowed in the return of income.

The AR argued that the disallowance under Section 14A read with Rule 8D should be made only if the suomoto disallowance made by the assessee was incorrect. The AR pointed out that the investments were made out of the company's own funds and not by diverting interest-bearing funds. The AR also referred to the CIT(A)'s order for A.Y. 2010-11, where no disallowance was made on account of interest expenditure.

The Tribunal observed that the CIT(A) had granted relief to the assessee for A.Y. 2010-11, and there was no evidence that the assessee had diverted interest-bearing funds for making tax-free investments. The Tribunal agreed with the CIT(A)'s approach for A.Y. 2010-11, where disallowance was made only under Rule 8D(iii) for administrative expenses. Therefore, the Tribunal directed the AO to follow the same approach for A.Y. 2008-09 and to give set-off for the suomoto disallowance already made by the assessee.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal. The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 9,52,14,000 on account of diminution in the value of fertilizer bonds and directed the AO to make disallowance under Section 14A read with Rule 8D(iii) for A.Y. 2008-09, giving set-off for the suomoto disallowance made by the assessee.