2016 (8) TMI 58 - HC - Income Tax

Disallownace of interest paid to nonconvertible debenture portion of public issue - Held that - CIT (A) deleting the disallownace made by the A.O. in respect of interest paid to nonconvertible debenture portion of public issue came to be confirmed, as also considering the decision in case of Core Health Care Ltd. (2008 (2) TMI 8 - SUPREME COURT OF INDIA ), this Court while adopting the said view does not think it proper to discuss the issue elaborately and accordingly answer the question in favour of the asseesse and against the department

Issues Involved:
1. Disallowance of special advertisement expenditure.
2. Disallowance of travelling and medical expenses of the Chairman.
3. Disallowance of interest paid on nonconvertible debenture shares of public issue.
4. Lump sum disallowance of expenses for selling publicity and medical literature.

Detailed Analysis:

1. Disallowance of Special Advertisement Expenditure:
The Assessing Officer (AO) noticed that the assessee claimed special advertisement expenditure amounting to ?39,49,930/-. However, the AO allowed only 1/5th of the expenditure, disallowing ?31,59,944/-. The matter was taken to the Commissioner of Income Tax (Appeals) [CIT (A)], who deleted the addition. The Income Tax Appellate Tribunal (ITAT) upheld the CIT (A)'s decision, leading to the department's appeal.

2. Disallowance of Travelling and Medical Expenses of the Chairman:
In the assessment order, an amount of ?13,62,000/- was disallowed in respect of the Chairman's travelling and medical expenses. The CIT (A) deleted this addition, and the ITAT upheld the CIT (A)'s decision. This issue was part of the broader appeal but was not the primary question of law considered by the High Court.

3. Disallowance of Interest Paid on Nonconvertible Debenture Shares of Public Issue:
The AO disallowed ?5,44,23,397/- in respect of interest paid on nonconvertible debenture shares of the public issue, considering it a capital expenditure not admissible under Section 36(1)(iii) or Section 37 of the Income Tax Act. The CIT (A) deleted this addition, and the ITAT confirmed the CIT (A)'s order. The High Court focused on this issue, considering whether the ITAT was right in law and on facts in confirming the CIT (A)'s order.

The High Court referred to the decision in Deputy Commissioner of Income Tax v. Core Healthcare Ltd., where it was held that interest on moneys borrowed for the purposes of business is a necessary item of expenditure. The relevant sections, Section 36(1)(iii) and Explanation 8 to Section 43(1), were discussed in detail. The court concluded that the AO was not justified in making the disallowance, as the interest paid on borrowed capital used for business purposes is deductible, irrespective of whether the capital was used to acquire a revenue or capital asset. The High Court adopted the view from the Core Healthcare Ltd. case and answered the question in favor of the assessee, dismissing the appeal.

4. Lump Sum Disallowance of Expenses for Selling Publicity and Medical Literature:
The AO made a lump sum disallowance of ?4,91,93,000/- out of expenses for selling publicity and medical literature. The CIT (A) deleted this addition, and the ITAT upheld the CIT (A)'s decision. This issue was part of the broader appeal but was not the primary question of law considered by the High Court.

Conclusion:
The High Court, after considering the arguments and the precedents, particularly the Core Healthcare Ltd. case, concluded that the AO's disallowance of interest paid on nonconvertible debenture shares of the public issue was not justified. The court upheld the ITAT's decision confirming the CIT (A)'s deletion of the disallowance and dismissed the appeal, answering the primary question of law in favor of the assessee and against the department.

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