2017 (3) TMI 1234 - AT - Income Tax

Term loan interests - Nature of expenditure - revenue or capital - Held that - The nature of the impugned amount was duly disclosed in the notes of account attached to the balance sheet. The said note mentioned that the amount involved was long term bank interest and medium term banking on interest. If that be so there was no reason to treat the same as preoperative expenses. However this aspect needs factual examination at the level of the Assessing Officer. Learned CIT(Appeals) also has principally agreed with the proposition of the assessee but has held that adequate materials are not on record. In these circumstances in our considered opinion, the issue as to whether the amount involved is actually revenue in nature needs to be remitted to the file of the Assessing Officer. Accordingly the issue is remitted to the file of the Assessing Officer. The Assessing Officer shall examine this issue after giving the assessee an opportunity of being heard. After due examination if he finds that the amount involved was revenue in nature liable to be debited to the profit and loss account, the assessee s claim would deserve to be allowed - Decided in favour of assessee for statistical purposes

Summary

Issues:
1. Determination of book profit vs. actual book loss.
2. Treatment of interest charged by the bank as revenue expenditure.
3. Application of Section 115JB to a company suffering huge losses.
4. Whether interest liability on term loan is debitable as revenue expenditure.
5. Reduction of interest liability for working out book profits under Section 115JB.

Issue 1: Determination of Book Profit vs. Actual Book Loss
The appeal challenged the determination of book profit at a certain amount despite the actual book loss being significantly higher. The appellant argued that the interest charged by the bank should be considered a revenue expenditure, leading to a book loss. The appellant relied on a case law to support the possibility of adjusting the book profit to reflect the correct amount.

Issue 2: Treatment of Interest Charged by the Bank
The appellant contended that the interest charged by the bank should be treated as a revenue expenditure, debitable to the profit and loss account, thereby reducing the book profit. The appellant argued that this treatment would result in no book profit and, consequently, no liability under Section 115JB. However, the authorities rejected this argument, stating that the interest amount could be considered capital expenditure to be added to the cost of the asset.

Issue 3: Application of Section 115JB to a Company Suffering Huge Losses
The appellant claimed that Section 115JB was intended to tax zero-tax companies, not companies facing substantial losses. The appellant argued that applying Section 115JB to a company continuously suffering significant losses, unable to pay bank loans or interest, was erroneous. The authorities, however, confirmed the application of Section 115JB to the company, leading to the dispute.

Issue 4: Debatability of Interest Liability as Revenue Expenditure
The appellant raised an issue regarding the interest liability on term loans, contending that it should be debited as revenue expenditure in the profit and loss account. The authorities disagreed, stating that there was insufficient evidence to establish the nature of the expenditure as revenue in character, leading to a disagreement on the treatment of the interest liability.

Issue 5: Reduction of Interest Liability for Book Profits under Section 115JB
The authorities held that the interest liability on term loans could not be considered revenue expenditure without adequate material to support its nature. The appellant argued that the accounts were not in compliance with the Companies Act, justifying the adjustment sought. The appellate tribunal agreed with the appellant's position, remitting the issue to the Assessing Officer for further examination and consideration.

In conclusion, the judgment addressed various issues related to the determination of book profit, treatment of interest liabilities, application of Section 115JB, and compliance with the Companies Act. The tribunal allowed the appeal for statistical purposes, emphasizing the need for a factual examination to determine the nature of the interest liability and its impact on book profits under Section 115JB.