2017 (8) TMI 35 - HC - Income Tax

Addition of interest paid to M/s IFCI Ltd. - Held that - As placed before the Court a copy of the sanction letter from IFCI, evidencing the fact that the term loan was utilised for purchasing fixed assets. This was further supported by copies of the audited balance sheet as at 31st March 2000 and 31st March 2001. He has also placed before the Court a copy of the audited balance sheet and Profit & Loss account (P&L Account) for the financial year 2006-07 evidencing that the waived off amount has been credited to capital reserve and the interest amount has been written off in the P&L Account. Consequently, the ratio of the decision of this Court in CIT v. Pasupati Spinning Weaving Mills Ltd. (2015 (11) TMI 385 - DELHI HIGH COURT) squarely covers to this appeal and the only question framed in this appeal is accordingly answered in the negative i.e. against the Revenue and in favour of the Assessee. It is held that the ITAT did not error in deleting the addition on account of amount transferred to capital reserve.

Summary

Issues:
1. Whether the ITAT erred in deleting the addition of ?5,25,685 made by the Assessing Officer on account of 'interest paid to M/s IFCI Ltd.'?
2. Whether the ITAT erred in deleting the addition of ?70,44,023 made by the Assessing Officer on account of 'amounts written off'?
3. Whether the ITAT erred in deleting the addition of ?22,90,00,000 made by the Assessing Officer on account of 'amount transferred to capital reserve'?

Analysis:
1. The High Court considered the appeal by the Revenue against the ITAT's order for the AY 2007-08. The Court framed three questions of law, including the deletion of additions made by the Assessing Officer. The Court found no substantial question of law regarding the first two issues as the interest paid was for late repayment of advance and the written-off amount was for old stock, not affected by the cessation of business. The Court admitted the appeal on the third issue concerning the amount transferred to capital reserve.

2. During the hearing, the Assessee cited a previous decision in their favor, while the Revenue relied on another judgment. The Court examined the Logitronics case, which clarified the tax treatment of waived loans based on their purpose. The Court noted that if a loan was for acquiring a capital asset, its waiver would not be taxable. In this case, the ITAT found that the loan from IFCI was for purchasing a capital asset for manufacturing activities, supported by documents such as the sanction letter and balance sheets.

3. The Assessee provided evidence that the waived amount was credited to capital reserve and interest was written off in the Profit & Loss account, aligning with the purpose of the loan for a capital asset. The Court concluded that the decision in favor of the Assessee in a previous case applied to this appeal. Therefore, the Court upheld the ITAT's decision to delete the addition of ?22.90 crores made by the AO on account of 'amount transferred to capital reserve.' The appeal by the Revenue was dismissed based on these findings.