2018 (10) TMI 589 - HC - Income Tax

Disallowance of interest - investment made in the 100% subsidiary companies - proof of commercial expediency warranting no interest disallowance - Held that - In view of concurrent finding of both the authorities and in view of the fact that 86,08,460/- deduction which was allowed by the CIT (A) after following the detail reasoning and the matter was remitted to verify the accounts, in that view of the matter, the first question is answered in favour of assessee against the Department. The funds borrowed to the extent which was from their own fund, interest is required to be deducted in view of the judgment of Supreme Court in Godrej Boyce Manufacturing Company Ltd. 2017 (5) TMI 403 - SUPREME COURT OF INDIA relied on by Mr. Sanjay Jhanwar. - Decided in favour of assessee. Education cess as a disallowable expenditure u/s 40(a)(ii) - Held that - In view of the circular of CBDT No. 91/58/66 ITJ (19), dated May 18, 1967 where word Cess is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision M/S. SRD NUTRIENTS PRIVATE LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE GUWAHATI 2017 (11) TMI 655 - SUPREME COURT OF INDIA referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue is required to be reversed and the said issue is answered in favour of the assessee. Disallowing deduction on account of Capital expenses claimed against the sale of mining rights and not reducing the short-term capital gains - Held that - For the assessment year 2004-05, it was stated that the same is not revenue expenses then for the relevant year, in our considered opinion, the CIT(A) has rightly accepted the details that payment has been made through cheque and the same has been reflected by the assessee in the balance sheet, merely on that ground the expenses cannot be disallowed since for earlier year it was accepted as capital expenses and capital gains, the issue ought to have been decided in favour of the assessee.

Issues Involved:
1. Interest disallowance on investments in subsidiary companies.
2. Disallowance of interest expenses on investments in subsidiary companies and mutual funds.
3. Disallowance of education cess under Section 40(a)(ii) of the Income Tax Act.
4. Deduction of capital expenses against the sale of mining rights.
5. Deduction allowed against the sale proceeds of mining rights without hearing the Assessing Officer.
6. Disallowance of interest paid on borrowed funds.
7. Deletion of disallowance of interest related to dividend income.
8. Deletion of disallowance of prior period expenses.

Detailed Analysis:

1. Interest Disallowance on Investments in Subsidiary Companies:
The tribunal upheld the disallowance of interest expenses, holding that the investments in subsidiary companies and mutual funds were made out of borrowed funds. The appellant argued that the investments were out of commercial expediency, warranting no interest disallowance. However, the tribunal's decision was based on the lack of evidence proving commercial expediency.

2. Disallowance of Interest Expenses on Investments in Subsidiary Companies and Mutual Funds:
The tribunal upheld the disallowance of interest expenses, stating that the investments were made from borrowed funds. The appellant did not press this issue, reserving the right to raise it in future cases. The court thus decided the issue as not pressed.

3. Disallowance of Education Cess under Section 40(a)(ii) of the Income Tax Act:
The appellant contested the tribunal's decision, arguing that education cess is not a tax and should not be disallowed under Section 40(a)(ii). The appellant relied on a CBDT circular and several Supreme Court decisions. The court agreed with the appellant, reversing the tribunal's decision and ruling in favor of the appellant on this issue.

4. Deduction of Capital Expenses Against the Sale of Mining Rights:
The appellant argued that the tribunal erred in not allowing the deduction of capital expenses against the sale of mining rights. The court found that the details of the expenses were provided and reflected in the balance sheet. The tribunal's decision was reversed, and the issue was decided in favor of the appellant.

5. Deduction Allowed Against the Sale Proceeds of Mining Rights Without Hearing the Assessing Officer:
The department argued that the tribunal allowed a deduction of ?86,08,460 without affording an opportunity of hearing to the Assessing Officer. The court upheld the tribunal's decision, noting that the deduction was allowed after verifying the accounts.

6. Disallowance of Interest Paid on Borrowed Funds:
The department contested the tribunal's decision to restrict the disallowance of interest paid on borrowed funds to ?37,65,316. The court upheld the tribunal's decision, finding that the funds borrowed were from the appellant's own funds and thus interest was deductible.

7. Deletion of Disallowance of Interest Related to Dividend Income:
The department argued against the tribunal's decision to delete the disallowance of ?11,10,98,825 out of interest related to dividend income. The court upheld the tribunal's decision, referencing the Supreme Court's judgment in Godrej & Boyce Manufacturing Company Ltd.

8. Deletion of Disallowance of Prior Period Expenses:
The department contested the tribunal's deletion of the disallowance of ?25,00,816 made on account of prior period expenses. The court upheld the tribunal's decision, noting that the expenses were routine revenue expenses and had crystallized during the year under consideration.

Conclusion:
The appeal of the assessee (No. 52/2018) was partly allowed, with issues 1 and 2 decided as not pressed, and issues 3 and 4 decided in favor of the assessee. The appeal of the department (No. 68/2018) was dismissed, with all issues decided in favor of the assessee.

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