9911796707
TMI Blog2010 (12) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... l cash did not change hands and the transaction was completed through book adjustments and that the interest liability had been paid off through giving the creditor a share in the owner ship of the assessee company and, thus, the assessee was entitled to claim the amount so paid off u/s 43B of the Act as a deduction and also in respect of applicability of restructuring expenses, even then if such expenditure were not to be termed ‘interest’, it would still be allowable as it had been incurred with the objective of squaring off a liability that was on revenue account and would thus acquire the character of a revenue expense. - decided in favor of assessee Irrecoverable interest on inter-corporate deposits - The Revenue’s claim that the assessee does not carry on the business of money lending and therefore, the principal of inter-corporate deposits written off was not allowable as business expenditure - the assessee had made efforts at its command to recover the dues from the above parties - Even with its best efforts to retrieve the balance interests from those parties went astray, the assessee had resorted to write off the balance amount as irrecoverable - Assessee had fulfilled th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered and disposed of, for the sake of convenience, in this common order. Let us now take up the issues raised by the assessee for adjudication (ITA No.922/Bang/2009). 6. During the course of hearing, the Ld. A R submitted that the assessee is not pressing the additional ground raised. Considering the plea of the Ld. A.R, the additional ground is dismissed as NOT pressed. 7. Reverting back to the main issue, briefly stated, the assessee company's ['the assessee' in short] nature of business being manufacturing and selling of pellets, hot rolled coils, sheets, plates etc., and the assessee had undertaken of setting of an integrated Steel Plant project atBellary and for that project, according to the assessee, it had required a housing complex atBangalore to house its executives/staff members for its effective business operation. In response to its advertisement released in newspapers for 225 residential flats (4 lakhs sft) the offer of Fortune Holdings was accepted which, according to the assessee, met the prescribed specifications of it. Accordingly, the assessee had advanced earnest deposit of Rs. 40 crores to Fortune Holdings in order to acquire rights in and for developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act was very remote. 9. Disenchanted with the finding of the Ld. CIT (A), the assessee has come up with the present appeal. During the course of hearing, the elaborate submissions made by the Ld. AR are summarized as under: (i) during the course of assessment proceedings the AO, without seeking any information or providing proper or sufficient opportunity to the assessee, concluded that because the advance which was not recovered related to an advance for acquisition of a capital asset, the non-recovered portion was nothing but a capital expenditure and cannot be allowed as a revenue expenditure; (ii) though various evidences and details in the form of advertisement, offer and acceptance of the proposal etc. were produced to prove that the advance was merely for the purpose of business and, thus, its non-recovery was a loss allowable to the assessee, the Ld. CIT (A), without providing adequate opportunity to the assessee, decided the issue with a terse comment that on account of dearth of documentations etc., it is not possible to conclude the expenditure to be an allowable business expenditure; (iii) the CIT (A) had failed to give reasonable opportunity to the assessee to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on a glimpse of the impugned order of the Ld. CIT(A)under dispute, we find that though she had discussed the issue in brief, but, failed to elicit more details from the assessee as to how those amounts have become irrecoverable. 11.2 The Ld. AR, in the midst of hearing beforethis Bench, pleaded that (at the cost of repetition) 'chiefly, the assessee was not provided with proper or sufficient opportunity to put-forth its view on the very issue either by the AO or by the CIT(A) and, furthermore, the CIT (A) had not apprised what were the further evidences, material or documents required to be placed before her to come to a correct and just conclusion that the assessee was entitled to claim the same as a business loss and, primarily, the assessee was prevented by a reasonable and sufficient cause in not being able to satisfy the lower authorities to allow its claim of loss in the current year.' 11.3 Taking into account the reasoning of the AO in rejecting the assessee's claim and also the pleading of the Ld. AR cited supra, we are of the considered view that the issue had not been properly handled either at the stage of assessment proceedings or for that matter at the appellate st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 43B of the Act by the Finance Bill 2006 with retrospective effect from 1.4.1989 which provided that interest can be claimed u/s 43B of the Act only when it is actually paid, conversion of interest amount into loans or borrowings shall not be deemed as payment of interest. 12.2 On further appeal before the first appellate authority, in respect of conversion of interest into loans and advances, the Hon'ble CIT(A) had upheld the order of the AO, relying on the Explanation 3C to sec.43B of the Act. However, the Hon'ble CIT(A) had specifically directed the AO that interest paid before filing return of income and also proportionate interest allowable as per clarification issued by the Central Board of Direct Tax vide Circular No.7/2006 datedJuly 07, 2006 should be allowed to the assessee. (It is important to mention here that the assessee had accepted the said findings of the CIT(A) and had not filed an appeal before us on this aspect of the matter). In respect of conversion of interest into Preference Shares, the CIT(A) had stated that the said conversion could not be brought within the ambit of the Explanation 3C to sec.43B of the Act as holder of such shares could not be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him...." Explanation 3C - For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid". 13.2 On perusal of sec.43B, it could be seen that the said section creates a fiction to provide that irrespective of the method of accounting followed by the assessee, certain liabilities would be allowed as deduction only on actual payment. Assessee's case falls under Clause (d) of said section which covers interest payment to certain institution. Further, Explanation 3C to said section provides that where interest payable u/s 43B(d) is converted into a loan or a borrowing, it shall not be deemed to have been actually paid. The assessee had conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the preference shareholders held voting rights in the company (source page 60 of paper book). (ii) Further, on direction of the Bench, the assessee has also filed the stock exchange quotes of CRPS of the assessee to prove that CRPS issued by the assessee were traded on stock exchange. (iii) The jurisdictional High Court in the case of Kirloskar Electric Co. Ltd. v CIT (228 ITR 674) has clearly explained the difference between the preference shares and borrowings. The relevant extract is reproduced below. "Subscription to preference share is a contribution to the capital of the company by its subscribers or shareholders and is not a borrowing by the company". In view of the above distinctions between loan and preference share capital and the jurisdictional High Court decision, we are of the view that the loan cannot be equated with Preference Share and consequently, it cannot be construed that Explanation 3C to section 43B of the Act covers not only loans and advances but also preference shares. 13.5 It is a well settled position of law that deeming provisions being legal fictions should be strictly construed. Explanation 3C being deeming provision strictly applies to convers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable up to the date of such event. They also will have a preferential right in respect of repayment of capital. Thus, besides the issuance of shares, the assessee is also put under incidental obligations in the process, it need to be clarified that with the relief granted by the institutions, it is not that long term benefits will keep on accruing to the assessee. There is merely a reduction in the rates of interest for the remaining period of the loans. Thus, in future, interest liability will keep on accruing to the assessee, albeit at a lower rate. But the part of interest which the institutions have sacrificed by such reduction in the rates, they have asked for their pound of flesh immediately from the assessee. Accordingly, the liability to compensate has arisen in the year under consideration, it has crystallized also in this year and therefore, the assessee should be entitled to the deduction thereof. Here, we may hasten to add that Explanation 3C to sec.43B will not apply. The said Explanation provides that where interest payable u/s 43B (d) is converted into a loan or a borrowing, it shall not be deemed to have been actually paid. The legislature in its wisdom has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up, we decide the issue against the Revenue and affirm the order of the CIT(A) on this aspect. Deletion of the addition of Rs.1.89 crores: 14. The other grievance of the Revenue being that the CIT(A) was not justified in deleting the addition of Rs.1.89 crores made on account of the disallowance of the amount claimed as irrecoverable interest on inter-corporate deposits written off. 14.1 The stand of the AO was that the payments made to Monnet Ispet Pvt. Ltd. and Reynold Traders Pvt. Ltd. have to be first appropriated towards the interest payable and the balance, if any, was towards the principle amount and, thus, the payments received in the earlier years towards interest was offered to tax and what remains now was only the principle amount. As the assessee was not in the business of money lending, the amount outstanding against the principle amount cannot be claimed as a deduction on account of the same being irrecoverable. 14.2 However, the Ld. CIT (A), after analyzing the well-knitted arguments put-forth by the assessee which was tied up with various judicial backing on a similar issue and also evaluating the provisions of s.36(1)(vii) r.w. s.36(2) of the Act, had a diverge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciating the reasons recorded by the AO and that the prevailing trade practice of first adjusting the amount received from the debtors against the interest component. 14.4 On his part, the Ld. A R explained the efforts made by the assessee to retrieve the interests on inter-corporate deposits and stoutly refuted the AO's claim that the amounts so written off represented the principal portion since the amounts recovered from the parties concerned should be first appropriated towards interest payable and the balance, if any, had to be appropriated towards the principal amount. To belie the AO's stand, the Ld. AR, during the course of hearing, furnished a voluminous paper book which, among others, contained the prolonged correspondences between the assessee and the parties concerned. 15. We have carefully considered the rival submissions, attentively gone through the relevant official records and also the documentary evidences advanced by the Ld. A R to strengthen the assessee's claim. 15.1 The Revenue's claim that the assessee does not carry on the business of money lending and therefore, the principal of inter-corporate deposits written off was not allowable as business expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
