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TMI Blog2013 (6) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of the existing business. In view of the above position all expenditure incurred in connection with new project which is of revenue in nature has to be allowed. Debenture issue expenses - CIT(A) confirmed the disallowance on the ground that the debentures were convertible in shares and thus expenditure was for expanding the capital base - Held that:- As out of total expenditure of ₹ 16,48,90,000/- only ₹ 2,64,34,555/- which related to optionally convertible debentures. In the present case the debentures are not compulsorily convertible into shares. These were optionally convertible and therefore the conversion would depend upon option if any exercised by the debenture holders. Therefore it could not be said that intention was clearly to issue shares. Obviously the intention was to raise loan which could be converted into shares in future if any option was exercised. Therefore the debenture issue expenses considering the judgments of Secure Meters Ltd. case [2008 (11) TMI 66 - HIGH COURT RAJASTHAN] and South India Corporation (2006 (8) TMI 153 - MADRAS High Court) have to be allowed. Respectfully following the decision uphold the order of the CIT(A). Disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined by the CBDT at the time of granting exemption. As already stated once the interest income is not taxable in the hands of recipient and was exempted by the Govt. of India, question of TDS on the interest paid by assessee does not arise. Therefore, the ground has no merit and accordingly rejected. Disallowance of depreciation by reducing the WDV by the amount of principal loan waived - CIT(A) held it to be unjustified - Held that:- As decided in Akzo Nobel Coatings India (P.) Ltd. case [2013 (1) TMI 311 - ITAT BANGALORE] only way by which the written down value on which depreciation is to be allowed as per the provisions of section 32(1)(ii) can be altered is as per the situation referred to in section 43(6)(c)(i) A and B. Neither was there purchase of the relevant assets during the previous year nor was there sale, discarding or demolishing or destruction of those assets during the previous year. Thus, the recourse by the revenue to those provisions on the facts and circumstances of the instant case, it is held, cannot be sustained. Appeal of revenue dismissed. - ITA Nos.4715/Mum/2005 & 2838, 2954 & 5086/Mum/2007 - - - Dated:- 22-3-2013 - B Ramakotaiah and Amit Shukl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able on external borrowings even though the same was not allowable under the provisions of section 40(a)(i) of the I.T. Act 1961." 4. Ground Nos. i ii: Briefly stated, Assessee Company had started the commercial production of Hot Rolled Coils (HRC) from 1.4.96. When this HRC unit was under trial production the entire revenue expenditure of this division was shown under Capital Work In Progress (CWIP) in the those years. As the HRC unit has commenced commercial production from 1.4.96 onwards, the entire revenue expenditure for this year was debited in the Profit Loss A/c except for a portion of the expenditure which was, shown under CWIP as an allocation towards the additional plant and machinery/ unit under construction/installation included in CWIP. For incometax purposes, this was claimed as revenue expenditure separately in the computation, as HRC unit forms part of its existing business. However, the AO has disallowed the same stating that it is capital expenditure. Similarly the AO has also disallowed assessee s claim for fees paid to financial institutions for loan of Rs.56,09,97,232/-, Floating Rate Notes (FRN) restructuring expenses of Rs.61,79,26,937/- and HBI plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial integration, personnel integration, common managing director, common executive director for finance, common administration and procurement etc. There was thus integration inter lacing, inter-dependence and dovetailing of the two divisions which had common finance and consolidated accounts. It was accordingly argued that both the divisions were part of the same business. The assessee was in the business of steel and manufacturing of different products constituted same business. Therefore expenses incurred for the existing business should be allowed. The AO was however not convinced by the arguments advanced by the assessee. It was observed by him that the HRC project was a new and independent project, the commercial production in respect of which was yet to start. It was also observed by him that in the earlier year, heavy expense incurred had been capitalized in the books of account. The AO took the view that expenditure could allowed only in relation to the project in respect of which profit was being computed. He placed reliance on the judgment of Hon'ble High Court of Kolkata in the case of Ritz Continental Hotel (114 ITR 554). As the new project was still being set u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether the assessee would be entitled to a particular deduction would depend upon the provisions of law and not on the nature of entries in the books. Reliance was placed on the judgment of Hon'ble Supreme Court in case of Kedarnath Jute Manufacturing Ltd. (82 ITR 363) . CIT(A) agreed with the assessee that there was unity of management and administration in this case. Therefore he observed that even if the products manufactured by the assessee were different having different types of businesses this would constitute only one business. Accordingly, it was held by him that the new project was expansion of the existing business. He also agreed that the treatment in the books of account was not conclusive regarding nature of expenditure. It was also observed by him that for considering allowability of deduction on account of interest on borrowed funds under section 36(1)(iii) what was required to be seen was that the money must have been borrowed for business purpose. CIT(A) accordingly allowed the claim of deduction on account of interest and general administrative expenses. 2.1.6 As regards the debenture issue expenses CIT(A) observed that debentures were convertible in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the records and considered the matter carefully. The dispute raised by the assessee is disallowance of debenture issue expenses relating to the HRC project. The assessee was already in the business of production of HBI and a new project had been taken up for production of HRC. The case of the assessee is that the new project was a part of the existing business and therefore the expenditure incurred was for the existing business and was thus allowable. The AO had treated the HRC project as a new business and accordingly did not allow the expenses on account of interest, general administration expenses and debenture issue expenses. CIT(A) however considered the HRC project as a part of the existing business and has allowed the general administrative expenses and interest expenses except the debenture issue expenses which have been disallowed on the ground that the debentures were convertible in shares and therefore the expenditure was for raising the capital base not allowable as revenue expenditure. It is a settled legal position that whether two businesses are one and the same business will not depend upon the nature of business or the product but on the fact whether there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning on a future date. The tribunal gave a finding that intention of the assessee was to issue shares partly on allotment and partly after 15 months. In the present case the debentures are not compulsorily convertible into shares. These were optionally convertible and therefore the conversion would depend upon option if any exercised by the debenture holders. Therefore it could not be said that intention was clearly to issue shares. Obviously the intention was to raise loan which could be converted into shares in future if any option was exercised. Therefore in our view the debenture issue expenses considering the judgments of Hon'ble High Court of Rajasthan and Hon'ble High Court of Madras (supra) have to be allowed. We therefore set aside the order of CIT(A) on this point and allow the claim of the assessee." Respectfully following the decision of the Tribunal referred to above we uphold the order of the CIT(A). We also agree with the submission of the ld. Counsel for the assessee that the request of the ld. D.R for examination of the nature of expenses at this stage is not called for. It is neither the case of the AO nor the case of the revenue in the ground of appeal that some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that claim of the assessee was not acceptable. 20. On appeal by the assessee the CIT(A) accepted the plea of the assessee holding as follows: 6.3 I agree with the submission made by the appellant that the lease rent is allowable fully for the year as in the earlier years relating to same assets. There is no revaluation done for purpose of deduction of same under IT Act. The change in the method of treatment of entries in the books will not alter the character of revenue expenditure. Moreover, this change in the method of treatment has not resulted in excess allowance than normally allowable. Therefore, no prejudice is caused to revenue. During the A.Y 1995-96, the entire lease rent of Rs. 8,03,49,553/- was allowed by the Assessing Officer. I delete this addition of Rs. 9,28,34,501 holding that appellant s treatment of deferred payment will not alter the character of the expenditure. 21. Before us ld. D.R relied on the order of the AO. 22. We are of the view that the order of the CIT(A) on this issue has to be accepted. Admittedly the deduction claimed by the assessee was in respect of its actual liability of payment of lease rent to the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 crores in respect of Plant Machinery, raw materials and components. AO has not treated the payments of interest as allowable on account of non deduction of tax at source with the following arguments. DISALLOWANCE OF INTEREST PAYABLE ON EXTERNAL COMMERCIAL BORROWING In the letter dated 19.12.2003, the assessee company stated that interest payable during the relevant previous year on the External Commercial Borrowing (ECB) raised in March 1997 syndicated by Bearish Landens Bank, Singapore is Rs. 11,94,87,216/-. However, no TDS has been deducted on this interest payable. The assessee pointed out that the Company had got the approval of the CBDT for exemption of this interest from income chargeable to tax in India u/s. 10(15)(iv)(c) of the Act as per the certificate dated 12.03.1997. The certificate of the CBDT approved only the rate of interest and it does not grant exemption from TDS. Moreover, the exemption is subject to the conditions mentioned in that Section. As described in detail in the assessment order dated 07.03.2003 for the A.Yr. 2000-01, the Assessee has not fulfilled the purpose and conditions laid down u/s. 1 0(15)(iv)(c) that the loan amount has been uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by industrial undertaking in India. Further, the money should be borrowed from a foreign country and purpose of such borrowals should be in respect of import of raw material etc. As can be seen from the above, the appellant has complied with all the conditions laid down in the aforesaid section. Dictionary meaning of the word "in respect of' is act of noticing with attention, giving particular considerations to, in regard to, in respect of these matters or in relation to or with regard to or with respect. From the above dictionary meaning it is clear that legislative intention was to give the exemption for the interest payable on the funds borrowed abroad in relation to buying the raw materials, capital goods, etc. It was not necessary that borrowing of funds should be followed by the subsequent utilization of the funds, nor is it necessary that the same borrowed funds should be utilised as such for buying those materials. Reliance was placed on CIT vs. Chunilal Rameshwarlal 70 ITR 167 (Patna) where the High Court had occasion to interpret the word in respect of as under: The expression in respect of is vital connotations that the word in or on . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lenders. The Assessing Officer is therefore directed to allow the appellant's claim of interest . 14. In the present order, the learned CIT (A) without elaborate discussion has allowed assessee s claim on the same reason as that of AY 2000-01. Therefore, in order to examine the issue, we had to extract the above order of the CIT (A) for considering this ground. As can be seen from the above, the learned CIT (A) discussed the issue both on facts as well as on law. It is a fact that the CBDT has examined the receipt of interest as per the provisions of section 10(15)(iv)(c) of the Act. Therefore, where the utilization is for purchase outside India of raw material, components or Plant Machinery, so long as exemption granted is valid, the interest received by the other party is not covered by the IT Act and by virtue of exemption granted by the Central Govt., the question of TDS on the above amount does not arise at all. Since there is no requirement of TDS, question of disallowance under section 40(a)(ia) for non deduction of tax also does not arise. Moreover, as seen from the correspondence with the Ministry of Finance by the assessee company way back in December, 1996 and Fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er law Id.CIT(A) erred in deleting the disallowance of Rs.10,38,46,3111- made on account of interest payable on external borrowings even though the same was not allowable under the provisions of section 40(a)(i) of the I.T. Act, 1961." 5. On the fact and in the circumstances of the case and as per law ld.CIT(A) erred in deleting the disallowance of Rs.3,85,01,705/-being interest on proportionate basis u/s.36(1)(iii) of the I.T.Act, 1961 without appreciating the facts that the assessee has never proved or agitated before the AO that during the year interest is payable by the assessee to M/s High Grade Pellet Ltd . 17. Ground No.1 and 3 pertain to the issue of deleting the addition of Rs.8,32,91,543/- made on account of expenses incurred on HRC division and HBI division included in the capital work-inprogress. The brief facts are that assessee has two manufacturing divisions known as HBI and HRC divisions. The commercial production of HRC Unit was started from 1.4.1996. Prior to this date, this Unit was under trial production and the entire revenue expenditure was shown as capital work-in-progress in the earlier years. Subsequent to starting of commercial production the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that sale and lease back transaction was financial transaction and therefore, only the amount debited to the Profit Loss A/c can be allowed as deduction. 22. The learned CIT (A) following his predecessor s orders in earlier years and also for AY 2001-02 allowed the claims as revenue expenditure as the facts in this year are the also same. This issue is similar to ground No.iii in AY 2001-02 discussed above. Since the issue was already covered in favour of assessee and the CIT (A) followed his own orders in earlier years which are upheld by the ITAT, the Revenue ground is dismissed. 23. Ground No.4 pertains to the issue of disallowance of Rs.10,38,46,3111- made on account of interest payable on external borrowings as not allowable under the provisions of section 40(a)(i) of the I. T. Act, 1961. 24. The facts are that the assessee had borrowed an amount of USD 40.00 million from abroad in March, 1997 by way of external commercial borrowing from a consortium of foreign bank. Assessee has incurred interest expenditure during the year under consideration on this loan. AO has disallowed the same under section 40(a)(ia) on the ground that since TDS has not been deducted the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culated such disallowance at Rs. 9,01,98,977/-. To this extent, we find that both the orders of lower authorities are lacking in details regarding break up of interest attributable to the various categories referred to above. However, at the same time, so far as the advance to HGPL is concerned, we find that the said advance has direct bearing with the commercial needs of the assessee. Once it has been established that the advances have been made for commercial reasons, no part of interest can be disallowed. Therefore, modifying the order of Ld. CIT(A), the AO is directed to allow the claim of interest. Accordingly, the appeal is allowed . 27. The learned CIT (A) gave a finding that during the year interest was payable by assessee to M/s High Grade pellets Ltd and so no disallowance is possible. In view of this finding and since the issue was already covered in favour of assessee in earlier year, we uphold the order of CIT(A). Revenue ground is dismissed. 28. In the result appeal in ITA No. 2838/Mum/2007 is dismissed. ITA No. 2954/Mum/2007 AY 2003-04: 29. The Revenue has raised the following three grounds: 1. On the facts and in the circumstances of the case and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue was discussed in ground No. I in AY 2001-02 and AY 2002-03 above. Since the issue is already covered in favour of assessee and the CIT (A) followed his own orders in earlier years which are upheld by the ITAT, the Revenue ground No.1 is dismissed. 33. Ground No.2 pertains to the issue of disallowance of Rs.16,64,47,465 on account of lease rent for equipments being plant and machinery. In the books of account assessee had shown these expenditures as deferred lease rent whereas in the computation of income the amount has been claimed as deduction for the year under consideration. AO has disallowed on the ground that sale and lease back transaction was financial transaction and therefore only the amount debited to the Profit Loss A/c can be allowed as deduction. 34. The learned CIT (A) following his orders in earlier years allowed the claim as revenue expenditure, as the facts in this year are the also same. This issue was discussed in ground No. 3 in AY 2001-02 and as ground No.2 in AY 2002-03 above. Since the issue is already covered in favour of assessee and the CIT (A) followed his own orders in earlier years which are upheld by the ITAT, the Revenue ground No.2 is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 40(a)(ia) on the ground that since TDS has not been deducted the expenditure cannot be allowed. Assessee contented that the interest under consideration is exempt under section 10(15)(iv)(c) and thus no TDS is applicable on the interest and accordingly disallowance cannot be made. Ld CIT(A) allowed the same as interest was exempt and there was no need for deducting tax and so no disallowance u/s 40(ia). 41. This is a recurring issue and came up for the consideration of the CIT (A) in assessee s own case in earlier years wherein this matter was decided in favour of assessee. As there is no change in the facts of the case, following his predecessor s orders in earlier years allowed the claim. This issue was discussed in ground No. 4 in AY 2001-02 and as ground No.4 in AY 2002-03 above. Since the issue is already covered in favour of assessee and the CIT (A) followed his own orders in earlier years which are upheld by the ITAT, the Revenue ground No.1 is dismissed. 42. Ground No.2 pertains to the issue of deleting the disallowance of Rs.81,04,05,885 of depreciation consequent to adjustments made by AO reducing the cost of plant machinery to the extent of waiver of amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) ii) CIT vs. Tata Iron Steel Co. Ltd (1998) 231 ITR 285 (SC). 45. It was the contention that the waiver of loan cannot be reduced from the WDV of plant machinery, thus the disallowance of depreciation by AO by reducing the waiver of loan from the cost of the plant and machinery is against the law. Assessee has pleaded for deletion of the disallowance of depreciation of Rs.81,04,05,885. 46. The learned CIT (A) considered the issue and held as under: 3.5 I have perused the facts of the case. I find that the decisions relied upon by the appellant are directly on the issue under consideration and therefore in the facts of the appellant s case the disallowance of depreciation by reducing the WDV by the amount of principal loan waived is not justified. AO is accordingly directed to grant depreciation on the full value of WDV without reducing the waived principal amount of loan The learned DR relied on the orders of AO whereas the learned Counsel submitted that the learned CIT (A) granted relief by relying on the decision of the Hon'ble Supreme Court in the case of CIT vs. Tata Iron Steel Co. Ltd (1998) 231 ITR 285 (SC) and the decision of the Hon'ble Kerala High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 32(1)(ii) can be altered is as per the situation referred to in section 43(6)(c)(i) A and B. Neither was there purchase of the relevant assets during the previous year nor was there sale, discarding or demolishing or destruction of those assets during the previous year. Thus, the recourse by the revenue to those provisions on the facts and circumstances of the instant case, it is held, cannot be sustained. The issue is than examined from the provisions of section 43(1) and Explanation 10 thereto. Waiver of loan cannot fall within scope of any of expressions 'subsidy or reimbursement' used in Explanation 10 to section 43(1) The provisions of Explanation 10 will apply only when there is a subsidy or grant or reimbursement. In the instant case, there was no such subsidy or grant or reimbursement. There was only a waiver of the amounts due for purchase of machinery which cannot fall within the scope of any of the expressions used in Explanation 10. Even otherwise section 43(1) is applicable only in the year of purchase of machinery and in the instant case the purchase of the machinery in question was not in AY 01-02. Therefore, the actual cost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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