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TMI Blog2014 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... d and then the case law has to be applied - Since the nature of spares has not been established nor the same were examined, the matter is to be remitted back to the AO fresh examination – Decided in favour of assessee. Set off of interest expenses disallowed – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that the interest expenditure incurred by the assessee cannot be adjusted against interest income earned by the assessee upto the date of commencement of business - interest expenditure incurred by the assessee during the pre-operative period upto the date of the commencement of the business cannot be adjusted against the interest income earned. Provision of network and repair expenses – Held that:- The authorities below have totally erred in treating the provision of expenses not allowable - It is only those provisions which are contingent liability which are not allowable - the provision was made for the repairs in this regard as the relevant bills were not received and payment thereof was not made upto the close of the assessment year - in accordance with accrual system of accounting, the provision in this regard was crea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce for taxation under the head ‘income from other sources’ - The interest expenditure incurred by the assessee are liable to be considered under the head ‘income from other business’ - The interest income earned is liable to be assessed under the income from other sources - assessee’s claim that interest expenditure incurred should be netted off against the interest income is not sustainable. Following the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 1997 (7) TMI 4 - SUPREME Court] - any income from non-business sources could not be set off against the liability to pay interest on funds borrowed for the purpose of plant and machinery, etc. even before the commencement of the business of the assessee – thus, the interest expenditure incurred for setting up of the business before the commencement of the business are to be computed under the preoperative expenses and are to be considered under income from business - Hence, the interest income earned, which is from the nonbusiness source cannot be adjusted against the liability to pay interest on funds borrowed of setting up of its business for purchase of plant and machinery etc. before the commencement of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in the case of CIT vs. Insilco Ltd. 222 CTR 641 (Del.) Alternatively the assessee claimed that if the depreciation of spares is disallowed, the assessee should be allowed entire expenses incurring amounting to ₹ 2,84,24,466/-. The Ld. CIT(A) considered the above and held that the approach taken by the assessee is correct and disallowance of depreciation was ordered to be deleted. 5. Against the above order the Revenue is in appeal before us. 6. We have heard both the counsel and perused the records. Ld. Counsel of the assessee submitted that the issue involved is squarely covered in favor of the assessee by the decision of the Hon ble Jurisdictional High Court in the case of CIT vs. Insilco Ltd. (Supra). We have carefully considered the submissions and perused the records. We find that the assessee has followed the prescribed accounting standards. The Hon ble Jurisdictional High Court in the decision cited above has referred to the above said accounting standard and observed in para 16.4 as under:- 16.4 It is clear upon reading the provisions of Accounting Standards (AS) 2 and (AS) 10 that, the opinion of the Council of the ICAI in respect of treatment of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stone of above said decision has not been examined by the authorities below. In our considered opinion, first the nature of the spare has to be established and then the case law has to be applied. Since the nature of spares has not been established nor the same were examined, we remit this issue to the files of the AO. The AO shall examine the issue afresh in light of the case law from Jurisdictional High Court as above. Needless to add that the assessee should be given adequate opportunity of being heard. ITA NO. 91/DEL/2011 (A.Y. 2003-04) (ASSESSEE S APPEAL) 7. The grounds raised read as under:- The Appellant respectfully submits that: 1. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - XI, New Delhi (hereinafter referred to as the 'learned CIT(A)') erred in confirming the action of the learned Deputy Commissioner of Income Tax, Circle 12(1), New Delhi (hereinafter referred to as the' learned AO') in not allowing set-off of interest expense incurred by the appellant amounting to ₹ 8,093,396 against the interest income of ₹ 8,100,165. 2. On the facts and circumstances of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. He held that the interest expenses will form part of preoperative expenses pending capitalization and the interest income will be taxed separately as income from other sources. 9. Upon assessee s appeal CIT(A) noted that dominant purpose of the expenditure incurred must be to earn income. He observed that there should be nexus between the expenditure incurred and the income sought to be earned. In this case he held that there is no nexus between the expenses incurred and the income sought to be earned. Ld. CIT(A) in this regard also referred to the decision of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 227 ITR 172 and accordingly, Ld. CIT(A) affirmed the order of the AO. 10. We find that the above issue has been adjudicated by us in assessee s appeal in ITA NO. 4146//Del/2011 (A.Y. 2002-03). In the said adjudication we had held that interest expenditure incurred by the assessee cannot be adjusted against interest income earned by the assessee upto the date of commencement of business. Hence, following the same reasoning, we hold that interest expenditure incurred by the assessee during the pre-operative period upto the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee is in appeal before us. 17. We have heard both the counsel and perused the records. Ld. Counsel of the assessee in this regard submitted that the complete details with regard to the rent payment was available in the Paper Book Page Nos. 240-250. Hence, he submitted that the disallowance in this regard was not called for. However, we note that AO had made the disallowance in this regard, as some of the details were not available before the AO. In this situation, Ld. Counsel of the assessee agreed that the matter may be remitted to the file of the AO. Accordingly, we direct the AO to examine the details as furnished by the assessee in this regard and decide accordingly. Needless to add that the assessee should be given adequate opportunity of being heard. 18. Apropos ground no. 4 Disallowance of expenses On this issue AO noted that the following provisions cannot be treated as actual revenue expenditure. Hence, he disallowed the same. - Provision for credit verification cost ₹ 11,41,060/- - Provision for consultancy charges ₹ 8,63,320/- - Provision for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure as deferred revenue expenditure. AO had allowed 20% during the year and rest is to be spread over in the succeeding 4 years. Ld. Counsel of the assessee in this regard submitted that there is no concept of deferred revenue expenditure in taxation laws and expenditure has either to be capitalised or revenue. He has submitted that in this case the AO has not made out the case that the expenditure involved is capital in nature. Ld. Counsel of the assessee submitted that brand launch expenses incurred in the pre-operative period has been added to the pre-operative expenses. He further submitted that the Hon ble Apex Court decision in the case of Madras Industrial Investment Corporation vs. CIT. (Supra) is not applicable on the facts of the case. In this regard, Ld. Counsel of the assessee referred to decision of this tribunal in ACIT vs. Global Healthline P Ltd. passed in ITA NO. 3319/Del/2012 vide order dated 7.9.2012. In this case, the tribunal has held as under:- 6. We have heard the rival contentions and perused the records. We find that the case law relied upon by the Assessing Officer in the case of Madras Industrial Corporation Ltd. vs. C.I.T. 225 ITR 802 is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely. The case law of the Hon ble Apex Court by the Ld. CIT(A) was in a different context and hence is not applicable, as has been brought out in the tribunal order as above. In the background of the aforesaid discussion and precedent, we set aside the orders of the authorities below and decide the issue in favor of the assessee. ITA NO. 4146/Del/2011 (A.Y. 2002-03) (Assessee s Appeal) 26. The issue raised is that Ld. CIT(A) erred in confirming the order of the DCIT in not allowing the set off of interest expenses incurred by the assessee amounting to ₹ 7,786,301/- against the interest income of ₹ 7,886,987/-. 27. In this case the business of the assessee did not commence in the concerned previous year. The business commenced in the subsequent financial year in June, 2002. The assessee had a credit facility with HSBC Bank. Assessee sought a loan of ₹ 25 crores from the bank in December, 2001 and extended the same as loan to its holding company Vodafone Essar Mobile Services Ltd. The loan obtained by the assessee was incurring rate of interest @11.16%, whereas assessee was charging interest @11.75% from its holding company. The total interest expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see further submitted that assessee only seeks adjustments of interest expenditure incurred from the interest income earned under section 57(iii) of the I.T. Act. 32. Ld. DR on the other hand relied upon the orders of the authorities below. He submitted that the decision of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (Supra) is squarely applicable on the facts of the case. Assessee has raised large amount of funds for the purpose of establishment of business. It is only surplus funds of ₹ 25 crore which was given to the holding company. Hence, he submitted that the interest earned thereon has to be offered for taxation as income from other sources, without any adjustments of the interest expenditure which was incurred for the purpose of business of the assessee. 33. We have carefully considered the submissions and perused the records. We note that assessee s business had not commenced during the previous year. It commenced only in the subsequent year in June, 2002. In December, 2001 assessee has taken loan from the bank and assessee gave the same to its holding company. Assessee has adjusted the interest expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m a non business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. 35. Now we find that on the facts of the present case the above exposition is applicable. Here, the assessee has obtained credit facility for the purpose of establishment/setting up of its business. Out of the above sum borrowed a sum of ₹ 25 crores was given to the holding company. Hence, there is no nexus between the loan obtained and the loan given. The funds obtained were for the purpose of business, while the interest income earned was income from other sources. In this situation, the expenditure incurred by the assessee for the purpose of setting up of its business could not be allowed as deduction, nor could it should be adjusted against any other income nor any other head. Similarly, as expounded above, any income from non-business sources could not be set off against the liability to pay interest on funds borrowed for the purpose of plant and machinery, etc. even before the commencement of the business of the assessee. 36. Thus, the contention of the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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