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TMI Blog2016 (5) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... ld fall for disallowance as per the ratio of Brooke Bond (India) Ltd. (supra). In this context, having regard to the entirety of facts and circumstances of the case, in our view, it would be in fitness of things that 10% of the expenditure, i.e. ₹ 5,05,080/- be disallowed and balance of the expense be allowed as a revenue expenditure. - Decided partly in favour of assessee Disallowance of expenditure in connection with issuance of shares - Held that:- The facts which emerge from the perusal of the orders of authorities below reveal that the impugned expenditure has been incurred in connection with increase in authorised share capital of the assessee-company and raising of share capital. The said expenditure, in our view, has been rightly disallowed following the ratio of the judgment of the Hon’ble Supreme Court in the case of Brook Bond India Ltd. (1997 (2) TMI 11 - SUPREME Court). Such expenditure is also not covered in the scope of Sec. 35D of the Act, as fairly conceded by the ld. Representative for the assessee. - Decided against assessee Addition u/s. 28(iv) - waiver of the outstanding principal amount of loan - Held that:- As per a working provided by the Ld. Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The phraseology of sub-section (6) of section 115JB of the Act prescribes that the income referred thereto may arise out from the ‘services rendered’ or from the ‘business carried on’ by the unit. The concept of ‘income arising from services rendered’ is narrower than the ‘income arising from any business carried on’ and viewed in that light in our view, the impugned income can definitely be said to be falling within the expression ‘arising from any business carried on’ in SEZ Unit. Therefore, in our view, the assessee has to succeed on its plea seeking exclusion of the impugned sum from the purview of section 115JB of the Act on account of sub-section (6) thereof. - Decided in favour of assessee Benefit of set off of unabsorbed depreciation against income from other sources denied - Held that:- The only issue agitated by the assessee is in relation to set-off of claim of unabsorbed depreciation, which in our view, is quite well-founded in terms of section 32(2) of the Act. To the aforesaid extent, we set-aside the order of CIT(Appeals) and direct the Assessing Officer to revisit the claim of the assessee in accordance with law, after allowing the assessee a reasonable opportu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The Id. CIT (A) ought to have considered that the loan was obtained and utilized for acquisition of capital assets and, therefore, not liable to be taxed either u/s. 28(iv) or u/ s. 41(1) of the Act. 5. The learned CIT(A) has erred in law and on facts in confirm the addition of ₹ 3,25,00,000/- out of the amount of Interest waived. 6. The learned CIT(A) has erred in law and on facts in upholding the action of the Assessing Officer in bringing to tax ₹ 34,61,28,850/- as book profit u/s. 115JB of the Act by holding that amount of waiver of principal and interest on loan are not income generated out of SEZ business activity. 7. The learned CIT(A) has erred in law and on facts in sustaining the action of the Assessing Officer in not allowing the benefit of set off of unabsorbed depreciation against income from other sources. 8. The learned CIT(A) has erred in law and on facts in confirming the TNMM method adopted by the TPO/AO in preference to the benchmarking done by the appellant following CUP method and in virtually approving the computation of ALP made by the TPO / AO subject to exclusion of three companies. 3. Further, the Ground of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure which has been disallowed by the Assessing Officer treating the same as capital expenditure. 6. In this context, relevant facts are that assessee paid a sum of ₹ 50,50,800/- to M/s. Quartet Financial Services Pvt. Ltd. in respect of advisory services rendered by them with respect to restructuring of bank debt, identification of investor, raising equity capital and structuring of such transactions. Justifying the payment as revenue expenditure, the stand of the assessee before us as well as before the lower authorities is on the following lines. It has been explained that assessee had an outstanding loan liability from Global Trust Bank carrying heavy interest cost which was affecting its profitability adversely. With a view to reducing interest cost, assessee-company made a decision to restructure the debts or identify a strategic investor who could take over the debts of the assessee-company. For the said purpose, Quartet Financial Services Pvt. Ltd. was appointed to come up with proposals which would enable assessee to achieve the said purpose and accordingly, a fee of ₹ 50,50,800/- was paid. The ld. Representative for the assessee pointed out before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed as a revenue expenditure. In our considered opinion, the aforesaid conclusion is quite justified inasmuch as the entirety of the expenditure cannot be considered as a capital expenditure by applying the judgement of the Hon ble Supreme Court in the case of Brook Bond India Ltd. (supra) because factually speaking the fee is paid primarily for restructuring of bank debts and not entirely for raising of the equity. Therefore, we setaside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance to ₹ 5,05,080/- and delete the balance. As a consequence, insofar as Ground of appeal no. 1 is concerned, assessee partly succeeds. 9. By way of Ground of appeal nos. 2 3, assessee-company has assailed the disallowance of ₹ 10,00,000/- incurred in connection with issuance of shares. The facts which emerge from the perusal of the orders of authorities below reveal that the impugned expenditure has been incurred in connection with increase in authorised share capital of the assessee-company and raising of share capital. The said expenditure, in our view, has been rightly disallowed following the ratio of the judgment of the Hon ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as treated as a benefit chargeable to tax in terms of Sec. 28(iv) of the Act. The aforesaid stand of the Assessing Officer has been further affirmed by the CIT(A) on the ground that the waiver of principal amount of loan amounting to ₹ 15.35 crores was revenue in nature and thus assessable in terms of Sec. 28(iv) of the Act. In this background, the rival counsels have made their submissions before us. 11. Before us, the Ld. Representative for the assessee has vehemently pointed out that both the authorities below have erred in denying the claim of the assessee by relying on the judgment of the Hon ble Bombay High Court in the case of Solid Containers Limited vs. CIT, 308 ITR 417(Bom), which is not applicable to the facts of the present case. The plea set up by the assessee is that the principal amount of loan which has been waived by the bank was indeed utilized for acquisition of a capital asset and, therefore, such waiver of debt is to be seen in the capital field and not in the revenue field so as to be taxed under section 28(iv) of the Act. It was, therefore, contended that the facts of the present case are similar to those in the case of Mahindra and Mahindra Ltd. vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 333 ITR 386 (Del) in support of his submissions that the waiver of loan in the present case is not taxable under section. 28(iv) of the Act. 14. We have carefully considered the rival submissions. The crux of the controversy before us arises from a One Time Settlement(OTS) entered by the assessee with its bank, whereby upon payment of certain amount, assessee has been allowed waiver of a portion of the principal amount of loan outstanding and interest thereof. The issue regarding the taxability of waiver of interest is not in dispute before us and the only issue before us relates to the taxability of a sum of ₹ 15,35,03,849/-, which represented the principal amount of the loan outstanding, waived by the bank. In principle we are in agreement with the proposition that in the context of waiver of loan amount, where loan was raised for acquiring a capital asset, the waiver thereof cannot be construed on revenue account and in a situation where the loan was for trading purpose the waiver thereof is liable to be treated as a revenue receipt chargeable to tax. In fact, the aforesaid premise clearly emerges from the judgments of the Hon ble Bombay High Court in the case of Soli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were sanctioned for the purpose of working capital/For acquisition . The assessee has been consistently asserting right from the level of the Assessing Officer that upon disbursement of loan, the loan proceeds have been utilized for acquiring shares in M/s. Applisoft Inc. and in this context our attention has also been invited to the bank statement for the relevant period placed in the Paper Book at page-2 and also the foreign remittance certificate placed at pages 3 4 of the Paper Book. It is quite evident that a sum of ₹ 34.95 crores has been transferred after receipt from the bank for acquiring the shares in M/s.Applisoft Inc. Such fact-situation is not disputed by the lower authorities. However, the plea set up by the income-tax authorities is that since the purpose of the loan included usage for working capital, therefore, it could not be said that the loan was for acquiring capital asset. In our considered opinion, what is more important is to consider the actual utilization of loan funds and not merely the purpose of the loan, though it may be an important ingredient. In the present case, loan sanction letter does not prescribe that the loan proceeds are to be used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 28(iv) of the Act for the reason that the same related to loan funds used for the purposes of trading/business. Quite clearly, the balance of the waiver is relatable to the proportion of loan funds utilized for acquisition of the shares of M/s. Applisoft Inc. and on this aspect the ratio of the judgement of the Hon ble Bombay High Court in the case of Mahindra and Mahindra Ltd.(supra) clearly supports the plea of the assessee. In this background of the matter, we, therefore, conclude that so far as the amount used for the purchase of capital asset is concerned, the waiver thereof is a capital receipt not chargeable to tax under section 28(iv) of the Act, which follows that the Assessing Officer is required to restrict the disallowance under section 28(iv) of the Act to the extent of ₹ 1.57 crores only, being the loan waiver which has been used for trading activity. We hold so. Thus, on this issue assessee partly succeeds. 17. In so far as Ground of appeal No.5 which relates to addition of ₹ 3.25 crores out of interest waiver is concerned, the same was not pressed at the time of hearing and is accordingly dismissed as not pressed. 18. The issue in Ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted by the Tribunal, though in a different context relating to allowability of interest expenditure under section 36(1)(iii) of the Act. For the aforesaid reasons, it has been pointed out that the impugned income on account of waiver has to be considered as income from business carried out in SEZ Unit, which is liable for exclusion as per provisions of sub-section (6) of section 115JB of the Act. 18.4 On the other hand, the Ld. Departmental Representative for the Revenue has reiterated the reason adopted by the lower authorities in support of the case of the Revenue, which we have already noted in earlier para and the same is not being repeated for the sake of brevity. 18.5 The dispute essentially revolves around the provisions of subsection( 6) of section 115JB of the Act, which prescribes that the section would not apply to the income accrued or arising from any business carried on or services rendered by an entrepreneur or a developer in SEZ Unit, as the case may be. In the present case, the assessee is engaged in the business of software development and rendering of technical services outside India in the field of computer software. The business of the assessee is be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on the judgment of the Hon ble Supreme Court in the case of Virmani Industries Pvt. Ltd., 216 ITR 607(SC). The CIT(Appeals) disagreed with the assessee and accordingly assessee is in further appeal before us. 19.1 Before us, the Ld. Representative for the assessee pointed out that having regard to the express provisions of section 32(2) of the Act, the depreciation allowance of earlier years is deemed to be the allowance of the succeeding year and hence the unabsorbed depreciation is liable to be set-off against the income from other sources in such succeeding year. It has also been contended that the judgment of the Hon ble Supreme Court in the case of Virmani Industries Pvt. Ltd. (supra) supports the plea that unabsorbed depreciation can be carried forward and set-off against the income of subsequent years. Ld. Representative for the assessee contended that assessee would be satisfied, if the matter be sent back to the file of the Assessing Officer for allowing appropriate set-off of unabsorbed depreciation against income from other sources. 19.2 Though the Ld. Departmental Representative for the Revenue has not opposed the prayer of the assessee for setting-aside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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