Income Tax Appellate Tribunal - Mumbai
Instant Holdings Ltd ( Successor To ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'I' BENCH
BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER
AND SHRI V.DURGA RAO, JUDICIAL MEMBER
I.T.A.NO.1605/Mum/2009 - A.Y 2005-06
M/s.Instant Holdings Limited Vs. Asst. Commissioner of I.T.,
(successor to M/s Instant Trading & Range 6(1),
Investment Company Limited, Mumbai.
C/o. K.B.Desai & Co. C.A.,
6, Bhaskar Bhavan, Sitaram Podar
Marg, Fanaswadi, Mumbai 400 002.
PAN: AAACI 1971 M
(Appellant) (Respondent)
Appellant by : Shri Kirit Desai.
Respondent by : Shri Sanjeev Dutt [CIT DR]
ORDER
Per T.R.SOOD, AM:
In this appeal the assessee has raised the following grounds:
Ground No.I Disallowance of interest u/s.14A of the Act.
1. On the facts and in the circumstances of the case and in law, the CIT[A] erred in confirming the action of the Assistant Commissioner of Income Tax, Circle 6(1), Mumbai ("the ACIT") of disallowing `.2,00,74,548/- being interest on borrowed funds, on the alleged ground that the Appellant has used the interest bearing funds to make investments in securities earning tax free income.
2. The Appellant prays that it be held that the disallowance be deleted.
3. Without prejudice to above, if at all the action of the CIT[A] is upheld, then, in that case, the disallowance be worked out in accordance with the provisions of rule 8D of the Income Tax Rules, 1962.
Ground No.II: Disallowance of Debenture issue expenditure- `.167,25,639/-
1. On the facts and in the circumstances of the case and in law, the CIT[A] erred in confirming the action of the ACIT of disallowing `.1,67,25,639/- being expenditure on issue of debentures on the ground that this should be allowed in the year of accrual of such expenses.
2
2. The Appellant prays that the disallowance be deleted.
3. Without prejudice to above, the expenditure be allowed in the year in which the same was incurred.
4. Without prejudice to the above, if at all the action of the CIT[A] is upheld, then, in that case the disallowance be restricted to `.53,46,095/- being the actual amount of claim made by the Appellant by way of charge to its Profit & Loss Account and the same amount was claimed in return of income as against the disallowance of `.1,67,25,639/- made by the lower authorities.
2. Ground No.1: After hearing both the parties, we find that the assessee had made certain borrowings and had also invested in various shares. The AO after going through the structure of capital and borrowings found that the assessee had 86.47% of loans in proportion to the total funds. Therefore, out of the total share investments, he presumed that 86.47% has come out of borrowed funds and accordingly disallowed the interest u/s.14A. This interest was calculated at `.5,10,74,548/-, but since the assessee itself has disallowed a sum of `.3.10 crores, the balance of `.2,00,74,548/- was disallowed u/s.14A.
3. The action of the AO was confirmed by the ld. CIT[A].
4. Before us, Ld. counsel of the assessee submitted that similar issue had come up before the Tribunal in A.Y 2001-02 and the Tribunal had confirmed the findings of the CIT[A] wherein only some part of the interest was held to be disallowable. In this year the assessee had calculated the disallowance on account of interest as per the formula given for earlier year and, therefore, no further disallowance was called for. He also argued that in any case Rule 8D cannot be applied retrospectively and for this he relied on the decision of the Hon'ble 3 High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [43 DTR 171].
5. On the other hand, ld. DR submitted that since 86.47% of the funds in proportion to the total funds were borrowed and the AO has assumed the investment in shares only in this proportion, therefore, the addition was justified.
6. We have considered the rival submissions carefully and find that this issue came up before the Tribunal for A.Y 2001-02 in I.T.A.No.8370/M/04 and the Tribunal decided the same vide para 8 which reads as under:
"8. We have heard the rival submissions and perused the records. During the course of Appellate Proceedings, the CIT[A] had gone at length into the details of availability/deployment of both interest free funds and interest bearing funds and their deployment in different assets owned by the assessee on which whether the assessee is earning any income or not. After due consideration of the facts, the CIT[A] has come to the conclusion that the assessee had utilised `.10 Crores of money raised on account of debentures in making share application money for the shares of CFSL. Secondly, the interest free borrowing was received from RPGLS in the earlier years which was invested in share investment activity. However, during the year under consideration, the said loan of RPGSL totaling `.10.00 Crores has been repaid on 31-02-2000 amounting to `.10.00 Crores and on 31- 02-2001 amounting to `.9.00 Crores. The CIT[A] thereafter computed the interest expenses on the funds utilised for repayment to RPGLS at `.3,10,39,452/-. In addition, the CIT[A] further held that the deduction in respect of amortization of ICICI Bank charges totalling `.56,12,533/- was required to be considered at period cost in respect of debentures issued by the company and the repayable portion pertaining to the money used worked to `.16,03,581/-, which was held to be disallowable under Section 14A of the Act. Accordingly, the total disallowance was worked at `.3,26,42,033/- against which admittedly the assessee is not in appeal. The revenue is aggrieved by the balance disallowance of the interest totaling to `.3,52,29,819/-. We find no infirmity in the order of the CIT[A], as the Revenue has failed to bring on record any error in the formula and calculation adopted by the CIT[A]. The disallowance worked out by the Assessing Officer was on the belief that the total investment in instruments earning exempt income was `.1,07,45,19,840/-. In actual fact, the aforesaid figure represented the total investment made by the assessee company as 4 on 31-02-2001, which included investment in shares of various companies and also investment in debentures of M/s Spencer International Hotels Ltd. & M/s CEAT Financial Services Ltd. aggregating to `.48,57,56,050/-. The assessee company had earned interest of `.4,07,91,988/- on the aforesaid debentures during the year. The total investment in shares of various companies amounted to `.58,87,63,789/- which was adopted as the basis for working out the disallowance u/s.14A of the I.T.Act. We confirm the same in totality of facts and circumstances as enumerated hereinabove and as noted by the CIT[A] in his appellate order. The provisions of Rule 8D of I.T.Rules are also not applicable in view of the clear cut findings of CIT[A] regarding development of interest bearing funds in interest free securities and there being no mixing of own funds and interest bearing funds. There is no merit in the ground of appeal raised by the Revenue and the same is dismissed."
The reading of the above para shows that the Tribunal confirmed the order of the ld. CIT[A] , because the ld. CIT[A] had made detailed analysis regarding the funds which were deployed in the investment of shares. In the year before us, no such analysis is available. Though assessee itself has disallowed a sum of `.3.10 crores, but it is not clear as to how this figure has been arrived at. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd. vs. DCIT [supra] has held that Rule 8D is not applicable with retrospective effect. But it has been further held that reasonable disallowance can be made u/s.14A. Therefore, in the interests of justice, we set aside the order of the ld. CIT[A] and remit the matter back to the file of the AO with a direction to re-examine the issue and decide the same in the light of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd. vs. DCIT [supra].
7. Ground No.2: After hearing both the parties, we find that during assessment proceedings AO noticed that the company had incurred a sum of `.1,67,25,639/- towards debenture issues/restructuring 5 expenses. The tenure of debenture issue is for three years and assessee had claimed a sum of `.53,46,095/- as expenses during the year. The AO observed that as the concept of deferred revenue expenditure is alien to the income tax provisions and, therefore, disallowed the whole of the claim amounting to `.1,67,25,639/-. The action of the AO was confirmed by the ld. CIT[A].
8. Before us, ld. counsel of the assessee submitted that, in fact, the assessee had claimed only a sum of `.53,46,095/- during the year which is allowable in terms of the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT 225 ITR 802. He further pointed out that this decision has also been followed by the Hon'ble Bombay High Court in the case of CIT vs. Taparia Tools Ltd. 260 ITR 102.
9. On the other hand, ld. DR relied on the orders of the lower authorities.
10. We have considered the rival submissions carefully and find that the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. vs. CIT [supra] has held that discount given on the issue of debenture is revenue expenditure and is to be allowed proportionately in each year over a period for the redemption. That means any expenditure in relation to debenture has to be treated as revenue expenditure and has to be allowed over the tenure of debenture. Since the tenure of debenture is 3 years, expenditure incurred in relation to issue of debentures should be allowed over a period of three years. 6 Therefore, we set aside the order of the ld. CIT[A] and direct the AO to allow proportionate expenditure on debentures in the year under consideration.
11. In the result, appeal is partly allowed.
Order pronounced in the open Court on this 4th day of November, 2010.
Sd/- Sd/-
(V.DURGA RAO) (T.R.SOOD)
Judicial Member Accountant Member
Mumbai:4th November, 2010.
P/-*