Case Law Details
CA Isha Seth
Question of Law Raised By ITAT:
Whether the Income Tax Appellate Tribunal as also the Commissioner of Income Tax (Appeals) had not erred in law and / or on facts in deleting the disallowance on discount and interest on borrowing through commercial papers and Non-Convertible Debentures (NCDs) amounting to Rs. 10,79,75,982/-?
Whether the Income Tax Appellate Tribunal as also the Commissioner of Income Tax (Appeals) had not erred in law and / or on facts in deleting the disallowance on discount and interest on borrowing through commercial papers and Non-Convertible Debentures (NCDs) amounting to Rs. 10,79,75,982/-? [RELEVANT EXTRACT FROM HIGH COURT ORDER]
In relation to Question of Law (a):
Brief Facts
The Assessing Officer disallowed the expenditure of the assessee company, that included discount on commercial paper amounting to Rs. 8,45,75,982/- and interest on Non-Convertible Debentures amounting to Rs. 2,34,00,000/-, totaling Rs. 10,79,75,982/- for the relevant assessment year under consideration, on the ground that the aforementioned expenses were not for the purpose of business of the assessee.
Assessee’s Contentions
1. A&M Publications Limited merged with the respondent assessee with effect from 01.04.2007 consequent to order of Delhi High Court dated 28.08.2008. Both A&M and assessee issued commercial paper on 01.11.2006 to give effect to CLB’s order dated 07.08.2006 for payment to shareholders. The expenses incurred on CP in the financial year 2006-07 were booked under respective accounting heads.
2. Non-Convertible Debentures were also issued due to shortage of funds.
Assessing Officer’s Observations
1. The aforementioned transactions were only in relation to acquisition of shares and had no relation with the business ordinarily being carried on by the assessee.
2. During the year under consideration, assessee and A&M Group had merged as per Delhi HC directions and there was no cross holding of shares in Amar Ujala Group as only one combined entity was in existence.
3. As NCDs were also taken for providing funds for purchase of shares from shareholders, the same was also not allowable as business expenditure.
4. Thus both interest on NCDs as well as discount on Commercial Paper were disallowed as the same were not business expenses.
CIT(Appeals) Findings & Order
1. The CIT(A) observed that there were two companies i.e. assessee and A&M Publications Ltd. The respondent brought shares from the shareholders of A&M Publications Limited consequent upon CLB order dated 07.08.2006. Similarly, A&M Publications brought shares from respondent’s shareholders.
2. However, both the companies were merged as a result of which shareholding held by each of the companies stood cancelled.
3. As on 01.04.2007 post-merger, entire funds owned by the assessee were deployed in its business. As observed from assessee’s Balance Sheet as on 31.03.2008, it was observed that the entire borrowed funds on which the interest had been paid had been utilized for the purpose of business.
4. Restructuring of the assessee was affected in the preceding year and there was no implication of such restructuring as far as allowability of interest on borrowed capital was concerned.
5. Thus, the aforementioned addition was deleted by CIT(Appeals).
ITAT Findings and Order
1. ITAT noted that the utilization of funds borrowed for buying the shares of shareholders by the assessee was not applicable for the year under consideration.
2. Post-merger, entire funds owned by the assessee were deployed in its business. As per the balance sheet as on 31.03.2008, the assessee had owned funds of Rs. 51.26 crores and secured loans of Rs. 165.63 crores against the fixed assets worth Rs. 171.64 crores and current assets worth Rs. 118 crores. This implied that the funds had been deployed in the assets.
3. Thus, the ITAT upheld the decision of CIT(Appeals)
High Court Judgment
The High Court held that the year involved in question is Assessment Year 2008-09 in which there was neither any restructuring nor any purchase of shares. All that had happened in the preceding year.
All the funds available at that point of time of merger, available with the respondent / assessee were, in the course of the year, deployed in the business of the respondent / assessee. Thus, AO could not have disallowed discount on commercial paper and interest on Non-Convertible Debentures.
Thus, the question of law framed above is answered in favour of the assessee and against the Department.
Thus, the appeal of the revenue is dismissed.
