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ITAT allowed expenditure which was for business purpose

Kanishka Mehta Income Tax, on : Dec. 7, 2017

Assessee declared a total loss of over Rs.- 15.50 crores. AO observed that assessee had agreed to pay Rs.12 crores to ICICI Bank which was payable by its wholly owned subsidiary. AO held that there was no business expediency and disallowed claim of expenditure of Rs. 12 crores. He taxed the interest on funds advanced to the subsidiary. CIT(A) confirmed disallowance. ITAT allowed expenditure which was for business purpose, and quashed interest.

Income Tax

Assessee declared a total loss of over Rs.- 15.50 crores. AO observed that assessee had agreed to pay Rs.12 crores to ICICI Bank which was payable by its wholly owned subsidiary. AO held that there was no business expediency and disallowed claim of expenditure of Rs. 12 crores. He taxed the interest on funds advanced to the subsidiary. CIT(A) confirmed disallowance. ITAT allowed expenditure which was for business purpose, and quashed interest.

1. Rain Industries Ltd., ("RIL") was a 100% subsidiary of Rain Commodities Ltd., the assessee herein, which was engaged in the business of cement. The cement business was transferred w.e.f. 1st April, 2003 to RIL i.e., the assessee's subsidiary. Thereafter, the assessee herein viz., Rain Commodities Ltd., had merged with its group company Rain Calcining Ltd., w.e.f. 1st April, 2007 and the CPC business of Rain Calcining Ltd., which was transferred by the Rain Commodities i.e., RCOL by virtue of merger, was transferred to RIL w.e.f. 1st April, 2007. The cement business was again re-transferred to Rain Commodities Ltd.,i.e., the assessee herein w.e.f. 1st July, 2006 and hence, for the relevant A.Y. 2006-07, the assessee's business was cement business. During the A.Y. 2006-07, the assessee had filed its return of income originally on 20.11.2006 declaring total loss of Rs.- 12,32,83,565. Subsequently on 23.03.2007, the assessee filed revised return declaring a total loss of Rs.- 15,50,69,761/-. During the assessment proceedings under section 143(3) A.O. observed that the assessee company had agreed to compensate ICICI Bank Ltd., by a sum of Rs.12 crores which was payable by its wholly owned subsidiary i.e., RIL. A.O. held that the assessee did not substantiate such business expediency and that the loan was availed by the subsidiary company for its business purposes and the payment by the assessee was on account of bank advice rather than assessee's own business expediency. He, therefore, disallowed the claim of expenditure of Rs. 12 crores and brought it to tax. The assessee company had advanced interest free advance to its subsidiary company in USA. The A.O. observed that the assessee has not offered any reason for advancement of such loan to its subsidiary and has not furnished any details of interest on loan to the tune of Rs.12,11,08,000 even though it has obtained a loan of Rs.22,67,33,000. Therefore, he brought to tax the interest on the funds advanced to its subsidiary at 12% p.a.

2. CIT(A) confirmed the disallowance and held that the said expenditure, even if allowable, was a capital expenditure and thus not allowable as business expenditure. It held that the interest on loan advanced to the A.E. is to be computed by adopting LIBOR.

3. On appeal, the ITAT held as under:

"According to the assessee, the purpose of taking-over of the loan is "to improve the financial viability of RIL", to facilitate 'one time settlement' of certain "loans in RIL" and "to complete subscription of non-convertible debentures with face value of Rs.112.78 Crores in RIL, which is critical for the operations of RIL". It is also not in dispute that the assessee has invested a sum of Rs.76.75 crores in the business of its subsidiary. Further, it is noticed from para-9 to the notes to accounts of the assessee company that there was a scheme of arrangement between the assessee company and its subsidiary which was approved by the Hon'ble High Court of A.P., by the respective share holders of the said companies; and also by the lenders of the company through a credit restructuring package by virtue of which, the business of cement manufacturing was transferred to RIL w.e.f. 1st April, 2003 and the effective date of the scheme was August 30, 2014 and accordingly, the scheme has been give effect to in the books of account for the 18 months period ended 30th September, 2003. From para-10 thereof, it is noticed that on the basis of the debt re-structuring proposals cleared by the Banks and the Financial Institutions and other measures initiated by the subsidiary, the diminution in the value of investments is temporary in nature and therefore, no provision is considered at this stage and the allowability of Rs.12 crores has been accepted by the company in terms of debt re-structuring scheme and the said amount has been considered as "Interest and Finance Charges". Thus, we find that the debt re- structuring scheme is pursuant to the transfer of the cement business from RIL to the assessee and any transfer of the liability is also to be considered as part of the transaction of transfer of the business to the assessee.

The debt re-structuring scheme is pursuant to transfer of cement business from RIL to the assessee herein. Thus the business expediency of the transaction is established. Further, as regards the Ld. CIT(A)'s finding that the loan is in the capital field and therefore, the resultant loss is capital loss and is not allowable under section 37(1) of the I.T. Act, we find that the sum of Rs.12 crores is not towards payment of interest but it is for the repayment of the principal as well as the interest as on the date of repayment of the loan. The sum of Rs.12 crores has been offered by RIL as "the liability no longer required and written back" but in the hands of the assessee, it is an expenditure to safeguard its interests or its investment in the subsidiary company. Therefore, it is for the business purpose of the assessee and hence revenue in nature and cannot be treated as a capital loss.Therefore, during the relevant period i.e., F.Y. 2006-07, when the said transaction was not an international transaction, no such imputation can be made. As far as the nexus between the interest free loan and the interest free advance is concerned, we are satisfied that the nexus has been established by the assessee and when there is no interest burden on the assessee by virtue of the loan advanced to its subsidiary, we are of the opinion that no such interest income can be attributed in the hands of the assessee. In view of the same, ground No.4 of the assessee is allowed.”

Case Reference - DCIT VS Rain Commodities Ltd.

ITA.No.988, 989/Hyd/2014, 1066 & 1067/Hyd/2014,

ITA.No.953/Hyd/2012 Rain Commodities Ltd., Hyderabad.

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES "B" : HYDERABAD

BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND

SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER


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