ACIT, Hyderabad V. M/s Gayatri Sugars Ltd, Hyderabad

ITA 851/HYD/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 6378 (ITAT-HYDERABAD)
• Duration Of Justice: 40 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-09-2010
• Appeal Filed By: Department
• Assessment Year: misc
• Appeal Filed On: 01-01-1970
• Court: TRIBUNAL
• Department Lawyers: K V N CHARYA
• Keywords: Proportionate interest; Revenue expenditure
• Section: 43B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A , HYDERABAD BEFORE SHRI N.R.S. GANSAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA. 851/HYD/2010 ASSESSMENT YEAR 2006-07 THE ACIT, CIRCLE 2 (3), HYDERABAD VS M/S GAYATRI SUGAR LTD., HYDERABAD (PAN (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.V.N. CHARYA, DR RESPONDENT BY : NONE O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTE D AGAINST THE ORDER PASSED BY THE CIT(A) III, HYDERABAD DATED 26 .3.2010 AND PERTAINS TO THE ASSESSMENT YEAR 2006-07. 2. THE REVENUE RAISED THE FOLLOWING GROUND IN ITS APPEAL IS THAT: THE DECISION OF THE CIT(A) IS NOT ACCEPTABLE AS THE R EDUCTION IN INTEREST RATE OF TERM LOAN (21% TO 15%) REDUCES THE LIABILITY ON THE PART OF THE ASSESSEE COMPANY. IN ORDER TO ESCAPE THIS REDUCTION IN LIAB ILITY, THE ASSESSEE TRIED TO CONVERT THE INTEREST AMOUNT INTO AN INVESTMENT IN F ORM OF EQUITY. IN ANY WAY THE REPAYMENT OF REDEEMABLE PREFERENCE SHARE I S A LIABILITY ON CAPITAL ACCOUNT AND NOT ON REVENUE ACCOUNT. MOREOVER, THE DISALLOWANCE OF THE SAID AMOUNT OF RS.59.30 LAKHS IS CONSIDERED VALID U/S 43 B(D), NO ACTUAL PAYMENT HAS BEEN MADE TO THE SAID FINANCIAL INSTITUTION DUR ING THE YEAR 2005-06. 2 2 4. BRIEF FACTS OF THE CASE ARE RELATED TO DISALL OWANCE OF RS.59.30 LAKHS MADE U/S 43B OF THE ACT IN THE ASSESSMENT. D URING THE ASSESSMENT THE ASSESSING OFFICER REFERRED TO THE ITEM NO.7 IN SCHEDULE K (SIGNIFICANT ACCOUNTING POLICIES AND NOTES ON ACCOUNTS) FORMING PART OF THE ANNUAL REPORT FOR 2005-06, IN WHICH IT IS MENTIONED THAT T HE INTEREST SUSPENSE AMOUNT REPRESENTING THE NET PRESENT VALUE OF DIFFER ENTIAL INTEREST ON IDBI AND IFCI LTD., TERM LOANS DUE TO REDUCTION OF RATE OF INTEREST ON ACCOUNT OF RESTRICTING IS BEING CHARGES TO PROFIT AND LOSS ACC OUNT OVER THE TENURE OF THE TERM LOANS. IN RESPONSE TO QUERY RAISED BY THE ASSESSING OFFICER FOR EXPLAINING THE SAME, THE ASSESSEE HAS FILED A LETTE R OF IDBI DATED 22.12.2000, CLARIFYING ABOUT THE RESTRUCTURING OF L OANS AVAILED BY THE ASSESSEE. THE ASSESSING OFFICER NOTICED THAT AS PE R THAT LETTER, THERE HAS BEEN REDUCTION IN THE RATE OF INTEREST TO A UNIFORM RATE OF 16.5% PER ANNUM W.E.F. 1.10.2000. AS PER THE SAID LETTER OF IDBI, THE NET PRESENT VALUE OF THE DIFFERENTIAL INTEREST AMOUNT (PAYABLE ON ACCOUNT OF REDUCTION IN INTEREST RATE W.E.F. 1.10.2000) AGGREGATING TO R S.17.61 MILLION HAS BEEN CONVERTED TO 13% CUMULATIVE REDEEMABLE PREFERENTIAL SHARES (CRPS) AND THE SAME ARE REDEEMABLE IN TWO INSTALLMENTS ON 1.10 .2007 AND 1.10.2008. THE ASSESSING OFFICER FURTHER NOTED, THE IDBI HAS C ONVERTED THE COMPOUND INTEREST ACCRUED AND DUE UP TO 30.9.2009 AGGREGATIN G TO RS.22.79 MILLION X 13% CRPS REDEEMABLE IN TWO INSTALLMENTS ON 1.10.2 007 AND 1.10.2008. HE NOTED IDBI HAD KEPT THE OPTION TO CONVERT THE AB OVE CRPS INTO EQUITY SHARES AT PAR. THE ASSESSING OFFICER FURTHER MENTI ONED THAT THE ASSESSEE HAS DEBITED INTEREST SUSPENSE ACCOUNT DURING THE AC COUNTING YEAR 2000-01 OF THE NET PRESENT VALUE OF THE DIFFERENTIAL INTERE ST AND THE SAME IS BEING WRITTEN OFF BY THE ASSESSEE OVER A PERIOD OF RESTRU CTURED LOAN PERIOD OF 8 YEARS STARTING FROM THE ACCOUNTING YEAR 2001-02. 5. HOWEVER, ACCORDING TO THE ASSESSING OFFICER, A S THE ABOVE AMOUNT 59.30 LAKHS ON THE ABOVE ACCOUNT DEBITED TO P&L ACCOUNT, IS NOT A REVENUE LIABILITY, THE SAME CANNOT BE ALLOWED AS DE DUCTION U/S 43B OF THE ACT. ON QUERY RAISED BY HIM IN THIS REGARD, AS MEN TIONED BY THE ASSESSING 3 3 OFFICER THE ASSESSEE VIDE HIS LETTER DATED 6.11.200 8, HAS SUBMITTED THAT SUCH CLAIM IS ALLOWABLE AS REVENUE EXPENDITURE. HO WEVER, THE ASSESSING OFFICER HAS NOT ACCEPTED SUCH SUBMISSION OF THE ASS ESSEE. HE NOTED THAT THE DIFFERENTIAL INTEREST AMOUNT HAS BEEN CONVERTED INTO REDEEMABLE PREFERENCE SHARES WITH AN OPTION TO CONVERT THEM IN TO EQUITY SHARES. HE OBSERVED, THAT THIS TANTAMOUNT TO CONVERTING THE IN TEREST AMOUNT INTO AN INVESTMENT IN THE FORM OF EQUITY. THUS, THE REPAYM ENT OF A REDEEMABLE PREFERENCE SHARES IS A LIABILITY ON CAPITAL ACCOUNT AND NOT ON REVENUE ACCOUNT. IT IS FURTHER OBSERVED, THAT EVEN IF THE SAME IS CONSIDERED AS REVENUE LIABILITY, THE SAME IS NOT ALLOWABLE U/S 43 B(D) AS NO PAYMENT HAS BEEN MADE TO THE FINANCIAL INSTITUTION DURING THE Y EAR. HENCE HE DISALLOWED THE SAID CLAIM OF RS.59,30,000/- U/S 43B OF THE ACT. 6. OBJECTING THE ABOVE DISALLOWANCE MADE BY THE A SSESSING OFFICER IN ASSESSMENT, IN THE WRITTEN STATEMENT FIL ED BY THE LEARNED AUTHORISED REPRESENTATIVE BEFORE THE LOWER AUTHORIT IES, IT WAS SUBMITTED THAT THE ASSESSEE COMPANY HAS AVAILED TERM LOANS FR OM IDBI AND IFCI, WHICH WERE RESTRICTED W.E.F. 1.10.2000 BY REDUCING THE RATE OF INTEREST FROM 21% PER ANNUM TO 16% P.A. AND CONVERSION OF SU CH DIFFERENTIAL INTEREST FOR NEXT 8 YEARS AT ITS PRESENT VALUE INTO CUMULATIVE REDEEMABLE PREFERENCE SHARES (CRPS) AND BY EXTENDING THE REPAY MENT PERIOD. IT WAS SUBMITTED THAT THE NET PRESENT VALUE OF SUCH FUTURE DIFFERENTIAL INTEREST BETWEEN 21.5% P.A. (INCLUDING INTERESTS TAX) AND 16 .5% P.A. AMOUNTED TO RS.444.70 LAKHS, COMPRISING RS.307 LAKHS IN RESPECT OF IDBI AND RS.137.70 LAKHS IN RESPECT OF IFCI. THE SAME WAS C ONVERTED INTO CUMULATIVE REDEEMABLE PREFERENCE SHARES (CRPS). TH IS NET PRESENT VALUE OF THE FUTURE DIFFERENTIAL INTEREST OF RS.444.70 LA KHS HAS BEEN DEBITED TO INTEREST SUSPENSE ACCOUNT IN THE YEAR 2000-01. THE COMPANY HAS BEEN CHARGING TO PROFIT AND LOSS ACCOUNT THE INTEREST DI FFERENTIAL PERTAINING TO THAT YEAR FROM THE SUSPENSE ACCOUNT, OVER A PERIOD OF THE TENURE OF THE TERM LOAN, FROM THE ACCOUNTING YEAR 2001-02. ACCO RDINGLY, AN AMOUNT OF RS.49.30 LAKHS (444.70 LAKHS/8) REPRESENTING INTERE ST DIFFERENTIAL FOR THE 4 4 ACCOUNTING YEAR 2005-06 HAS BEEN CHARGED TO PROFIT AND LOSS ACCOUNT UNDER THE HEAD INTEREST ACCOUNT. IT WAS SUBMITTED THAT, IN THIS REGARD THE ASSESSEE COMPANY IS CONSISTENTLY DISCLOSING IN THE NOTES TO ACCOUNTS THE METHOD OF ACCOUNTING FOLLOWED FOR CHARGING THE INTE REST. THE ABOVE POLICY HAS BEEN FOLLOWED RIGHT FROM THE ASSESSMENT 2001-02 , AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT. IT WAS FURTHER SU BMITTED THAT THERE WAS NO DISALLOWANCE MADE ON THE ABOVE ACCOUNT DURING TH E EARLIER ASSESSMENTS MADE IN THE CASE OF THE ASSESSEE. THE SAID AMOUNT CHARGED TO P&L ACCOUNT IS AS PER THE CONSISTENT ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE SINCE ASSESSMENT YEAR 2001-02 AND THERE WA S NO JUSTIFICATION FOR DISALLOWING THE SAID AMOUNT IN THE CURRENT ASSESSME NT YEAR. 7. ON APPEAL, THE CIT(A) OBSERVED THAT RESTRUCTUR ING OF THE TERM LOANS BY REDUCING THE RATE OF INTEREST FROM 21% TO 16% PER ANNUM BY IDBI AND IFCI, W.E.F. 1.10.2000, THE NET PRESENT VALUE O F SUCH DIFFERENTIAL INTEREST FOR NEXT 8 YEARS WHICH AMOUNTED TO RS.444 .70 LAKHS WAS CONVERTED INTO CRPS SINCE SUCH AMOUNT WAS QUANTIF IED AT RS.444.70 LAKHS, TAKING INTO ACCOUNT THE LIABILITY OVER A PER IOD OF 8 YEARS, WHILE CHARGING THE SAID AMOUNT TO INTEREST SUSPENSE ACCOU NT, THE ASSESSEE HAS BEEN CHARGING 1/8 TH OF THAT AMOUNT TO ITS P&L ACCOUNT IN EACH YEAR. I T IS THE ASSESSEES CLAIM THAT SINCE IT HAS ALREADY INCU RRED THE SAID INTEREST LIABILITY BY ISSUING THE CRPS TO THE SAID TWO FINAN CIAL INSTITUTIONS, IT IS ELIGIBLE FOR DEDUCTION OF PROPORTIONATE AMOUNT TOWA RDS SUCH INTEREST FOR THE CURRENT PREVIOUS YEAR. IT IS AS GOOD AS ISSUING OF DEBENTURES FOR THE SAID AMOUNT, REDEEMABLE AFTER 8 YEARS. SINCE THE A SSESSEE HAS ALREADY INCURRED SUCH LIABILITY, BY QUANTIFYING THE AMOUNT OF INTEREST PAYABLE BY IT TO THE SAID TWO FINANCIAL INSTITUTIONS OVER THE TEN URE OF THE SAID TERM LOAN AND ISSUING CRPS ON THAT ACCOUNT, THE PROPORTIONATE AMOUNT ON THAT ACCOUNT, PERTAINING TO THE PREVIOUS YEAR UNDER CONS IDERATION, IS ALLOWABLE AS DEDUCTION IN ITS CASE. HE PLACED RELIANCE ON TH E DECISION OF THE HONBLE MUMBAI HIGH COURT IN TAPARIA TOOLS LTD. VS. JCIT (2 003) (260 ITR 102), WHEREIN, AFTER REFERRING TO THE DECISION OF HONBLE SUPREME COURT MADRAS 5 5 INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT (199 7) (225 ITR 802), IT WAS HELD THAT THE LIABILITY TOWARDS INTEREST HAS TO BE SPREAD OVER THE PERIOD OF DEBENTURES AND THE AMOUNT ATTRIBUTABLE TO THE ACCOU NTING YEAR IS DEDUCTIBLE. HE OBSERVED THAT SINCE THE ASSESSEE HA S CHARGED TO THE P&L ACCOUNT, THE PROPORTIONATE INTEREST LIABILITY PERTA INING TO THE PREVIOUS YEAR UNDER CONSIDERATION, THE AMOUNT OF RS.59.30 LAKHS C HARGED TO P&L ACCOUNT, IS DEDUCTIBLE. AGAINST THIS THE REVENUE IS IN APPEAL BEFORE US. 8. NONE APPEARED BEFORE THIS TRIBUNAL ON BEHALF OF THE ASSESSEE ON THE DATE OF HEARING AND HENCE WE DECIDED TO DISPOSE OF THE CASE AFTER HEARING THE LEARNED DEPARTMENTAL REPRESENTATIVE. ACCORDING LY, WE HEARD THE DEPARTMENTAL REPRESENTATIVE AND PERUSED THE MATERIA LS ON RECORD. IN OUR OPINION, THE INTEREST CONCESSION DERIVED BY THE ASS ESSEE IS AN INCOME TO THE ASSESSEE IN THE REVENUE FIELD, RATHER THAN EXPE NDITURE. WE ARE NOT ABLE TO APPRECIATE HOW THE ASSESSEE HAS CLAIMED IT AS EX PENDITURE WHEN THERE IS DEDUCTION IN THE INTEREST RATE FROM 21% TO 15% ON T ERM LOAN. EVEN IF THE ASSESSEE DETERMINING THE NET PRESENT VALUE OF DIFFE RENTIAL INTEREST AMOUNT AND THE SAME HAS BEEN CONVERTED INTO CUMULATIVE RED EEMABLE PREFERENTIAL SHARES, THE SAME CANNOT BE CONSIDERED AS ACTUAL PAY MENT OF INTEREST IN THE ASSESSMENT YEAR UNDER CONSIDERATION. THIS IS NOTHIN G BUT CESSATION OF LIABILITIES. IN OUR HUMBLE OPINION, THE CIT(A) IS NOT JUSTIFIED IN ALLOWING AS AN EXPENDITURE. ACCORDINGLY, WE REVERSE THE ORDER OF THE CIT(A) AND UPHOLD THE ASSESSMENT ORDER. 9. IN THE RESULT THE APPEAL OF THE REVENUE STAND S ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 17.9.2010 SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 17TH SEPTEMBER, 2010 6 6 COPY FORWARDED TO: 1. THE ACIT, CIRCLE 2 (3), HYDERABAD 2. M/S GAYATRI SUGAR LTD., HYDERABAD 3. CIT(A)-III, HYDERABAD. 4. CIT, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. NP