By TIOL News Service

MUMBAI, SEPT 14, 2016: THE issue is - Whether amount raised by issue of debentures would still be considered as used for the purpose of business even if the entire amount raised is advanced to the sister concern which is in the same line of business and they have business connection with each other. YES is the verdict.

Facts of the case

The assessee is a Company, who had issued certain debentures at a discount. During the relevant AY, the assessee amortised part of the total discount and claimed the same as business expenditure in its return. The AO disallowed the claim for deduction on the ground that it was capital expenditure and secondly he added the deduction claimed under Section 41(1) of the Act to the income. Being aggrieved, the assessee carried the issue in appeal before the first Appellate Authority who disallowed the same, on the ground that the deduction of discount claimed was in the nature of interest free advances given to sister concern and, therefore, not wholly and exclusively expended for purposes of its business. On further appeal, the Tribunal held that the issue of debentures was a loan and the discount on its issue was a business expenditure. Aggrieved Revenue filed appeal before the High Court. During assessment process, AO invoked Rule 8D while disallowing expenditure u/s 14A of the Act. On further appeal, the CIT(A) upheld the disallowance by the AO. This matter also finally reached before the High Court.

After hearing parties, HC held that,

++ it is not disputed before us in the present facts that issue of debenture was a loan and discount, was in the nature of interest / expenditure for the loan. We find that the decision of the Apex Court in S.A. Builders still holds field as its operation has not been stayed. Therefore, the Tribunal was justified in relying upon a binding decision of the Apex Court in S.A. Builders to examine the case of the respondent assessee before it to determine whether the expenditure was on account of commercial expediency and on facts held it to be so. This on account of undisputed position that the debentures were issued to a sister concern in the same line of business having business connection with each other.Thus, in view of the binding decision of the Apex Court in S.A. Builders (supra), question (a) does not give rise to any substantial question of law. Thus, not entertained;

++ the impugned order places reliance upon the decision of this Court in the case of Godrej and Boyce Manufacturing Co. Ltd. Vs. Dy. Commissioner of Income Tax to hold that as the subject assessment year is A.Y. 2007-08 Rule 8D of the Rules could not be invoked. In the above view, the impugned order allowed the appeal of the respondent assessee. It may be noted that the impugned order holds that on merits, Section 14A of the Act will not apply. However, no appeal on this aspect has been filed by the Revenue. Ms. Bharucha, Counsel for the Revenue very fairly states that the issue stands concluded against the Revenue by the decision of this Court in Godrej & Boyce. In the above case, this Court has held that disallowance under Section 14A of the Act on application of Rule 8D of the Rules would only apply from A.Y. 2008-09, prior thereto it has to be by a reasonable method.Therefore, question (b) as formulated does not give rise any substantial question of law. Thus, not entertained. Accordingly, Appeal is dismissed. No order as to costs.

(See 2016-TIOL-2085-HC-MUM-IT)