M/S. GRIDCO LIMITED,BHUBANESWAR vs. ACIT, CIRCLE-2(1), BHUBANESWAR
What did the Tribunal hold?
The Tribunal held that since the bonds were created from existing debtors and not from interest-bearing funds, no disallowance of interest expenditure was warranted. The investment in shares was also considered to be out of non-interest bearing funds.
What were the facts?
The assessee converted outstanding debtors from DISCOMs into bonds worth Rs. 400 crores. These bonds originated in assessment year 2007-2008 and have not been encashed or yielded income since. The Assessing Officer disallowed interest expenditure, viewing the conversion as an investment.
What were the issues?
Whether interest expenditure is disallowable when an assessee converts outstanding debtors into bonds without utilizing interest-bearing funds.
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, CUTTACK BENCH CUTTACK
Before: SHRI GEORGE MATHAN & SHRI ARUN KHODPIA
O R D E R Per Bench : This is an appeal filed by the assessee against the order of the ld.CIT(A)-1, Bhubaneswar, dated 09.05.2016 passed in I.T.Appeal No.0493/14-15, for the assessment year 2010-2011.
It was submitted by the ld. AR that in the course of assessment the AO has taken a view that the assessee had invested Rs.510 crores which includes investment of Rs.110.22 crores in the equity shares of the DISCOMs and Rs.400 crores being the bonds from DISCOMs. It was submitted that the assessee purchases and sells power. The assessee is to receive sale price from the DISCOMs. The DISCOMs do not pay the assessee on time. There being substantial lapses and consequently the debtors in the assessee’s balance sheet representing the DISCOMs had gone to a very high amount. As the power sector itself was undergoing substantial turmoil, the Govt. of India had intervened and had issued DISCOMs into the bonds to an extent of Rs.400 crores. Ld. AR drew our attention to page 270 of the paper book and submitted that these bonds of Rs.400 crores had come into existence as early as during the assessment year 2007-2008 i.e. the same had been disclosed in its balance sheet for the year ending 31.03.2007. It was the submission that this amount of Rs.400 crores have been carried forward right from A.Y.2007-2008 and even till today these bonds have not been encashed nor the assessee has been able to derive any income out of the said bonds. The discussions and litigations in respect of the same are still pending. It was the submission that the AO has taken a mistaken impression that the assessee had invested in the bonds. The assessee had made no specific investment out of its surplus funds or its share capital but had converted through discussions the amount representing the debtors from the DISCOMs being NESCO, WESCO and SOUTHCO into 12.5% non-convertible secure bonds to the extent of Rs.400 crores. It was the submission that this being so, as the assessee had not diverted interest bearing funds for the purpose of obtaining the said bonds, no disallowance of the interest expenditure was called for. It was the submission that the ld. CIT(A) had also dismissed assessee’s appeal without appreciating these facts. It was the prayer that as the assessee had not made any investment in the bonds out of its interest bearing funds and as no disallowance of interest has been made A.Y.2007-2008, no disallowance is called for during the relevant assessment year.
In reply, ld. CIT-DR vehemently supported the order of the ld. AO and ld. CIT(A). It was the submission that each assessment is a separate assessment year and that as the assessee has got the investment in the bonds, the assessee was liable to show the income from the bonds during each of the years. It was the submission that it is on this count that the AO has disallowed the interest expenses insofar as the funds which otherwise would have been used by the assessee for its business has been blocked by the assessee in the form of bonds.
We have considered the rival submissions. A perusal of the facts of the present case clearly show that the so-called investment in the bonds has come from the assessment year 2007-2008. These bonds have come into existence on account of the reduction from the quantum of the debtors. In short, the substantial portion of the debtors representing the DISCOMs had been converted into interest bearing non-convertible secure bonds. This being so, it can clearly be mentioned here that the assessee has not used any interest bearing funds for the purpose of obtaining the said bonds. This being so, no disallowance from interest expenditure would be called for. Further the investment in the share of Rs.110 crores clearly is less than the capital available, which is non- interest bearing funds, therefore, no disallowance on the same would also be called for.
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