TRIUMPH INTERNATIONAL FINANCE INDIA LTD,MUMBAI vs. DCIT CEN CIR 40, MUMBAI

During the course of assessment proceedings, the A.O. observed that the assessee company has kept the F.D. with the National Stock Exchange as lien which was invoked and the banks have given the money to National Stock Exchange. The assessee company has shown interest income received on such fixed deposits from NSE at Rs. 1,88,64,396/- under the head, "Income from Other Sources" and claimed deduction u7s.57(iii) of Rs.3,28,65,299/- as interest payable for the amount given by the Bank to NSE which is restricted to Rs. 1,88,64,396/- to the extent of income. The assessee earned interest on funds called from the banks in view of invocation of Bank Guarantee by the NSE. The A.O. has taken the view that as interest was earned on the fund which was called and retained by the NSE due to invocation of Bank Guarantee, it was not correct to conclude that the assessee had expended interest expenses of Rs.3,28,65,299/- wholly and exclusively 4 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., for the purpose of earning interest income of Rs.1,88,64,396/-. The assessee has not kept the funds with the NSE on its own to earn income against which deduction of Rs.3,28,65,299/-, as interest expended was claimed. The A.O. further observed that earning of interest income was not the sole purpose against which interest expenditure has been expended as claimed by the assessee. The assessee had not invested the fund with NSE, but earned interest on fund due to invocation of Bank Guarantee by the NSE. Due to invocation of bank guarantee, the assessee had expended money and interest paid thereon out of necessity. Hence, the A.O. was of the view that assessee was not entitled to deduction claimed u/s. 57(iii) of Rs.1,88,64,396/-.

The A.O. has not accepted the above said claim on the ground that the assessee was not entitled to claim deduction u/s.57(iii) of the Act. Further, the assessee company did not submit any documents in support of their contention except written submissions filed in the course of assessment proceedings. The A.O. has referred to the remand report submitted to the CIT(A) during the course of appeal proceedings for A.Y.2008-09, in light of the additional evidence filed and has concluded that the source of the various F.Ds. was out of assessee’s own funds. Accordingly, the claim of the assessee company for deduction of interest expense against interest income has been rejected.

We have considered rival contentions and carefully gone through the orders of the authorities below. We had also gone through the order of the Tribunal wherein para No.7 & 8 of page 8 & 12 for the A.Y.2008-09 and 2009-10, the tribunal have allowed assessee’s claim of deduction of interest out of interest income.

With regard to applicability of provisions of Section 43B, we observe that the same are applicable to income computed under the head "business income" only and are not applicable to incomes under the head "income from other sources".

As per our considered view if the bank later on waives the interest to be paid to them by the assessee, the provisions of section 41(1) shall not be applicable but the provisions of section 59 of the Act which are similar to section 41(1) will be applicable. 18. Since the allowability of interest expenditure are with respect to the details of interest due with the above banks, whereas the one time settlement entered by the assessee for assessment year 2005-06 is with 8 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., Centurion Bank; hence, the contention of learned DR is not applicable to the facts of the case. 19. Even though assessee has not paid the interest to the bank but as per provisions of Section 145(1), assessee has to compute its income under the head ‘Profit and Gains of business and profession’ or ‘income from other sources’ subject to provisions of sub-section (2) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Thus, the interest expenditure need not be paid in as much as the income chargeable to tax under business income or income from other sources shall be computed in accordance with cash or mercantile basis regularly employed by the assessee. 20.The precise observation of Tribunal in its order dated 25/08/2016 was as under:- 7.We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below and case laws relied upon by the parties. We find that the business of the assessee was discontinued following the order of SEBI which was upheld by the SAT and Apex Court also and thus the business of the assessee came to forced stand still. The assessee was doing business of security and stock broking and trading in shares. We find that following the discontinuance of business by the order of SEBI, the National Stock Exchange invoked the guarantees furnished by the assessee and also exercised the lien on FDRs and proceeds of FOR were also send to the National Stock Exchange by the various banks when the assessee was declared defaulter by the NSC resulting into accumulation of deposit to the tune of Rs. 24,35,12,8137- with National Stock Exchange on which the NSE allowed interest of Rs. 2,60,42,2977- during the financial year 2007-08 relevant to the assessment year under consideration. We find that these deposit of Rs. 24 crores accumulated out of various bank guarantee invoked and proceeds of FDRs given as security. The source of the said amounts of accumulated funds with the NSC are from the borrowed funds from banks. Now the question before us is whether the assessee is entitled to deduction of interest 9 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., incurred to various banks from whom the funds were arranged from the interest received from National Stock Exchange which is assessable under the head "income from other sources". For the sake of convenience and better understanding, the provisions of section 57(iii) are reproduced below : '57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :- (i), (ia) & (ii), (iia) ** ** ** (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income; (iv).....' The interest is not in doubt or disputed that the interest received from the National Stock Exchange on the total amount of deposit with it is assessable as "income from other sources". So far as the question of deduction qua interest to various banks is concerned, we are of the opinion that if there is nexus between the interest received and interest to banks on borrowings , the same is to be allowed as deduction u/s 57(iii) of the Act. A plain reading of provisions of section 57(iii) of the Act reveals that any expenses which is not of capital in nature and is wholly and exclusively incurred or expended for the purpose of making or earning of such income has to be allowed against the income which is earned and assessable under the provisions of section 56 of the Act. We also find that the National Stock Exchange exercised lien on FDRs of Rs. 5 crores on 23.07.2002 (proceeds of FDRs Rs. 5,94,03,209/-)which was purchased on 19.07.2000 out of money borrowed from the Global Trust Bank and the assessee incurred interest on the said bank to the tune of Rs. 95.00 lakhs. Three other deposits out of interest bearing funds from Global Trust Bank were also given Rs. 2,00,000/- on 07.02.2000, Rs, 6,00,000/- on 21.09,2000 and Rs. 25,00,000/- on 18.10.2000 on which the assessee incurred interest of Rs. 6,27,000/- .Interest on bank guarantees invoked by the stock Exchange Rs. 3,15,00,000/- from Global Trust Bank , interest of Rs. 59,85,0007- was incurred and on Rs. 3,00,00,000/- from Centurian Bank out of which Rs. 2,11,00,000/-were interest bearing and interest incurred was at Rs. 33,76,000/-. Likewise assessee incurred interest of Rs. 80,00,000/- on the amount of invoked bank guarantee of Rs. 5,00,00,000/- from ICICI Bank. Thus the total amount of interest incurred to various banks on the borrowings comes to Rs. 2,74,88,000/- 8. Considering the above facts and arguments of the rival parties we find clear cut nexus between the interest earned from NSE on deposits with National Stock Exchange out of bank guarantees invoked and proceeds of FDRs and interest incurred on the sources 10 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., of funds which are from the various banks out of the interest bearing funds given to NSE in the form of the bank guarantees invoked in year 2002 and FDRs with lien in favour of NSE on which the lien was exercised in 2002. We find merit in the arguments of the Id.AR that the interest incurred to these banks namely Global Trust Bank and Centurion Bank , ICICI Bank should be allowed while assessing the interest income of the assessee from the deposits with NSE and we are not convinced with the findings of Id.CIT(A) that there is no nexus between the funds/deposits lying with the NSE under lien and NSE have various deposits or FDR under lien or deposits out of sources as discussed supra and the interest expense accrued in favour of various banks on the money borrowed for the purpose of FDRs for security and also for bank guarantees to NSC. Accordingly, we set aside the order of Id.CIT(A) and direct the AO to allow deduction of interest of Rs. 2,74,88,000/- out of the interest received from the National Stock Exchange. This ground is allowed in favour of the assessee.

The issue raised in ground no.4 is against the non allowance of credit of tax Rs. 38,79,584/-. This ground was taken before the I. ,CIT(A) who dismissed the ground by holding that the assessee was free to move an application u/s 154 of the Act before the AO and accordingly, claim the credit of TDS and thus dismissed the appeal of the assessee. The Id. AR submitted before us that the AO has not allowed the credit of TDS deducted on behalf of the assessee amounting to Rs. 38,79,584/-. At the time of hearing, the ( Id.AR submitted that the Id. CIT(A) also erred in directing the assessee to move an application u/s 154 of the Act instead of issuing direction to the AO to allow credit of TDS which was a legitimate claim to which the assessee was legally entitled.

We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below. We find that the assessee has not been allowed credit of Rs. 38,79,5847- being TDS at source on behalf of the assessee by NSE/Banks and the Id. CIT(A) has just dismissed the ground by directing the assessee to file rectification application u/s 154 of the Act which is not correct in our view and hence we are of the view that it would meet ends of justice if the AO is directed to allow the credit of TDS of Rs. 38,79,5847- after verifying the claim of the assessee after allowing reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

The issue raised in respect of depreciation amounting to Rs. 1,79,634/- raised in ground No.2 not allowing the depreciation to the 11 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., assessee. The Id. CIT(A) also rejected the ground of the assessee on the ground that business has ceased and therefore no deprecation was allowable in the current year or in the subsequent years. Aggrieved by the order of Id. CIT(A) the assessee in appeal before us.

After hearing the rival contentions and on perusal of the record, we find that the assessee has discontinued the business following the order of SEBI and therefore there was no activity during the year and the claim of the depreciation o f Rs. 1,79,634/- cannot be allowed as the assessee did not carry out any business activity. However, the assessee is free to claim deprecation in the year in which the business is re-commenced on the basis of Written Down Value in the year in which the business was discontinued.

In the result, the appeal of the assessee is partly allowed.

Now, we shall take the appeal in ITA No. 7518/Mum/2013 relating to the assessment year 2009-10 16. We have already decided an identical issue in ITA No. 3225/Mum/2013 (AY-2008-09) and therefore, i our decision in ITA No.3225/Mum/2013 would mutatis mutandis would apply to these appeals as well. The AO is directed accordingly.

Respectfully following the decision of Tribunal in assessee’s own case, the interest claimed by assessee is to be allowed to the assessee primarily on the basis of consolidated order of the Tribunal for income-tax assessment years 208-09 and 2009-10.We direct accordingly.

Assessee has also taken ground for disallowance of administrative expenses, depreciation against the other income of Rs.22,053, being mark-to-market valuation of shares.

We found that since during the year under consideration the business was not in operation and assets were not put to use, the claim of depreciation cannot be allowed. However, when the business again starts, assessee can claim depreciation on the WDV as stood in the year when business was discontinued. We direct accordingly.

Similar grounds have been taken by assessee in the A.Y.2011-12 and 2012-13 also. Following reasoning given hereinabove, we dire the AO to allow assessee’s claim of interest expenditure against the interest income.

In the result, appeals of the assessee are allowed in part in all the years under consideration in terms indicated hereinabove. Year :2005-06) 26. Assessee is aggrieved for addition made u/s.41(1) on account of waiver allowed by the Centurian Bank. 27. Rival contentions have been heard and record perused. 28. The brief facts of the case, as stated in the assessment order, are that the assessee is engaged in the business of trading in shares and securities. In this case, original assessment u/s.143(3) of the Act was completed on 26.12,2007 determining the total income at Rs.16,73,20,422/- as against the returned income of Rs.Nil. While finalizing the assessment, the A.O., among other additions, has made an addition of Rs.14,45,48,419/- on account of loan written off by Centurion Bank. The assessee preferred appeal before the CIT(A) against the action of the A.O., who in turn, had confirmed the action of A.O. The assessee preferred an appeal before the Hon'ble IT AT which has set aside the issue of disallowance of loan written off Centurion Bank to the file of the A.O. for fresh adjudication. Accordingly, notice u/s.143(2)/142(1) dated 28.02.2014 was issued to the assessee. The A.O. has completed the 13 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., assessment on 31.03.2015 at total income of Rs.1,20,645,480/- after making an addition of R« 103.711,957/-on account of loan written by Centurion Bank.

During the course of assessment proceedings, the A.O. observed that the assessee company filed the same details which were filed before the Assessing Officer and various appellate forum. The assessee was requested to file the interest expenses ledger account appearing in the books of the assessee relating to the period A.Y.2001-02 to 2005-06 to which the amount of waiver pertained. However, not convinced with the assessee’s reply, AO disallowed assessee’s claim on account of loan written off by Centurian Bank.

By the impugned order CIT(A) confirmed the action of the AO against which assessee is in further appeal before us.

At the outset, learned AR placed on record the order of the Tribunal in assessee’s own case for the A.Y.2005-06 dated 15/04/2012 wherein the matter was restored back to the file of the AO with the following direction:- 11. We have considered the rival submissions. While we agree in principal. that on the waiver of the principal amount due to the bank and the bene5c that accrues to assessee on waiver of such waiver provisions under section 41(1) cannot be applied, we are of the view that in the present case the orders of the revenue authorities are not clear as to how the amount of principal waived by the bank was arrived at a sum of Rs.4,08,36,462/-. One has to look at the statement of the Bank to identify what is the principal amount waived and the interest amount waived and the terms of the loan in respect of which the liability in question arose. It has also to be verified as to what is the interest expenditure that was claimed by the Assessee as deduction in the past while computing its taxable income and what was the amount that was actually allowed as deduction in the past assessments. Neither the order of the AO nor the that of the CIT(A) is clear on this aspect. We, therefore, hold that in principle the 14 ITA No.6548-6550/Mum/2016 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., provisions of section 41(1) of the Act will not be applicable to waiver of principal amount. We direct the AO to examine the issue with regard to the actual quantum of principal waived and the quantum of interest that was waived by the bank and restrict the addition to be made under section 41(1) of the Act to the extent that the waiver relates to the interest liability of the assessee which had been claimed as deduction by the assessee while computing its income in the past. Ground No.2 is thus allowed for statistical purposes.

Learned AR also placed on record the order of the Tribunal in the group concern M/s.N H Securities Limited in for the A.Y.2005-06 dated 07/06/2017 wherein exactly similar issue was decided in favour of the assessee after having the following observation:- 11. We have heard rival contentions and perused the record. The assessee has furnished ledger account copy of Centurion bank account at pages 24 to 35 of the paper book. We notice there from that the assessee has been given a loan of Rs.20.00 crores by Centurion bank on 30-05-2000. The balance as on 14/02/2001 is shown as Rs. 10,99,64,081/-, which means, there is merit in the contentions of the assessee that it has repaid principal amount to the tune of Rs.9.01 crores and also the liability towards interest/charges raised by the bank till 14/02/2001 has been settled by the assessee. From the statement furnished by the assessee, a further debit towards interest/charges/payments has been raised by the bank to the tune of Rs.2.12 crores. The bank has collected a sum of Rs.6.37 crores by way of repayment, share invocation and dividend. 12. The contention of the assessee is that the above said amount of Rs.6.30 crores should be adjusted against the interest/charges liability, meaning thereby, the interest/charges liability has been fully settled by the assessee and the balance amount of Rs.4.25 crores have been repaid towards principal portion of loan. Accordingly it has been contended that the remaining amount waived by the bank would represent only principal portion only. 13. In our view, the above said contention of the assessee cannot be found fault with. The Hon'ble Supreme Court has also in the case of Meghraj and others Vs. Mst. Bayabhai and others (supra) has expressed the view that the collections shall be first adjusted towards interest component. In the instant case, the total amount of collections was Rs.6.37 crores as against interest/charges liability of Rs.2.12 crorcs and hence there is merit in the contentions of the assessee that the same should be considered as fully collected. Over and above that, a portion of principal loan has also been collected by the bank. Hence, in the fact 'and circumstances of the case, we are of the view that the amount of Rs.2.12 crorcs, which is part of amount waived by the bank, shall also represent Principal portion of loan only. Accordingly we set aside the order passed by Ld C1T(A) on this 15 ITA No.6548-6550/Mum/2016 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., issue and direct the AO to delete the assessment of Rs.2.12 crores referred above. 14.The assessee has also raised a legal issue. Since we have decided the issue urged on merits, in favour of the assessee, we do not find it necessary to adjudicate the legal issue.

It was contention of learned AR that the issue, in principle, is covered by a recent order of the co-ordinate Bench of the Tribunal at Mumbai in the case of N.H. Securities Limited for income-tax assessment year 2005-06 in where the Honourable Judicial Member is a party. The Tribunal relying on the decision of the Supreme Court in the case of Meghraj & Others v Mst Bayabai and others, AIR 1970 SC 161 has expressed a view that in a one- time settlement (OTS) by the borrower with the lender, any repayments by the borrower shall first be adjusted towards the interest component and the balance, if any, shall be adjusted against the principal amount.

On the other hand contention of learned DR was that any payment by the assessee under one time settlement scheme will be first adjusted by the bank against principal amount and not towards interest amount. He placed reliance on the decision of Akay Organics Ltd., As per learned DR, the decision in case of Akay Organics Ltd., was on the identical issue, whereas the decision of Hon’ble Supreme Court in the case of Meghraj & Others which was considered by the Tribunal in the case of N.H. Securities Ltd., was in respect of decretal amount in Court.

We had carefully gone through the orders of the authorities below and found that the present appeal is the second round, partial relief given to the assessee by the CIT(A) in the first round, which attained finality inasmuch as the Department did not file an appeal against the order of the CIT(A). It is the appeal of the assessee to the Tribunal which was set-aside and therefore, the 16 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., Assessing Officer and the CIT(A) in the second round travelled beyond the directions of the Tribunal in the first innings. 36. Directions of the Tribunal in the first round - (a) The directions of the Tribunal in the first round are contained in para 11 on page 6 of the order. In response to the observation of the Tribunal order as to how the amount of Rs 4,08,36,462, being the principal amount, which was deleted by the CIT(A) has been arrived at, the AR referred to point no 2 at page no 29, page nos 28 to 30 of the paper book were submitted to the Tribunal in the first round. 37. This we found that the direction of the Tribunal was limited to the extent of "to identify what is the principal amount waived and the interest amount waived ...... It has also to be verified as to what is the interest expenditure thai was claimed by the Assessee as deduction in the past while computing its taxable income and what was the amount that was actually allowed as deduction in the past assessments,. , .We direct the AO to examine the issue with regard to the actual quantum of principal waived and the quantum of interest that was waived by the bank and restrict the addition to be made under section 41 (1) of the Act to the extent that the waiver relates to the interest liability of the assessee which had been claimed as deduction by the assessee while computing its income in the past" 38. The Tribunal in the first round made it very clear that "While we agree in principle that on the waiver of the principal amount due to the bank and the benefit that accrues to assessee on waiver, such waiver provisions under section 41(1) cannot be applied....... We, therefore, hold that in 17 & 2154/Mum/2017 M/s. Triumph International Finance India Ltd., principle the provisions of section 41(1) of the Act will not be applicable to waiver of principal amount. "

Thus, the principal was decided by the Tribunal and what was left to the Revenue authorities was only to decide the amount of principal and interest waived by the lender bank.

The AR pointed out that pursuant to the directions of the Tribunal, the assessee made detailed submissions to the Assessing Officer by letter dated 12th March, 2014, a photo copy of the same is enclosed (refer point 1.2 above) - refer page nos 1 to 27 of the paper book. However for ready reference, certain relevant portions of the letter are reproduced below:-

With regard to the observation of the AO, we found that direction of the Tribunal in the first round was as under:-

The CIT(A) himself observed that the adjustment of the payments between the principal and the interest is not apparent from the order of the Mumbai DRT order; which has been observed by the Tribunal as well in the first round and this was the reason for the send back as well. Thus the observation of AO was not in consonance with the direction of Tribunal.

After carefully going through the order of the Tribunal in we observe that Tribunal relying on the decision of the Supreme Court in the case of Megraj & Omers v Mst Bayabai and others, AIR 1970 SC 161 has expressed a view that in a one-time settlement (OTS) by the borrower with the lender, any repayments by the borrower shall first be adjusted towards the interest component and the balance, if any, shall be adjusted against the principal amount - refer Tribunal order para no 13 on page nos 6 and 7.

Respectfully following the order of Tribunal in the case of group concern on the very same issue, we direct the AO to delete the addition made on account of waiver allowed by the Centurian Bank.