2013 (3) TMI 459 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions Dismissing Revenue Appeal on Interest Disallowance

The Tribunal upheld the CIT(A)'s decisions in the case, dismissing the Revenue's appeal. The disallowance of interest under Sections 36(1)(iii) and 43B ... Disallowance of interest attributable to capital work in progress under section 36(1)(iii) - allocation of interest between own funds and borrowed funds for purposes of section 36(1)(iii) - disallowance of interest where loans/advances are given out of interest bearing borrowed funds - allowability of interest under section 37 for unpaid sale consideration and inapplicability of section 43B to unpaid sale consideration - deduction under section 43B for interest payable only when actually paid - treatment of accrued interest receivables in mercantile accountingDisallowance of interest attributable to capital work in progress under section 36(1)(iii) - allocation of interest between own funds and borrowed funds for purposes of section 36(1)(iii) - Whether the disallowance of interest u/s 36(1)(iii) attributable to capital work in progress was correctly computed by the AO and whether the CIT(A)'s restriction of the disallowance is sustainable. - HELD THAT: - The Tribunal found that the Assessing Officer ignored details submitted by the assessee and wrongly allocated total interest on the basis that only borrowed funds were to be considered for disallowance. The Tribunal held that, absent any finding that capital work in progress was financed exclusively from borrowed funds, the correct allocation must take into account total funds (own funds and borrowed funds). Applying that principle to the material on record, the Tribunal concluded that the disallowance claimed by the AO was excessive and that the CIT(A)'s restriction (reflected in the order) is sustainable. The Tribunal therefore upheld the CIT(A)'s approach and order on this issue. [Paras 2]The CIT(A)'s restriction of the disallowance of interest u/s 36(1)(iii) is upheld and the Revenue's ground is dismissed.Disallowance of interest where loans/advances are given out of interest bearing borrowed funds - Whether the proportionate disallowance of interest u/s 36(1)(iii) in respect of loans and advances made out of interest bearing borrowed funds was justified. - HELD THAT: - The Tribunal accepted that the assessee furnished detailed break up of 'loans and advances' showing that most items were trade advances, receivables, prepayments and interest receivable carried forward from earlier years. Only a specified sum related to an old advance that had received interest in earlier years. In those circumstances the AO had no basis for treating the entire balance as interest free loans financed from borrowed funds and making the impugned proportionate disallowance. The CIT(A)'s deletion of the addition was therefore found to be correct on the facts. [Paras 3]The deletion of the proportionate disallowance of interest is upheld and the Revenue's ground is dismissed.Deduction under section 43B for interest payable only when actually paid - interaction between disallowance under section 36(1)(iii) and section 43B - Whether the AO was correct in disallowing interest under section 43B and whether the CIT(A)'s restriction of that disallowance is sustainable. - HELD THAT: - The CIT(A) quantified the interest covered by section 43B and adjusted it by excluding the portion already attributable to capital work in progress as determined earlier. The Tribunal found no infirmity in the CIT(A)'s arithmetic and reasoning, and the Department could not point to any error in that approach. Consequently the Tribunal sustained the CIT(A)'s restricted disallowance under section 43B. [Paras 4]The CIT(A)'s restriction of the section 43B disallowance is upheld and the Revenue's ground is dismissed.Allowability of interest under section 37 for unpaid sale consideration and inapplicability of section 43B to unpaid sale consideration - Whether interest payable to GIDC on unpaid sale consideration is disallowable or is allowable as business expenditure (section 37) and not hit by section 43B. - HELD THAT: - The Tribunal followed its own earlier decision in the immediately preceding assessment year in the assessee's own case, which held that interest on unpaid sale consideration for acquisition of capital asset was allowable as business expenditure (section 37) and that unpaid sale consideration did not constitute monies 'borrowed' so as to attract section 43B. In absence of any contrary material, the Tribunal respectfully followed that earlier decision and dismissed the Revenue's challenge. [Paras 5]The disallowance in respect of interest payable to GIDC is deleted following the Tribunal's earlier decision; the Revenue's ground is dismissed.Treatment of accrued interest receivables in mercantile accounting - Whether accrued interest receivables and similar items shown in books should be brought to tax in the relevant year notwithstanding that they pertain to earlier years or are unrealised. - HELD THAT: - The Tribunal accepted the assessee's explanation and records that the items were carried forward from earlier years (insurance claims, accumulated interest receivable and other receivables that could not be realised). The Assessing Officer did not controvert these factual assertions. Since no portion of the impugned sums had accrued during the year under consideration, the CIT(A)'s deletion of the addition was held to be correct. [Paras 6]The deletion of the addition of accrued interest income is upheld and the Revenue's ground is dismissed.Final Conclusion: The Tribunal dismissed the Revenue's appeal against the CIT(A)'s order for A.Y. 2005-06, upholding the deletions and restrictions of disallowances and additions as recorded by the CIT(A) on the respective issues. Issues Involved:1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.2. Proportionate disallowance of interest under Section 36(1)(iii) for loans and advances.3. Disallowance of interest under Section 43B.4. Disallowance of interest payable to GIDC.5. Addition of accrued interest income.Issue-wise Detailed Analysis:1. Disallowance of Interest under Section 36(1)(iii):The Revenue challenged the CIT(A)'s order restricting the disallowance of interest to Rs. 79,29,330/- out of Rs. 1,85,13,497/- disallowed by the A.O. The A.O. had determined the disallowable interest based on the capital work in progress and borrowed funds. The CIT(A) found that the A.O. wrongly allocated the total interest and concluded that only Rs. 79,29,330/- was attributable to capital work in progress. The Tribunal upheld the CIT(A)'s order, noting that the A.O. failed to consider the assessee's own funds and borrowed funds collectively and dismissed the Revenue's ground.2. Proportionate Disallowance of Interest for Loans and Advances:The Revenue contested the CIT(A)'s deletion of proportionate disallowance of Rs. 34,54,480/-. The A.O. had disallowed this amount, alleging that loans and advances were made out of interest-bearing borrowed funds without charging interest. The CIT(A) found that most advances were for business purposes and not necessitating interest charges. The Tribunal upheld the CIT(A)'s decision, noting that the A.O. did not establish a nexus between borrowed funds and interest-free advances, and dismissed the Revenue's ground.3. Disallowance of Interest under Section 43B:The Revenue challenged the CIT(A)'s order restricting the disallowance to Rs. 1,39,86,215/- out of Rs. 2,19,15,545/- disallowed by the A.O. The A.O. disallowed the interest payable to banks as it was unpaid, invoking Section 43B. The CIT(A) found that only Rs. 1,39,86,215/- was disallowable after accounting for interest already disallowed as part of capital work in progress. The Tribunal upheld the CIT(A)'s order, finding no infirmity in the CIT(A)'s reasoning, and dismissed the Revenue's ground.4. Disallowance of Interest Payable to GIDC:The Revenue contested the deletion of disallowance of Rs. 39,00,000/- payable to GIDC. The CIT(A) had deleted the disallowance, following the Tribunal's decision in the assessee's case for the previous year, where it was held that the interest expenditure was allowable under Section 37(1) and not subject to Section 43B. The Tribunal, following its earlier decision, upheld the CIT(A)'s order and dismissed the Revenue's ground.5. Addition of Accrued Interest Income:The Revenue challenged the deletion of Rs. 1,36,72,457/- added by the A.O. as accrued interest income. The A.O. had added the amount, considering it accrued during the year under the mercantile system of accounting. The CIT(A) found that these amounts were carried forward from earlier years and not accrued during the year. The Tribunal upheld the CIT(A)'s order, noting that the Revenue could not controvert the assessee's submission or point out any factual error, and dismissed the Revenue's ground.Conclusion:The Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions on the disallowance of interest under Sections 36(1)(iii) and 43B, the treatment of interest payable to GIDC, and the addition of accrued interest income.