2013 (6) TMI 408 - AT - Income Tax

Appeal outcome: Deductions allowed, prior period expenses disallowed. Interest and penalty proceedings withdrawn.

The Tribunal partly allowed the appeal, permitting the deduction for swapping premium under Section 36(1)(viii) and the deduction for bad and doubtful ... Swapping premium - Disallowance u/s 36(1)(viii) - Held that:- As decided in assessee's own case [2008 (12) TMI 27 - AUTHORITY FOR ADVANCE RULINGS] swapping premium is nothing but discounted interest and had originated in the long term finance initially advance. The premium is actually traced to the original source and is not kept remedy of business of providing long term finance Provision for bad and doubtful debts - Disallowance u/s 36(1)(viii) - Held that:- As decided in Power Finance Corporation Ltd. v. JCIT [2006 (8) TMI 332 - ITAT DELHI] the presentation of the concerned amount under schedule of Reserve and Surplus was based on the mandate of CAG but its nature and character remains tile same as (envisaged under clause (viia)(c) of section 36(1) of IT Act as contextually interpreted and explained in the Board Circular No 258 dated 14-6-1979), the assessee should be taken to have complied With the requirement of making the said provision for c1aiming deduction under clause (viia)(c) of section 36(1). Prior period expenses disallowed - Held that:- Assessee did not produce any evidence to demonstrate that these expenses crystallized during the year under consideration. The assessee is following mercantile system of accounting and in mercantile system of accounting the expenses relate to that year though not incurred has to be provided on estimate basis provided the incurring of such expenses is not contingent. The Ld AR did not submit any argument or evidence to prove that these expenses were contingent. Issues Involved:1. Disallowance of deduction under Section 36(1)(viii) for consultancy, management fees, upfront fees, and swapping premium.2. Disallowance of deduction under Section 36(1)(viia)(c) for bad and doubtful debts.3. Disallowance of prior period expenses.4. Levy of interest under Section 234B.5. Initiation of penalty proceedings under Section 271(1)(c).Issue-wise Detailed Analysis:1. Disallowance of Deduction under Section 36(1)(viii):The appellant contended that the income from consultancy, management fees, upfront fees, and swapping premium should be eligible for deduction under Section 36(1)(viii) as they are derived from the business of long-term finance. The Assessing Officer (AO) and CIT(A) disagreed, stating these incomes are incidental and not directly derived from long-term finance. The Tribunal upheld the CIT(A)'s view, emphasizing that 'income earned which is incidental to the business cannot be said to be income derived from interest on lending money for long-term finance.'However, regarding the swapping premium, the Tribunal found in favor of the appellant, citing an AAR Order No.758 dated 23.12.2008, which considered swapping premium as discounted interest from long-term finance. Therefore, the swapping premium was allowed for deduction under Section 36(1)(viii).2. Disallowance of Deduction under Section 36(1)(viia)(c):The appellant claimed a deduction of Rs. 34.51 crores under Section 36(1)(viia)(c) for creating a reserve for bad and doubtful debts. The AO disallowed this, arguing that the appellant did not create a provision but a reserve, which does not meet the section's requirements. The CIT(A) upheld this view.The Tribunal, however, referred to the case of Power Finance Corporation Ltd. v. JCIT, where it was held that the presentation of the amount under the schedule of Reserve and Surplus, as mandated by the CAG, does not alter its nature and character as a provision for bad and doubtful debts under Section 36(1)(viia)(c). Therefore, the Tribunal allowed the deduction, reversing the AO's decision.3. Disallowance of Prior Period Expenses:The appellant claimed prior period expenses of Rs. 10,65,060/-, arguing that these expenses crystallized during the year. The AO disallowed the claim, stating that the expenses pertained to earlier years and were not allowable under the mercantile system of accounting. The CIT(A) concurred, noting the appellant failed to provide evidence that the expenses crystallized during the year.The Tribunal upheld the disallowance, agreeing with the CIT(A) that no evidence was presented to demonstrate that these expenses crystallized during the year under consideration.4. Levy of Interest under Section 234B:The appellant did not press this ground of appeal, and hence it was treated as withdrawn.5. Initiation of Penalty Proceedings under Section 271(1)(c):Similarly, the appellant did not press this ground of appeal, and it was treated as withdrawn.Conclusion:The appeal was partly allowed. The Tribunal allowed the deduction for swapping premium under Section 36(1)(viii) and the deduction under Section 36(1)(viia)(c) for bad and doubtful debts. However, it upheld the disallowance of prior period expenses and noted the withdrawal of grounds related to interest under Section 234B and penalty proceedings under Section 271(1)(c).