Tribunal dismisses revenue appeal, allows assessee's appeal on interest deduction

The Tribunal dismissed the revenue appeal (ITA NO.6228/Mum/2018) as not maintainable based on a CBDT Circular directing withdrawal of appeals for tax disputes below Rs. 50,00,000. The revenue may seek exceptions with evidence for a recall. In the assessee's appeal (ITA No.5839/Mum/2018), the Tribunal allowed the appeal, directing the Assessing Officer to delete the disallowed interest deduction of Rs. 2,19,69,050, as the borrowed funds were utilized as per court directions and for legitimate purposes, not warranting imposition of notional interest liability.

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Issues involved:
1. Maintainability of revenue appeal based on Circular by CBDT.
2. Disallowance of interest deduction by the Assessing Officer.

Issue 1: Maintainability of revenue appeal based on Circular by CBDT

The Tribunal considered the cross appeals in ITA Nos.6228/Mum/2018 & 5839/Mum/2016 for A.Yrs. 2014-15 arising from the order by the ld. Commissioner of Income Tax (Appeals)-52, Mumbai. The revenue appeal (ITA NO.6228/Mum/2018) for A.Y. 2004-05 was mutually agreed by both parties to be dismissed as not maintainable in light of a recent Circular issued by the CBDT. The Circular directed the withdrawal of appeals by the revenue if the tax effect on disputed issues is less than or equal to Rs. 50,00,000, which is binding on revenue authorities. The Tribunal dismissed the revenue appeal as not maintainable, providing an opportunity for the revenue to provide evidence for exceptions outlined in the Circular. If exceptions are established, the revenue may file a miscellaneous application for the order's recall. Thus, the appeal filed by the revenue was ultimately dismissed as not maintainable.

Issue 2: Disallowance of interest deduction by the Assessing Officer

In the assessee's appeal (ITA No.5839/Mum/2018) for A.Y. 2014-15, the main issue revolved around the disallowance of interest amounting to Rs. 2,19,69,050 by the ld. CIT(A). The ld. AO disallowed the interest deduction claimed by the assessee under section 57 of the Income Tax Act, 1961, citing that the liability was provisional and contingent. The ld. AR argued that the borrowings made by the assessee in 1990 were invested in shares, and the interest paid on these borrowings was previously allowed as a deduction. The shares were later sold at a higher price, and the proceeds were either kept in fixed deposits or used for payments to notified entities. The Tribunal analyzed the balance sheet provided by the ld. AR, highlighting the capital account balance and loans from various entities. The Tribunal considered the diversion of borrowed funds for non-business purposes and the disallowance of interest by the ld. AO. The ld. AR contended that the borrowings were utilized as per the directions of the Hon’ble Special Court and for payments to notified entities, hence no notional interest liability should be imposed. The Tribunal agreed with the ld. AR's arguments, emphasizing that the prepaid taxes and own funds of the assessee indicated no misuse of borrowed funds for tax payments. Relying on the case law of Reliance Utilities and Power Ltd., the Tribunal directed the ld. AO to delete the disallowance of interest amounting to Rs. 2,19,69,050. Consequently, the Tribunal allowed the assessee's appeal while dismissing the revenue's appeal.

In conclusion, the Tribunal addressed the issues of maintainability of the revenue appeal based on the CBDT Circular and the disallowance of interest deduction by the Assessing Officer in a detailed and comprehensive manner, resulting in the dismissal of the revenue appeal and the allowance of the assessee's appeal.

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