2016 (9) TMI 157 - AT - Income Tax

Investment company wins appeal, finance charges deemed deductible. Disagreement over liability nature under Income-tax Act.

The Tribunal allowed the appeal of the investment company, ruling that the finance charges were an accrued liability and should be deductible. The ... Disallowance of whole of finance charges - accrual of incremental liability - assessee is stated to be an Investment Company investing in shares and securities - Held that:- In the present case, the assessee by virtue of assignment agreement has received certain amount which is to be replenished and repaid by higher sum computed by applying Net Present Value method at a discounting factor of 10%. The corresponding finance costs debited to Profit & Loss Account during the year represents incremental increase in the liability with the efflux of time where the liability gets accrued as it inches towards maturity. Thus, it is manifest that the incremental liability has accrued to the assessee in presenti with the efflux of time notwithstanding the fact that increase in the liability is required to be actually discharged on a future date. The gradual increase liability is dependent on the time horizon that has elapsed and therefore not an uncertain event by any stretch of imagination. The Assessing Officer has disallowed the deduction for the liability on the ground that sum will have to be incurred and accordingly in his view the liability has not accrued. We do not find any rationale for holding such view. As noted, the obligation for repayment of enhanced liability corresponding to the financial charges has crystallized with the efflux of time. Thus, the facts of the case clearly indicates that enhanced liability and consequential differential costs i.e. finance charges is accrued indeed. In our considered view, the liability has definitely accrued in presenti against future outflow of resources which obligation in the present case can be determined with great reliability. Therefore, we find considerable merit in the arguments propounded on behalf of the assessee. - Decided in favour of assessee Issues Involved:1. Disallowance of finance charges as income for the assessment year 2007-08.2. Determination of whether the liability is contingent or accrued.3. Applicability of Section 37 and Section 43B of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of Finance Charges as Income:The assessee, an investment company engaged in financial intermediary activities, filed a return declaring Nil income. During assessment, the Assessing Officer observed that the assessee had debited Rs. 44,71,126 as finance charges. The assessee explained that this amount represented the difference in Net Present Value (NPV) of a sales tax deferral loan taken over from Indian Seamless Steels and Alloys Ltd. (ISSAL). The Assessing Officer disallowed this claim, considering it a contingent liability, not a revenue expenditure, and added it to the total income of the assessee.2. Determination of Whether the Liability is Contingent or Accrued:The CIT(A) upheld the Assessing Officer's decision, stating that the liability was contingent and not present. The CIT(A) noted that the liability was to be paid in future installments starting from FY 2011-12, and no actual payment was due as of 31.03.2007. The CIT(A) emphasized that the difference in NPV was not a liability in praesenti but a liability de futuro, thus not allowable as a deduction under Section 37 of the Act. The CIT(A) also noted that the sales tax department had not acknowledged the transfer of liability to the assessee.3. Applicability of Section 37 and Section 43B of the Income-tax Act, 1961:The CIT(A) further argued that even if the liability had accrued, it would still not be deductible under Section 43B, which allows deductions for certain liabilities only when actually paid. The CIT(A) concluded that the provision for the liability was not allowable as it was not actually paid during the year.Tribunal's Analysis:The Tribunal considered the arguments from both sides. The assessee argued that the liability was an integral part of its financing business and should be allowed as an expenditure on an accrual basis as per Accounting Standards. The assessee contended that the liability was not contingent but accrued with the efflux of time and should be allowed as a deduction.The Tribunal noted that under the Mercantile System of Accounting, a liability that has accrued during the year must be accounted for, even if it will be discharged in the future. The Tribunal emphasized that the incremental liability had accrued with the passage of time and was not contingent. The Tribunal found merit in the assessee's arguments and concluded that the finance charges represented an accrued liability.Conclusion:The Tribunal allowed the appeal of the assessee, ruling that the finance charges were an accrued liability and should be allowed as a deduction. The Tribunal disagreed with the Assessing Officer and CIT(A)'s view that the liability was contingent and not allowable under Section 37 or Section 43B.Order Pronounced:The appeal of the assessee was allowed, and the order was pronounced on 26th August 2016.