2019 (2) TMI 369 - AT - Income Tax

Interest expense disallowed under Income Tax Act upheld by ITAT; Revenue's appeal dismissed.

The Assessing Officer disallowed an interest expense of Rs. 1,79,92,000/- as not actually paid, invoking section 43B of the Income Tax Act, 1961. The ... Disallowance of Interest Expenses - Interest accrued but not due - Held that:- Contention of the Assessee that the aforesaid amount of interest was not claimed as expenditure, or deduction is borne out from records, which could not be contradicted by the Ld. DR. After perusal of the submissions made from the Assessee’s side during assessment proceedings and after perusal of the reconciliation of Interest Expenses and also reconciliation of disallowance made by AO we are of the view that the addition made by the AO on account of disallowance of Interest Expenses was unjustified, unwarranted and illegal. AO has failed to establish a legal basis, in the facts and circumstances of the case, for the addition on account of disallowance of Interest Expenses, when the Assessee has not even claimed this amount as expenditure or deduction. - Decided in favour of assessee Issues Involved:1. Addition of Rs. 1,79,92,000/- on account of 'disallowance of Interest Expenses not actually paid.'2. Whether the liability shown by the Assessee was due and paid during the year.3. Whether the addition was made by invoking the provisions of section 43B of the Income Tax Act, 1961.Detailed Analysis:1. Addition of Rs. 1,79,92,000/- on account of 'disallowance of Interest Expenses not actually paid':The Assessing Officer (AO) made an addition of Rs. 1,79,92,000/- in the Assessment Order dated 30.03.2013, on the grounds that the interest accrued but not due was shown under the head 'Current Liabilities' and had not been paid during the year. The AO observed that the interest liability had accrued on security deposits received from customers by Mother Dairy Foods Processing Limited (MDFPL) on behalf of the Assessee Company and was transferred to the Assessee during the year. The AO contended that the interest expenses of Rs. 1,79,92,000/- had not been actually paid and thus disallowed the same as it was not an allowable deduction under the Income Tax Act, 1961.2. Whether the liability shown by the Assessee was due and paid during the year:The Assessee argued that the interest of Rs. 1,79,92,000/- was neither debited in the profit and loss account nor claimed as expenditure for the year. The interest liability had accrued on security deposits received by MDFPL and was transferred to the Assessee Company. The Assessee maintained that the question of disallowing an interest liability not claimed as expenditure does not arise. The CIT(A) agreed with the Assessee, stating that the AO had not understood the proper accounting principles of this transaction and had unjustifiably disallowed the interest liability.3. Whether the addition was made by invoking the provisions of section 43B of the Income Tax Act, 1961:The AO's disallowance was based on the assumption that the interest liability fell under the purview of section 43B, which provides for disallowance of unpaid interest only in the case of loans/borrowings from public financial institutions, state financial corporations, state industrial investment corporations, or scheduled banks. The Assessee clarified that the interest was payable to customers on security deposits and did not fall under the purview of section 43B. The CIT(A) concurred, noting that the AO's disallowance was unjustified as it did not align with the provisions of section 43B.Appellate Tribunal ITAT Decision:The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal. The ITAT found that the Assessee had not claimed the amount of Rs. 1,79,92,000/- as expenditure or deduction, and the AO had failed to establish a legal basis for the addition. Consequently, the addition made by the AO was deemed unjustified, unwarranted, and illegal.Cross Objection by Assessee:The Assessee's Cross Objection became purely academic as the ITAT had already decided the issue in favor of the Assessee on merits. The ITAT declined to express any opinion on the grounds raised in the Cross Objection, leaving it open for the Assessee to take it up in the future if deemed fit.Conclusion:In the result, the Revenue's appeal was dismissed, and the Cross Objection of the Assessee was partly allowed for statistical purposes. The order was pronounced in the open court on 05th February 2019.