2016 (2) TMI 1394 - AT - Income Tax

Tribunal supports assessee's Rs. 99,12,892/- interest waiver; dismisses unpressed forex and Section 14A disallowance issues.

Madhu Sudan Dalmia Versus Assistant Commissioner of Income-tax, circle-31, Kolkata.

The Tribunal deleted the addition of Rs. 99,12,892/- as interest waived before accrual, siding with the assessee's argument that the waiver was a ... Addition of interest waived before accrual - According to AO, the assessee avoided crediting this interest to itself from a company which he had controlling stake as shareholder and director, hence added back this interest to the returned income of the assessee - assessee pleaded for commercial expediency HELD THAT:- As relying on M/S. BAGORIA UDYOG [2011 (3) TMI 25 - CALCUTTA HIGH COURT] the waiver of interest before the year end cannot be treated as income in the given facts and circumstances of the case. Accordingly, we delete the addition and allow this issue of assessee’s appeal. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:1. Whether the addition of interest amounting to Rs. 99,12,892/- by the Assessing Officer (AO), which was allegedly waived before accrual, was justified.2. Whether the additions confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the notional foreign currency exchange difference of Rs. 2,80,248 and the disallowance of Rs. 1,29,898/- under Section 14A of the Income Tax Act were justified.ISSUE-WISE DETAILED ANALYSIS1. Addition of Interest Waived Before AccrualRelevant Legal Framework and PrecedentsThe legal framework revolves around the accrual of income under the Income Tax Act, 1961. The relevant precedent cited was the decision of the Hon'ble Calcutta High Court in Bagoria Udyog Vs. CIT, which discussed the permissibility of waiving interest before it becomes due based on commercial expediency.Court's Interpretation and ReasoningThe Tribunal examined the circumstances under which the interest was waived. It considered the financial position of SSD Securities Pvt. Ltd., which had requested the waiver due to financial difficulties and a downturn in business profitability. The Tribunal noted that the waiver was claimed due to the global financial crisis impacting the capital market.Key Evidence and FindingsThe Tribunal reviewed the financial statements of SSD Securities Pvt. Ltd. for the relevant financial years, which showed a significant decline in profitability. The profit of Rs. 23.76 crores in FY 2007-08 turned into a loss of Rs. 1.24 crores in FY 2008-09, indicating financial distress.Application of Law to FactsThe Tribunal applied the principles laid down by the Hon'ble Calcutta High Court in Bagoria Udyog, which allowed for the waiver of interest on grounds of commercial expediency before it became due. It found that the waiver was a legitimate business decision given the financial situation of SSD Securities Pvt. Ltd.Treatment of Competing ArgumentsThe Tribunal considered the AO's argument that the interest waiver was a device to reduce taxable income. However, it was persuaded by the assessee's argument that the waiver was a commercially expedient decision, supported by financial evidence and legal precedent.ConclusionsThe Tribunal concluded that the waiver of interest before the year-end could not be treated as income. Therefore, the addition of Rs. 99,12,892/- was deleted, and this issue of the assessee's appeal was allowed.2. Notional Foreign Currency Exchange Difference and Disallowance under Section 14AThese issues were not pressed by the assessee's counsel during the hearing, and as such, they were dismissed.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal referenced the Hon'ble Calcutta High Court's decision in Bagoria Udyog, emphasizing that 'the interest having been waived before it became due, the assessee was entitled to rely upon such waiver and there was no justification of adding the amount as deemed interest accrued in favour of the assessee.'Core Principles EstablishedThe judgment reinforced the principle that interest waived on grounds of commercial expediency before it becomes due should not be treated as accrued income for tax purposes.Final Determinations on Each Issue1. The addition of Rs. 99,12,892/- as interest waived before accrual was deleted, allowing this part of the assessee's appeal.2. The issues concerning the notional foreign currency exchange difference and the disallowance under Section 14A were dismissed as they were not pressed during the hearing.In conclusion, the appeal was partly allowed, with the primary issue concerning the interest waiver being resolved in favor of the assessee.