2026 (3) TMI 876 - AT - Income Tax

Actual-Payment Requirement under Section 43B: capitalization to WIP does not satisfy payment; scheduled bank interest requires actual payment.

The note addresses two tax issues: (i) the correctness of deleting a disallowance for expenditure relating to exempt income where dividend was treated as ... Disallowance u/s 14A - Applicability of section 43B to interest payable to scheduled co-operative banks Disallowance u/s 14A - dividend income receipt - assessee claimed that assessee had no exempted income the said dividend was received is a taxable income - HELD THAT: - Tribunal upheld the CIT(A)'s reliance on the Coordinate Bench decision in the assessee's own case and found no infirmity in deleting the disallowance u/s 14A; the Revenue's challenge was dismissed as the DR did not controvert the CIT(A)'s conclusion. [Paras 6] Ground No.1 of the Revenue's appeal is dismissed and the deletion of the section 14A disallowance is sustained. Applicability of section 43B to interest payable to scheduled co-operative banks - Whether interest payable to Punjab & Maharashtra Co-operative Bank is exigible to disallowance u/s 43B for A.Y. 2017-18? - CIT(A) deleted addition - HELD THAT: - The Tribunal held that the Punjab & Maharashtra Co-operative Bank was a scheduled co-operative bank as per the RBI list and therefore interest payable to it falls within the ambit of provisions governing interest payable to a bank for purposes of section 43B. The Tribunal further found that capitalization of interest to Work-in-Progress does not take the expenditure outside the scope of section 43B's requirement of actual payment. The CIT(A)'s reliance on a Coordinate Bench decision was held distinguishable on facts, and the deletion was therefore erroneous. [Paras 9] Grounds No.2 and No.3 are allowed; the CIT(A)'s deletion of the section 43B disallowance is set aside and the Assessing Officer's order is restored. Final Conclusion: The appeal is partly allowed: the Tribunal sustained the deletion of the section 14A disallowance but set aside the CIT(A)'s deletion of the section 43B disallowance in respect of interest payable to the Punjab & Maharashtra Co operative Bank and restored the Assessing Officer's order for A.Y. 2017-18. Issues: (i) Whether deletion of disallowance under section 14A r.w.r.8D(2) (relating to expenses in relation to exempt income) by the Commissioner of Income Tax (Appeals) was correct; (ii) Whether deletion of disallowance under section 43B of the Income-tax Act, 1961 (interest on overdraft from Punjab & Maharashtra Co-operative Bank) by the Commissioner of Income Tax (Appeals) was correct, having regard to (a) the status of the bank as a scheduled bank and (b) capitalization of interest to work-in-progress.Issue (i): Deletion of disallowance under section 14A r.w.r.8D(2) where dividend/exempt income treatment was in dispute.Analysis: The Tribunal examined the facts and the coordinate-bench decision relied upon by the Commissioner of Income Tax (Appeals) in the assessee's own case. The order noted that the dividend in question was treated as taxable in the assessment year under consideration and that the appellate authority correctly applied the earlier coordinate-bench precedent to the facts, addressing the applicability of the rule for computing disallowance where exempt income was not in substance earned in the year.Conclusion: The deletion of the section 14A disallowance by the Commissioner of Income Tax (Appeals) is upheld and the revenue's ground in this respect is dismissed (in favour of the assessee).Issue (ii): Deletion of disallowance under section 43B in respect of interest on overdraft from Punjab & Maharashtra Co-operative Bank, including (a) whether PMC Bank is a scheduled bank within the scope of section 43B and (b) whether capitalization of interest to WIP removes the requirement of actual payment for claiming deduction.Analysis: The Tribunal reviewed the material demonstrating that Punjab & Maharashtra Co-operative Bank was listed in the Reserve Bank of India's list of scheduled banks (Second Schedule to the Reserve Bank of India Act, 1934). The Tribunal further examined the legal effect of the amendment bringing cooperative banks within section 43B with effect from A.Y. 2018-19 and found that where the bank qualifies as a scheduled bank the interest payable falls within the ambit of the statutory requirement for actual payment. The Tribunal also analysed the accounting treatment and concluded that capitalization of interest to work-in-progress only defers the deduction and does not take the expenditure outside the statutory command of actual payment for claiming the deduction under section 43B.Conclusion: The deletion of the section 43B disallowance by the Commissioner of Income Tax (Appeals) is set aside; the Assessing Officer's disallowance under section 43B is restored (in favour of the revenue) and grounds 2 and 3 of the revenue's appeal are allowed.Final Conclusion: The appeal is partly allowed - the Tribunal upholds the appellate deletion relating to section 14A but restores the assessing officer's disallowance under section 43B in respect of interest payable to the bank; overall legal effect is a mixed result with relief to the assessee on the 14A issue and to the revenue on the 43B issue.Ratio Decidendi: Interest payable to a bank that qualifies as a scheduled bank under the Second Schedule to the Reserve Bank of India Act, 1934 falls within the scope of the actual-payment requirement of section 43B of the Income-tax Act, 1961, and capitalization of interest into work-in-progress does not remove the statutory requirement of actual payment for claiming the deduction under section 43B.