TaxTMI 
TaxTMI 
2013 (11) TMI 1593
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....dition of Rs. 1,72,78,000/- being interest paid to Nishkalp Energy Limited and Tata Motors Ltd. By ignoring the following facts: (i) The liability to pay interest was due on year to year basis as per agreement between assessee and Tata Motors Ltd. The accounting method was mercantile and the same has been maintained regularly on year to year basis. (ii) As per agreement the assessee was liable to pay interest on year to year basis. (iii) Assessee has never objected to pay interest and was doing business i.e. purchase and sale of Tata Vehicle. As such, there was no dispute. (iv) There was a clause for arbitration, in the case of any dispute arised. The parties had to approach to the arbitrator when there was a dispute. (v) Although it was contractual liability but it was due for payment on year to year basis as per agreement held in 2000 because there was no dispute between the parties and method of accounting was adopted mercantile. In fact assessee itself made default in making provision on payment of interest/installments. (vi) No suit has been lodged before the judicial authority for the settlement of dispute, if any arised. ....
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.... of the assessee has deleted the addition. 4. Aggrieved, the Revenue has preferred an appeal before the Tribunal with the submissions that after the assessment year 2008-2009 the disallowances u/s 14A are to be computed as per the provisions of Rule 8D of the I.T. Rules. The assessee has made the investment in shares and the dividend income is exempt from tax, therefore, the Assessing Officer has rightly made the corresponding disallowance of expenditure to be incurred in earning the interest free income. 5. The learned counsel for the assessee, besides placing reliance upon the order of CIT(A), has submitted that the provisions of section 14A can only be invoked when the interest free income is included in the total income of the assessee. In the impugned assessment year the assessee has not earned any tax free income, therefore, the corresponding disallowance of the expenditures incurred in earning the tax free income cannot be made. The learned counsel for the assessee further invited our attention to the financial position of the assessee company with the submission that he had sufficient funds to make the investment in shares, therefore, no borrowed funds were invested i....
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....re is no tax free income, no disallowance u/s 14A is possible. 6.2 The similar view was also expressed by the Tribunal in the case of Siva Industries & Holdings Ltd. (Formerly known as Sterling Infotech Ltd.) vs. ACIT, Company Circle-VI(9) (supra). Therefore, the CIT(A) has rightly held that in the absence of tax free income, no disallowance u/s 14A is permissible. Since we do not find any infirmity in the order of CIT(A), we confirm his order. 7. Apropos ground No. 2, the facts in brief, borne out from the record, are that the Assessing Officer has noticed during the course of assessment proceedings that the assessee has claimed interest of Rs. 1,72,78,000/- under the head 'interest' in Schedule-17 forming part of profit & loss account. It was also noticed that as per notes on accounts of the annual report, the assessee company has provided interest of Rs. 1,64,51,000/- towards interest on loan from M/s Niskalp Investment and Trading Company Limited, now known as M/s Niskalp Energy Limited (NEL). on the basis of the final settlement. The assessee was asked to explain the details of interest and also to justify its claim. In response thereto, the detailed reply was filed alon....
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....t for the period 30/03/2000 to 31/03/2007 was debited, TDS was deducted and payments were made. On the basis of this agreement, the assessee has debited the payment of interest to the profit & loss account. 7.2 The Assessing Officer was not convinced with the explanation of the assessee and made a disallowance of claim of interest of Rs. 1,72,78,000/- having observed that the assessee had followed mercantile system of accounting from year to year including previous year, therefore, the liability of payment of interest can be quantified and made in the corresponding assessment years. 8. The assessee preferred an appeal before the CIT(A) and reiterated its contentions. He has also placed heavy reliance upon the judgment in the case of CIT vs. Oriental Motor Car Co. Pvt. Ltd. 124 ITR 74 (All), CIT vs. Nathmal Tolaram [1973] 88 ITR 234 (Guj), Saurashtra Cement and Chemical Industries Ltd. Vs. CIT [1995] 213 ITR 523 and CIT vs. Nagri Mills Co. Ltd. [1958] 33 ITR 684 in support of its contention that where liability is contractual in nature, it would be allowed on its crystallization only and not in earlier years. The Learned counsel for the assessee further contended that undisput....
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....spute/concerns were not allayed even in this meeting/and thus, it had no intention to comply with the decision made in that meeting too, which is evident from the fact that no payments on account of interest were made by the appellant company even after that meeting. This impasse continued till 2007 when a fresh agreement, dated 12/04/2007 was signed (between the appellant company & the Tata group) wherein various concessions were allowed to the appellant company which included reduction of interest rate to 6% p.a. In accordance with this agreement, the appellant company made payment of interest of Rs. 1,64,51,896/- on and from April 2007 to July 2007 and claimed it as an expenditure during the F.Y. 2007- 08. 6.1.1 After going through the entire chronology of events, which I have tried to summarise as above, am of the considered view that the said interest liability (even though pertaining to earlier years) never crystallized in the hands of the appellant company since it had no intention to pay such interest as it had serious objections/dispute with the terms of the agreement. Such interest payment was not a statutory liability but only a contractual liability and if one ....
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....ty, which was finally settled, vide agreement/letter dated 20th September, 1981 and, therefore, the liability to payment accrued only when it has been finally settled on 20th September, 1981. The various decisions of Court referred hereinabove, clearly held that the liability of a contractual in nature accrues when it is finally settled. The facts of the present case is almost similar to the facts in the decision of this Court in the case of CIT v. Oriental Motors Car Co. (P) Ltd (supra), which has been referred hereinabove. In the said case, the decision of the Supreme Court in the case of Kedar Nath Jute Manufacturing Co. Ltd v. CIT reported in 82 ITR 363 has also been considered and distinguished on the ground that in the said case, liability of sales tax arose by virtue of the statute as soon as the sale was effected. The Division Bench of this Court clearly held that the contractual liability accrues when it is finally settled. From the fact stated hereinabove, it is clear that in the present case the liability was not in the nature of statutory liability. The demand raised by Automobiles Ltd was disputed, by the assessee which was in the nature of contractual liability which ....
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....sputedly the assessee was a dealer of TML for sale of its commercial vehicles and at the relevant point of time there was substantial outstanding credit balance due to TML without any liability of interest. At the behest of TML, financial arrangements were made between the assessee and NEL, a subsidiary of Tata Group, and a loan of Rs. 4,80,76,000/- was provided to the assessee company @12% per annum. It is also undisputed fact that the entire loan was immediately utilized by TML for squaring up its outstanding dues recoverable from the assessee company. Though the financial arrangement was made @12% per annum but the assessee has never paid or provided any interest on loan provided by NEL and since beginning the assessee has been disputing the rate of interest with the lender i.e. NEL. A note to this effect was also made by the auditors in the notes to the accounts attached with the balance sheet each year. 11.1 We have also carefully examined the notes of auditors attached to the balance sheet since beginning. From the notes attached to the balance sheet as on 31/03/2011, in the first balance sheet the auditor has given a note at Item No. 10 that no provision has been made in ....
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.... revised principal amount of Rs. 229.32 lacs for the period starting from 1st April, 2007 till repayment of the principal amount will be paid by the Borrower in three equal installments commencing from April 2010 to June 2010. The Revised Monthly Installment (RMI) include the part of amount to be adjusted against interest payment. Accordingly, the differential amount of interest liability arising out of computation of recovery of principal amount first against RMI determined on the basis of part payment of principal amount and interest will be computed at the end of tenure or in or about April 2010 when the appropriate amount of rebate may be considered on the basis of tract record of payment of RMI on stipulated dates till March 2010." 11.3 On the basis of this agreement through which the liability has been crystallized, the assessee has debited the interest of Rs. 1,72,80,000/- under the head interest in Schedule-17 forming part of profit & loss account and corresponding entries were passed in the books of account of the assessee. We have also carefully examined various judgments referred to by the parties. In the case of CIT vs. Raj Motors [2006] 284 ITR 489 (All), their Lord....