2008 (5) TMI 662 - AT - Income Tax

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Disallowance of expenditure of Rs. 6,71,60,000.
3. Nature of liability incurred by the assessee.
4. Applicability of Section 43B.

Summary:

1. Delay in Filing the Appeal:
The appeal was delayed by 15 days. The assessee explained that the delay was due to the appeal papers getting mixed up with other documents and being found only on 19-10-2005. The Tribunal found the explanation bona fide and condoned the delay, admitting the appeal.

2. Disallowance of Expenditure of Rs. 6,71,60,000:
The assessee claimed a deduction of Rs. 6,71,60,000 as expenditure incurred on the issue of cumulative redeemable preference shares (CRPS) to IDBI and IFCI. The Assessing Officer disallowed this expenditure, citing that different accounting systems for shareholders and income tax purposes are not permissible.

3. Nature of Liability Incurred by the Assessee:
The CIT (A) held that the liability was in the nature of interest within the meaning of sec. 2(28A) and not accrued in the year of issue of CRPS but over the period of the loan. The Tribunal examined the facts and concluded that the liability was indeed interest liability and on revenue account. The Tribunal noted that the institutions calculated the present value of future liability, and the assessee compensated this by issuing CRPS, leading to an accelerated accrual of liability.

4. Applicability of Section 43B:
The CIT (A) applied sec. 43B (d), stating that since no amount was paid during the year, the amount was not allowable. The Tribunal, however, held that the assessee made a constructive payment by issuing CRPS, which is a common way of discharging liability. The Tribunal clarified that Explanation 3C to sec. 43B does not apply to the conversion of interest payable into share capital, as the institutions become contributors to the capital and not creditors. The Tribunal concluded that the liability to compensate crystallized in the year under consideration, allowing the deduction of Rs. 6,71,60,000.

Conclusion:
The appeal of the assessee was allowed, and the order was pronounced in the court on 9-5-2008.