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2009 (5) TMI 582 - AT - Income TaxDisallowance - assessee had claimed a sum of Rs. 6,08,03,230 as interest liability in respect of Deep Discount Bonds issued to banks and financial institutions - section 36(1)(iiia) provides that the pro rata amount of discount on zero coupon bonds having regard to the life of such bonds calculated in the manner as may be prescribed is to be allowed as deduction - Deduction is allowed Regarding applicability of s. 43B - the interest is payable in respect of amounts deposited by financial institutions with the assessee by subscribing to the bonds issued by the assessee - For the same reason, cl. (e) of s. 43B relating to loans and advances from a scheduled bank is also not applicable in the instant case - It is observed that the amount of provision made by the assessee in respect of interest accrued on bonds is not in dispute as excessive or not relating to the year under consideration - Appeal is allowed
Issues Involved:
1. Legality of the assessment order passed against a non-existent entity. 2. Disallowance of interest on Deep Discount Bonds under Section 43B of the Income Tax Act. 3. Accrual of interest liability on Deep Discount Bonds. 4. Entitlement to deduction of interest on Deep Discount Bonds. Issue-wise Detailed Analysis: 1. Legality of the Assessment Order Passed Against a Non-existent Entity: The first ground of appeal raised by the assessee was that the assessment order passed against Vadodara Halol Toll Road Co. Ltd. was invalid as the company was not in existence on the date of passing the order (23rd March 2006). However, during the hearing, the assessee's Authorized Representative did not press this ground of appeal, and hence, it was dismissed as not pressed. 2. Disallowance of Interest on Deep Discount Bonds Under Section 43B of the Income Tax Act: The assessee contested the disallowance of Rs. 6,08,03,230 as interest liability on Deep Discount Bonds, arguing that Section 43B was not applicable. The AO had disallowed the interest claim under Section 43B, noting that the liability was not paid during the year or before the due date for filing the return. The assessee argued that the interest accrued on Deep Discount Bonds was deductible based on CBDT Circulars No. 2 of 2002 and No. 4 of 2002, which clarified that tax was deductible only on payment of interest and not on accrual. The CIT(A) upheld the disallowance, stating that the circulars pertained to the incidence of tax on recipients and did not support the deductibility of expenses by the payer. 3. Accrual of Interest Liability on Deep Discount Bonds: The assessee argued that the interest liability on Deep Discount Bonds accrued annually and should be deductible on a pro-rata basis. The CIT(A) disagreed, stating that the interest was payable only on maturity, and hence, no liability had accrued. The assessee cited several judicial precedents, including the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs. CIT, which supported the pro-rata deduction of discount on bonds over their tenure. The Tribunal found that, under the mercantile system of accounting followed by the assessee, the interest accrued annually even if payable on maturity. Therefore, the interest accrued during the year was allowable as a deduction. 4. Entitlement to Deduction of Interest on Deep Discount Bonds: The assessee argued that the interest on Deep Discount Bonds was not covered under Section 43B, as it was not an interest on loans or borrowings but on securities. The Tribunal agreed, stating that Section 43B(d) and (e) applied to interest on loans or borrowings from financial institutions or scheduled banks, not to interest on bonds. The Tribunal also noted that the amount of provision made by the assessee for interest accrued on bonds was not disputed as excessive or unrelated to the year under consideration. Consequently, the Tribunal deleted the disallowance of Rs. 6,08,03,230 and allowed the assessee's appeal on this ground. Conclusion: The Tribunal concluded that the disallowance of interest on Deep Discount Bonds under Section 43B was not justified, as the interest liability had accrued annually under the mercantile system of accounting and was not covered by Section 43B. The appeal of the assessee was partly allowed, with the disallowance of Rs. 6,08,03,230 being deleted.
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