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2013 (11) TMI 1328 - AT - Income TaxEligibility of interest expense u/s 36(1)(viii) of the Income Tax Act Held that - Unless and until all the ingredients specified in Explanation (e) to section 36(1)(viii) are satisfied, the transaction will not fall within the reach of long term finance. If the transactions are not considered as Longterm Finance , there is no question of any deduction being given under section 36(1)(viii) of the Act since the claim gets ousted at the threshold Relying upon the judgment in the case of CCE v. Harichand Shrigopal 2010 (11) TMI 13 - SUPREME COURT OF INDIA , wherein it has been held that a person who claimed exemption or concession, is required to establish clearly that he was covered by the provision concerned and in the case of doubt or ambiguity, benefit would go to the State - finding of the Assessing Officer that interest on short term deposits was not eligible for the deduction under section 36(1)(viii), which were confirmed by the CIT(A), is in accordance with law - Deposits can never be treated on par with loans or advances. Therefore, interest on deposits will never fall within the definition of long term finance given in Explanation (e) to section 36(1)(viii) of the Act Decided against the Assessee. Disallowance u/s 43D of the Income Tax Act - By virtue of Sec.43D, it was necessary to offer such interest income, only when interest was realized - Assessee had advanced a sum of Rs. 300 lakhs, as term loan to M/s. NEPC Micon Ltd., who had failed to repay the installments due from 01.04.1997. Assessee had classified the dues as Non-Performing Asset in its books based on Reserve Bank of India guidelines. Assessee had not shown any accrual of interest on such term loan in its accounts. Assessing Officer was of the opinion that since it was following mercantile system of accounting, it was mandatory to show the accrued interest. As per the Assessing Officer, RBI guidelines were only for the purpose of supervision, and management of non banking financial companies and was not relevant for ascertaining income under the Income Tax Act Held that - No doubt that assessee had not charged in its books of accounts any interest on the loans classified by it as non performing assets. It is not a case where assessee had credited such interest and then claimed write off. Assessee might have been following mercantile system of accounting. However, the prudential norms prescribed by RBI, for non banking financial Company under section 45 Q of the RBI Act, made it obligatory for the assessee to classify the loans on which interest was not received for a period exceeding six months, as non-performing assets. Once it was so classified, interest could not be charged in its accounts and taken as income Assessee s contention is also fortified by the decision in the case of CIT v. Elgi Finance Ltd 2007 2007 (6) TMI 180 - MADRAS High Court Decided in favor of Assessee.
Issues Involved:
1. Treatment of hire purchase income under Section 36(1)(viii). 2. Treatment of lease income under Section 36(1)(viii). 3. Eligibility of interest on deposits for deduction under Section 36(1)(viii). 4. Levy of interest under Section 234D. 5. Disallowance under Section 43D. Detailed Analysis: 1. Treatment of Hire Purchase Income under Section 36(1)(viii): The assessee, a Non-banking Financial Company, claimed deductions under Section 36(1)(viii) for hire purchase income. The Assessing Officer (AO) denied these claims, stating that the income did not derive from long-term finance as defined in Explanation (e) of the section. Upon appeal, the CIT(A) allowed the deduction, reasoning that the hire purchase agreements were essentially financing transactions for the Tamilnadu Electricity Board (TNEB). The Tribunal, however, found that the matter required a fresh look by the AO to determine if the transactions truly constituted long-term finance as per the statutory definition. 2. Treatment of Lease Income under Section 36(1)(viii): The assessee also claimed deductions for lease income under the same section. The AO denied this, and the CIT(A) upheld the denial, distinguishing lease rentals from hire purchase income and concluding that lease rentals did not involve an element of interest. The Tribunal directed the AO to re-examine the nature of the lease agreements to determine if they fell within the ambit of long-term finance. 3. Eligibility of Interest on Deposits for Deduction under Section 36(1)(viii): The AO and CIT(A) both denied the deduction for interest on deposits, classifying it as income from other sources rather than from long-term finance. The Tribunal agreed with this assessment, stating that deposits do not qualify as loans or advances under the definition of long-term finance in Explanation (e) of Section 36(1)(viii). 4. Levy of Interest under Section 234D: The CIT(A) ruled that the levy of interest under Section 234D applied only from Assessment Year 2004-05, based on a decision by the Delhi Special Bench of the Tribunal. However, the Tribunal noted that the jurisdictional High Court had ruled that interest under Section 234D applies if regular assessments were completed after the amended provision came into effect. The Tribunal remitted this issue back to the AO to verify the completion dates of regular assessments for the relevant years. 5. Disallowance under Section 43D: The AO added back interest on a loan classified as a Non-Performing Asset (NPA), arguing that the assessee, following the mercantile system, should have accrued the interest. The CIT(A) deleted this addition, accepting the assessee's argument that RBI guidelines mandated not recognizing interest on NPAs. The Tribunal upheld the CIT(A)'s decision, referencing a jurisdictional High Court ruling that supported non-recognition of income from NPAs in line with RBI guidelines. Conclusion: The Tribunal allowed the appeals of the assessee and the revenue for statistical purposes, remitting the issues regarding hire purchase and lease income back to the AO for fresh consideration. The denial of deduction for interest on deposits was upheld. The issue of interest under Section 234D was remitted back to the AO for verification, and the disallowance under Section 43D was deleted, supporting the CIT(A)'s decision.
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