2015 (2) TMI 55 - AT - Income Tax

Discount on assigned liabilities disallowed - Held that - The difference between amount received by the assessee and total amount payable at a future date represents the cost of borrowings which is deductible expenditure over a period for which the amount received initially has been used, thus we do not find any merit in the order of the lower authorities for disallowing discount on ascertained liability u/s.37(1) of the I.T. Act. - Decided in favour of assessee.

Summary

Issues:
Disallowance of discount on assigned liabilities claimed as deductible under Section 37(1) of the Income Tax Act.

Analysis:
The appeal was filed against the order of CIT(A) for the assessment year 2009-10 concerning the disallowance of discount on assigned liabilities claimed as deductible under Section 37(1) of the Income Tax Act. The assessee, a private Trust named M/s. Jamnagar Infrastructure Enterprises, formed by Reliance Capital Ltd., claimed discount on assigned liability of Rs. 4,07,80,324. The AO disallowed the claim, citing similar disallowances in previous years. The CIT(A) upheld the AO's decision, leading to the appeal before the ITAT Mumbai.

The assessee contended that the discount represented the finance cost of the liability taken over and relied on legal precedents to support their claim. The ITAT considered the nature of the transaction, where the liability was accepted at its present value and reflected in the balance sheet. The ITAT found the discount to be a proper charge on the business income of the Trust, as it was part of normal business transactions and a revenue deduction.

The ITAT noted that the discount claimed was an actual liability arising from the contract, not a contingent liability. The difference between the amount received and payable over time was considered a cost of borrowing, incurred for the purpose of business. Referring to the decision of the Hon'ble Supreme Court in a similar case, the ITAT emphasized that such liabilities, though payable in the future, were deductible expenditures over the period they were utilized for business purposes.

The ITAT highlighted the consistency in allowing similar claims in the assessee's previous assessments and the Supreme Court's view on liabilities incurred for business purposes. By applying these principles to the current case, the ITAT concluded that the discount on ascertained liability should be allowed as a deduction under Section 37(1) of the Income Tax Act. Therefore, the appeal filed by the assessee was allowed, overturning the decisions of the lower authorities.

In conclusion, the ITAT Mumbai ruled in favor of the assessee, allowing the deduction of discount on assigned liabilities under Section 37(1) of the Income Tax Act, based on the nature of the transaction, legal precedents, and the business purpose of the liabilities incurred.