2015 (4) TMI 943 - HC - Income Tax

Deduction under Section 43B - Tribunal held that principal sum waived, is offered to tax, and as such, the disallowance is to be subsumed into offer on waiver of Principal, which is against the sum and substance of the scheme of allowing deduction under Section 43B which is based on actual payment of interest and recorded perverse finding - Held that - If out of the total sum of ₹ 257.08 Lakhs which has been offered and subjected to tax by the assessee in its return, the amount of unpaid interest of ₹ 193.96 Lakhs is deducted then the waived principal sum would come to ₹ 62.58 Lakhs (i.e., 441.30 minus 378.72). Either it is the interest which is to be waived, and if the same is not to be waived, then the waived principal amount of ₹ 257.08 Lakhs has to be reduced by the amount of interest of ₹ 193.96 Lakhs which is not permitted for deduction under Section 43B of the Act. In either case, the amount of deduction, as well as the amount which is subjected to tax, would come to the same. If we accept the argument of learned counsel for the appellant - revenue, then it would amount to the department having the cake as well as eating it, which would mean subjecting the assessee to double jeopardy. This cannot be permitted. Either the interest amount has to be allowed for deduction under Section 43B or the sum offered for tax (as waived by the Bank) has to be reduced by the amount of interest paid. Thus we do not find that any infirmity with the order of the Tribunal of allowing the disallowance of interest under Section 43B of the Act to be subsumed into the offer of waiver of principal amount.

Summary

Issues:
Assessment of one-time settlement amount for loan repayment and interest deduction under Section 43B of the Income Tax Act, 1961.

Analysis:
The case involved a Private Limited Company engaged in manufacturing and trading of edible oil, which defaulted on loans from Canara Bank, leading to the account being declared a non-performing asset (NPA). The total outstanding amount payable to the Bank, including principal and interest, was &8377; 635.26 Lakhs. The assessee reached a one-time settlement with the Bank, paying &8377; 378.72 Lakhs, with &8377; 193.96 Lakhs designated as interest. The dispute arose over the treatment of this interest amount and the principal sum in the company's tax returns. The department contended that the entire &8377; 378.72 Lakhs should be adjusted towards the principal amount, while the assessee claimed deduction under Section 43B for the interest paid. The Tribunal disallowed the interest adjustment but directed that the disallowance be subsumed into the offer of &8377; 257.08 Lakhs on waiver of principal.

The substantial question of law raised was whether the Tribunal's decision to allow the disallowance of interest under Section 43B to be subsumed into the offer of waived principal amount was correct. The appellant argued that the interest amount should be separately taxed, even though the principal sum had been subjected to tax. However, the Tribunal held that subjecting both the waived principal and disallowance of interest to tax would amount to double jeopardy for the assessee. The Tribunal reasoned that the two effects were exclusive and could not coexist, emanating from a single transaction/event. It concluded that the interest disallowance should be subsumed into the offer of waived principal.

The High Court agreed with the Tribunal's finding, emphasizing that the assessee should not be subjected to double jeopardy. It noted that the amount subjected to tax and the disallowed interest would cancel each other out, leading to the same tax liability. The Court rejected the appellant's argument, stating that either the interest should be allowed for deduction under Section 43B or the sum offered for tax as waived principal should be reduced by the interest paid. Consequently, the Court found no infirmity in the Tribunal's decision and dismissed the appeal, stating that no substantial question of law arose for consideration.