2015 (11) TMI 1194 - AT - Income Tax

Disallowance of prior period expenses and prior period salary - Held that - The rate of tax applicable upon the assessee in this assessment year remains the same. It has been reporting loss in the earlier years and in subsequent years. As far as taxability part is concerned, there is no substantial effect upon the assessee in this year because it show losses. Only effect is that the assessee can be exposed to penalty on account of reduction of loss than the one returned in the income. The assessee could not demonstrate as to how loss has also been incurred in this year. The expenses do not pertain to this year, therefore, they are not allowable. We do not find any error in the findings of the Revenue authorities- - Decided in favour of revenue. Disallowance of payment as per section 43B - whether the issuance of equity shares of the assessee-company to the financial institutions amounts to actual payment of interest liability or not? - Held that - The conversion of interest into loan, and issuance of equity shares in lieu of interest payment being very basic similarity, therefore, does not amount to actual payment. in our opinion, Explanation 3C only prohibits an assessee for recognizing the actual payment of interest by converting its interest into loan or borrowings. In other words, if an assessee has interest liability, and he converts that interest liability in further loan, then that will not amount to payment of interest under section 43B as per Explanation-3C. If an assessee has issued equity shares, which anyone can acquire, and it has a trading value, it would not construe that the interest liability has been converted into loan. The financial institutions can independently trade those equity. Therefore, the assessee has made payment of interest liability in money s worth. It has not re-negotiated in such a way that its interest liability has been ceased. We allow this ground of appeal and delete the disallowance.- Decided in favour of assessee. Disallowance of expenses amortized under section 35D - Held that - When in the first year no disallowance was made, and thereafter, in subsequent two years this 1/5th has been allowed, the AO is not justified to ask the assessee to establish its genuineness. Therefore, taking into consideration past history, we delete the disallowance. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of prior period expenses claimed by the assessee.
2. Disallowance of interest payment claimed by the assessee through issuance of equity shares.
3. Disallowance of expenses claimed by the assessee under section 35D of the Act.
4. Charging of interest under sections 234A, 234B, and 234C of the Act.
5. Initiation of penalty under section 271(1)(c) of the Act.

Issue 1: Disallowance of Prior Period Expenses:
The assessee claimed prior period expenses totaling &8377; 4,62,427 under different heads in the Asstt.Year 2006-07. The AO disallowed the claim as the expenses were not demonstrated to have been incurred during the relevant accounting period. The CIT(A) upheld the disallowance. The assessee argued that the expenses were small and pertained to earlier years but were debited in the current year upon discovery. The tribunal held that since the expenses did not pertain to the current year, they were not allowable as deductions. The judgments cited by the assessee were not found applicable, and the disallowance was upheld.

Issue 2: Disallowance of Interest Payment through Equity Shares:
The assessee claimed to have paid interest liability of &8377; 60,79,265 to IDBI and LIC by issuing equity shares. The AO disallowed the claim citing Section 43B of the Act, stating that equity shares did not amount to actual payment. The tribunal disagreed, noting that the liability was shown as paid and not outstanding in the accounts. Relying on judicial precedents, the tribunal held that payment in money's worth constituted actual payment, allowing the appeal and deleting the disallowance.

Issue 3: Disallowance of Expenses under Section 35D of the Act:
The assessee had claimed expenses under section 35D, which were amortized over years. The revenue authorities disallowed a portion of the claimed expenses due to lack of proof of expenditure incurred before the relevant year. The tribunal found the disallowance unjustified as past allowances indicated genuineness. Therefore, the disallowance was deleted based on the past history of allowance.

Issue 4: Charging of Interest under Sections 234A, 234B, and 234C:
The tribunal noted that the charging of interest under these sections would be consequential and rejected the ground as it was of a consequential nature.

Issue 5: Initiation of Penalty under Section 271(1)(c) of the Act:
The assessee challenged the initiation of penalty under this section, which the tribunal deemed premature. The tribunal stated that the assessee could challenge the penalty upon receiving the notice and hence rejected the ground at the current stage.

In conclusion, the tribunal partly allowed the assessee's appeal, overturning the disallowance of interest payment through equity shares and expenses under section 35D while upholding the disallowance of prior period expenses. The tribunal rejected the grounds related to charging of interest and initiation of penalty at the current stage.