2016 (1) TMI 1023 - AT - Income Tax

Revision u/s 263 - CIT(A) directing AO to bring to tax a sum of under S.41(1) - interest payable to the institutions under S.43B - Held that - The assessee had taken loans from various banks, such as IDBI Bank, Bank of India, SBI etc. and has also issued debentures to RCTC. The interest on these term loans and debentures was payable by the assessee and it has accordingly debited the same to the Profit & Loss Account on accrual basis. While computing the taxable income of the assessee, the assessee had made disallowance of interest payable to these institutions under S.43B of the Act and thus offered it as income. The four amounts which have been brought to tax by the Commissioner under S.263 being remission of interest payable to IDBI in assessment year 2000-01 and assessment year 2004-05; remission of interest liability payable to Bank Of India during the assessment year 2000-01; and remission of interest payable to RCTC in assessment year 2000-01. The assessee has filed the returns of income and the computation of income for all the relevant years. From the statement showing the computation of income for the year ended 31st March, 1999, we find that the net loss for the year ended 31st March, 1999, as per the Profit & Loss Account was (Rs.1,27,03,833) from which the assessee has reduced the disallowance under S.43B of interest of ₹ 51,08,897 payable to IDBI on term loan, interest of ₹ 1,11,933 on term payable to Bank of India, ₹ 7,16,716 as interest payable on debentures to RCTC, thereby reducing the net loss. From the statement showing computation of income for the accounting year ended on 31st March, 2000, we find that while the assessee has made the disallowance under S.43B and has reduced the same from the net loss, claimed the amounts disallowed under S.43B in the earlier years as deduction on payment basis, which included interest on IDBI term loan of ₹ 51,08,897, interest on Bank of India term loan of Rs,1,11,933, interest payable to RCTC of ₹ 4,25,000. Similarly, statement showing computation of income for the year ended 31st March, 2003, we find that the loss for the year ended on 31.3.2003 as per Profit & Loss Account was (Rs.5,24,55,821), which has been reduced by the disallowances under S.43B, being interest on term loan payable to IDBI of ₹ 2,26,38,281. From page 35 of the paper-book, which is the statement showing computation of income for the subsequent assessment year, i.e. assessment year 2004-05, we find that the assessee has claimed the said amount of ₹ 5 lakhs as amount disallowed under S.43B in the earlier years and now claimed as deduction on payment basis. From these details, it is clear that the assessee has, though accounted for the interest payable during the relevant assessment years and has made the disallowance of the same under S.43B, and offered the income for taxation during the relevant assessment years. However, on making the payment of interest in the subsequent years, the assessee has claimed the same on payment basis. It is undisputed fact that the remission of liability would be only of the amount payable and not of the amounts paid by the assessee. These amounts cannot be brought to tax, as the remission of liability, as there is no remission of liability of the amount already paid by the assessee. Therefore, we do not find any factual mistake in the order of the Assessing Officer passed under S.143(3) read with S.147 of the Act. Further, the learned counsel for the assessee has also drawn our attention to the chart drawn up by the CIT(A) in his impugned order, wherein the liability for the assessment year 2004-05 has not been considered by the Commissioner. Further, he has also filed a statement showing the interest claimed in computation on payment basis to demonstrate his point. We find that the Commissioner has not taken into consideration the interest payable on term loan to IDBI, Bank of India land RCTC for the assessment year 2004-05. From these facts, it is clear that the assessment order is neither erroneous nor prejudicial to the interests of the Revenue. We, therefore, quash the revision order under S.263 passed by the Commissioner. - Decided in favour of assessee.

Summary

Issues:
Assessment under Section 263 of the Income Tax Act for the assessment year 2007-08.

Analysis:
1. The appellant, engaged in the manufacture and sale of specialty chemicals, filed its return of income for the assessment year 2007-08, declaring total income as NIL. The assessment was reopened under Section 147 of the Act due to the remission of loan liabilities. The Assessing Officer observed that the remission of loan liabilities should be brought to tax under Section 41(1) of the Income Tax Act. The appellant explained that the loans were for acquiring assets, and the remission should be treated as capital receipts, not taxable income. The Assessing Officer accepted the explanation and computed the tax accordingly.

2. Subsequently, the Commissioner of Income-tax invoked Section 263 of the Act, finding the assessment order prejudicial to the Revenue's interests. The Commissioner held that the Assessing Officer did not consider interest payments claimed in subsequent years, resulting in an erroneous order. The Commissioner directed the Assessing Officer to modify the assessment order by bringing a sum to tax under Section 41(1) of the Income-tax Act. The appellant appealed against this decision.

3. The appellant's counsel argued that the Assessing Officer had considered all details and applied his mind while accepting the return. The appellant had offered interest payable to financial institutions as income and claimed deductions on a payment basis in subsequent years. The appellant contended that no remission was granted for the interest paid, and therefore, it should not be taxed. The counsel cited a relevant judgment to support this argument.

4. The Departmental Representative supported the Commissioner's order, claiming the assessment order was erroneous and prejudicial to the Revenue's interests. However, upon review, it was found that the appellant had properly accounted for interest payable and had made disallowances under Section 43B, offering the income for taxation in relevant years. The remission of liability should only apply to amounts payable, not amounts already paid. The assessment order was deemed neither erroneous nor prejudicial to the Revenue's interests. The revision order under Section 263 was quashed, and the appeal of the assessee was allowed.

In conclusion, the judgment addressed the issue of reassessment under Section 263 of the Income Tax Act for the assessment year 2007-08. The court found that the appellant had correctly accounted for interest payable and had offered income for taxation in relevant years. The remission of liability should only apply to amounts payable, not amounts already paid, leading to the quashing of the revision order and allowing the appeal of the assessee.