2019 (11) TMI 1450 - AT - Income Tax

Disallowance of interest u/s 57 - AO disallowed the claim of deduction of interest on the ground that the said liability is provisional as well as contingent in nature - AO observed that the assessee was claiming interest expenditure on the amount outstanding to the said related notified broker entities, however, these broker entities were not charging on the other clients - HELD THAT - When the amounts were advanced to certain notified persons in order to comply with the directions of the Hon ble Special Court with specific directions for utilisation of those funds subsequently also, the assessee cannot be fastened with a notional interest liability while complying with the said directions of the Hon ble Special Court. Prepaid taxes paid by the assessee in the form of TDS, wealth tax, income tax and advance tax has got no relevance with the borrowings of the assessee as admittedly those were paid by the assessee over the years out of the income earned by the assessee in several years and out of maturity proceeds of fixed deposits / sale proceeds of shares. Hence, there cannot be any assumption that the borrowed funds were used by the assessee for making payments towards the aforesaid taxes. We find that in any case, assessee is having sufficient own funds in its kitty as is prevalent in the balance sheet and hence, there cannot be any disallowance of interest on that count itself. Reliance in this regard is placed in case of Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . Hence, we direct the ld. AO to delete the disallowance of interest - Decided in favour of assessee.

Summary

Issues involved:
1. Maintainability of revenue appeal based on Circular by CBDT.
2. Disallowance of interest deduction by the Assessing Officer.

Issue 1: Maintainability of revenue appeal based on Circular by CBDT

The Tribunal considered the cross appeals in ITA Nos.6228/Mum/2018 & 5839/Mum/2016 for A.Yrs. 2014-15 arising from the order by the ld. Commissioner of Income Tax (Appeals)-52, Mumbai. The revenue appeal (ITA NO.6228/Mum/2018) for A.Y. 2004-05 was mutually agreed by both parties to be dismissed as not maintainable in light of a recent Circular issued by the CBDT. The Circular directed the withdrawal of appeals by the revenue if the tax effect on disputed issues is less than or equal to ?50,00,000, which is binding on revenue authorities. The Tribunal dismissed the revenue appeal as not maintainable, providing an opportunity for the revenue to provide evidence for exceptions outlined in the Circular. If exceptions are established, the revenue may file a miscellaneous application for the order's recall. Thus, the appeal filed by the revenue was ultimately dismissed as not maintainable.

Issue 2: Disallowance of interest deduction by the Assessing Officer

In the assessee's appeal (ITA No.5839/Mum/2018) for A.Y. 2014-15, the main issue revolved around the disallowance of interest amounting to ?2,19,69,050 by the ld. CIT(A). The ld. AO disallowed the interest deduction claimed by the assessee under section 57 of the Income Tax Act, 1961, citing that the liability was provisional and contingent. The ld. AR argued that the borrowings made by the assessee in 1990 were invested in shares, and the interest paid on these borrowings was previously allowed as a deduction. The shares were later sold at a higher price, and the proceeds were either kept in fixed deposits or used for payments to notified entities. The Tribunal analyzed the balance sheet provided by the ld. AR, highlighting the capital account balance and loans from various entities. The Tribunal considered the diversion of borrowed funds for non-business purposes and the disallowance of interest by the ld. AO. The ld. AR contended that the borrowings were utilized as per the directions of the Hon’ble Special Court and for payments to notified entities, hence no notional interest liability should be imposed. The Tribunal agreed with the ld. AR's arguments, emphasizing that the prepaid taxes and own funds of the assessee indicated no misuse of borrowed funds for tax payments. Relying on the case law of Reliance Utilities and Power Ltd., the Tribunal directed the ld. AO to delete the disallowance of interest amounting to ?2,19,69,050. Consequently, the Tribunal allowed the assessee's appeal while dismissing the revenue's appeal.

In conclusion, the Tribunal addressed the issues of maintainability of the revenue appeal based on the CBDT Circular and the disallowance of interest deduction by the Assessing Officer in a detailed and comprehensive manner, resulting in the dismissal of the revenue appeal and the allowance of the assessee's appeal.