2018 (9) TMI 2016 - AT - Income Tax

Disallowance u/s 43B(e) read with explanation 3D - AO made disallowance of interest on OD account maintained by the assessee on the ground that every month, the interest amount was debited to the OD account which only resulted in increasing the amount of loan/advance due to the bank from the assessee - CIT(A) deleted the disallowance while relying on various judicial decisions and relying on the order of his predecessors in assessee s own case for AY 2011-11 by holding that the assessee had made payment of interest with respect to the OD /CC account and therefore was not covered by the provision of section 43B(e) r.w explantation 3D - HELD THAT - We find that the identical ground has already been decided for AY 2011-12in assessee s own case 2016 (12) TMI 1839 - ITAT MUMBAI department declined to grant the benefit of deduction on interest paid primarily on the plea that the amount has not been actually paid and transfer of amount from one account to another account cannot be treated as paid. However, the Tribunal repelled the said plea by interpreting Section 43B of the Act and held that overdraft/cash credit accounts are not similar to loan accounts. The Tribunal further observed that the interest amount has been actually paid by the assessee through Overdraft/Cash Credit account and, therefore, set aside the disallowance made under Section 43B of the Act. A bare reading of Explanations 3C and 3D to Section 43B of the Act provides an answer to the problem by making it clear that where interest amount has not been converted into loan or borrowing (or) loan or advance, as the case may be, there is no question of denying the benefit of deduction. In the case on hand, the interest amount has been actually paid by the assessee through Overdraft/Cash Credit account and the same has not been converted into loan or borrowing (or) loan or advance, as the case may be. These appeals are dismissed by answering the question of law against the Revenue and in favour of the assessee

Summary

Issues:
1) Interpretation of Section 43B(e) and explanation 3D regarding deduction of interest payable.
2) Assessment of positive balance in cash credit account for deduction purposes.
3) Determination of closing balance in OD account as principle loan or interest.
4) Requirement of documentary evidence for interest payment claim.

Issue 1:
The primary issue in this case revolves around the interpretation of Section 43B(e) and explanation 3D concerning the deduction of interest payable. The appeal filed by the revenue challenges the Ld. CIT(A)'s decision to delete the disallowance of interest amounting to &8377; 89,04,538/- based on these provisions. The Ld. CIT(A) justified this decision by emphasizing that the assessee had made actual interest payments related to the OD/CC account, thus not falling under the purview of Section 43B(e). The Ld. AR for the assessee argued that previous judicial decisions and precedents supported their stance, including a favorable ruling by the Coordinate Bench of ITAT in a prior year's case. The Tribunal, after considering the arguments and evidence, upheld the Ld. CIT(A)'s decision based on the precedents and judicial consistency, dismissing the revenue's appeal.

Issue 2:
Another crucial issue addressed in the judgment pertains to the assessment of a positive balance in the assessee's cash credit account for deduction purposes. The AO had disallowed the interest on the OD account, contending that the interest debited each month increased the loan/advance amount owed to the bank. However, the Ld. CIT(A) disagreed, citing the assessee's payment of interest and previous rulings in the assessee's favor for the AY 2011-12. The Tribunal, after a thorough analysis of the facts and previous decisions, concluded that the ground raised by the revenue was covered against them, finding no fault in the Ld. CIT(A)'s order.

Issue 3:
The judgment also delves into the determination of the closing balance in the OD account, whether it represents principle loan or interest. The AO had disallowed the interest, claiming it was converted into a loan due to the increasing debit balance in the CC account. However, the Ld. CIT(A) disagreed, highlighting the deposits made by the assessee and the OD limit increase to &8377; 3 crores. The Tribunal, in alignment with previous decisions and the Madras High Court's ruling, upheld the Ld. CIT(A)'s decision, emphasizing that the interest had been paid through the OD account and had not been converted into a loan.

Issue 4:
Lastly, the requirement of documentary evidence for interest payment claim was raised as an issue in the judgment. The AO had disallowed the interest due to lack of proof of actual payment, despite the assessee's submissions. However, the Ld. CIT(A) considered the bank statements and other evidence provided by the assessee, concluding that the interest had been paid as per the terms of the agreement. The Tribunal, in line with previous decisions and legal provisions, upheld the Ld. CIT(A)'s decision, dismissing the revenue's appeal on this ground as well.

In conclusion, the judgment extensively analyzed the issues related to the deduction of interest payable, assessment of account balances, and the requirement of documentary evidence, ultimately upholding the decisions of the Ld. CIT(A) based on legal provisions and precedents.