2008 (10) TMI 183 - HC - Income Tax

Tribunal was not justified in law in concluding that the funded interest could be said to be non-payment of interest in the relevant year to invoke the proviso to section 43B of the Act to disallow the deduction of interest as claimed by the appellant. The Assessing Officer was not justified in law to make a prima facie adjustment in a proceeding under section 143(1)(a) of the Act by holding that there was no deemed payment of interest in the relevant year without appreciating the interest outstanding for the earlier years 1994-95 and 1995-96 had been funded by K.S.F.C. during the relevant year by a fresh loan and that the proviso to section 43B of the Act was not applicable.

Summary

Issues:
Challenging disallowance of deduction under section 43B of the Income-tax Act for interest liability claimed by the assessee.

Analysis:

1. The appellant, a private limited company, filed a return of income for the assessment year 1997-98 claiming deduction towards interest liability to a financial institution. The assessing authority disallowed the deduction under section 143(1)(a) by applying the proviso to section 43B. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal upheld the disallowance. The appellant contended that the funded interest should be considered as payment of interest, making it eligible for deduction. The Tribunal relied on a decision by the Madras High Court and dismissed the appeal.

2. The appellant argued that the interest due for the assessment years 1994-95 and 1995-96 was funded by the financial institution through a fresh loan during the assessment year 1997-98, constituting deemed payment of interest. The authorities failed to consider this aspect and only focused on the absence of actual repayment. The appellant cited a decision by the Delhi High Court to support the contention that a debatable issue cannot be a ground for disallowance under section 143(1)(a).

3. The High Court observed that the funded interest should be treated as deemed payment of interest. It referenced a judgment in the case of CIT v. God Granites to emphasize that disallowance under section 143(1)(a) should not be based on debatable issues and that the Assessing Officer must follow the proper procedure under section 143(2) for disallowing deductions. The court concluded that the Tribunal erred in disallowing the deduction claimed by the appellant under section 43B and directed the Assessing Officer to reconsider the appellant's return for the assessment year 1997-98 in accordance with the law.