2017 (4) TMI 1004 - AT - Income Tax

Disallowance on account of prior period expenses on interest paid to government of India on unspent subsidy - Held that - The moment the liability is admitted in the present case it accrues as an expenditure and therefore in the year of accrual the liability is required to be recorded for in the books of accounts and is liable in the year in which it is recorded therefore according to us it is not a prior period expenditure but expenditure pertaining to the current year as it crystallized during the year. Looking from the different angle, there was no stipulation originally for payment of any interest however the assessee and the government of India agreed on a certain terms and condition for compensation to the government of India based on the unspent subsidy lying with the appellant, the resultant expenditure which is a compensation of the earning made by the assessee on account of funds of government of India being used by the assessee for intermittent period, becomes an expenditure which is allowable under section 37 (1) of the assessee during the current year as it is incurred wholly and exclusively for the purposes of the business. In view of this we reverse the finding of the CIT (A) disallowing a sum on account of interest paid by the appellant to the government of India on unspent subsidy received by it - Decided in favour of assessee. Addition on account of loans pending reconsideration of excess or additional interest - Held that - It is not the case of the revenue that excess interest shown by the assessee has not been shown as an income in subsequent years when it has become due. In view of this we are of the opinion that the amount of excess interest received by the assessee which has become due in the subsequent year and in the subsequent year that assessee has recorded it as its income there is no reason that why this income should be chargeable to tax in this year when it has not become due. Further it is not been denied by the revenue that this method of accounting is followed by the assessee from year to year and revenue has accepted this method in the past years and not disturbed the returned income of the assessee on this account. In view of this we reverse the finding of the Ld. CIT appeal confirming the addition of ₹ 1.20 crores as income on account of excess interest received reduced from the debtors subject to reconciliation. - Decided in favour of assessee. Disallowance on account of financial charges paid for issue of bonds etc held as capital expenditure - Held that - Set aside back to the file of the assessing officer with a direction to adjudicate the matter afresh in accordance with the law after granting assessee appropriate opportunity of hearing as relying on previous year in assessee s own case.

Issues Involved:

1. Disallowance of ?7.14 crores on account of prior period expenses.
2. Addition of ?1.20 crores on account of loans pending reconsideration of excess or additional interest.
3. Disallowance of ?15.68 crores on account of financial charges paid for the issue of bonds, etc., held as capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of ?7.14 crores on account of prior period expenses:

The first issue pertains to the disallowance of ?7.14 crores, which was interest paid to the Government of India on unspent subsidy. The assessee argued that the liability for this interest crystallized during the year due to a board resolution, making it an allowable expense for the current year. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had disallowed this expense, treating it as a prior period expense.

The Tribunal considered the facts that the interest liability arose from an audit objection raised by the C&AG for the year ending March 2000, and the Ministry decided on 07/10/2003 that the appellant should pay the interest. The liability was quantified and admitted during the year when the Board of Directors decided to pay the interest on 17/11/2003. The Tribunal referred to various judicial precedents, including the Hon’ble Gujarat High Court in Saurashtra Cement and the Hon’ble Delhi High Court in Jet Lite India, which supported the view that a liability crystallized in the current year is allowable in that year, even if it pertains to an earlier period. Consequently, the Tribunal allowed the appeal on this ground, reversing the disallowance.

2. Addition of ?1.20 crores on account of loans pending reconsideration of excess or additional interest:

The second issue involved the addition of ?1.20 crores, which was shown as a deduction from loans pending reconsideration of excess or additional interest. The assessee contended that this amount represented excess interest received from borrowers, which was to be adjusted against future dues and was not actual income for the current year. The AO and CIT(A) had disallowed this deduction, treating it as income.

The Tribunal found that the method of accounting followed by the assessee involved recognizing interest income only when it became due, and any excess interest received was shown as a liability until it was adjusted. The Tribunal noted that this method was consistently followed by the assessee and accepted by the Revenue in past years. The Tribunal held that the excess interest received, which was to be adjusted in subsequent years, could not be treated as income for the current year. Therefore, the Tribunal reversed the CIT(A)'s finding and allowed the appeal on this ground.

3. Disallowance of ?15.68 crores on account of financial charges paid for the issue of bonds, etc., held as capital expenditure:

The third issue was the disallowance of ?15.68 crores on account of financial charges for issuing bonds, PDS, and term loans, which the AO and CIT(A) treated as capital expenditure. The assessee argued that these charges were claimed as revenue expenditure in the year they were incurred and not as deferred revenue expenditure.

The Tribunal noted that this issue had been decided in the assessee's favor in earlier years by a coordinate bench, which had remanded the matter back to the AO for fresh adjudication. Following the consistency in the Tribunal's decisions, the Tribunal set aside this issue back to the AO for fresh adjudication in accordance with the law, after granting the assessee an appropriate opportunity of hearing.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, reversing the disallowance of ?7.14 crores and ?1.20 crores, and remanding the issue of ?15.68 crores back to the AO for fresh adjudication. The order was pronounced in the open court on 07/10/2016.

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