2018 (5) TMI 1019 - AT - Income Tax

Disallowance u/s 43B on account of unpaid sales tax - Held that - In view of Circular No. 496. dated 25-09-1987 and Circular no.674 dated 29.12.1993 which are binding on the revenue authorities and in view of the evidence submitted by the assessee that the sales tax had been converted into loan pursuant to provisions of the State Act i.e. West Bengal Sales Tax Act, the assessee is deemed to have complied with the provisions of section 43B and accordingly entitled for deduction of the same. Hence we have no hesitation to consider grant of deduction u/s 43B on account of unpaid sales tax. - Decided in favour of assessee Disallowance u/s 43B on account of unpaid interest to IDBI - Held that - From a perusal of the aforesaid provision it is very clear that the unpaid interest which got converted into loan cannot be claimed as deduction u/s 43B of the Act. Hence we hold that the CIT(A) had rightly confirmed the disallowance of unpaid interest payable to IDBI. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of ?39,29,928/- under Section 43B of the Income Tax Act on account of unpaid sales tax.
2. Disallowance of ?1,51,26,826/- under Section 43B of the Income Tax Act on account of unpaid interest to IDBI.

Issue-wise Detailed Analysis:

1. Disallowance of ?39,29,928/- under Section 43B of the Income Tax Act on account of unpaid sales tax:

The primary issue in this appeal is whether the CIT(A) was justified in confirming the disallowance of ?39,29,928/- under Section 43B of the Income Tax Act due to unpaid sales tax. The assessee, M/s Teesta Agro Industries Ltd, had received ?39,29,928/- under a sales tax deferment scheme sanctioned by the Government of West Bengal, which allowed the company to defer the payment of sales tax collected. The AO disallowed the amount under Section 43B, stating that the assessee had not provided evidence that the unpaid sales tax was converted into a loan by the state government, as required by CBDT Circular No. 496 dated 25.09.1987.

The CIT(A) noted that the Commercial Taxes Department, West Bengal, had granted deferment of payment of tax for a period of 7 years, and the assessee had provided evidence supporting the conversion of the sales tax liability into a loan. However, the CIT(A) observed that the assessee did not furnish evidence of any amendment in the sales tax laws as required by the CBDT circular.

Upon appeal, the tribunal examined the relevant provisions of the West Bengal Sales Tax Act, 1954, and the CBDT Circulars No. 496 and No. 674. It was found that the sales tax collected by the assessee was indeed deferred under the provisions of the state act, and the circulars allowed for such deferment to be treated as a discharge of statutory liability for the purposes of Section 43B. Therefore, the tribunal concluded that the assessee had complied with the provisions of Section 43B and was entitled to the deduction of ?39,29,928/- on account of unpaid sales tax. Accordingly, the appeal on this ground was allowed.

2. Disallowance of ?1,51,26,826/- under Section 43B of the Income Tax Act on account of unpaid interest to IDBI:

The second issue concerns the disallowance of ?1,51,26,826/- under Section 43B due to unpaid interest to IDBI. The assessee explained that the company had become a sick unit under the Sick Industrial Companies (Special Provisions) Act, 1985, and was under the purview of the Board of Industrial and Financial Reconstruction (BIFR). Due to adverse business conditions, the company was unable to pay interest on loans and sought to reschedule the loan with IDBI, converting unpaid interest into a loan to be repaid over time.

The AO disallowed the deduction, stating that the conversion of interest into a loan did not constitute actual payment. The CIT(A) upheld this decision. Upon appeal, the tribunal referred to Explanation 3C to Section 43B, which explicitly states that interest converted into a loan or borrowing shall not be deemed to have been actually paid. Consequently, the tribunal upheld the disallowance of ?1,51,26,826/- and dismissed the appeal on this ground.

Other Grounds:

During the hearing, grounds no. 3 and 4 were not pressed by the assessee due to the smallness of the amounts involved and were thus dismissed. Ground no. 5 was general in nature and did not require specific adjudication.

Conclusion:

The appeal was partly allowed, with the tribunal granting the deduction for unpaid sales tax but upholding the disallowance for unpaid interest to IDBI. The order was pronounced on 15.05.2018.