2018 (9) TMI 773 - AT - Income Tax

Revision u/s 263 - CIT found fault with the action of the AO in allowing interest as interest on the loan, the assessee had taken from the Govt. of West Bengal - Held that - At the first instance itself note that the loan was sanctioned by the West Bengal Government and as per the terms and conditions of the loan sanctioned it was provided that the G.O. will be issued later on prescribing the terms and conditions of the loan sanctioned. In the light of the G.O. on the subject matter loans and advances of the State Govt. & interest rates and other term and conditions for the year 2011-12 the interest on the borrowed funds cannot be termed as a contingent liability. However, we note that though the assessee had debited ₹ 537.34 lacs i.e. 6.25% of the borrowed funds as interest expenditure and claimed deduction of the same. The said sum was not paid before the due date of filing of the return of income. So, as per section 43B of the Act, the sum of interest not paid cannot be allowed as expenditure in this A.Y. And since the AO has accepted the return of income of the assessee without looking into the fact that the assessee has not remitted the interest to the lender, so as per section 43B of the Act the expenditure claimed on interest incurred on the loan taken, could not have been allowed and, therefore, the order of the AO is erroneous as well as prejudicial to the interest of the revenue. We uphold CIT s action in setting aside the order of the AO and directing him to reassess the assessment and disallow interest is in order - Decided against assessee.

Summary

Issues:
1. Jurisdiction under section 263 of the Income-tax Act, 1961
2. Treatment of interest on loan from the Government of West Bengal as a contingent liability
3. Compliance with section 43B of the Act regarding interest payment deduction

Jurisdiction under section 263:
The appeal challenged the revision order of the Principal Commissioner of Income Tax (Pr. CIT) invoking section 263 of the Income-tax Act, 1961. The Pr. CIT found fault with the Assessing Officer (AO) for allowing interest on a loan from the Government of West Bengal as an expenditure. The Pr. CIT set aside the assessment order, directing the AO to reassess after disallowing the interest amount. The appellant contended that the Pr. CIT's jurisdiction was flawed as it lacked a finding on how the assessment was erroneous and prejudicial to revenue.

Treatment of interest as contingent liability:
The loan from the West Bengal Government stipulated that further terms would be provided through a Government Order (G.O.). The G.O. issued later specified interest rates varying from 6.75% to 13.50%, while the appellant debited interest at 6.25% in its Profit and Loss Account. The Tribunal noted that the interest on borrowed funds could not be considered a contingent liability based on the G.O. provisions. However, the appellant failed to pay the interest before the income tax return due date, rendering it non-deductible under section 43B of the Act.

Compliance with section 43B regarding interest payment deduction:
The Tribunal upheld the Pr. CIT's decision, emphasizing that the interest expenditure claimed by the appellant was disallowed due to non-payment before the due date. The AO's failure to scrutinize the non-remittance of interest rendered the assessment order erroneous and prejudicial to revenue. Consequently, the Tribunal dismissed the appeal, affirming the Pr. CIT's directive to reassess and disallow the interest amount. The decision was based on the non-compliance with section 43B, warranting no interference from the Tribunal.

In conclusion, the Tribunal upheld the Pr. CIT's revision order, emphasizing the non-deductibility of interest under section 43B due to non-payment before the due date. The jurisdiction under section 263 was deemed valid, and the treatment of interest as a contingent liability was analyzed based on the loan terms and G.O. provisions. The Tribunal's decision focused on ensuring compliance with statutory provisions and safeguarding revenue interests.