2021 (2) TMI 825 - AT - Income Tax

Disallowance of the interest expenditure u/s 43B(d)/(e) r.w Explanation 3D - HELD THAT - Any sum inter alia payable by the assessee on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Sec. 28 of that previous year in which such sum is actually paid by him. As per the Explanation 3D it has been clarified that a deduction of any sum, inter alia being interest payable on any loan or advance from a scheduled bank shall be allowed if such interest has been actually paid and any interest which had been converted into a loan or advance shall not be deemed to have been actually paid. In our considered view, the controversy in hand had emerged from the different manner in which Sec. 43B(d)/(e) r.w Explanation 3D had been construed by the assessee and the revenue. As observed by the A.O, as the interest debited/charged by the bank got converted into further liability wherein the existing debit balance would be further increased in the overdraft account thus, any payment of an amount towards interest would partake the character as that of repayment of the existing amount of the principal loan and not the interest claimed by the assessee. We find that the aforesaid issue had been looked into by the Hon ble High Court of Madras in CIT Vs. Prakash Food Feed Mills Pvt. Ltd. 2014 (11) TMI 1232 - MADRAS HIGH COURT .wherein not finding favour with the view taken by the A.O had observed, that as the interest amount paid by the assessee through overdraft/cash credit account was not similar to loan accounts, thus, the Explanation 3C or Explanation 3D to Sec. 43B would not be applicable insofar the interest amount had been actually paid by the assessee through overdraft/cash credit account and the same has not been converted into loan or advance, as the case may be. Backed by its aforesaid observation the Hon ble High Court had dismissed the appeal of the revenue. We find that following the aforesaid judgment of the Hon ble High Court of Madras, a coordinate bench of the Tribunal i.e ITAT, Bench I , Mumbai in the assessee s own case for A.Y 2011-12 2016 (12) TMI 1839 - ITAT MUMBAI had vacated a similar disallowance of interest paid by the assessee on its overdraft/cash credit account under Sec. 43B(d)/(e) r.w Explanation 3D to Sec. 43B - Decided against revenue.

Issues Involved:
1. Interpretation of Explanation 3D to Clause (e) of Section 43B of the Income Tax Act, 1961.
2. Whether the assessee had a positive balance in the cash credit account before filing the return.
3. Whether the assessee furnished documentary evidence supporting the claim that interest was paid.
4. Request to add, amend, alter, or delete any ground of appeal.
5. Request to vacate the CIT(A)'s order and restore the A.O's order.

Detailed Analysis:

1. Interpretation of Explanation 3D to Clause (e) of Section 43B of the Income Tax Act, 1961:

The primary issue revolves around the interpretation of Explanation 3D to Clause (e) of Section 43B, which states that a deduction on any sum, being interest payable, shall be allowed only if such interest has been actually paid. The A.O disallowed the interest expenditure claimed by the assessee, arguing that the interest debited by the bank increased the liability in the overdraft account, thus converting it into a loan or advance, and therefore, it was not "actually paid" as per Explanation 3D.

The CIT(A) and the Tribunal, however, found that the interest was indeed paid through the overdraft/cash credit account and was not converted into a loan or advance. They relied on the judgment of the Hon'ble High Court of Madras in CIT Vs. Prakash Food & Feed Mills Pvt. Ltd., which clarified that interest paid through an overdraft/cash credit account is not the same as converting it into a loan or advance. The Tribunal upheld the CIT(A)'s order, which followed its previous decisions in the assessee's own case for earlier assessment years.

2. Whether the Assessee Had a Positive Balance in the Cash Credit Account Before Filing the Return:

The A.O observed that the assessee did not have a positive balance in the cash credit account on any date prior to filing the return, implying that the interest was not actually paid but rather added to the overdraft balance. The CIT(A) and the Tribunal, however, found that the assessee had sufficient deposits in the cash credit account to cover the interest payments, and the overdraft limit was within the sanctioned limit by the bank. Thus, the interest was considered actually paid.

3. Whether the Assessee Furnished Documentary Evidence Supporting the Claim That Interest Was Paid:

The A.O contended that the assessee failed to furnish documentary evidence supporting the claim that the interest was paid. The CIT(A) and the Tribunal, however, found that the assessee provided sufficient documentary evidence, including bank statements showing the debit of interest and subsequent deposits covering the interest payments. The Tribunal noted that the interest payments were made through the overdraft account and were not converted into a loan or advance.

4. Request to Add, Amend, Alter, or Delete Any Ground of Appeal:

The revenue's request to add, amend, alter, or delete any ground of appeal was noted but did not impact the final judgment as the primary issues were comprehensively addressed.

5. Request to Vacate the CIT(A)'s Order and Restore the A.O's Order:

The revenue requested to vacate the CIT(A)'s order and restore the A.O's order. However, the Tribunal upheld the CIT(A)'s order, finding no infirmity in the CIT(A)'s decision to delete the disallowance of interest expenditure made by the A.O under Section 43B(d)/(e) r.w Explanation 3D.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order that deleted the disallowance of interest expenditure of ?1,93,79,722/- made by the A.O under Section 43B(d)/(e) r.w Explanation 3D. The Tribunal found that the interest was actually paid through the overdraft/cash credit account and was not converted into a loan or advance, aligning with judicial precedents and the assessee's previous assessment years' rulings.

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