2022 (2) TMI 575 - AT - Income Tax

Disallowance of interest expense holding it as prior period expense - Assessee submitted the fact that actual credit and payment of this interest amount and TDS relating thereto occurred in A.Y. 2013-14 i.e. the assessment year under consideration - HELD THAT - In the given facts and circumstances where the assessee has not claimed interest expenses in the preceding years and the loan creditor IBFSL has also not recognized the corresponding interest income in the preceding years, it will not be justified to disallow the claim of interest expense in the hands of the assessee when it remained contingent in the preceding years and which devolved and crystallized only during the relevant year under consideration before us, owing to realization of its dues by IBFSL in one shot from the assessee. It is not a case as if the Revenue has been deprived of any tax. In fact, by not claiming interest expense in the earlier years, assessee has reported higher amounts of total income. Hence, there is no loss of tax to the Revenue. We are of the considered view that Ld. CIT(A) was not justified in sustaining the disallowance of interest expense claimed by the assessee in his profit and loss account when the documentary evidence to substantiate the claim were placed on record. We accordingly set aside the finding given by the Ld. CIT(A). Consequently, addition made by the Ld. AO by making a disallowance as arrears interest is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
Disallowance of interest expense as prior period expense despite actual payment and credit in the assessment year under consideration.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of interest expense amounting to ?5,82,80,708 as prior period expenditure.
2. The appellant, an individual and trader, had borrowed funds from a financial services company. The dispute arose between the appellant and the company regarding interest payments for the period from 05.06.2009 to 31.03.2012.
3. The appellant settled the loan account with the company in the assessment year under consideration, 2013-14, by selling shares and securities held as collateral. The company recognized interest income only in the financial year 2012-13 relevant to A.Y. 2013-14.
4. The Assessing Officer disallowed the interest expense for the prior period and added it back to the appellant's total income for the relevant year. The Commissioner of Income Tax (Appeals) upheld this disallowance.
5. The Tribunal found that the interest liability crystallized during the assessment year under consideration due to the settlement of the loan account. The appellant had not claimed interest expenses in the earlier years, and the company had not recognized interest income in those years.
6. The Tribunal held that the disallowance of the interest expense was not justified as the expenses devolved and crystallized only in the relevant year. The appellant had reported higher total income by not claiming the interest expenses earlier, resulting in no loss of tax revenue.
7. The Tribunal set aside the Commissioner's decision and deleted the addition made by the Assessing Officer, allowing the appeal of the assessee.

This detailed analysis of the judgment highlights the key arguments, findings, and conclusions related to the disallowance of interest expense as a prior period expense, providing a comprehensive understanding of the legal reasoning and outcome of the case.