2022 (3) TMI 373 - AT - Income Tax

Disallowing interest u/s. 36(1)(iii) - assessee has failed to prove that the interest of OD charges for the purpose of business - AO was of the view that OD account was also used for advancing to family members and also for making investment in subsidiary companies - CIT-A deleted the addition - HELD THAT - That no disallowance has been made in the earlier years on this account. This submission has been accepted by the ld. CIT(A) - no infirmity in the decision by the ld. CIT(A). It is settled law that unless, there is change in law or facts and circumstances of the case, contrary view cannot be taken on the issue that has attained finality in earlier assessment years and the fundamental aspect permeates in different years. It is duly supported by the decision of Hon'ble Supreme court in the case of Radha Swami Sastry 1991 (11) TMI 2 - SUPREME COURT AO is drawing adverse inference that assessee has not submitted the utilization of the overdraft in the earlier years. We note that this is not the case, where AO has any power to reopen the case of earlier years or that the AO has stepped into the shoes of ld. CIT and is exercising jurisdiction u/s 263 and that also for earlier year. No cogent rebuttal has been given on behalf of the revenue against the finding given by ld. CIT. In this view of the matter ld. CIT(A) has taken the correct view of the mater. We do not find any infirmity in the same and accordingly we uphold the same. Disallowance u/s. 37(1) - assessee has failed to prove that the penal charges paid for business expenditure - CIT-A deleted the addition - HELD THAT - The facts recorded by ld. CIT(A) are that this was paid by the assessee in terms of the commercial agreement to another party, where assessee was obliged to remit the toll collection within a particular period and in case of default amount was to be paid for the default styled as penal charges. In substance, the penalty charges are interest charges payable, when there is delay in remitting the toll collection to the other party as per the contract. It is settled law that it is the substance that counts and not the form given to in the accounts of the party. The cases referred by the AO are in connection with payments under the penal provisions contained in a statutory provision. It is not at all the case here that the amount paid in the present case is due to any infringement of law. In this view of the matter, the decision of ld. CIT(A) is correct. Disallowing interest u/s. 24(b) - assessee has failed to prove the genuineness of interest on borrowed capitals - as per AO bank statement furnished by the assessee is not clear whether the loan was for acquisition of the said flat and how the total interest component was arrived at - CIT-A deleted the addition - HELD THAT - CIT(A) has given the finding that assessee has duly submitted the statement of the bank, copies of possession certificates and ledger copy of housing loan. These evidences were found by the ld. CIT(A) to be justifying that the loan was utilized for the housing purposes. Ld. CIT(A) has also noted that it is also not the case of the AO that loan utilized have been utilized for any other purpose. In the paper book submitted before us statement of bank account has been attached which confirmed the view taken by the ld. CIT(A). The ld. DR could not rebut the aforesaid finding. In this view of the matter, we do not find any infirmity in the order of ld. CIT(A). Accordingly, we uphold the same. Revenue appeal dismissed.

Summary

Issues Involved:

1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance of penal charges under Section 37(1) of the Income Tax Act, 1961.
3. Disallowance of interest under Section 24(b) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):

During the assessment proceedings, the Assessing Officer (AO) observed that the appellant incurred interest of ?72,30,564/- on an overdraft (OD) facility from DNS Bank, which was claimed as a business expense. The AO disallowed this interest, arguing that the OD account was used for non-business purposes, such as advancing funds to family members and investing in subsidiary companies. The AO noted that no details were provided to substantiate that the opening debit balance of ?7.38 Crore was for business purposes.

Upon appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] found that the OD facility was used for investments in subsidiaries of Ideal Toll Infrastructure Pvt. Ltd., in which the assessee had a controlling stake. The CIT(A) concluded that the OD funds were utilized out of commercial expediency and allowed the interest deduction. However, the CIT(A) directed the AO to disallow proportionate interest for a ?1,00,00,000/- payment made to Shri D.P. Mhaiskar for non-business purposes.

The Tribunal upheld the CIT(A)'s decision, citing that the interest was paid for commercial expediency and supported by various case laws, including S.A. Builders vs. CIT and CIT vs. Tulip Star Hotels Ltd. The Tribunal found no infirmity in the CIT(A)'s decision and dismissed the revenue's appeal on this ground.

2. Disallowance of Penal Charges under Section 37(1):

The AO observed that the appellant debited ?3.34 Crores as penal charges in the Profit & Loss Account. The appellant argued that these charges were paid to M/s. DS Enterprises based on an agreement for toll collection, where penal charges were imposed for delayed remittance. The AO disallowed these charges, stating that they were not incurred wholly and exclusively for business purposes and were not incidental to the business.

Upon appeal, the CIT(A) accepted the appellant's argument, noting that the penal charges were a commercial necessity arising from prudent business considerations. The CIT(A) held that the charges were not penalties for infraction of law but compensations for delayed remittance, thus allowable under Section 37(1).

The Tribunal upheld the CIT(A)'s decision, emphasizing that the penal charges were genuine business expenditures and not for any illegal or unlawful purposes. The Tribunal referred to the Supreme Court's decision in Mahalaxmi Sugar Mills Co., which supported the allowance of such expenditures.

3. Disallowance of Interest under Section 24(b):

The AO disallowed the appellant's claim of ?38,63,736/- as interest on borrowed capital for a flat in Pune, arguing that the appellant failed to substantiate the loan's purpose with cogent evidence. The appellant provided a bank statement, possession certificate, and ledger of housing loan to support the claim.

Upon appeal, the CIT(A) found that the appellant had provided sufficient documentary evidence indicating that the loan was for acquiring the flat. The CIT(A) noted that the appellant had been claiming this interest since AY 2015-16 and allowed the deduction.

The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the allowance of the interest deduction. The Tribunal noted that the appellant had substantiated the loan's purpose, and the revenue could not rebut the findings.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The Tribunal found that the CIT(A) had correctly interpreted the law and facts, ensuring that the expenditures and deductions claimed by the appellant were justified and allowable under the relevant sections of the Income Tax Act.