2023 (1) TMI 481 - AT - Income Tax

TDS u/s 194A - Allowability of interest expenditure neither accounted in the books of account nor paid during the previous year relevant to the assessment year under consideration - Applicability of provision of sec 40(a)(ia) - HELD THAT - It is settled position of law that in the absence or presence of entries in the books of account does not determine the allowability of interest expenditure while computing the taxable income of an assessee under the head business . Similarly, the provisions of section 194A have no application in case where no interest is credited to the account of the parties nor was paid during the previous year relevant to the assessment year under consideration. Therefore, in the absence of obligation to deduct tax at source, the assessee cannot be held to be an assessee in default and consequential provisions of section 40(a)(ia) have no application. The ratio of case of Pranik Shipping Services Ltd. 2012 (3) TMI 210 - ITAT MUMBAI is squarely applicable to the facts of the present case. However, the Assessing Officer had no occasion to examine accrual of the interest liability of expenditure since the AO had disallowed the same on the ground that no TDS was deducted. Therefore, we remit the matter to the file of the AO to allow the interest liability for expenditure as allowable expenditure on satisfying himself that the interest liability had crystallized during the previous year relevant to the assessment year under consideration in terms of the contract entered by the appellant with the lenders. Thus, the grounds of appeal filed by the assessee stand partly allowed.

Summary

Issues:
- Allowability of interest expenditure not accounted or paid during the relevant assessment year.
- Application of provisions of section 194A for interest liability.
- Compliance with tax deduction at source requirements.
- Interpretation of legal precedents on interest expenditure deductions.

Analysis:
1. Allowability of Interest Expenditure:
The appellant, a company engaged in real estate, claimed interest expenses on unsecured loans as a deduction in the assessment year 2013-14. The Assessing Officer disallowed a portion of the interest claimed as it was not accounted for or paid during the relevant year. The appellant contended that since there was no obligation to deduct tax at source, the interest should be allowed as a deduction. The Tribunal held that the absence of entries in the books of account does not determine the allowability of interest expenditure. It was emphasized that the provisions of section 194A do not apply when no interest is credited or paid. The Tribunal remitted the matter to the Assessing Officer to verify the crystallization of the interest liability during the relevant year, based on the contract terms with lenders. Consequently, the grounds of appeal were partly allowed.

2. Application of Section 194A and Compliance:
The Assessing Officer disallowed a portion of the interest claimed by the appellant for failure to deduct tax at source. The Tribunal clarified that in the absence of an obligation to deduct tax at source, the provisions of section 40(a)(ia) do not apply. It was highlighted that compliance with tax deduction requirements is crucial for determining the allowability of deductions.

3. Interpretation of Legal Precedents:
The appellant relied on the decision of a Mumbai Tribunal case regarding the allowability of interest expenditure. The Tribunal distinguished the facts of the present case from the decision of the Hon'ble Supreme Court in Palam Gas Service vs. CIT, emphasizing that the latter decision applies when interest liability was accounted for and paid during the relevant year. The Tribunal found that the Mumbai Tribunal's decision was applicable to the current case, where interest liability was not accounted for or paid, and remitted the matter for further examination by the Assessing Officer.

4. Judgment on Appeals:
The Tribunal disposed of both appeals related to the assessment years 2013-14 and 2014-15, partly allowing the appellant's claims for interest expenditure deductions. The decision in the appeal for 2013-14 was applied mutatis mutandis to the appeal for 2014-15 due to identical facts and issues involved. Consequently, both appeals were partly allowed, and the orders were pronounced accordingly on January 10, 2023.