1995 (6) TMI 57 - AT - Income Tax

Summary

Issues Involved:

1. Validity of adjustments made by the Assessing Officer under Section 143(1)(a) of the Income-tax Act, 1961.
2. Applicability of Section 43B(d) for disallowance of interest on loans from public financial institutions.
3. Levy of additional tax under Section 143(1)(a) due to the adjustments.

Detailed Analysis:

1. Validity of Adjustments under Section 143(1)(a):

The appellant, a manufacturing company owned by the Kerala Government, filed a return admitting a loss of Rs. 1,44,97,339 for the assessment year 1991-92. The return was processed under Section 143(1)(a) of the Income-tax Act, 1961, and the loss was reduced to Rs. 69,34,787 due to various adjustments made by the Assessing Officer. These adjustments included disallowances related to depreciation, entertainment expenditure, articles presented, and interest on loans from Industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI). Consequently, an additional tax of Rs. 6,95,755 was levied.

The appellant filed a petition under Section 154 seeking rectification of these adjustments and waiver of the additional tax, which was rejected by the Deputy CIT (Assessment). The CIT (Appeals) upheld the adjustments, referencing the retrospective amendment of Section 143(1)(a) and dismissing the appeal. The appellant contended that the adjustments, particularly those related to interest on loans from IFCI and IDBI, could not form part of prima facie adjustments.

2. Applicability of Section 43B(d) for Disallowance of Interest:

The appellant argued that the interest on loans from IFCI and IDBI was debited on an accrual basis and should not be disallowed under Section 43B(d) without verifying if the interest had become payable according to the loan agreements. The appellant cited Board's Circular No. 689, which specifies circumstances for prima facie adjustments, asserting that disallowance of interest did not fall within these circumstances.

The Assessing Officer disallowed the interest based on the tax audit report in Form No. 3CD, which indicated that the interest was debited but not paid during the year. The CIT (Appeals) supported this disallowance, stating it fell within prima facie adjustments under Section 143(1)(a).

3. Levy of Additional Tax:

The Tribunal examined whether the Assessing Officer was justified in invoking Section 43B(d) for prima facie adjustments. The Tribunal noted that Section 43B allows deductions based on actual payment rather than accrual of liability. Explanation 2 to Section 43B applies only to clause (a) and not to clause (d). Therefore, without evidence that the interest had become payable during the year, the disallowance under Section 43B(d) could not be justified as a prima facie adjustment.

The Tribunal concluded that the Assessing Officer should have rectified the assessment under Section 154, and the CIT (Appeals) erred in not considering the provisions of Section 43B(d) and Explanation 2. The Tribunal set aside the CIT (Appeals) order, deleted the disallowance of interest, and consequently, the additional tax levy was also deleted.

Conclusion:

The appeal was allowed, with the Tribunal ruling that the disallowance of interest on loans from public financial institutions under Section 43B(d) could not be considered a prima facie adjustment without verifying the terms of the loan agreements. The additional tax levied due to such disallowance was also deleted.