2012 (9) TMI 550 - AT - Income Tax

Disallowance of reversal of interest - Held that - The assessee is a Government Company engaged in the business of providing long-term finance for Industrial projects. The assessee has followed a system of accounting in respect of penal interest on accrual basis and as and when it was charged from the customer the same was shown as income of the assessee. Subsequently, on settlement with the parties the penal interest is either waived or reduced - Since the Board had taken the decision during the current year, therefore the amount of previous year s expense had been charged to P&L account in the current year. On that basis, the decision taken by the Board cannot be held as an unsubstantiated decision and the interest income which was taxed in the past by offering in the books of accounts forming part of the total income declared, however the same was a doubtful of recovery, therefore the assessee-company had justification to reverse that entry by charging the same in the P&L account - in favour of assessee. Addition on account of interest waived - CIT(A) deleted the addition - Held that - Facts have revealed that the amount in question pertained to penal interest which stood allowed therefore, following the directions of the Tribunal, the CIT(A) has directed that the waiver of penal interest is allowable. This findings of the CIT(A) being inconsistent with the order of the Tribunal is hereby allowed - against revenue. Addition of interest amount reverse pertaining to the earlier year - CIT(A) deleted the addition - Held that - CIT(A) has found that the assessee has wrongly computed the higher income than the actual receivable, therefore rectification was correctly made. In the absence of any contrary material, this finding of ld.CIT(A) is hereby confirmed - against revenue. Addition being the interest waived pertaining to the earlier year - CIT(A) deleted the addition - Held that - Facts have revealed a finding was given that there was an overlapping between the waiver of the penal interest and the amount pertaining to preceding year but the exact position of overlapping of the amount has not been placed on record, therefore we refer this item of waiver of penal interest back to AO to verify the same - in favour of Revenue by way of remand. Addition being the amount of interest waived pertaining to the earlier year - CIT(A) deleted the addition - Held that - As that the amount was waived in terms of the settlement with the customer no fallacy in the deletion made by ld.CIT(A) - against revenue.

Issues Involved:
1. Disallowance of reversal of interest.
2. Disallowance of Rs.2,98,49,969/- as expenditure related to the previous year.
3. Disallowance of provision of interest on deposit of Rs.83,561/- and reversal of provision of accrual of underwriting commission of Rs.30,000/-.
4. Deletion of addition of Rs.10,95,222/- on account of interest waived.
5. Deletion of addition of Rs.11,17,376/- being the interest amount reversed pertaining to the earlier year.
6. Deletion of addition of Rs.20,69,012/- being the interest waived pertaining to the earlier year.
7. Deletion of addition of Rs.1,15,112/- being the amount of interest waived pertaining to the earlier year.

Issue-wise Detailed Analysis:

1. Disallowance of Reversal of Interest:
The assessee argued that the reversal of interest had crystallized during the year and was allowable as per the Tribunal's directions. The Tribunal had previously restored the issue to the AO to examine whether the expenditure had crystallized during the year. The AO, however, found no documentary evidence supporting the claim that the liability had crystallized during the year and disallowed the amount. The CIT(A) upheld the AO's decision, stating that the reversal of interest was a unilateral act and should be treated as a bad debt under section 36(1)(vii) of the IT Act, not as a normal expense.

2. Disallowance of Rs.2,98,49,969/- as Expenditure Related to the Previous Year:
The Tribunal had directed the AO to examine whether the expenditure had crystallized during the year under consideration. The assessee contended that the Board of Directors had decided not to charge interest in cases where legal action had been initiated, and this decision led to the reversal of interest during the year. However, the CIT(A) held that the reversal of interest was a unilateral act and not an allowable expense under section 37(1) of the IT Act. The Tribunal, however, reversed the CIT(A)'s findings, stating that the interest income, which was taxed in the past, was doubtful of recovery, and therefore, the reversal entry was justified.

3. Disallowance of Provision of Interest on Deposit of Rs.83,561/- and Reversal of Provision of Accrual of Underwriting Commission of Rs.30,000/-:
The Revenue Authorities held that no evidence was placed on record to establish that these amounts had crystallized during the year under consideration. In the absence of corroborative evidence, the Tribunal dismissed these grounds, upholding the findings of the Revenue Authorities.

4. Deletion of Addition of Rs.10,95,222/- on Account of Interest Waived:
The CIT(A) allowed the waiver of penal interest, following the Tribunal's directions. The Tribunal upheld this finding, stating that it was consistent with the Tribunal's previous order.

5. Deletion of Addition of Rs.11,17,376/- Being the Interest Amount Reversed Pertaining to the Earlier Year:
The CIT(A) found that the rectification entry for the reversal of excess interest was correctly made, as the assessee had wrongly computed higher income than actually receivable. The Tribunal confirmed this finding in the absence of any contrary material.

6. Deletion of Addition of Rs.20,69,012/- Being the Interest Waived Pertaining to the Earlier Year:
The CIT(A) concluded that the waiver of penal interest, whether for the current year or not, should be allowed as per the Tribunal's directions. However, the Tribunal referred this item back to the AO to verify the exact position of overlapping of the amount and to allow it if found correct.

7. Deletion of Addition of Rs.1,15,112/- Being the Amount of Interest Waived Pertaining to the Earlier Year:
The CIT(A) deleted the addition, stating that the amount was waived in terms of a settlement with the customer. The Tribunal found no fallacy in this deletion and upheld the CIT(A)'s decision.

Conclusion:
The assessee's appeal was partly allowed, with the main ground regarding the reversal of interest being allowed. The Revenue's appeal was treated as partly allowed for statistical purposes, with some grounds being dismissed and others referred back to the AO for verification.

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