2013 (7) TMI 118 - HC - Income Tax

Deletion of disallowance - deduction on account of interest paid - investment in mutual funds - Held that - investment in mutual funds was made by the Respondent-assessee out of its own funds and not out of interest bearing borrowed funds - Entire borrowed funds was utilized to repay the loan taken from Oil India Development Board so as to take advantage of lesser rate of interest - There was no borrowed funds available with the Respondent-assessee to be invested in mutual funds - When sufficient interest free funds were available with the assessee, the presumption has to be that investment was made out of such interest free funds - There is no requirement under the law that an assessee should have separate account in respect of non interest bearing funds from that of interest bearing funds to establish that the investments have been made out of its own funds - Following decision of CIT vs. Reliance Utility and Powers Limited 2009 (1) TMI 4 - HIGH COURT BOMBAY - Decided against revenue. Disallowance of expenditure - prior period expenditure - mercantile system of accounting - Held that - liability in respect of work/services rendered in earlier year was crystallized only on receipt of the bill in the current assessment year - Moreover, the method adopted by the respondent assesses has been accepted by the revenue for the earlier assessment year and also while accounting for the income earned in respect of the work done in earlier years - In the circumstances, the Revenue is required to adopt consistent approach and allow the expenditure which was crystallized during the assessment year under consideration as done in the earlier years - Decided against revenue.

Summary

Issues:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act
2. Disallowance of prior period expenses

Issue 1: Disallowance of interest under Section 36(1)(iii) of the Income Tax Act:

The Revenue contested the disallowance of Rs.76.76 lacs made by the Assessing Officer under Section 36(1)(iii) of the Income Tax Act. The Assessing Officer disallowed the expenditure as interest on borrowed funds used for investment in mutual funds. However, the CIT (Appeals) and the Tribunal found that the investment in mutual funds was made from the respondent's own funds and not from borrowed funds. The Tribunal relied on the decision in CIT vs. Reliance Utility and Powers Limited to support the presumption that investments were made from interest-free funds when available. The Revenue argued that since the respondent did not maintain separate accounts for borrowed and own funds, the disallowance was justified. The Court upheld the findings of fact by the lower authorities, stating that the investment was indeed made from the respondent's own funds, and no borrowed funds were used. Therefore, the appeal was dismissed based on established facts and legal precedent.

Issue 2: Disallowance of prior period expenses:

The Revenue challenged the disallowance of Rs.92.81 lacs claimed by the respondent as prior period expenses for the assessment year 2004-05. The Assessing Officer disallowed the expenses, stating that under the mercantile system of accounting, expenses from an earlier year cannot be deducted in the current assessment year. However, the CIT (Appeals) and the Tribunal found that the respondent consistently accounted for expenses when bills were received, even if the work was done in a previous year. They noted that the Revenue had accepted this method in previous assessments. The Tribunal upheld the consistent practice followed by the respondent, allowing the prior period expenses claimed during the assessment year when bills were received. The Revenue argued that expenses should be accounted for when the work was done, not when bills were received. The Court upheld the findings, stating that the liability crystallized when bills were received in the current assessment year, and the consistent approach should be maintained. As it was a factual finding supported by past practices and not shown to be incorrect, the appeal was dismissed without costs.

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