2014 (3) TMI 532 - AT - Income Tax

Deductibility of the interest expenditure Held that - CIT(A) has correctly appreciated the facts and the law to hold that the matter of grant of interest being sub-judice before the Special Court, the same may be allowed where so granted for the relevant year - the order is confirmed subject to a modification that the interest to be allowed, in-as-much as the same is to be by way of deduction against interest income, assessable as income from other sources, cannot exceed the rate at which the interest on deposit/s stands earned by the assessee, on an average, for the relevant period - only the expense incurred for the purpose of earning the interest income is to be allowed u/s. 57 of the Act - Payment of interest at a higher rate implies a gross loss, with no contractual obligation to pay interest having been established, so that the payment of interest at a higher rate cannot either conceivably. Computation of book profit u/s.115-JB of the Act Held that - CIT(A) has also held o that his order merits being upheld - the assessee has suo motu disallowed Rs.110.86 lacs out of the total interest claim of Rs.118.96 lacs u/s.14A of the Act - The same being qua a direct interest expenditure would also have a direct bearing on the computation of the book profit under Explanation 1(f) below section 115JB(2) - the reduction of the sum in computing the book profit u/s.115JB shall be subject to the interest liability being ascertained - only to the extent it does not represent a direct interest expenditure covered under Explanation 1(f) - the assessee having itself disallowed Rs.110.86 lacs u/s.14A, so that it is in respect of an expenditure booked in accounts and, further, in relation to income that does not form part of the total income Decided partly in favour of Assessee. Deletion of the interest charged u/ss.234A, 234B and 234C of the Act Held that - The decision in CIT vs. Divine Holdings Pvt. Ltd. 2012 (4) TMI 100 - BOMBAY HIGH COURT - The levy of interest under the provisions of Sections 234A, 234B and 234C is mandatory in nature - the Tribunal was in error in coming to the conclusion that interest under Sections 234A, 234B and 234C cannot be levied on an assessee thus, the levy of interest under the relevant sections is upheld Decided in favour of Revenue.

Summary

Issues Involved:
1. Deductibility of interest expenditure.
2. Computation of book profit under Section 115JB.
3. Additional ground regarding the assessment of income in the hands of another party.
4. Deletion of interest charged under Sections 234A, 234B, and 234C.

Issue-wise Detailed Analysis:

1. Deductibility of Interest Expenditure:
The principal issue raised by the assessee concerns the deductibility of interest expenditure amounting to Rs. 8,09,700/-. The assessee is a notified party under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, with all its assets attached and vested in the Custodian. The assessee had borrowed capital and had been extended credit from three brokerage firms before 08.06.1992. The Custodian sold some shares and invested the proceeds in bank term deposits. The assessee claimed a deduction of Rs. 8,09,700/- against the interest income from these deposits.

The Revenue argued that the liability to pay interest is inchoate, as no right in favor of the creditors had arisen for the assessee to claim interest. The matter is still in dispute before the Special Court.

The Tribunal held that the basic condition for allowance of an expense is its accrual. The liability to pay interest must be established, and it must be an ascertained liability. The Tribunal confirmed the CIT(A)'s direction that the interest may be allowed if granted by the Special Court, but it should not exceed the rate at which the interest on deposits was earned by the assessee.

2. Computation of Book Profit under Section 115JB:
The fifth ground raised by the assessee pertains to the computation of book profit under Section 115JB at Rs. 52,51,234/-. The principal adjustment made by the A.O. was in respect of the interest claim of Rs. 118.95 lacs. The CIT(A) held that the interest was not an accrued liability and thus could not be considered an ascertained liability.

The Tribunal upheld the CIT(A)'s decision, stating that the reduction of the impugned sum in computing the book profit under Section 115JB shall be subject to the interest liability being ascertained and only to the extent it does not represent a direct interest expenditure covered under Explanation 1(f).

3. Additional Ground Regarding Assessment of Income:
The assessee raised an additional ground, claiming that its income belongs to another party and should be assessed in that party's hands. This claim was based on an order by the Special Court, which stated that the property held by several parties of a group could be used for discharging the liabilities of the group leader.

The Tribunal observed that the issue is essentially about whether the income represents a diversion of income by overriding title or an application of income. The Tribunal followed its earlier decision in similar cases, stating that no direction is warranted as the matter is sub-judice before the Supreme Court. If the income is finally held to be assessed in the hands of another party, no liability for interest to other parties in the group would arise.

4. Deletion of Interest Charged under Sections 234A, 234B, and 234C:
The sole issue raised by the Revenue is the deletion of interest charged under Sections 234A, 234B, and 234C. The CIT(A) had followed the decisions by the Tribunal, which held that interest under these sections could not be levied on a notified party under the Special Court Act.

However, the matter was decided by the jurisdictional High Court, which held that the charge of interest under the Act is mandatory and shall not abate. The Tribunal, therefore, upheld the levy of interest under the relevant sections, allowing the Revenue's appeal.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was allowed. The Tribunal pronounced the order in the open court on March 10, 2014.