2016 (2) TMI 889 - AT - Income Tax

Set off interest on income tax refund received from interest on income tax paid - Held that - The set off of interest paid against that received shall accordingly be subject to the two being for the same period, and to the extent of interest income for the said period. Two, the interest rate paid to the Revenue is higher than the interest rate paid by it. Now, without question, interest as an expenditure u/s. 57(iii), i.e., under which provision deduction in its respect is claimed and allowed, could only be allowed to the extent of interest attributable to the rate at which interest is received from the Revenue. This is as nobody can be said to have borrowed funds at a rate (of interest) to earn interest income at a lower rate there being no scope for earning any income, which is only net of expenditure, under such an arrangement. It needs to be appreciated that it is only toward earning (net) interest that the expenditure is allowed u/s. 57(iii), presuming a nexus between the funds borrowed and lent. True, the interest rates are not in the control of the assessee, but statutorily defined. That, in fact, is a basis on which we have opined of the interest suffered as being a statutory liability, unconnected with the earning of interest, so that it is not admissible as a deductible in the first place. However, even granting deductibility, the parameters of section 57(iii) do not admit of expenditure being incurred to sustain a predetermined loss, which again points to the expenditure being involuntary - another aspect of the matter emphasizing its non-deductibility. The deduction for interest paid would thus be limited to the quantum of interest received on the like (principal) amount for the same period, defined as from a particular date to a particular date. Subject to these two caveats, forming part of the application of the principle of deductibility of interest expenditure to Revenue against that received from it, accepted by us in principle respectfully following the decisions by the co-ordinate benches of this tribunal, we allow the assessee s claim - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of prior period expenses.
2. Disallowance of provision for leave encashment.
3. Set-off of interest on income tax refund against interest on income tax paid.

Detailed Analysis:

1. Disallowance of Prior Period Expenses:
The first issue concerns the disallowance of prior period expenses amounting to Rs. 1,42,317/-. The assessee claimed these expenses on the basis that the liability crystallized during the current year. However, the Revenue disallowed the claim due to the assessee's failure to substantiate the crystallization of the corresponding liability during the year. The Assessing Officer (A.O.) found that most invoices related to the expenses were dated within the relevant previous year. The legal principle cited includes Kedarnath Jute Mfg. Co. Ltd. vs. CIT [1971] 82 ITR 363 (SC), which allows claims irrespective of booking in accounts. However, the assessee failed to prove any dispute regarding the sums. The Tribunal upheld the disallowance, noting that the Revenue acted reasonably by disallowing the net income, which would be taxed either in the year of accrual or receipt.

2. Disallowance of Provision for Leave Encashment:
The second issue involves the disallowance of a provision for leave encashment amounting to Rs. 283.24 lacs. The assessee argued that the provision of section 43B(f) was held ultra vires by the Calcutta High Court in Exide Industries Ltd. vs. Union of India [2003] 292 ITR 470 (Cal). However, the Supreme Court stayed the operation of this decision, mandating tax payment as if section 43B(f) was valid. The Tribunal emphasized that section 43B introduces a legal fiction, allowing deductions only upon actual payment, including sums payable for leave encashment. The Tribunal found no merit in the assessee's case and upheld the Revenue's stance, noting that the final decision by the Supreme Court would protect the assessee's interests.

3. Set-off of Interest on Income Tax Refund Against Interest on Income Tax Paid:
The Revenue's appeal involved the set-off of interest on an income tax refund against interest on income tax paid. The assessee paid Rs. 103.61 lacs as interest to the Income-tax Department and set it off against Rs. 264.13 lacs received as interest on refunds. The A.O. denied this set-off, citing the need for a direct nexus, while the CIT(A) allowed it based on tribunal decisions. The Tribunal held that the principal amounts on which interest is paid and received must be the same and related to the same period. The Tribunal noted that interest paid on delayed tax payment is not a business expenditure and cannot be deducted. The Tribunal allowed the assessee's claim for set-off, subject to conditions that the interest periods and rates match, and limited the deduction to the interest received from the Revenue. The Tribunal disposed of the Revenue's appeal accordingly.

Conclusion:
In summary, the Tribunal dismissed the assessee's appeal regarding prior period expenses and provision for leave encashment, while the Revenue's appeal on the set-off of interest was disposed of with specific conditions. The judgment emphasized the importance of substantiating claims and the legal principles governing the deductibility of expenses and provisions under the Income Tax Act.