2016 (9) TMI 708 - AT - Income Tax

Disallowance of Interest - Accrual of interest liability - year of assessment - Held that - Any liability for expenses can be claimed in the year of crystallization. In the instant case assessee had had not claimed interest expenditure in earlier years, however to settle the matter he entered into MOU with creditors to pay the same. The liability to pay interest for earlier year was crystallized during this year only. In view of all the contradictions pointed out by CIT(A), we restore the matter back to the file of Assessing Officer to examine the correctness of the interest so claimed with reference to actual amount due to earlier year. Assessing Officer is also directed to verify if assessee had actually made payment of interest in the subsequent year. If the Assessing Officer found that even after making provision in MOU, assessee has not made payment in subsequent year, because more that 7-8 years have been passed after the execution of the MOU, the Assessing Officer will be at the liberty to disallow the same. We directed accordingly. Penalty u/s.271(1)(c) - Held that - The assessee claimed the interest to the tune of ₹ 53,76,200/- which was disallowed on the ground of that earlier to the relevant assessment year no provision of interest was retained in the account books and when the assessee claimed in the relevant assessment year then the same includes the interest payable to M/s. Sangam India Ltd. for the earlier year also i.e. 2000-01 to onwards. The MOU dated 29.07.2003 no doubt speaks the liability of the assessee to pay the interest but the figure did not match with the explanation of assessee in view of the letter dated 30.06.2011 as discussed above. The MOU never acted upon no payment was made the cheques issued by the assessee were bounced and the claim of the creditors went up to the Hon ble Bombay High court as well as before the recovery Tribunal. Therefore, in the said circumstances it is a clear case of furnishing the inaccurate particulars just to evade the tax liability, therefore, in the said circumstances the law relied by the representative of the assessee has to no use.

Summary

Issues Involved:

1. Disallowance of Interest - ? 53,76,200/-
2. Levy of Penal Interests

Issue-wise Detailed Analysis:

1. Disallowance of Interest - ? 53,76,200/-

The assessee filed its return of income declaring a total loss of ? 58,15,725/-. The Assessing Officer (AO) disallowed the interest claimed amounting to ? 53,76,200/- on the grounds that it was not paid to the creditors, particularly M/s. Sangam India Ltd. The assessee argued that the liability to pay interest was crystallized by virtue of a Memorandum of Understanding (MOU) dated 29.07.2003 due to mounting business losses and legal actions initiated by creditors. The assessee made a provision in the account books following the mercantile system of accounting. However, the AO noted that M/s. Sangam India Ltd. confirmed they did not receive any interest from the assessee, and the entry was not recorded in their account books. The AO concluded that the interest expense was not incurred for business purposes and added the amount to the assessee's income.

The salient features of the MOU included an agreement to sell property for ? 2.5 crores, adjustment of ? 57,00,000/- from the sale proceeds, and payment of the balance amount in 30 monthly installments with interest. The CIT(A) pointed out discrepancies in the interest calculations and noted that the MOU was not acted upon, as no actual interest payment was made. The Tribunal restored the matter to the AO to verify the correctness of the interest claimed and whether the interest was paid in subsequent years. The AO was directed to disallow the interest if it was found that no payment was made even after the provision in the MOU.

2. Levy of Penal Interests

The assessee challenged the penalty levied under section 271(1)(c) of the Income Tax Act on the grounds that the interest claim was bona fide but not accepted. The assessee cited several legal precedents to argue that no penalty should be levied where two views are possible. The representative of the department relied on the CIT(A)'s order, which upheld the penalty. The Tribunal noted that the interest claim was disallowed because no provision for interest was made in earlier years, and the interest included amounts payable for earlier years. The MOU was not acted upon, and the cheques issued by the assessee were dishonored. The Tribunal concluded that the assessee furnished inaccurate particulars to evade tax liability, and thus, the penalty was justified.

Conclusion:

Both appeals filed by the assessee were dismissed. The Tribunal upheld the disallowance of interest and the penalty levied under section 271(1)(c) of the Income Tax Act. The order was pronounced in the open court on 5th August 2016.