2016 (10) TMI 592 - AT - Income Tax

Addition u/s 43B - sales tax liability and outstanding demand of sales tax - Held that - A plain reading of the proviso suggests that the deductions is allowable otherwise that in respect of any sum payable towards any tax, duty, cess or fee, but, however, aforesaid section does not apply to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. With regard to the issue raised by the Revenue for deletion of the disallowance of sales tax liability, we find that the allowability of the sales tax liability is governed by the provisions of section 43B of the Act i.e. on actual payment basis. In the instant case the assessee has not brought anything on record which justified that the sales tax liability was taxed in the earlier years. The ld. AR before us submitted that the sales tax was exempted by the West Bengal Government. Therefore there was no collection of sales tax during the period of the exemption on the sales of the goods. The entire sale price has been offered to tax in the year 1998-99. It is well settled law that the sales tax liability is allowed in the year of the payment by virtue of the provisions of section 43B of the Act. The ld. AR drew our attention to the schedule 10 of the balance sheet to demonstrate that no sales tax liability is appearing in the audited financial statements as on 31.3.1998. Our attention was also drawn to paper book where the order of the Sales Tax Department was also placed demanding the outstanding amount of sales tax pertaining to the year 1998-99. In view above we conclude that the payment of the sales tax demand is very much covered under the provisions of section 43B of the Act. Accordingly we do not find reasons to interfere in the order of ld. CIT(A). Hence this ground of Revenue s appeal is dismissed. Disallowance of interest which paid to the bank against the O.D. account - Held that - The transactions with regard to the sale & purchase with the M/s Super Smelters were minimal considering the flow of money between the two. Therefore the issue of the diversion of the interest bearing fund cannot ignored/ diverted. However from the submission of the assessee we find that there is regular outflow and inflow of funds in the account of M/s Super Smelters. The fund is going to the account of M/s Super Smelters from the bank of the assessee and after some days the amount is also coming back to the account of the assessee from M/s Super Smelters. This regular activity of the fund transfer shows that the borrowed money has not been utilized solely by M/s Super Smelters for the entire year. For part of the year the assessee has utilized the fund and for part of the year M/s Super Smelters has utilized the fund. Therefore in our considered view the interest on borrowed money needs to be allocated on proportionate basis depending on the utilization of funds. In support of this the ld. AR has allocated the interest amount which is enclosed as annexure 1 in this order. Whether the disallowance of the interest shall be worked after considering the capital of the assessee? - Held that - Considering AR submission that the amount given to M/s Super Smelters first needs to be adjusted with the owned fund of the assessee and the amount which is over and above of the owned fund of the assessee given to M/s Super Smelters should only be taken for the purpose of the disallowance of the interest, we are finding the force in the submission of the assessee therefore we are inclined to disallow the interest on the borrowed fund only for the period utilized by M/s Super Smelters and only that amount shall be considered which is over and above of the owned fund of the assessee

Issues Involved:
1. Violation of Rule 46A
2. Allowability of ?40,32,762/- under Section 43B of the Income Tax Act
3. Disallowance of interest amounting to ?38,63,307/- paid to the bank against the O.D. account

Issue-wise Detailed Analysis:

1. Violation of Rule 46A:
The Revenue contended that the CIT-A allowed the assessee's claim without giving the AO an opportunity to examine the evidence, thus violating Rule 46A. The Revenue argued that the CIT-A relied on new evidence submitted by the assessee. However, upon review, it was found that the CIT-A did not consider any additional evidence not already available to the AO. The Tribunal concluded that there was no violation of Rule 46A as no new evidence was produced before the CIT-A. Hence, this ground raised by the Revenue was dismissed.

2. Allowability of ?40,32,762/- under Section 43B of the Income Tax Act:
The assessee claimed a deduction of ?40,32,762/- paid towards sales tax for the assessment year 1999-2000, which was disallowed by the AO on the grounds that the payment was not made within the relevant assessment year and was not claimed in the original return. The CIT-A allowed the claim, noting that the payment was indeed made during the year under consideration and was allowable under Section 43B, which allows deductions on an actual payment basis. The Tribunal upheld the CIT-A's decision, referencing Section 43B, which mandates that deductions for tax payments are allowable in the year they are actually paid. The Tribunal found no reason to interfere with the CIT-A's order, and thus, this ground of the Revenue's appeal was dismissed.

3. Disallowance of interest amounting to ?38,63,307/- paid to the bank against the O.D. account:
The AO disallowed the interest expense on the grounds that the assessee had advanced ?10.7 crores to its group company, M/s Super Smelters Ltd., and argued that borrowed funds were used for non-business purposes. The CIT-A upheld this disallowance, noting that the advances were not part of normal business transactions and that borrowed funds were indeed used. However, the assessee argued that the advances were part of regular business transactions and that it had sufficient own funds to cover the advances. The Tribunal found that the transactions with M/s Super Smelters involved regular inflow and outflow of funds, indicating that the borrowed funds were not solely used by the group company throughout the year. The Tribunal directed that the interest disallowance should be proportionate to the period and amount of borrowed funds actually utilized by M/s Super Smelters, after adjusting for the assessee's own funds. Consequently, the Tribunal partly allowed the assessee's appeal on this ground and directed the AO to recompute the disallowance accordingly.

Conclusion:
- The appeal of the Revenue regarding the violation of Rule 46A and the allowability of ?40,32,762/- under Section 43B was dismissed.
- The appeal of the assessee regarding the disallowance of interest amounting to ?38,63,307/- was partly allowed, with directions to the AO to recompute the disallowance based on the proportionate use of borrowed funds.

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