2016 (11) TMI 1368 - HC - Income Tax

Entitlement to set off interest finance and professional and other charges from the interest income for the next assessment year - prior period expenditure - Held that - The note appended to the computation of income file along with the return by the assessee in this case clearly stated that interest and legal charges were excluded on the basis of the Income Tax Department s stand in other group cases that they could be included in the case of land and were done by way of abundant caution as a disallowance. Having regard to this circumstance and further the fact that other group company cases i.e. Kum Kum Cultivation involved a similar and identical exercise where ultimately the disallowance was set aside by the ITAT, the adoption of the same course of action in this case cannot be said to have been erroneous. Furthermore, in the eventuality of the transaction itself maturing the likelihood of the assessee being permitted to capitalize or include the interest component as part of the cost of land has not been disputed. If such is correct course of action, the reverse situation whereby the transaction does not mature, should also attract a similar treatment that the interest paid but not shown as deductible expenditure for the previous period should be permitted as prior period expenditure. - Decided in favour of the assessee

Summary

Issues:
1. Whether the assessee is entitled to set off certain expenses from interest income for a specific assessment year?
2. Whether the order of the ITAT dismissing the appeal of the Revenue is justified and reasoned?

Analysis:
1. The case involved an assessee dealing in real estate who entered into an agreement to purchase commercial land and paid substantial amounts as interest to a bank. The assessee claimed expenses as legal and other charges for specific assessment years. The computation of income for those years excluded interest and finance charges based on the Income Tax Department's stance in similar cases. The issue arose when the assessee sought to set off total interest expenditure as "prior period" expenses for a subsequent assessment year. The AO disallowed this claim, stating that since the expenditure was not incurred during the relevant assessment year, it couldn't be allowed as prior period expenditure.

2. The CIT(A) reversed the AO's decision, citing the assessee's accounting method and past acceptance of similar methods by the AO. The CIT(A) referred to previous decisions and upheld the allowance of prior period expenditure. This reasoning was affirmed by the ITAT. The Revenue contended that the prior period expenditure couldn't be permitted as claimed by the ITAT and CIT(A) since no deduction was claimed in the previous years, and the interest liability was determined and crystallized. However, the Court found that the assessee's exclusion of interest and legal charges in previous years was a precautionary measure and consistent with other group cases. The Court held that if the transaction had matured, the interest component could have been included in the cost of land, so in case of the transaction falling through, the interest paid should be permitted as prior period expenditure.

3. Considering the circumstances and the precedent set by similar cases involving group companies, the Court ruled in favor of the assessee. The Court emphasized that the treatment of interest expenses should be consistent whether the transaction matures or not. Therefore, the questions of law were answered against the Revenue, and the appeal was dismissed.