2018 (11) TMI 639 - AT - Income Tax

Disallowance of interest expenses - disallowance u/s 37(1) as well as by invoking the provisions of section 40(a)(ia) for non-deduction of tax - Held that - Assessee is a limited company engaged in the business to act as financial consultant and broker for generating and mobilizing FDs for other companies and corporate loans and that of trading in shares. Interest is provided in the accounts on the basis of order of Special Court. As per order of Special Court the assessee was required to make full payment of interest and in case there is TDS deducted on the same, there would have been violation of court order. Similar issue has arisen one of the group companies of the assessee i.e. Sam Leasco Ltd. wherein Hon ble Special Court has specifically directed not to deduct TDS. The interest is on account of directions of Special Court and hence, there is no requirement of TDS. Accordingly, find no infirmity in the order of CIT(A) and hence, the same is confirmed. This issue of Revenue s appeal is dismissed.

Summary

Issues:
- Disallowance of interest expenses under sections 37(1) and 40(a)(ia) of the Income Tax Act, 1961.

Analysis:
1. The appeal by the Revenue challenges the order of the Commissioner of Income Tax (Appeals) regarding the deletion of disallowed interest expenses amounting to ?65 lacs under sections 37(1) and 40(a)(ia) of the Act. The Revenue raised three grounds questioning the correctness of the CIT(A)'s decision. The CIT(A) allowed the claim of the assessee based on the direction of the Special Court, which led to the AO being directed to delete the addition. The Revenue contended that the expenses were penal in nature and not allowable under section 37(1) and that the non-payment of interest and failure to deduct TDS would have attracted contempt of court. The CIT(A) upheld the appeal of the assessee, emphasizing that TDS on such payment would have violated the court order, and hence, the disallowance was not justified under section 37(1) of the Act.

2. The facts reveal that the assessee, a financial consultant and broker, incurred interest expenses of ?65 lacs, which the AO disallowed as penal and not allowable under section 37(1). The CIT(A) allowed the claim based on the Special Court's order, directing the AO to delete the addition. The interest was payable as per the Special Court's order, and the assessee had paid a significant amount against the liability. The interest expense was provided in the accounts in compliance with the court order, and there was no direction to deduct TDS. The Tribunal noted that similar issues had arisen in other cases where courts had directed not to deduct TDS, relying on legal precedents such as the Haryana Urban Development Authority case, emphasizing that in certain cases of compensation, there is no requirement to deduct TDS.

3. The Tribunal examined the legal position and upheld the CIT(A)'s decision, emphasizing that the interest expenses were incurred based on the Special Court's order, which did not necessitate TDS deduction. The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order. The judgment highlighted the importance of complying with court orders and the legal principles governing the deduction of TDS in specific circumstances. Ultimately, the Tribunal upheld the decision in favor of the assessee, emphasizing the justification for not deducting TDS on the interest payment as directed by the Special Court.

4. In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order regarding the deletion of disallowed interest expenses under sections 37(1) and 40(a)(ia) of the Income Tax Act, 1961. The judgment underscored the significance of complying with court directives and the legal nuances surrounding the deduction of TDS in cases where court orders explicitly prohibit such deductions. The decision provided clarity on the treatment of interest expenses incurred in compliance with court orders, emphasizing the need to consider the specific legal context in determining the allowability of such expenses under the Income Tax Act.