2021 (7) TMI 710 - AT - Income Tax

Disallowance of interest expenses by treating the same as prior period expenses - CIT(Appeals) by holding that the said interest expenses are not allowable as deduction even u/s 36(1)(iii) - HELD THAT - We find no merit in the contention of the assessee that the interest-free advance given by the assessee-company to M/s. NRC Limited was for the purpose of its business. We, however, find merit in the alternative contention raised by the assessee that only part amount of fund borrowed from M/s. ISG Traders Limited having been advanced to M/s. NRC Limited interest-free, the ld. CIT(Appeals) was not justified in disallowing the entire interest expenses under section 36(1)(iii) and the said disallowance should be restricted to be interest expenses attributable to the interest-free advance given by the assessee-company to M/s. NRC Limited during period 01.04.2010 to 31.03.2011. We accordingly direct the Assessing officer to compute the interest expenses attributable to the interest-free advance given by the assessee to M/s. NRC Limited and restrict the disallowance to that extent. Ground No. 1 of the assessee's appeal is accordingly partly allowed. Disallowance on account of interest expenses under section 36(1)(iii) - HELD THAT - Following the said conclusion drawn while deciding the issue involved in Ground No. 1, we uphold the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on account of interest expenses to the extent the same was attributable to the interest-free advance given by the assessee-company to M/s. NRC Limited. Ground No. 2 of the assessee's appeal is accordingly dismissed.

Summary

Issues Involved:
1. Disallowance of ?4,06,16,220/- on account of interest expenses treated as prior period expenses.
2. Disallowance of ?2,38,29,825/- on account of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961.
3. Non-adjudication of the ground regarding the set-off of the brought forward business loss of earlier year.

Issue-Wise Detailed Analysis:

1. Disallowance of ?4,06,16,220/- on account of interest expenses treated as prior period expenses:
The primary issue in Ground No. 1 was the disallowance of ?4,06,16,220/- by the Assessing Officer (AO) on the grounds that it was a prior period expense. The assessee, a company engaged in financial activities, had borrowed funds from M/s. ISG Traders Limited and incurred interest expenses. The AO noted that the interest expenses pertained to the period from 01.04.2010 to 31.03.2011 and thus treated it as prior period expenses, disallowing the deduction in the year under consideration. The assessee contended that the liability for interest was under dispute and was only crystallized in September 2011 when M/s. ISG Traders Limited issued a debit note. Therefore, the interest expenses should be allowable in the year under consideration. The Tribunal, referencing a similar case (DCIT vs. M/s. Off-shore India Limited), held that the liability crystallized during the year under consideration and thus should not be treated as prior period expenses. The AO was directed to allow the deduction.

2. Disallowance of ?2,38,29,825/- on account of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961:
In Ground No. 2, the issue was the disallowance of ?2,38,29,825/- under section 36(1)(iii) of the Income Tax Act. The AO disallowed the interest expenses on the grounds that the borrowed funds were used to give interest-free advances to M/s. NRC Limited, which was not for the purpose of the assessee's business. The CIT(A) confirmed this disallowance, noting that the advances to NRC Ltd., a sick company, were not for commercial expediency. The Tribunal upheld this view but noted that only the portion of interest expenses attributable to the interest-free advance should be disallowed. The AO was directed to compute and restrict the disallowance accordingly.

3. Non-adjudication of the ground regarding the set-off of the brought forward business loss of earlier year:
The assessee had raised an additional ground regarding the non-adjudication of the set-off of brought forward business loss by the CIT(A). The assessee had filed a rectification petition under section 154, which was pending. The Tribunal admitted the additional ground and directed the AO to consider and decide the issue after verifying the relevant records.

Conclusion:
The appeal by the assessee was partly allowed. The Tribunal directed the AO to allow the interest expenses of ?4,06,16,220/- as the liability crystallized during the year under consideration. For the disallowance under section 36(1)(iii), the AO was instructed to compute and restrict the disallowance to the portion attributable to the interest-free advances. Additionally, the AO was directed to consider the set-off of brought forward business loss after verifying the records.