2021 (12) TMI 140 - AT - Income Tax

Disallowance of interest paid to bank u/s.43B - nexus between loans borrowed from bank and business activities of the assessee - HELD THAT - Since the assessee has made payment of interest on loans for impugned assessment year, it has rightly claimed deduction towards said interest on payment basis, as per provisions of section 43B - The findings of fact recorded by the learned CIT(A) in light of facts brought out by the Assessing Officer and arguments advanced by the learned A.R for the assessee is in accordance with provisions of section 43B of the Act, which was further supported by decision of Associated Pigment Ltd. Vs. CIT 1998 (9) TMI 78 - CALCUTTA HIGH COURT where the High Court has considered similar issue and held that even though the assessee has not made any provision in books of account in respect of purchase tax in the earlier year to which it relates, but same is deductible on payment basis in terms of provisions of section 43B of the Act. Revenue has failed to bring on record any evidences to counter findings of fact recorded by the learned CIT(A) nor bring on record any decision in favour of the Revenue to support its arguments that before claiming deduction on payment basis in terms of section 43B of the Act, the assessee needs to record such interest in the previous year to which such interest pertains. Therefore, we are of the considered view that there is no error in the reasons given by the learned CIT(A) to delete additions made by the Assessing Officer towards disallowance of interest paid to bank u/s.43B - Decided against revenue.

Summary

Issues Involved:
1. Nexus between business and loans for claiming interest deduction under Section 36 of the Income Tax Act.
2. Allowability of deduction under Section 43B of the Income Tax Act on actual payment basis.
3. Requirement of recording interest in the books of account for claiming deduction under Section 43B.

Issue-Wise Detailed Analysis:

1. Nexus between Business and Loans for Claiming Interest Deduction:
The Revenue contended that the assessee failed to establish the nexus between the business and the loans to claim a deduction under Section 36 of the Income Tax Act. The Assessing Officer (AO) argued that the interest paid on loans borrowed from banks could not be allowed as a deduction unless it was provided in the books of account on an accrual basis. The learned CIT(A), however, found that the loans were indeed borrowed for the purpose of the business, and hence, the interest payable on these loans was an allowable deduction. The CIT(A) rejected the AO’s conclusion that the loans were utilized for non-business purposes, noting that the loans remained invested in the business as evidenced by the balance sheet.

2. Allowability of Deduction under Section 43B on Actual Payment Basis:
The Revenue challenged the allowability of the deduction under Section 43B, which mandates that the deduction shall be on an actual payment basis irrespective of the previous year in which the payment would otherwise be allowable. The CIT(A) held that the interest was admissible in the respective year to which it pertains but was deductible in the year in which such interest was paid to banks, in accordance with Section 43B(e) of the Income Tax Act. The CIT(A) relied on judicial precedents, including the Hon’ble Madras High Court’s decision in M/s. Chemicals & Plastics India Ltd. Vs. CIT, which supported the view that once the loan was utilized for business purposes, the interest payable was an allowable deduction on payment basis.

3. Requirement of Recording Interest in Books of Account for Claiming Deduction under Section 43B:
The Revenue argued that for allowing deduction under Section 43B, the requisite condition was that it should have been recorded in the books of account of the previous year to which it pertains. The CIT(A) and the Tribunal, however, found that Section 43B does not stipulate that the interest must be recorded in the books of account for the previous year to which it pertains. Instead, the deduction is allowable on an actual payment basis in the year in which the interest is paid. This view was supported by the Calcutta High Court’s decision in the case of Associated Pigment Ltd. Vs. CIT, which held that the deduction is allowable on payment basis even if no provision was made in the books of account in the earlier year.

Conclusion:
The Tribunal upheld the findings of the CIT(A), concluding that the loans were borrowed for business purposes and the interest paid on these loans was deductible on an actual payment basis under Section 43B of the Income Tax Act. The Tribunal dismissed the Revenue’s appeal, affirming that the assessee’s claim for deduction was in accordance with the mandate of Section 43B and supported by judicial precedents. The appeal filed by the Revenue was dismissed, and the order pronounced in the open court on 30th November 2021.