2022 (4) TMI 1386 - AT - Income Tax

Addition on account of excess interest paid - HELD THAT - As the assessee itself has worked out that excess interest has been charged by the various banks, naturally this amount cannot be said to be an expenditure incurred by the assessee for the purpose of the business of the assessee for the assessment year 2009 10. However, the whole interest expenditure stated to be excess charged cannot be disallowed, as it has not been claimed as expenditure during the year. During the year the total expenditure claimed which has been charged excessively by those banks is amounting to ₹ 2,629,006 and 49 only. In view of this, even if there is any disallowance it could be restricted only to the sum. Therefore, we direct the learned assessing officer to restrict the disallowance only to ₹ 2,629,649. Accordingly, ground number 1 of the appeal is partly allowed. Addition on account of charging of 2% as guarantee fees by the Maharashtra government and then converting it into a capital by disallowing the guarantee fee of that amount - HELD THAT - It is an undisputed fact that guarantees fee is an expenditure incurred by the assessee. It is also not in dispute that it has been incurred by the assessee during the year and crystallized during the year. Therefore, the corporate guarantee fee payable by the assessee to the government of Maharashtra has OF an expenditure incurred by the assessee for the purposes of the business. Therefore, we hold that the expenditure has been incurred by the assessee during the year for the purposes of the business therefore it is allowable to the assessee under the provisions of Section 37 (1) of the. Mere fact that it has been converted into equity capital by government of Maharashtra does not change the character of expenditure of guarantee fee paid by the assessee. It is a manner of payment of such expenditure by assessee to government of Maharashtra. Further, the conversion of guarantee fee is also backed by the Cabinet committee decision of the government of Maharashtra. Therefore, it cannot be stated that these are mere paper transactions. In view of this, we reverse the findings of the lower authority and direct the learned assessing officer to delete the disallowance of ₹ 9283 lakhs on account of guarantee fee paid to government of Maharashtra. Accordingly, ground number 2 of the appeal is allowed.

Summary

Issues Involved:
1. Disallowance of ?68,030,000 towards excess interest debited by banks.
2. Disallowance of ?928,300,000 towards prior period expenses related to the conversion of guarantee fee into share capital payable to the Government of Maharashtra.

Issue-wise Detailed Analysis:

1. Disallowance of ?68,030,000 towards excess interest debited by banks:

The assessee, Maharashtra State Road Development Corporation Limited, contested the disallowance of ?68,030,000, which was noted as excess interest recovered by various banks. The assessee argued that this amount was mentioned merely as a general note in the financial statements and had no impact on the financial statements since the recovery was under review by the banks. The assessee also stated that any recovery in subsequent years would be offered for tax, and a similar reversal of ?1.53 crores had been offered for taxation in A.Y. 2009-10. The department's representative supported the disallowance, arguing that the identified excess interest could not be considered a deductible expenditure as it was not actually incurred by the assessee.

Upon review, the tribunal found that the excess interest charged by the banks amounted to ?68,029,972, with ?2,629,649 pertaining to the assessment year 2009-10. The tribunal concluded that only the excess interest claimed as a deduction for the current year, ?2,629,649, should be disallowed, rather than the cumulative amount of ?68,029,972. Therefore, the tribunal directed the assessing officer to restrict the disallowance to ?2,629,649, partly allowing the first ground of appeal.

2. Disallowance of ?928,300,000 towards prior period expenses related to the conversion of guarantee fee into share capital payable to the Government of Maharashtra:

The assessee challenged the disallowance of ?928,300,000, which represented the guarantee fee payable to the Government of Maharashtra that was converted into equity share capital. The assessee argued that the guarantee fee was a legitimate business expenditure incurred and crystallized during the year, and the conversion into equity did not alter its nature as an allowable expense under Section 37(1) of the Income Tax Act. The assessee cited various judicial decisions to support their claim.

The department's representative maintained that the guarantee fee was a circular transaction, where the fee was not actually paid but converted into equity, thus not constituting a real expenditure.

The tribunal reviewed the facts and found that the guarantee fee was indeed an expenditure incurred by the assessee for business purposes and crystallized during the year. The tribunal held that the conversion of the guarantee fee into equity did not change its character as a deductible expense. The tribunal reversed the findings of the lower authorities and directed the assessing officer to delete the disallowance of ?928,300,000, thereby allowing the second ground of appeal.

Conclusion:

The appeal was partly allowed. The disallowance for excess interest was restricted to ?2,629,649, and the disallowance of the guarantee fee converted into equity was deleted, recognizing it as an allowable business expenditure.