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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI KULDIP SINGH & SHRI GAGAN GOYAL
This appeal by assessee is directed against the order of National Faceless Appeals Centre; Delhi (for short ‘NFAC’) dated 09.09.2022 u/s. 250 of the A. On the facts and in the circumstances of the case and in law, the CIT (A) has erred to allow the appeal of the assessee to allow expenses of Rs. 11, 22, 25, 588/- on account of payment made by third party without appreciating the fact that the assessee itself admitted that it has not made the actual payment of the said interest. B. On the facts and circumstances of the case and in law, the CIT (A) has erred to allow the appeal of the assessee to allow expenses of Rs. 11, 22, 25,588/- without appreciating the fact that the interest payment made by the ARC to the TFCI on behalf of assessee is a liability in the hands of assessee and not an expenditure as claimed by the assessee.
The brief facts of the case are that assessee filed its return of income on 30.09.2014 declaring total loss at Rs. 11,66,29,989/-. The assessee company is engaged in the business of maintaining and running a water park. The case of the assessee was selected for limited scrutiny. During the assessment proceedings, it was observed that a loan of Rs. 3, 27, 74,412/- was payable to Tourism Finance Corporation of India Ltd. (TFCI). This amount of loan along with interest accrued thereon was taken over by an asset reconstruction company (ARC) viz. M/s Edelweiss Asset Reconstruction Company Ltd. by paying an amount of Rs. 14.5 Cr. to the original lender i.e. M/s TFCI as full and final payment of capital borrowed + interest thereon on behalf of assessee company. In this transaction, amount of interest which assessee debited in his books of accounts was Rs. 11, 22, 25,588/-.
Assessing Officer has 2 objections while not allowing this amount of interest viz. (1) Company follows the mercantile system of accounting, hence interest of all the years cannot be claimed in one year i.e. in which loan
3 M/s Nishiland Park Ltd. account of the assessee taken over by ARC, provision of section 40(a) (ia) of the Act also violated as no TDS has been deducted on the amount of interest expenses booked in the books of accounts. Consequently, AO disallowed /added back the amount of interest to the income of the assessee company. Assessee Company being aggrieved with this order of AO preferred an appeal before the Ld. CIT (A). In his order dated 09.09.2022, Ld. CIT (A) agreed with the contentions of the assessee and allowed the appeal. With this order of Ld. CIT (A) now revenue felt aggrieved and preferred this appeal before us.
We have gone through the order of the AO, order of the Ld. CIT (A) and as there is no submission from assessee (neither orally nor in writing), we are deciding the issue based on the documents mentioned (supra). It is observed that the main lender M/s TFCI who gave a term loan of Rs. 4.75 Cr. to establish a water park cum amusement park in 1996, was charging a very high rate of interest and in initial period assessee debited the interest amount on due basis but later on, due to continuous losses and high rate of interest, assessee stopped doing provision of interest amount on accrual basis. As the assessee was in bargaining /dispute with the lender about interest rate, it neither made provisions nor paid the amount of interest to M/s TFCI. Later on, this amount of loan taken over by an ARC viz. Edelweiss Asset Reconstruction Co. Ltd. and settled the account of the assessee in the books of TFCI and entered into the shoe of lender. To confirm its dispute with TFCI, assessee submitted letter of communications with TFCI vide its letter dated 02.12.2016 before the AO. It is further observed and even AO is also agreed that account was settled and paid by M/s Edelweiss meaning thereby no amount of interest and principle amount paid by assessee directly to M/s
4 M/s Nishiland Park Ltd. TFCI. M/s TFCI is a notified public financial institution u/s. 4A of the companies Act, 1956, vide notification dated 03.01.1990 issued by the Ministry of Industry, Department of Company Affairs and is also registered u/s. 45IA of the RBI Act 1934.
Under the provisions of section 43B, notwithstanding anything contained in any other provision of the Income tax Act, a deduction otherwise allowable under the Act in respect of any sum payable by the assessee as interest on any loan or borrowing from any public financial institution shall be allowed, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee, in that previous year in which such sum is actually paid by him. Since TFCI is a Public Financial Institution under section 4A of the Companies Act 1956, despite the fact the appellant employs the mercantile system of accounting, the interest payable to TFCI should be allowed in the year in which it is actually paid. It is an undisputed fact that the appellant has paid the interest of Rs. 11, 36, 33,700/-in the previous year relevant to the A.Y in question. In terms of the provisions of section 43B, it is clear that this amount would be allowable in this A.Y. Hence, the act of debiting the amount of Rs11, 36, 33,700/- in the P & L account is in accordance with the provisions of law and the same cannot be disallowed merely because it relates to the prior period.
In view of the above, discussion it is amply clear that why assessee had note charged amount of interest on accrual basis as there was a dispute between the assessee and lender about the high rate of interest secondly, even if assessee would have charged this amount of interest would have 5 M/s Nishiland Park Ltd. been allowed to the assessee only on payment basis by virtue of section 43B applicable in the case of institutions governed by Section 4A of the Companies Act, 1956. Practically speaking in this case whether assessee charged the interest on accrual basis or not will not make any difference as the same has to be allowed only on payment basis as the lender is being governed by section 4A of the Companies Act 1956 and attracts section 43B of the Income Tax Act 1961. So in this situation, objection of the AO about non charging of interest on due basis and treating the amount of interest in this year as prior period expense is not a valid contention.
Another objection of the AO about non deduction of TDS by virtue of provisions of section 40(a)(ia) also does not hold water as the payment were being made by the ARC. Assessee simply passed a general entry in its books of accounts by debiting the account of TFCI and crediting the account of ARC. The main lender i.e. M/s TFCI is a reputed government financial institution which is subject to various orders under the Companies Act and Income Tax Act by the CAG of India and their appointed chartered accountant firms must have appropriately booked and considered the amount of interest involved in their income and accordingly, paid taxes thereon. In view of this, the purpose of inserting section 40(a) (ia) is being achieved.
In totality of the facts, there is no contravention of the accounting principles in this case and simultaneously provisions of the IT Act also. In view of this, we do not find any fault in this order of Ld. CIT (A) passed u/s. 250 in favour of assessee, hence not inclined to interfere with the same. In the result, order passed by Ld. CIT (A) is sustained.