ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, DIBRUGARH vs. M/S. BRAHMAPUTRA VALLEY FERTILIZER CORPORATION LIMITED, DIBRUGARH

The revenue has raised the following grounds:

The issue raised in ground nos. 1 and 2 is against the deletion of addition of Rs.23,52,79,034/- on account of interest payment on loan taken from Govt. of India.

Facts in brief are that the AO during the course of assessment proceeding observed that assessee debited in P&L Account a sum of Rs.71,85,32,707/- as interest and the said interest includes penal interest of Rs.23,42,79,034/- and accordingly, a show cause notice was issued to the assessee as to why the same should not be disallowed and added to the income of the assessee. The assessee replied vide letter dated 13.12.2010 submitting that the penal interest is not in the nature of penalty imposed for any violation of law but for failure to timely pay the interest to the Govt. of India as envisaged in the loan agreement. It is submitted that it is not in the nature of expenditure as referred to in explanation to section 37(1) of the Act. However, the contention by the assessee did not find favour with the AO and he added the amount to the income of the assessee.

In appeal before the Ld. CIT(A), he deleted the addition observing as under:

After hearing the rival contentions and perusing the material available on record, we find that the higher rate of interest paid by the assessee is not for any infringement of law or due to commission of any offence . The Ld. CIT(A) has recorded a very clear cut finding to this effect besides, the Ld. CIT(A) has rightly relied on the decision of Hon’ble Gujarat High Court in the case of Gujarat State Financial Corporation Ltd. Vs. CIT (2013) 35 taxmann.com 64 (Guj.) wherein it has been held that penal interest charged for late repayment of loan did not constitute penalty as contemplated in explanation to section 37(1) of the Act. Accordingly, we do not find any infirmity in the order of Ld. CIT(A) and we are inclined to uphold the same by dismissing ground nos. 1 and 2 of the revenue.

The issue raised in ground no. 3 is against the deletion of addition of Rs.1,34,59,370/- on account of prior period expenses.

The facts in brief are that the AO, during the assessment proceeding, observed that assessee has debited net amount of Rs.1,34,59,370.65 as adjustment relating to prior period under various heads. AO also noted that in Schedule 25 of Tax Audit Report, the same was stated to be prior period and accordingly, the same was disallowed and added to the income of the assessee. In the appellate proceeding, ld. CIT(A) deleted the same by holding that prior period debits were Rs.1,55,94,000/- and credits were Rs.21,35,000/- and hence, the net of Rs.1,34,59,370/- was claimed in the account. The Ld. CIT(A) deleted the addition after relying on the decision of Coordinate Bench in the case of ACIT Vs. Meghalaya State Electricity Corporation (ITA No.359/Gau/2013 dated 13.05.2017) wherein it has been held that when prior period income is accepted the prior period expenses should not be disallowed.

After hearing the rival contentions and perusing the material available on record, we observe that assessee had debited prior period expenditure under various sub-heads upon crystallization of these expenses as the bills were received in the current year and therefore, these were claimed to be expenses pertaining to the current year only. We note that during the year, the assessee has earned income of Rs.21,35,000/- as prior period income and the expenses of prior period of Rs.1,55,94,000/- were netted against this income and a net expenses of Rs.1,34,59,370/- was claimed. We note that Ld. CIT(A) has rightly followed the decision of Coordinate Bench in the case of Meghalaya State Electricity Corporation (supra) wherein ratio has been laid down that if prior period income is accepted by the AO then prior period expenses has to be allowed. Accordingly, we do not find any infirmity in the order of Ld. CIT(A) and we are inclined to uphold the same and dismiss this ground of appeal of the revenue.