DCIT-2(2)(1), MUMBAI vs. M/S K S DIESELS LTD, MUMBAI

Briefly stated, the assessee company which is engaged in the business of manufacturing of fuel injection equipments and pump sets had filed its return of income for A.Y 2010-11 on 29.09.2010, declaring a loss of (-) Rs.1,46,11,516/- (including unabsorbed depreciation of Rs.7,29,864/-). The return of income filed by the assessee company was initially processed as such u/s 143(1) of the Act. Original assessment was framed by the A.O vide his order passed u/s 143(3), dated 08.02.2013 determining the total income of the assessee company at (-) Rs.1,44,83,023/-. Subsequently, the A.O holding a belief that the assessee‟s claim for deduction u/s 43B of interest payable to Gujarat Industrial Investment Corporation Ltd.(GIIC) of Rs.3,23,84,509/- was wrongly allowed while framing the assessment u/s 143(3), dated 08.02.2013, reopened the case of the assessee u/s 147 of the Act.

During the course of the reassessment proceedings, it was observed by the A.O that the assessee company had obtained a “term loan” from Gujarat Industrial Investment Corporation Ltd. (GIIC) way back in the year 1973 for acquisition of new plant and machinery. Thereafter, as the assessee company in succeeding years had suffered losses and had become a sick company, it thus failed to repay the aforesaid loan. Interest charged by GIIC on the aforesaid loan over the years was provided for by the assessee company as per the mercantile system of accounting in its „books of accounts‟. However, as the aforesaid amount of interest was not actually paid by the assessee, therefore, it is stated to have while computing its income for the said respective years disallowed the same as per the mandate of Sec. 43B of the Act, as under :

Aggrieved, the assessee carried the matter in appeal before the CIT(A). After deliberating at length on the issue in hand it was observed by the CIT(A) that as the interest of Rs.3,23,84,509/- (supra) had never been claimed/allowed as an expense to the assessee and was in fact disallowed in the earlier years u/s 5 DCIT-2(2)(1) Vs. M/s K.S. Diesels Ltd.

The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee relied on the orders of the CIT(A).

Per contra, the ld. Departmental Representative (for short „D.R‟) though did not seriously objected to the observations of the CIT(A), but at the same time relied on the assessment order. 7. We have heard the ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. A.R to drive home his claim. As observed by us hereinabove, the assessee company had raised a “term loan” from Gujarat Industrial Investment Corporation Ltd. (GIIC) way back in the year 1973 for acquisition of new plant and machinery. Thereafter, as the assessee company in succeeding years had suffered losses and was declared a sick company, it had thus failed to repay the aforesaid loan. It is the claim of the assessee that interest aggregating to Rs.3,23,84,509/- (supra) charged over the years by GIIC on the “term loan” was though provided for in its „books of accounts‟ as per the mercantile system of accounting, but the same not having been paid during the said respective years was consistently disallowed u/s 43B of the Act. On 01.04.2009 the outstanding dues of the assessee company towards GIIC was Rs.4,75,31,789/- (including interest). OTS was sanctioned by GIIC vide its letter dated 10.07.2009. As per terms and conditions of OTS the assessee company had to make a payment of Rs. 2,35,00,000/- towards full and final settlement of its outstanding dues towards GIIC. Complying with the terms and conditions of OTS the assessee company had paid an amount of Rs. 2,35,00,000/- to GIIC, viz. (i). Principal: Rs. 43,80,917/-; and (ii). Interest: Rs.1,91,19,083/-. As a result of the aforesaid settlement the assessee company had inter alia received a waiver of interest of Rs.2,04,20,706/-. In its Profit & loss a/c the assessee company had credited the 7 DCIT-2(2)(1) Vs. M/s K.S. Diesels Ltd.

Before us the controversy involved lies in a narrow compass i.e the entitlement of the assessee for claim of deduction of interest of Rs. 3,23,84,509/- (supra). On the one hand the assessee had claimed deduction of the entire amount of interest of Rs.3,23,84,509/- (supra) that is stated to have been disallowed u/s 43B while computing the income of the respective preceding years; while for on the other hand the A.O being of the view that the aforesaid interest that was disallowed in the preceding years u/s 43B was not actually paid by the assesse during the year under consideration, thus, was not entitled for deduction as claimed by the assessee. On appeal, it was observed by the CIT(A), that to the extent the part of interest of Rs.3,23,84,509/-(supra) that was disallowed u/s 43B in the earlier years had been credited by the assessee in its profit and loss account for the year under consideration, its claim for deduction of the same in its computation of income was in order. However, in all fairness the CIT(A) had directed the A.O to verify from the records and ascertain the correct amount that was credited on account of waiver of interest payable to GIIC in the Profit and loss account of the assessee for the year under consideration; and also, whether the same had been included in the figure of „Profit‟ as per Profit and loss account taken to the computation of income a/w the fact as to whether the said amount of Rs.3,23,84,509/- being interest payable to GIIC had been disallowed u/s 43B in the earlier years, as claimed by the assessee company. Backed by his aforesaid observations, the CIT(A) had directed the A.O to delete the disallowance to the extent waiver of interest payable to GIIC was credited by 8 DCIT-2(2)(1) Vs. M/s K.S. Diesels Ltd.

We have deliberated at length on the issue in hand and find that the controversy involved in the present case hinges around the maintainability of the assessee‟s claim for deduction of interest of Rs. 3,23,84,509/- (supra). It is the claim of the assessee that as the aforesaid interest aggregating to Rs. 3,23,84,509/- was not actually paid by it in the years to which they pertained i.e A.Y 2002-03 to A.Y 2008-09, therefore, while computing its income for the said respective years it had suo motto disallowed the same as per the mandate of Sec. 43B of the Act. We may herein observe, that as held by the CIT(A), and rightly so, as the assessee had after OTS paid interest of Rs. 1,91,19,083/- during the year under consideration and not the entire amount of Rs. 3,23,84,509/-, therefore, the narration in its computation of income i.e “Amount disallowed u/s 43B pd. during the year” is not only incorrect but also confusing. Be that as it may, it is a matter of fact borne from the record that the assessee company during the year under consideration had under OTS paid an amount of Rs.1,91,19,083/- towards interest to GIIC. If the claim of the assessee that interest payable to GIIC of Rs. 3,23,84,509/- (supra) in the preceding years i.e A.Y 2002-03 to A.Y 2008-09 had been disallowed u/s 43B in the said respective years is found to be in order, then, we find no justification that as to why its claim for deduction of interest of Rs. 1,91,19,083/- i.e having actually been paid during the year under consideration is not to be allowed u/s 43B of the Act. Insofar the assessee‟s claim for deduction of the balance interest of Rs. 1,32,65,426 [Rs. 3,23,84,509/- (-) Rs. 1,91,19,083/-] is concerned, we concur with the view taken by the CIT(A) that if the said amount was already disallowed by the assessee u/s 43B in the earlier years and formed part of the amount of interest of Rs. 2,04,20,706/- that was waived under OTS and credited in its Profit & loss a/c for the year under consideration, then, the declining of the assessee‟s claim for 9 DCIT-2(2)(1) Vs. M/s K.S. Diesels Ltd.

Backed by the facts involved in the case before us, we are of the considered view that as the assessee as per the terms and conditions of the OTS had during the year under consideration made a payment of interest of Rs.1,91,19,083/- to GIIC out of the interest of Rs.3,23,84,509/- (supra) that was disallowed u/s 43B in the said earlier years, therefore, such sum so actually paid would be eligible as a deduction during the year under consideration u/s 43B of the Act. As regards the balance amount of interest of Rs.1,32,65,426/- [Rs.3,23,84,509/- (-) Rs.1,91,19,083/-], we concur with the view taken by the CIT(A) that if the said amount was disallowed u/s 43B in the earlier years and had been credited by the assesee company in its Profit and loss account for the year under consideration on account of waiver of interest income payable to GIIC, then, the claim of the assessee for deduction of such amount in its computation of income is in order. We, thus, in terms of our aforesaid observations find no infirmity in the view taken by the CIT(A) who had directed the A.O to carry out certain verifications, viz. (i). that the interest waived was credited in the profit & loss a/c of the assessee company for the year under consideration; and (ii). that the interest waived had been included in the figure of 10 DCIT-2(2)(1) Vs. M/s K.S. Diesels Ltd.

The appeal filed by the revenue being devoid and bereft of any merit is dismissed in terms of our aforesaid observations.