CHETAN DAS,BANGALORE vs. JCIT, BANGALORE

The learned Assessing Officer had erred in the disallowing the claim of deduction of interest is Rs.29,90,918/- and the learned Commissioner of Income tax (Appeals) has erred in confirming the same.

The lower authorities have arrived at an erroneous conclusion on an improper appreciation of facts. On correct appreciation of facts it will be clear that deduction of Rs.29,90,718/- was correctly claimed by the appellant and the same is to be allowed to the appellant. 3. The learned Assessing Officer has also erred in levying interest u/s.234B, 234C of the I. T. Act, 1961. The appellant denies liability to pay Interest. The interest having been levied erroneously is to be deleted. 02. Brief facts are, the assessee an individual, filed the return of income for the AY 2011-12 declaring an income of Rs.30,66,010/-. The case was selected for scrutiny and notice was issued on 06.08.2013 in response to which the assessee’s representative appeared and the case was discussed. Thereafter a show-cause notice was issued as the assessee failed to furnish the requisite details.

The AO made an addition of Rs.29,90,718/-, being deduction of claim for interest by the assessee. It was the case of the assessee that the assessee entered into an agreement of lease with Beeradevara Devasthanagala Sangha (hereinafter referred to as ‘BDS’ for short), Sampige Tank Bund Road, Woodlands Hotel, Bengaluru, in respect of property at Residency Road also known as Sampige Tank Bund Road vide agreement dt.06.08.1980. The assessee claims that the agreement could not be fully converted into contract of lease due to dispute between the assessee and the BDS, which resulted into filing of a ITA.780/Bang/2016 Page - 3 litigation and the case was pending before the Hon’ble Karnataka High Court by way of RFA No.90/2012. The assessee had entered into ‘agreement to sublease’ to lease the above said property with M/s. Tapovan Builders P. Ltd on 23.02.1987 and further another sub-lease agreement was entered with M/s. Bangalore Hospital Ltd on 23.09.1990. The assessee received sums of Rs.9,50,000/- and Rs.40 lakhs from the above two sub-lessees respectively as advance and the assessee has claimed Rs.29.90 lakhs only as interest expense on the above said advance. It was submitted by the assessee that the interest payable on the advances has been claimed as deduction u/s.57 of the Act, from the interest received on deposits. However, the AO was not convinced and has made the addition on the following grounds : i) that the claim is vague ii) the parties entered into lease agreements despite knowing that the property was in litigation iii) the matter has not reached finality and the liability is not crystalised iv) interest is not actually paid and the liability is a contingent one.

The CIT (A) confirmed the additions made by the AO. Being further aggrieved, the assessee is in appeal before us.

Before us the Ld. AR relied upon the provisions mentioned in the sub-lease agreement to the following effect :

In view of the above, it was submitted by the Ld AR that the liability is not a contingent liability and it is the liability of the assessee to pay the interest in terms of the agreement and therefore the finding of the AO and CIT (A) were in correct. Further, it was submitted that the assessee is following the mercantile system of accounting and the assessee is liable to show the interest income in its books of account. It was lastly submitted that invocation of section 57(3) by the authorities below were not correct.

On the other hand, the Ld. DR supported the orders of the lower authorities and has submitted that the agreement entered into between the assessee (chief-tenant) with the sub-lessees is not enforceable in the eyes of law and therefore there is no question of contingent liability.

We have heard the rival submissions and perused the material on record and also the written submissions filed. From the record, the following facts arise :

From the above, it is clear that the initial lease for a period of ten years expired on 19.05.1988 and there was no extension of lease agreement in favour of the assessee. On account of the above, we are of the opinion that once the assessee did not have any right to remain in possession of lease, there was no occasion for the assessee to enter into a sub-lease agreement initially with Tapovan Builders in the year 1987 and thereafter with Bangalore Hospitals Ltd. Moreover the existence of both the sub-lease agreements was dependent upon the clear and marketable title of the assessee, on the basis of which the assessee can execute the sub-lease agreement in favour of these two sub-lessees. Once the title of the assessee is under cloud, there is no occasion for the assessee to execute the sub-lease agreement in favour of these two entities. Further both the sub-lease agreements were only a prelude to the agreement as neither the title of the assessee was clear nor the assessee could put these two entities into possession, nor these two entities have paid the remaining amount of Rs.10 lakhs and Rs.45 lakhs respectively.

In view of the above, the claim of the assessee that the interest was payable on advances of Rs.9,50,000/- and Rs.40,00,000/- are not payable on accrual basis. Once the assessee was unable to discharge its obligation under the agreement, it is for the assessee to take a call and return the amount received by him immediately when he was unable to pay the amount. Further the credit of interest accrued in favour of these two entitles was relatable to the business of the assessee, as it was not wholly and exclusively connected with the business of the assessee. Our view is further supported by the fact that these two entities have not shown any interest amount towards these advances as receivables in their books of account.

In view of the above, we are of the opinion that the liability is only sought to be credited by way of crediting the interest amount was merely a contingent liability / or rather no liability in the eyes of law. Therefore the assessee was not entitled to credit the same amount by deducting it under the provisions of the Act. In view of the above, the reasoning given by the CIT (A) in para 3.17 and 3.18 are correct and no interference is called for.