DCIT, CIR-11(2), KOLKATA, KOLKATA vs. M/S WESTING HOUSE SEXBY FARMER LTD., KOLKATA

This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-21, Kolkata dated 25.05.2015. Assessment was framed by ACIT, Circle-2, Kolkata u/s 147/143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 26.12.2007 for assessment year 2003-04. Shri Saurabh Kumar, Ld. Departmental Representative represented on behalf of Revenue and Shri Subhadip Dey, Ld. Authorized Representative appeared on behalf of assessee.

Solitary issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer for ₹1,93,34,365/- u/s. 36(1)(iii) of the Act.

Briefly stated facts are that assessee is a limited company and engaged in manufacturing business of signaling system and civil construction work.

Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that it has taken loan from Govt. of W. Bengal for its business activity, but, the amount of loan as well as interest was not paid by assessee due to financial crunch. But it is undisputed fact that loan was never waived off by the Govt. of W. Bengal. In fact the amount of accumulated liability payable to the Govt. of W. Bengal was converted into equity shares after mutual consent with the Govt. of W. Bengal. Accordingly, the adjustment was made in the books of account. The assessee further submitted that on the identical issue for the AY 2004-05 relief was granted by Ld. CIT u/s. 264 of the Act in the own case of assessee. Ld. CIT(A) after considering the submission of assessee deleted the addition made by AO by observing as under:- “6. I have considered the submission of the appellant and perused the assessment order. I have also gone through the loan sanction order issued by the government of West Bengal. On perusal of loan sanction order dated 09.11.2002, it is observed that the loan was sanctioned by the Governor, West Bengal being payment of Non-plan loan to the assessee i.e. Westinghouse Saxby Farmer Lt. which was released by the Public Enterprises Department, Government of West Bengal. As per the term and conditions, the loan would carry interest @ 14.50% p.a. subject to 2.50% p.a. rebate for timely repayment of loan and payment of interest. Further, the loan sanctioned and interest thereon would have a moratorium of 5 years and would be repayable in 15 years in 10 equal installments from the sixth anniversary date of drawl of loan. A.Y. 2003-04 DCIT Cir-11(2), Kol. Vs. M/s Westing House Sexby Farmer Ltd. Page 3 That, the interest on the period of moratorium might be sub-divided in 10 equal installments and added up with every installments. Thus, it is apparent from the sanctioned letter that though was there was moratorium period for repayment of loan and payment of interest but there was fixed rate of interest which accrued year after year. The loan sanctioned by the Government was not interest free. Since, the appellant company could not repay the loan and paid the interest accrued, therefore, in the later years the amount of loan and interest accrued was converted into equity shares and the shares were allotted to the Government of West Bengal. On careful consideration of the facts, I am of the opinion that the liability to pay the interest on loan was not tentative liability or unascertained liability as viewed by the AO in the assessment order to make the disallowance. The loan was bearing a fixed rate of interest subject to some rebate on timely repayment of loan and payment of interest. Since, the appellant has maintained its books of account on the basis of mercantile system of accounting and, hence, it has to provide for the interest accrued on the Govt. Loan at the rate provided in the sanctioned order. Thus, it would not be correct to say that the liability of interest on loan was an unascertained liability or the tentative liability. Since, the app is following the mercantile system of accounting, therefore, it had rightly claimed the deduction on account of interest on loan. Further, I am of the opinion that in this case the provisions of section 43B are also not applicable because the loan has not been taken from any financial institution. The loan was directly taken from the Government of West Bengal which was sanctioned by the Governor of the West Bengal. It is also observed that the similar disallowance in the immediately succeeding year i.e. AY 2004-05. In that year, against the order of the AO, the appellant company had filed an application u/s. 264 of the Act before the CIT, Kolkata-I, Kolkata contesting the disallowance of interest on Govt. loan. The CIT, Kolkata-I, Kolkata passed an order u/s. 264 of the Act for the A.Y 2004-05 on 29.08.2008 wherein after considering the facts of the case, he directed the AO to allow the deduction of interest on loan. In view of above, I am of the opinion that the AO was not justified in making the disallowance of interest of Rs.1,93,34,365/-. He is directed to delete the disallowance. The ground no. 6 is allowed.”