SANJEEV MOTWANI,MUMBAI vs. ACIT 19(1), MUMBAI

The assessee is aggrieved by the decision of learned CIT(A) in confirming following two additions made by the Assessing Officer :

Facts relating to the issues are stated in brief. The assessee is an individual and is carrying on contract business. The assessee had availed over draft (O.D) loan from Vaisya Bank Ltd., the said bank got merged with M/s. ING Vaishya Bank Ltd. The assessee defaulted in making payment of loan taken by him. The outstanding balance of O.D facility as on 31.3.2001 was shown at Rs. 29.85 lakhs in the books maintained by the assessee. The 2 Mr. Sanjeev Motwani assessee did not account for interest pertaining to subsequent years in its books of account and accordingly continued to show almost the same balance up to 31.3.2006. However, the bank continued to charge interest on the outstanding amount and hence outstanding balance as per bank book rose to Rs. 59.90 lakhs. During the year under consideration the assessee entered into one time settlement with banker and accordingly he paid a sum of Rs. 45 lakhs in full and final settlement of the overdraft account. Accordingly, the assessee claimed the difference of Rs. 15.15 lakhs (45.00 lakhs minus 29.85 lakhs) as interest expenditure in its books of account. The Assessing Officer took the view that interest expenditure of Rs. 15.15 lakhs does not pertain to A.Y. 2007-08 and it related to the earlier years. Accordingly he disallowed the claim of interest of Rs. 15.15 lakhs.

Further the Assessing Officer took the view that waiver of Rs. 14.90 lakhs (Rs.59.90 lakhs less Rs.45.00 lakhs) given by the bank is cessation of liability and accordingly assessed the same u/s. 41(1) of the Act. Learned CIT(A) also confirmed the same.

We have heard the parties on this issue. It is an undisputed fact that the assessee has shown bank liability at Rs. 29.85 lakhs since 31.3.2001 onwards in its books of account, meaning thereby, the assessee has not debited interest in its books of account on the bank loan cited above from 31.3.2001 onwards. The question of application of section 41(1) shall apply only if the assessee has claimed any expenditure and subsequently he gets any benefit by way of remission or cessation of liability.

In the instant case the assessee settled the loan at Rs.45.00 lakhs and hence the assessee utmost can claim further deduction of Rs.15.15 lakhs, being the difference between the outstanding loan amount as shown in the books, viz., Rs. 29.85 lakhs and the amount settled with the bank. The question of assessing the waiver u/s 41(1) shall arise only if the assessee had claimed the difference between the settled amount of Rs.45.00 lakhs and the 3 Mr. Sanjeev Motwani outstanding shown in the bank book, i.e., Rs.59.90 lakhs as deduction in the earlier years or current year. Since the assessee has not claimed any deduction for Rs.14.90 lakhs (Rs.59.90 lakhs less Rs.45.00 lakhs), the question of assessing the same u/s 41(1) shall not arise.

The Ld CIT(A) has taken support of the decision rendered by Hon’ble Bombay High Court in the case of Solid Containers Ltd (308 ITR 417) to sustain the addition of Rs.14.40 lakhs made by the AO. In our view, the above said decision of Hon’ble Bombay High Court shall apply only if there is waiver of any part of principal amount. In the instant case, we notice that the assessee was given over draft facility for a sum of Rs.35.00 lakhs and the principal amount shown by the assessee as outstanding was Rs.29.85 lakhs. Since the assessee has paid a sum of Rs.45.00 lakhs, it should be presumed that the assessee has paid full portion of the principal amount and the amount paid over and above Rs.29.85 lakhs should be considered as interest portion. Accordingly, we do not agree with the view taken by Ld CIT(A) in respect of the addition of Rs.14.90 lakhs for the reasons discussed supra. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

The next issue relates to the disallowance of Rs. 15.15 lakhs claimed by the assessee as interest expenditure. For the reasons discussed in the preceding paragraph, we agree with the assessee that the same represents interest expenditure. However, since the assessee had accounted for interest expenditure upto 31.3.2001, in our view, it should be presumed that the amount of Rs. 15.15 lakhs pertains to the period from 1.4.2001 to 17.3.2007 (date of settlement) pertaining to A.Y. 2002-03 to 2007-08. Thus the interest amount of Rs.15.15 lakhs pertains to six years from AY 2002-03 to 2007-08 and in the absence of the year wise details of interest, we hold that the same may be spread equally for six years.

Since the assessee is following mercantile system of accounting, the interest pertaining to earlier years cannot be claimed in the current assessment year. However, we notice that the provisions of sec. 43B allows the deduction of interest pertaining to Over draft facility on actual payment basis from 2004-05 onwards, meaning thereby, the interest pertaining to AY 2004-05 to 2006-07 can be allowed u/s 43B of the Act and the interest relating to AY 2007-08 can be allowed u/s 36(1)(iii) r.w.s. 43B of the Act. Accordingly, the interest pertaining to AY 2002-03 to 2003-04 should be disallowed on the basis of accrual method of accounting principles. We order accordingly. The order of Ld CIT(A) passed on this issue is set aside accordingly.

In the result, the appeal filed by the assessee is partly allowed. Order has been pronounced in the Open Court on 25.5.2016.