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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: SMT.ANNAPURNA GUPTA & T.R. SENTHIL KUMAR
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER The present appeal has been filed by the assessee against the order passed by the Pr.Commissioner of Income Tax-2, Rajkot (in short referred to as Ld.Pr.CIT), dated 23.3.2018 to Assessment Year 2013-14 by invoking revisionary power under section 263 of the Income Tax Act, 1961 ("the Act" for short).
The assessee has raised the following grounds:
“1. The learned Commissioner of Income Tax erred in holding that the order of the AO was erroneous and prejudicial to the interests of the revenue. The order of the assessment was passed by the Income Tax Officer was after full inquiry and the decisions of appellant authorities. 2. Without prejudice ground no. 1, the learned Commissioner of Income Tax erred in relying on amendment to section 263 by Finance Act 2015. The
ITA No.147/Rjt/2018 2 case of the appellant related to A.Y. 2013-14 and the amendment is not applicable to A.Y. 2012-13.
As transpires from the order of the Ld. PCIT, the assessment order passed in the case of the assessee under section 143(3) of the Act for the impugned year was found erroneous on account of two claims of deduction which as per the Ld.PCIT were not allowable to the assessee as per facts on record and had been allowed without proper inquiry by the AO viz.
(i) claim of interest expenses made under section 43B of the Act of Rs.1,15,36,991/-, and
(ii) claim of interest amounting to Rs.12,07,435/- under section 36(1)(iii) of the Act.
The case of Ld.Pr.CIT with respect to the claim of interest expenses as per provision of section 43B of the Act was that while the assessee had disallowed interest expenses of Rs.98,76,033/- under section 43B of the Act, which related to interest of Rajkot Nagrik Sahkari Bank (RNSB) not paid by the assessee, it had claimed deduction under section 43B of the Act of Rs.1,15,36,991/- in respect of bank interest paid relating to another bank RCC Bank which had been paid through assessee’s wife account. According to the ld.Pr.CIT this was wrong claim of deduction made under section43B of the Act and needed to be disallowed to this extent of Rs.1,15,36,991/-.
With regard to the issue of allowance of interest expenses under section 36(1)(iii) of the Act, the case of the ld.PCIT was that while the assessee had claimed interest expenditure of Rs.1,10,83,468/- in his profit & loss account, financial statement of the assessee revealed that the loans to which these interest expenses
ITA No.147/Rjt/2018 3 pertained had been diverted for non-business purpose, as there was huge negative capital balance in the books of the assessee amounting to (-)Rs.13,85,90,715/-. The ld.PCIT was of the view that the assessee had diverted bank loan for non-business purpose and noting that out of the total interest debited to profit & loss account of Rs.1,10,83,468/-, the assessee himself has disallowed Rs.98,76,033/- under section 43B of the Act as remaining unpaid, the balance amount of Rs.12,07,435/-,he held, needed to be disallowed under section 36(1)(iii) of the Act.
Contention of the ld.counsel for the assessee before us, briefly summarized, was that it had been explained, both during the assessment proceedings to the AO and even in the appellate proceedings before the ld.CIT(A), that the entire interest expenditure claimed by the assessee either in the profit & loss account or in the computation of income, whether added back as unpaid under section 43B of the Act or claimed as paid under section 43B of the Act, all related to very old loans taken by the assessee from both the RNSB and RCC bank way back in 1999, and on account of dispute arising with the bank with regard to interest charged by them, the assessee has stopped paying interest and principal amount to RCC Bank, and accordingly from Asst.Year 2007-08 onwards the assessee had added back the interest while computingthe income liable to tax as per section 43B of the Act; that subsequently the dispute was referred to Board of Registrar’s Nominees who passed order dated 23.7.2007 directing the assessee to pay a sum of Rs.10 lakhs per month, which it started paying and principal amount of Rs.6.09 crores was first repaid by itupto 27.10.2012. After that theassessee paid interest amount and on payment of interest amount, the assessee claimed deduction of the same under section
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43B of the Act. Ld.counsel for the assessee stated that it had also been pointed out to the ld.Pr.CIT that dispute of allowability of this amount of interest, which was disallowed in Asst.Year 2005-06 also, was decided in favour of the assessee by the Hon’ble Gujarat High Court. The ld.counsel stated that it was also pointed out that repayment of these amounts was being done from the assessee’s wife account to him. That he had given loan to her and was charging interest on the same and as per his directions, his wife was paying the amount to the bank. The ld.counsel for the assessee stated that all evidences relating to disallowance of interest expenses was filed to the ld.Pr.CIT pertaining to loans taken from these banks,being computation of return of income right from Asst.Year 2007-08 on wards along with order of the Hon’ble Gujarat High Court in favour of the assessee allowing the claim of interest expenses on payment basis, and also copy of account of the assessee’s wife showing payment to the bank with copy of bank statement showing credit to his account. Our attention was drawn to the submissions made before the AO during the assessment proceedings vide letter dated 5.3.2016 as under:
43B I have disallowed amount of bank interest payable to RNSB amounting to Rs.9876033/- u/s.43B which was not paid by me during the accounting period. I have claimed amount of Rs.67108/- paid to RNSB and Rs.11536991/- paid as interest during the accounting period to RCC Bank as per the judgement given by Board of Registars Nominees, Rajkot Vibhag, Court of Rajkot in case no. 302/2007. The necessary copies of evidences in support of claim are enclosed herewith.
and to the ld.Pr.CIT in proceedings under section 263 of the Act vide letter dated 10.3.2018 placed before us at PB Page No.13 as under:
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2.1 I had taken a loan from RNSB and RCC bank in 1999. There was a dispute with the bank with regards the interest charged by them. Hence I had stopped paying interest and principal amount to RCC bank. Hence from 2007-08. I have disallowed the same in the computation of/income. Copies of computation of income from 2007-08 onwards are enclosed. The matter was referred to the Board of Registrars Nominees. They passed an order dated 23.07.2007. We were directed to pay a sum of Rs 1000000 per month. We started paying this sum since the order. The principal amount of Rs 60988008 was first repaid by us. This amount was paid till 27.10.2012. 2.2 After this amount was repaid we started paying the interest amount. 2.3 Since these amounts were disallowed since 2007-08 we claimed the same as a deduction under the provisions of section 43B of the Act. 2.4 The department has disputed the allow ability of this amount of interest. The amount of interest was disallowed in AY 2005-06. The matter was decided in my favour by the Hon' Gujarat High Court. Copy of the order is enclosed. In the subsequent years the matters were decided by the IT AT in my favour.
3.0 It has been mentioned in the notice that the amounts were paid from my wife's account. I submit that I had given a loan to my wife and was charging interest on the advance. Hence as per my direction she paid the amount to the bank. Copy of my wife's account showing the payment to bank is enclosed. I am also enclosing herewith a copy of my bank statement showing that the amount has been credited to my account.
The ld.counsel for the assessee stated that having clarified the facts as above relating to interest expenses debited to the Profit and Loss account as pertaining to very old loan taken in 1999 , it was also pointed out that the said loans could not in any away be co- related to the negative capital balance of the assessee so as to hold that loans was diverted to non-business purpose. The ld.counsel for the assessee therefore stated that it had been clearly pointed out that the assessment order, allowing claim of interest expenses under section 43B of the Act as also making no disallowance under section 36(1)(iii) of the Act was in accordance with law, and there was no error as such order of the AO. He therefore pleaded that order of the ld.Pr.CIT be set aside as not sustainable in law, as there being no error in the order of the AO on the issue pointed out by the ld.Pr.CIT.
ITA No.147/Rjt/2018 6 8. The ld.DR on the other hand heavily supported the order of the ld.Pr.CIT.
We have heard both the parties. We have also gone through the order of ld.Pr.CIT and have also considered the documents referred by the ld.counsel for the assessee before us. On considering all the above facts, we hold that the ld.counsel for the assessee has made a fair case and sufficiently demonstrated before us that there was no error in the order of the AO in allowing the assessee the claim of interest expenses under section 43B of the Act amounting to Rs.1,15,36,991/- and making no disallowance of interest expenditure under section 36(1)(iii) of the Act.
As pointed out by the ld.counsel for the assessee, it had been explained during assessment proceedings, and even to the ld.Pr.CITthat the entire amount of interest expenses debited in the profit & loss account pertained to loans taken from two banks in 1999 in which dispute had arisen and accordingly the assessee was, though claiming interest expenses pertaining to these amounts in his profit & loss account, had been disallowing the same in the computation of income since 2007-08 onwards. That subsequently- on resolution of all the disputes the assessee had started making payment, both principal and interest components of loan, and on payment of interest was claimingdeduction under section 43B of the Act of the interest earlier disallowed by it. The assessee had evidenced the same with details of the disputed loan amounts and repayment, giving break-up of the principal and interest components therein.The assessee had also filed computationof income and return of income of years when the interest paid on these loans had been disallowed under section 43B of the Act. The assessee had also filed
ITA No.147/Rjt/2018 7 judgment of Hon’ble jurisdictional High Court in its own case upholding the assessee’s claim of interest expenses paid pertainingh to the Asst.Year 2005-06 on payment basis. Even copy of the order of the resolution of dispute between the assessee and the bank was filed to the Pr.CIT. Therefore, we find that the assessee had explained with evidence that the claim of interest expenses under section 43B of the Act amounting to Rs.1,15,36,991/- was in accordance with law, as pertaining to the interest expenses which had been earlier added back to the income and were now being claimed on payment basis. He had also clarified that the payment was being made by his wife, who had been given a loan by him, which she was repaying directly to the bank. The assessee has evidenced the same with the copy of ledger account of assessee’s wife as also copy of the bank statements showing repayment of loan. We find that the assessee had duly substantiated his claim of interest expenses under section 43B on payment basis. The ld.Pr.CIT has, except for stating that the payment has been made by his wife, and therefore, is not allowable, has pointed out no other anomaly in the explanation of the assessee nor has he pointed out why despite all the facts, as narrated and substantiated by the assessee, the claim was still disallowable under section 43B of the Act.The fact that payment made by his wife was on account of repayment of loan given by him to his wife was duly demonstrated with evidence to the Ld.PCIT. Even otherwise how the fact of payment of interest by any other person other than the assessee affects claim of expenses on payment basis as per section 43B of the Act has not been brought out by the Ld.PCIT. Therefore, we agree with the ld.counsel for the assessee that there is no error in the order of the AO allowing the assessee’s claim of interest under section 43B amounting toRs.1,15,36,991/-.
ITA No.147/Rjt/2018 8 10. As for the disallowance of interest expenses under section 36(1)(iii) of the Act, the basis of the ld.Pr.CIT for holding so wasthat there was a huge negative capital balance account of the assessee and on that basis he held that proportionate loans were utilized towards the negative capital account which tantamounted to utilization of the same for non business purposes and accordingly interest expenses relating to the same was not allowable. But we have noted that the assessee had explained to the ld.Pr.CIT that the loans appearing in his books of accounts were very old loans since 1999 and from RNSB and RCC Bank, and therefore, they could not be attributed to have been utilized for non-business purpose in the impugned year. Despite these explanations given by the assessee to the ld.Pr.CIT, the ld.Pr.CIT being aware of all these facts, he has still gone ahead to hold that interest expenses claimed by the assessee not allowable under section 36(1)(iii) of the Act. We are not in agreement with the ld.Pr.CIT on this aspect also, noting that the assessee has duly explained that there was no nexus between the loans and negative capital balance in the impugned year, the loans being very old pertaining to 1999.
In view of the same, we agree with the ld.counsel for the assessee that there was no error in the order of the AO vis-à-vis the allowability of claim of interest expenses under section 36(1)(iii) of the Act also.
Accordingly, we hold that order of the ld.Pr.CIT passed under section 263 of the Act on the above two issues of disallowance allowance of claim of interest under section 43B and under section 36(1)(iii) of the Act, is not sustainable in law, and there was no error in the order of the AO allowing both these claim to the assessee.
ITA No.147/Rjt/2018 9 Order passed by the ld.Pr.CIT is accordingly set aside, and the appeal of the assessee is allowed.
In the result, appeal of assessee is allowed.
Order pronounced in the Court on 1st December, 2022 at Ahmedabad.
Sd/- Sd/- (T.R. SENTHIL KUMAR) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad, dated 01/12/2022