M/S. HIMACHAL CONSTRUCTION CO. PVT. LTD.,JAMSHEDPUR vs. ITO, WARD- 1(5), JAMSHEDPUR

Brief facts of the case are that the assessee has filed its return of income electronically on 29.11.2014 declaring total income of Rs.7,67,920/-. Apart from other retail trading, the assessee was working as a Civil Contractor and undertook civil contract works of various M/s. Himanchal Construction Co. Pvt. Ltd. Departments of the Government of Bihar in the concerned accounting year for A.Y. 2014-15. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) was issued and served upon the assessee. The assessee has debited an expenditure of Rs.3,50,942/- towards interest expenses. This expenditure has been disallowed by the ld. Assessing Officer by recording a very brief finding. The appeal to the ld. CIT(Appeals) did not bring any relief to the assessee.

With the assistance of the ld. representatives, we have gone through the record carefully. Before recording any finding, we deem it appropriate to take note of the finding recorded by the ld. Assessing Officer and the submissions made by the assessee before the 1st appellate authority including the finding of the ld. CIT(Appeals), which is a very brief finding. All these details read as under:-

16.1. “Findings of the AO: The AO in the assessment order gave the finding as under: “4. Interest payable to the Contractee:- It has been observed that the assessee has debited an amount of Rs.3,50,942/- under head ‘interest payable to contractee’. The assessee was asked to explain the same. In reply, the A/R of the assessee submitted a statement regarding interest payable to contractee, which is placed on record. As per provision of the I.T. Act, 1961, any interest paid is penal in nature and is not an allowable expenditure u/s 37(1) of the I.T. Act, 1961. Hence, the amount of Rs. 3,50,942/- is disallowed and added to the total income of the assessee.” 16.2. Appellant’s contention: During the course of appellate proceeding, the AR of the appellant filed written submission as under: “That the Ld A.O. has made an addition for a sum of Rs. 3,50,942/- under the head interest payable to the contractee without giving any cogent reason In this regards it is humbly submitted that the appellant company has entered into an agreement with water resources department wherein it has been mentioned at para 2 page GC-4 that “mobilization advance not exceeding five percent of the contract amount, amount shall be given, if requested by the contract in writing within three months of the date of notice to proceed with the work. In such a case a bank grantee as per annexure F-8 shall be deposited by the contracter before sanction of the advance. The above advance steak: bear simple interest at the rate of 13(thirteen) percent per annum.” Copy of agreement (concern para) is attached. The appellant company has made- provisions for interest payable under this obligation and therefore appellant company has debited and amount of Rs.3,50,942/- as payable.

The ld. counsel for the assessee at the very outset submitted that the disallowance made in A.Y. 2013-14 has been deleted by the ITAT vide its order dated 30.04.2021 passed in ITA No. 47/RAN/2020. He placed on record copy of the Tribunal’s order. On the other hand, ld. D.R. relied upon the orders of the revenue authorities.

On due consideration of the above facts and circumstances, we find that both the authorities failed to take note of the facts in their right perspective. The Assessing Officer has not made any discussion about the nature of claim made by the assessee. He failed to appreciate the true affairs on this issue. We failed to understand how he construed the claim made by the assessee as a penal interest. This aspect has been explained by the assessee before the first appellate authority in its written submission (extracted supra). Again first appellate authority did not touch any of the aspects of assessee’s explanation. In brief case of the assessee is that under the contract it was supposed to give a Bank Guarantee towards mobilisation advances not exceeding 5% of the contract value. On such advances, it has incurred the interest expenditure. This aspect has been considered by the ITAT in the earlier year, i.e. in A.Y. 2013-14 and disallowance has been deleted. The only objection of the Assessing Officer in A.Y. 2013-14 was that it is a contingent liability, whereas Tribunal held that it was ascertained liability and the assessee is entitled for deduction of the expenditure.

Charging of interest under section 234A is consequential in nature. Hence this ground of appeal is rejected.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on March 11th, 2022.