| SooperKanoon Citation | sooperkanoon.com/386914 |
| Subject | Direct Taxation |
| Court | Karnataka High Court |
| Decided On | Oct-24-2008 |
| Case Number | I.T.A. No. 434 of 2004 |
| Judge | K.L. Manjunath and ;B.V. Nagarathna, JJ. |
| Reported in | [2009]313ITR154(KAR); [2009]313ITR154(Karn); [2009]186TAXMAN72(Kar) |
| Acts | Income Tax Act, 1961 - Sections 43B, 80I, 143, 143(1), 143(2) and 154 |
| Appellant | Vinir Engineering P. Ltd. |
| Respondent | Deputy Commissioner of Income-tax |
| Appellant Advocate | S. Parthasarathy, Adv. |
| Respondent Advocate | M.V. Seshachala, Adv. |
| Disposition | Appeal allowed in favour of the assessee |
Excerpt:
- labour & services recruitment: [p.d.dinakarana, c.j. & mohan shantanagoudar,j] post of primary school teacher - karnataka civil service (general recruitment rules, 1977, rule 9 (as amended in 2000) - recruitment under the quota of dependents of project displaced person applied for post of primary school teacher - appointment denied on ground that geandson not covered by relevant provision as a family member of displaced person held, legislature has deliberately not included, grandson within the definition of family member. only son and not grandson is entitled to benefit of said quota. no interference warranted with denial of appointment. however, liberty of applicant reserved to seek appointment in other categories, if applicable. - 9. what is significant is that the authorities below as well as the tribunal have failed to notice that the interest which was due to the karnataka state financial corporation for the accounting years relating to the assessment years 1994-95 and 1995-96 though were provided in the accounts of the respective assessment years were not claimed and added back to the total income of the respective years, thereby the assessee had not made any claim in the respective years with regard to the interest accrued by applying the proviso to section 43b of the act. in our view, the authorities below as well as the tribunal failed to take into consideration the substance of the loan transaction, but only considered the fact that there was no actual repayment of the loan. in other words, the assessing officer to make any adjustment in the returned income by disallowing any claim for deduction or allowance or relief must be satisfied on the basis of the information available in the return documents and accounts accompanying it and that there was no possibility of further debate thereon. 14. we accordingly, allow this appeal and set aside the order of the assessing officer in exercising his power under section 143(1)(a) of the act as well as the order dated august 10, 2000, passed by the commissioner of income-tax (appeals)-iii, bangalore, and, order bearing i.b.v. nagarathna, j.1. this appeal is filed by the assessee challenging the order of the income-tax appellate tribunal bearing no. i.t.a. no. 698/bang/2000 dated, february 27, 2004.2. the relevant facts of the case are that the assessee is a private limited company and had filed its return of income for the assessment year 1997-98 on november 27, 1997, declaring nil income. in the said return of income, the assessee had claimed deduction towards interest liability to financial institution to an extent of rs. 8,97,756 being the interest due relating to the assessment years 1994-95 and 1995-96 on account of availing of a loan from the karnataka state financial corporation. annexure b is the statement of the total income furnished along with the return. the said return was processed under section 143(1)(a) of the income-tax act and the intimation was issued by the assessing authority disallowing the deduction by applying the proviso to section 43b and a copy of the said intimation under section 143(1)(a) is produced as annexure c to this appeal. the assessee thereafter filed an application under section 154 of the act explaining the reason for claiming deduction of rs. 8,97,756. in response to the said application, the assessing authority by his order dated july 15, 1999, rejected the application by stating that reschedule of interest payment by means of a fresh loan cannot be treated as interest payment deductible under section 43b of the specific repayment schedule. the copy of the application and the order dated july 15, 1999, are produced as annexures d and e respectively.3. being aggrieved by the said order the assessee filed an appeal before the commissioner of income-tax (appeals), who upheld the order of the said assessing authority on august 18, 2000, and the assessee thereafter filed an appeal before the income-tax appellate tribunal, challenging the disallowance as made was not a prima facie adjustment as provided under section 143(1)(a) of the act and that the adjustment as made was not permissible and accordingly disallowance as made was required to be cancelled. the tribunal, however, held that the disallowance was proper and permissible under section 143(1)(a) of the act and dismissed the appeal by order dated february 27, 2004. it is the said order which is challenged in the instant appeal.4. we have heard sri s. parthasarathy, learned counsel for the appellant and sri m.v. sheshachala, learned counsel for the respondent.5. it is submitted on behalf of the appellant that the interest related to the assessment years 1994-95 and 1995-96 on the loan advanced by the karnataka state financial corporation and that k.s.f.c. has provided further credit facility in respect of the interest to be repaid during the relevant year, i.e., the assessment year 1997-98 and thereby the outstanding interest was converted into a fresh loan which would mean that there was deemed payment of interest. hence, the assessee was entitled to claim deduction during the relevant assessment year. he further submits that whether the funded interest would amount to payment of interest was a debatable issue and prima facie issue under the proviso to section 143(1)(a) of the act. he, therefore, requests this court to allow the appeal of the assessee on the following substantial questions of law:1. whether, on the facts and in the circumstances of the case, the funded interest could be said to be non-payment of interest in the relevant year to invoke the proviso to section 43b of the act to disallow the deduction of interest as claimed by the appellant ?2. whether, on the facts and in the circumstances of the case, the tribunal was justified in upholding the disallowance of rs. 8,97,766 as made by the assessing officer while issuing the intimation under section 143(1)(a) of the act without appreciating the interest outstanding for the earlier years 1994-95 and 1995-96 had been funded by k.s.f.c. during the relevant year and accordingly there was deemed payment of interest in the relevant year and the proviso to section 43b of the act was not applicable?6. per contra, it is submitted by learned counsel for the department that prima facie, the interest amounts were not repaid by the assessee and, therefore, the disallowance made under section 143(1)(a) of the act is just and proper and that the disallowance made cannot be said to be a debatable issue. therefore, the assessee is not entitled to claim deduction. he, therefore, submits that there is no merit in this appeal and that the same ought to be dismissed.7. it is not in dispute that m/s. karnataka state financial corporation to whom interest was payable by the assessee had rescheduled the outstanding interest under a revival scheme and the same was sourced by means of a fresh loan which had a repayment schedule all over three years. the assessee had claimed in its return of income deduction for an amount of rs. 8,97,756 being the interest due to financial institution despite reschedulement of the payment of interest by a fresh loan and hence deduction was sought. however, the assessing officer was of the opinion that reschedulement of interest of payment by means of a fresh loan cannot be treated as interest payment deductable under section 43b and, therefore, rejected the application under section 154 of the act.8. according to the commissioner of income-tax (appeals), the interest payable to a financial institution is eligible for deduction under section 43b of the act and on the basis of actual payment and since the assessee had not paid the said interest, it could not claim deduction on the said amount. hence, the assessing officer was justified in making the adjustment under section 143 of the act. the tribunal is also of the opinion that the assessee, who had incurred the statutory liability could not get deduction for the same without actually making the payment. relying upon a decision of the madras high court in kalpana lamps and components ltd. v. deputy cit reported in : [2002]255itr491(mad) held that the assessee's contention that the funding of the loan resulted in the constructive discharge of interest liability could not be accepted and thereby dismissed the appeal.9. what is significant is that the authorities below as well as the tribunal have failed to notice that the interest which was due to the karnataka state financial corporation for the accounting years relating to the assessment years 1994-95 and 1995-96 though were provided in the accounts of the respective assessment years were not claimed and added back to the total income of the respective years, thereby the assessee had not made any claim in the respective years with regard to the interest accrued by applying the proviso to section 43b of the act. it was only in the assessment year 1997-98, the k.s.f.c. funded the above by way of interest by granting of fresh loan and loan repayment schedule. since the interest amount was funded by the k.s.f.c. the assessee had claimed deduction in the relevant assessment year as the amount of interest deemed to have been paid. in our view, the authorities below as well as the tribunal failed to take into consideration the substance of the loan transaction, but only considered the fact that there was no actual repayment of the loan.10. the decision of the madras high court relied upon by the tribunal is in the context of sales tax liability being converted into loans by the state government under the deferred scheme but there is another decision of the delhi high court in the case of samtel color ltd. v. union of india reported in [2002] 258 itr 1, wherein it has been held that the claim of the assessee in the said case in treating the sales promotion assistance as capital receipt was not prima facie inadmissible in view of the fact that a similar claim in respect of an earlier year had been accepted by the assessing officer in a regular assessment and that the disallowance of relief claimed by the assessee under section 80-i against the commercial profits without taking into consideration, the depreciation for the current year fell within the ambit of section 143(1)(a) of the act. the court further elaborated on the phrase prima facie for the purpose of adjustments under clause (iii) of the proviso to section 143(1)(a) to be a deduction claimed which must be inadmissible on the face of the return and documents and accounts accompanying it and that if the deduction or allowance or relief so claimed is capable of a debate or requires further proof, it cannot be made under clause (iii) of the proviso to section 143(1)(a) of the act. in other words, the assessing officer to make any adjustment in the returned income by disallowing any claim for deduction or allowance or relief must be satisfied on the basis of the information available in the return documents and accounts accompanying it and that there was no possibility of further debate thereon. further, the question of prima facie adjustment under section 143(1)(a) of the act has to be considered with reference to the date on which return of income is filed and not with reference to the events subsequent thereto. in a given case the assessing officer has any doubt about the allowability of deduction or claim made by the assessee, it is open to him to issue a notice under sub-section (2) of section 143 and have the evidence in support thereof and then consider the matter on the merits.11. in the instant case, the fact that the interest related to the assessment years 1994-95 and 1995-96 on the loans from the financial institution was not claimed in the earlier assessment years coupled with the fact that the assessee had availed of a fresh loan during the assessment years 1997-98 by converting the outstanding interest, in our view, must be treated as deemed payment of interest. further, the question as to whether outstanding interest which was funded by a fresh loan would amount to payment of interest is a debatable issue and prima facie adjustment could not have been made by applying the proviso to section 143(1)(a) of the act inasmuch as the transaction in question was a debatable one. hence, we hold that there is no reason to make a prima facie adjustment under section 143 of the act by holding that the funded interest would be said to be nonpayment of interest in the relevant year under the proviso to section 43b of the act and thereby disallow the deduction of interest as claimed by the assessee and that exercise of power by the assessing officer under the said section was not just and proper.12. we are also supported in our view by a judgment in the case of cit v. god granites reported in : [1996]218itr298(kar) , wherein it has been held that under the first proviso to section 143(1)(a) of the act, the assessing officer can make an adjustment by disallowing the deduction claimed in the return, only if it is prima facie inadmissible, on the basis of the information available in such return or accounts or documents accompanying the return. the fact that on ultimate analysis the assessee may not be entitled for the deduction claimed from the total income does not mean that records can be had to disallow under section 143(1)(a), dispensing with hearing and denying an opportunity to the assessee to challenge the assessment. under the guise of effecting an adjustment under section 143(1) (a) the assessing officer cannot decide debatable issues. if the assessing officer wants to disallow a deduction or a claim, he is bound by the procedure under section 143(2) by giving a notice to the assessee and that no substantial adjustment which requires examination of evidence or which would require a hearing is contemplated under section 143(1)(a).13. in view of what is stated above, we answer the substantial questions of law raised in this appeal by holding that the tribunal was not justified in law in concluding that the funded interest could be said to be non-payment of interest in the relevant year to invoke the proviso to section 43b of the act to disallow the deduction of interest as claimed by the appellant. the assessing officer was not justified in law to make a prima facie adjustment in a proceeding under section 143(1)(a) of the act by holding that there was no deemed payment of interest in the relevant year without appreciating the interest outstanding for the earlier years 1994-95 and 1995-96 had been funded by k.s.f.c. during the relevant year by a fresh loan and that the proviso to section 43b of the act was not applicable.14. we accordingly, allow this appeal and set aside the order of the assessing officer in exercising his power under section 143(1)(a) of the act as well as the order dated august 10, 2000, passed by the commissioner of income-tax (appeals)-iii, bangalore, and, order bearing i.t.a. no. 698/bang/2000, dated february 27, 2004, passed by the income-tax appellate tribunal and direct the assessing officer to reconsider the return of the appellant relating the assessment year 1997-98 under section 143 of the act in accordance with law. no costs.
Judgment:B.V. Nagarathna, J.
1. This appeal is filed by the assessee challenging the order of the Income-tax Appellate Tribunal bearing No. I.T.A. No. 698/Bang/2000 dated, February 27, 2004.
2. The relevant facts of the case are that the assessee is a private limited company and had filed its return of income for the assessment year 1997-98 on November 27, 1997, declaring nil income. In the said return of income, the assessee had claimed deduction towards interest liability to financial institution to an extent of Rs. 8,97,756 being the interest due relating to the assessment years 1994-95 and 1995-96 on account of availing of a loan from the Karnataka State Financial Corporation. Annexure B is the statement of the total income furnished along with the return. The said return was processed under Section 143(1)(a) of the Income-tax Act and the intimation was issued by the assessing authority disallowing the deduction by applying the proviso to Section 43B and a copy of the said intimation under Section 143(1)(a) is produced as annexure C to this appeal. The assessee thereafter filed an application under Section 154 of the Act explaining the reason for claiming deduction of Rs. 8,97,756. In response to the said application, the assessing authority by his order dated July 15, 1999, rejected the application by stating that reschedule of interest payment by means of a fresh loan cannot be treated as interest payment deductible under Section 43B of the specific repayment schedule. The copy of the application and the order dated July 15, 1999, are produced as annexures D and E respectively.
3. Being aggrieved by the said order the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who upheld the order of the said assessing authority on August 18, 2000, and the assessee thereafter filed an appeal before the Income-tax Appellate Tribunal, challenging the disallowance as made was not a prima facie adjustment as provided under Section 143(1)(a) of the Act and that the adjustment as made was not permissible and accordingly disallowance as made was required to be cancelled. The Tribunal, however, held that the disallowance was proper and permissible under Section 143(1)(a) of the Act and dismissed the appeal by order dated February 27, 2004. It is the said order which is challenged in the instant appeal.
4. We have heard Sri S. Parthasarathy, learned Counsel for the appellant and Sri M.V. Sheshachala, learned Counsel for the respondent.
5. It is submitted on behalf of the appellant that the interest related to the assessment years 1994-95 and 1995-96 on the loan advanced by the Karnataka State Financial Corporation and that K.S.F.C. has provided further credit facility in respect of the interest to be repaid during the relevant year, i.e., the assessment year 1997-98 and thereby the outstanding interest was converted into a fresh loan which would mean that there was deemed payment of interest. Hence, the assessee was entitled to claim deduction during the relevant assessment year. He further submits that whether the funded interest would amount to payment of interest was a debatable issue and prima facie issue under the proviso to Section 143(1)(a) of the Act. He, therefore, requests this Court to allow the appeal of the assessee on the following substantial questions of law:
1. Whether, on the facts and in the circumstances of the case, the funded interest could be said to be non-payment of interest in the relevant year to invoke the proviso to Section 43B of the Act to disallow the deduction of interest as claimed by the appellant ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of Rs. 8,97,766 as made by the Assessing Officer while issuing the intimation under Section 143(1)(a) of the Act without appreciating the interest outstanding for the earlier years 1994-95 and 1995-96 had been funded by K.S.F.C. during the relevant year and accordingly there was deemed payment of interest in the relevant year and the proviso to Section 43B of the Act was not applicable?
6. Per contra, it is submitted by learned Counsel for the Department that prima facie, the interest amounts were not repaid by the assessee and, therefore, the disallowance made under Section 143(1)(a) of the Act is just and proper and that the disallowance made cannot be said to be a debatable issue. Therefore, the assessee is not entitled to claim deduction. He, therefore, submits that there is no merit in this appeal and that the same ought to be dismissed.
7. It is not in dispute that M/s. Karnataka State Financial Corporation to whom interest was payable by the assessee had rescheduled the outstanding interest under a revival scheme and the same was sourced by means of a fresh loan which had a repayment schedule all over three years. The assessee had claimed in its return of income deduction for an amount of Rs. 8,97,756 being the interest due to financial institution despite reschedulement of the payment of interest by a fresh loan and hence deduction was sought. However, the Assessing Officer was of the opinion that reschedulement of interest of payment by means of a fresh loan cannot be treated as interest payment deductable under Section 43B and, therefore, rejected the application under Section 154 of the Act.
8. According to the Commissioner of Income-tax (Appeals), the interest payable to a financial institution is eligible for deduction under Section 43B of the Act and on the basis of actual payment and since the assessee had not paid the said interest, it could not claim deduction on the said amount. Hence, the Assessing Officer was justified in making the adjustment under Section 143 of the Act. The Tribunal is also of the opinion that the assessee, who had incurred the statutory liability could not get deduction for the same without actually making the payment. Relying upon a decision of the Madras High Court in Kalpana Lamps and Components Ltd. v. Deputy CIT reported in : [2002]255ITR491(Mad) held that the assessee's contention that the funding of the loan resulted in the constructive discharge of interest liability could not be accepted and thereby dismissed the appeal.
9. What is significant is that the authorities below as well as the Tribunal have failed to notice that the interest which was due to the Karnataka State Financial Corporation for the accounting years relating to the assessment years 1994-95 and 1995-96 though were provided in the accounts of the respective assessment years were not claimed and added back to the total income of the respective years, thereby the assessee had not made any claim in the respective years with regard to the interest accrued by applying the proviso to Section 43B of the Act. It was only in the assessment year 1997-98, the K.S.F.C. funded the above by way of interest by granting of fresh loan and loan repayment schedule. Since the interest amount was funded by the K.S.F.C. the assessee had claimed deduction in the relevant assessment year as the amount of interest deemed to have been paid. In our view, the authorities below as well as the Tribunal failed to take into consideration the substance of the loan transaction, but only considered the fact that there was no actual repayment of the loan.
10. The decision of the Madras High Court relied upon by the Tribunal is in the context of Sales tax liability being converted into loans by the State Government under the deferred scheme but there is another decision of the Delhi High Court in the case of Samtel Color Ltd. v. Union of India reported in [2002] 258 ITR 1, wherein it has been held that the claim of the assessee in the said case in treating the sales promotion assistance as capital receipt was not prima facie inadmissible in view of the fact that a similar claim in respect of an earlier year had been accepted by the Assessing Officer in a regular assessment and that the disallowance of relief claimed by the assessee under Section 80-I against the commercial profits without taking into consideration, the depreciation for the current year fell within the ambit of Section 143(1)(a) of the Act. The court further elaborated on the phrase prima facie for the purpose of adjustments under Clause (iii) of the proviso to Section 143(1)(a) to be a deduction claimed which must be inadmissible on the face of the return and documents and accounts accompanying it and that if the deduction or allowance or relief so claimed is capable of a debate or requires further proof, it cannot be made under Clause (iii) of the proviso to Section 143(1)(a) of the Act. In other words, the Assessing Officer to make any adjustment in the returned income by disallowing any claim for deduction or allowance or relief must be satisfied on the basis of the information available in the return documents and accounts accompanying it and that there was no possibility of further debate thereon. Further, the question of prima facie adjustment under Section 143(1)(a) of the Act has to be considered with reference to the date on which return of income is filed and not with reference to the events subsequent thereto. In a given case the Assessing Officer has any doubt about the allowability of deduction or claim made by the assessee, it is open to him to issue a notice under Sub-section (2) of Section 143 and have the evidence in support thereof and then consider the matter on the merits.
11. In the instant case, the fact that the interest related to the assessment years 1994-95 and 1995-96 on the loans from the financial institution was not claimed in the earlier assessment years coupled with the fact that the assessee had availed of a fresh loan during the assessment years 1997-98 by converting the outstanding interest, in our view, must be treated as deemed payment of interest. Further, the question as to whether outstanding interest which was funded by a fresh loan would amount to payment of interest is a debatable issue and prima facie adjustment could not have been made by applying the proviso to Section 143(1)(a) of the Act inasmuch as the transaction in question was a debatable one. Hence, we hold that there is no reason to make a prima facie adjustment under Section 143 of the Act by holding that the funded interest would be said to be nonpayment of interest in the relevant year under the proviso to Section 43B of the Act and thereby disallow the deduction of interest as claimed by the assessee and that exercise of power by the Assessing Officer under the said section was not just and proper.
12. We are also supported in our view by a judgment in the case of CIT v. God Granites reported in : [1996]218ITR298(KAR) , wherein it has been held that under the first proviso to Section 143(1)(a) of the Act, the Assessing Officer can make an adjustment by disallowing the deduction claimed in the return, only if it is prima facie inadmissible, on the basis of the information available in such return or accounts or documents accompanying the return. The fact that on ultimate analysis the assessee may not be entitled for the deduction claimed from the total income does not mean that records can be had to disallow under Section 143(1)(a), dispensing with hearing and denying an opportunity to the assessee to challenge the assessment. Under the guise of effecting an adjustment under Section 143(1) (a) the Assessing Officer cannot decide debatable issues. If the Assessing Officer wants to disallow a deduction or a claim, he is bound by the procedure under Section 143(2) by giving a notice to the assessee and that no substantial adjustment which requires examination of evidence or which would require a hearing is contemplated under Section 143(1)(a).
13. In view of what is stated above, we answer the substantial questions of law raised in this appeal by holding that the Tribunal was not justified in law in concluding that the funded interest could be said to be non-payment of interest in the relevant year to invoke the proviso to Section 43B of the Act to disallow the deduction of interest as claimed by the appellant. The Assessing Officer was not justified in law to make a prima facie adjustment in a proceeding under Section 143(1)(a) of the Act by holding that there was no deemed payment of interest in the relevant year without appreciating the interest outstanding for the earlier years 1994-95 and 1995-96 had been funded by K.S.F.C. during the relevant year by a fresh loan and that the proviso to Section 43B of the Act was not applicable.
14. We accordingly, allow this appeal and set aside the order of the Assessing Officer in exercising his power under Section 143(1)(a) of the Act as well as the order dated August 10, 2000, passed by the Commissioner of Income-tax (Appeals)-III, Bangalore, and, order bearing I.T.A. No. 698/Bang/2000, dated February 27, 2004, passed by the Income-tax Appellate Tribunal and direct the Assessing Officer to reconsider the return of the appellant relating the assessment year 1997-98 under Section 143 of the Act in accordance with law. No costs.