Principal Commissioner Of Income Tax – 2, Kolkata v. West Bengal Infrastructure Development Finance Corporation Limited

ORDER IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE OD – 3 & 4 ITA/1/2018 PRINCIPAL COMMISSIONER OF INCOME TAX – 2, KOLKATAVERSUSWEST BENGAL INFRASTRUCTURE DEVELOPMENT FINANCE CORPORATIONLIMITED ITA/331/2008COMMISSIONER OF INCOME TAX, KOLKATA – IIVERSUSWEST BENGAL INFRASTRUCTURE DEVELOPMENT FINANCE CORPORATIONLIMITED BEFORE : THE HON’BLE JUSTICE SURYA PRAKASH KESARWANIAND THE HON’BLE JUSTICE RAJARSHI BHARADWAJDate : 1[st] May 2024. Appearance:Ms. Smita Das De, Advocate… for the appellant.Mr. J. P. Khaitan, Senior AdvocateMr. Ananda Sen, Advocate… for the respondent. 1.Heard Smt. Smita Das De, learned senior standing counsel for theappellant and Sri J. P. Khaitan, learned senior advocate assisted by SriAnanda Sen, learned counsel for the respondent assessee.appellant and Sri J. P. Khaitan, learned senior advocate assisted by SriAnanda Sen, learned counsel for the respondent assessee. 2.ITA/1/2018 relates to assessment year 2001-02. ITA/331/2008 relates toassessment year 2002-03. ITA/1/2018 was admitted by this Court byorder dated 17[th] January 2018 on three substantial questions of law.assessment year 2002-03. ITA/1/2018 was admitted by this Court byorder dated 17[th] January 2018 on three substantial questions of law. ITA/331/2008 was admitted by this Court by order dated 01.03.2011 ontwo substantial questions of law. Both the substantial questions of law asframed in ITA/331/2008 are similar to the substantial questions of lawNos.2 and 3 as framed in ITA/1/2018. The substantial questions of lawas framed in ITA/1/2018 as framed by this Court are reproduced below:- “1.Whether in the facts and in the circumstances of the case,direction of the Income Tax Appellate Tribunal allowing anamount of Rs.1,40,77,397/- under Section 43B(d) of the IncomeTax Act, 1961 was perverse, in the absence of such amount nothaving been debited to the profit and loss account and nothaving been claimed by the assessee in their return or revisedreturn?direction of the Income Tax Appellate Tribunal allowing anamount of Rs.1,40,77,397/- under Section 43B(d) of the IncomeTax Act, 1961 was perverse, in the absence of such amount nothaving been debited to the profit and loss account and nothaving been claimed by the assessee in their return or revisedreturn? 2.Whether the Income Tax Appellate Tribunal, in directing deletionof addition by the Assessing Officer of a sum of Rs.1,24,31,423/-as interest from non-performing assets, had properly construedthe provision of Section 43D of the Act, the said sum representinginterest on non-performing assets which were not accounted forby the assessee?of addition by the Assessing Officer of a sum of Rs.1,24,31,423/-as interest from non-performing assets, had properly construedthe provision of Section 43D of the Act, the said sum representinginterest on non-performing assets which were not accounted forby the assessee? 3.Whether Income Tax Appellate Tribunal erred in directingdeletion of interest of recurring deposit of Rs.11,74,79,000/-which was added by the Assessing Officer in a situation wherethe assessee represented that the interest accrued in the year ofmaturity and not during the subsistence of the deposit tenure?”deletion of interest of recurring deposit of Rs.11,74,79,000/-which was added by the Assessing Officer in a situation wherethe assessee represented that the interest accrued in the year ofmaturity and not during the subsistence of the deposit tenure?” 3.The substantial question of law in ITA/331/2008 are reproduced below:- “1)Whether the learned Tribunal below committed substantial errorof law in deleting the addition of Rs.41,89,29,498/- on accountof interest on NPA without considering that non-recognition ofof law in deleting the addition of Rs.41,89,29,498/- on accountof interest on NPA without considering that non-recognition of income is not permissible under the Income-tax Act, 1961 andthe same should be added to the total income of the assessee forthe year. 3.The substantial question of law in ITA/331/2008 are reproduced below:- “1)Whether the learned Tribunal below committed substantial errorof law in deleting the addition of Rs.41,89,29,498/- on accountof interest on NPA without considering that non-recognition ofof law in deleting the addition of Rs.41,89,29,498/- on accountof interest on NPA without considering that non-recognition of income is not permissible under the Income-tax Act, 1961 andthe same should be added to the total income of the assessee forthe year. 2)Whether the learned Tribunal below committed substantial errorof law in deleting the addition of Rs.36,09 crores being intereston sinking fund without considering that the assessee followedthe mercantile system of accounting and the assessee itself in itsreturn for the Assessment Year 2004-05 has credited andincluded interest earned on accrual basis on its deposit.”of law in deleting the addition of Rs.36,09 crores being intereston sinking fund without considering that the assessee followedthe mercantile system of accounting and the assessee itself in itsreturn for the Assessment Year 2004-05 has credited andincluded interest earned on accrual basis on its deposit.” 4.Since both the appeals involve common substantial questions of law withone additional question in ITA/1/2018, therefore, both the appeals havebeen heard together, with the consent of learned counsel for the parties.one additional question in ITA/1/2018, therefore, both the appeals havebeen heard together, with the consent of learned counsel for the parties. 5.We have substantially heard learned counsel for the parties, carefullyconsidered their submissions and perused the paper book.considered their submissions and perused the paper book. Re: Substantial question of law No.1 in ITA/1/2018 6.Briefly stated, facts of the present case are that the respondent assessee isan undertaking of the Government of West Bengal and is registered as anon-banking financial company [for short, ‘NBFC’]. It is engaged in thebusiness of financing various industries and infrastructure projects inWest Bengal. Its accounts are being audited. During the assessment year2001-02, the assessee paid on 18.09.2000 and 18.11.2000 EMI to ICICIBank in respect of term loan taken by it. The interest component in thepayment of EMI so made was a sum of Rs.1,40,77,397/-. Due toinadvertence, the assessee showed the entire payment of EMI with interestan undertaking of the Government of West Bengal and is registered as anon-banking financial company [for short, ‘NBFC’]. It is engaged in thebusiness of financing various industries and infrastructure projects inWest Bengal. Its accounts are being audited. During the assessment year2001-02, the assessee paid on 18.09.2000 and 18.11.2000 EMI to ICICIBank in respect of term loan taken by it. The interest component in thepayment of EMI so made was a sum of Rs.1,40,77,397/-. Due toinadvertence, the assessee showed the entire payment of EMI with interest as repayment of principal. When the mistake was noticed, it was rectifiedin the following financial year. The mistake was detected after theassessment order was passed by the assessing officer. Therefore, inappeal before the CIT(A), the assessee took additional ground that theinterest of Rs.1,40,77,397/- was an allowable business expenditure. TheCIT(A) rejected the claim of the assessee. Aggrieved, the assessee filed anappeal before the Income Tax Appellate Tribunal, Bench “A”, Kolkatawhich allowed the claim of the assessee on the aforesaid point. Aggrievedwith the order of the ITAT dated 16.10.2015 in ITA No.388/Kol/2008 andcross appeal in ITA/464/Kol/2008 [assessment year 2001-02], therevenue has filed the present appeal in ITA No.1/2018. 7.The ITAT has considered the aforesaid issue in detail and recorded itsfinding in paragraph 9 of the impugned order, as under:-finding in paragraph 9 of the impugned order, as under:- 7.The ITAT has considered the aforesaid issue in detail and recorded itsfinding in paragraph 9 of the impugned order, as under:-finding in paragraph 9 of the impugned order, as under:- “9.We have given a very careful consideration of the rivalsubmissions. From a perusal of the remand report of the AO, acopy of which is placed at page 39 of the paper book filed by theassessee, it is clear that the AO does not dispute the fact that anamount of Rs.1,40,77,397/- was interest on term loan which waspaid to ICICI during the previous year relevant to A.Y. 2001-02. Itis also not in dispute that the provision of section 43B of the Actwill apply to such interest payment and therefore the interestexpenditure in question cannot be claimed by the assessee asdeduction in any other assessment year in view of the specific barcontained in section 43B(d) of the Act. In other words irrespectiveof the method of accounting following by the assessee, interest,submissions. From a perusal of the remand report of the AO, acopy of which is placed at page 39 of the paper book filed by theassessee, it is clear that the AO does not dispute the fact that anamount of Rs.1,40,77,397/- was interest on term loan which waspaid to ICICI during the previous year relevant to A.Y. 2001-02. Itis also not in dispute that the provision of section 43B of the Actwill apply to such interest payment and therefore the interestexpenditure in question cannot be claimed by the assessee asdeduction in any other assessment year in view of the specific barcontained in section 43B(d) of the Act. In other words irrespectiveof the method of accounting following by the assessee, interest, expenses of the nature referred to section 43B(d) of the Actcan be allowed as a deduction only in the year in whichsuch interest are actually paid. The debit to the profit and lossaccount of an amount which is claimed as deduction u/s 43B of theAct is not a requirement and the decision of the Hon'ble CalcuttaHigh Court in the case of Associated Pigments Ltd. Vs CIT (supra)supports the plea of the assessee in this regard. The only objectionwhich remains for consideration is as to whether in the absence ofa revised return of income filed by the assessee making claim fordeduction on account of interest expenses the deduction can beallowed. The reliance placed by the revenue in this regard is on thedecision of the Hon'ble Supreme Court in the case of Goetze IndiaLtd. (supra) wherein it had laid down that the AO cannot consider aclaim made by an Assessee before him, in the absence of suchclaim being made in the return of income or a revised return ofincome. As rightly contended by the ld. Counsel for the assessee,such a bar does not extend to the appellate authorities under theAct. The decisions referred to by the ld. Counsel for the assesseesquare support the stand of the assessee in this regard. We,therefore, hold a sum of Rs.1,40,77,397/- should be allowed as deduction. We hold and direct accordingly and allow thegrounds raised by the assessee in this regard.” 8.We find that the controversy is squarely covered by a judgment of Hon'bleSupreme Court in Wipro Industries Limited v. Commissioner of IncomeTax [2022] 443 ITR 250 (SC) in which Hon'ble Supreme Court held asunder:- “10.The learned Additional Solicitor General appearing for theDepartment had faintly argued that since the appellant in its return as deduction. We hold and direct accordingly and allow thegrounds raised by the assessee in this regard.” 8.We find that the controversy is squarely covered by a judgment of Hon'bleSupreme Court in Wipro Industries Limited v. Commissioner of IncomeTax [2022] 443 ITR 250 (SC) in which Hon'ble Supreme Court held asunder:- “10.The learned Additional Solicitor General appearing for theDepartment had faintly argued that since the appellant in its return had taken a conscious explicit plea with regard to the part of theclaim being ascribable to capital expenditure and partly to revenueexpenditure, it was not open for the appellant to plead for the firsttime before the Income-tax Appellate Tribunal that the entire claimmust be treated as revenue expenditure. Further, it was not opento the Income-tax Appellate Tribunal to entertain such fresh claimfor the first time. This submission needs to be stated to berejected. In the first place, the Income-tax AppellateTribunal was conscious about the fact that this claim wasset up by the appellant for the first time before it, and wasclearly inconsistent and contrary to the stand taken in thereturn filed by the appellant for the concerned assessmentyear including the notings made by the officials of theappellant. Yet, the Income-tax Appellate Tribunalentertained the claim as permissible, even though for thefirst time before the Income-tax Appellate Tribunal, inappeal under section 254 of the 1961 Act, by relying on thedictum of this court in National Thermal Power Co. Ltd.Further, the Income-tax Appellate Tribunal has alsoexpresslyrecorded the no objection given by therepresentative of the Department, allowing the appellant toset up the fresh claim to treat the amount declared ascapital expenditure in the returns (as originally filed), asrevenue expenditure. As a result, the objection now taken bythe Department cannot be countenanced. Learned Additional Solicitor General had placed reliance onthe decision of this court in Goetze (India) Ltd. v. CIT in support ofthe objection pressed before us that it is not open to entertain freshclaim before the Income-tax Appellate Tribunal. According to him,the decision in National Thermal Power Co. Ltd. merely permits raising of a new ground concerning the claim already mentioned inthe returns and not an inconsistent or contrary plea or a new claim.We are not impressed by this argument. For, theobservations in the decision in Goetze (India) Ltd. itself makeit amply clear that such limitation would apply to the“assessing authority”, but not impinge upon the plenarypowers of the Income-tax Appellate Tribunal bestowed undersection 254 of the Act. In other words, this decision is of noavail to the Department.”the returns and not an inconsistent or contrary plea or a new claim.We are not impressed by this argument. For, theobservations in the decision in Goetze (India) Ltd. itself makeit amply clear that such limitation would apply to the“assessing authority”, but not impinge upon the plenarypowers of the Income-tax Appellate Tribunal bestowed undersection 254 of the Act. In other words, this decision is of noavail to the Department.” 9.Thus, the substantial question of law No.1 is answered in negative i.e. infavour of the assessee and against the revenue.favour of the assessee and against the revenue. Re: Substantial question of law No.2 in ITA/1/2018 and substantialquestion of law No.1 in ITA/331/2008question of law No.1 in ITA/331/2008 9.Thus, the substantial question of law No.1 is answered in negative i.e. infavour of the assessee and against the revenue.favour of the assessee and against the revenue. Re: Substantial question of law No.2 in ITA/1/2018 and substantialquestion of law No.1 in ITA/331/2008question of law No.1 in ITA/331/2008 10.This substantial question of law regarding alleged interest on non-performing asses is covered by a judgment of Delhi High Court inCommissioner of Income Tax v. Vasisth Chay Vyapar Ltd. & Another[2011] 330 ITR 440 (Delhi), which was affirmed by Hon'ble Supreme Courtin Commissioner of Income-Tax v. Vasisth Chay Vyapar Ltd. [2019] 410ITR 244 (SC). The relevant portion of the judgment of Delhi High Court inthe case of Vasisth Chay Vyapar Ltd. (supra) is reproduced below:-performing asses is covered by a judgment of Delhi High Court inCommissioner of Income Tax v. Vasisth Chay Vyapar Ltd. & Another[2011] 330 ITR 440 (Delhi), which was affirmed by Hon'ble Supreme Courtin Commissioner of Income-Tax v. Vasisth Chay Vyapar Ltd. [2019] 410ITR 244 (SC). The relevant portion of the judgment of Delhi High Court inthe case of Vasisth Chay Vyapar Ltd. (supra) is reproduced below:- “In this scenario, we have to examine the strength in thesubmission of learned counsel for the Revenue that whether it canstill be held that income in the form of interest though not receivedhad still accrued to the assessee under the provisions of theIncome-tax Act and was, therefore, exigible to tax. Our answer isin the negative and we give the following reasons in support:submission of learned counsel for the Revenue that whether it canstill be held that income in the form of interest though not receivedhad still accrued to the assessee under the provisions of theIncome-tax Act and was, therefore, exigible to tax. Our answer isin the negative and we give the following reasons in support: (1) First of all we would discuss the matter in the light of theprovisions of the Income-tax Act and to examine as to whether inthe given circumstances, interest income has accrued to theassessee. It is stated at the cost of repetition that the admittedposition is that the assessee had not received any interest on thesaid ICD placed with Shaw Wallace since the assessment year1996-97 as it had become NPAs in accordance with the PrudentialNorms which was entered in the books of account as well. Theassessee has further successfully demonstrated that even in thesucceeding assessment years, no interest was received and theposition remained the same until the assessment year 2006-07.Reason was adverse financial circumstances and the financialcrunch faced by Shaw Wallace. So much so, it was facing windingup petitions which were filed by many creditors. Thesecircumstances led to an uncertainty in so far as recovery of interestwas concerned, as a result of the aforesaid precarious financialposition of Shaw Wallace. What to talk of interest, even theprincipal amount itself had become doubtful to recover. In thisscenario it was legitimate move to infer that interest incomethereupon has not “accrued”. We are in agreement with thesubmission of Mr. Vohra on this count, supported by variousdecisions of different High Courts including this court which hasalready been referred to above. (2) In the instant case, the assessee-company being NBFC isgoverned by the provisions of the RBI Act. In such a case, interestincome cannot be said to have accrued to the assesseehaving regard to the provisions of section 45Q of the RBI Actand Prudential Norms issued by the RBI in exercise of itsstatutory powers. As per these norms, the ICD had becomeNPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not betreated to have been accrued in favour of the assessee.” Relevant portion of the judgment of Hon'ble Supreme Court in the case ofVasisth Chay Vyapar Ltd. (supra) is also reproduced below:- (2) In the instant case, the assessee-company being NBFC isgoverned by the provisions of the RBI Act. In such a case, interestincome cannot be said to have accrued to the assesseehaving regard to the provisions of section 45Q of the RBI Actand Prudential Norms issued by the RBI in exercise of itsstatutory powers. As per these norms, the ICD had becomeNPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not betreated to have been accrued in favour of the assessee.” Relevant portion of the judgment of Hon'ble Supreme Court in the case ofVasisth Chay Vyapar Ltd. (supra) is also reproduced below:- “2.Having gone through the impugned judgment in the aforesaidappeals, we are of the view that the consideration of the questionhas been given a full and meaningful reasoning and we agreewith the same.”appeals, we are of the view that the consideration of the questionhas been given a full and meaningful reasoning and we agreewith the same.” 11.Thus, the substantial question of law No.2 relating to assessment year2001-02 and the substantial question of law No.1 relating toassessment year 2002-03 are answered in favour of theassessee and against the revenue.2001-02 and the substantial question of law No.1 relating toassessment year 2002-03 are answered in favour of theassessee and against the revenue. Re: Substantial question of law No.3 in ITA/1/2018 and substantialquestion of law No.2 in ITA/331/2008 12.While considering this issue, the ITAT in the impugned order has recordedthe following findings:-the following findings:- “22. The second ground in respect of interest on recurringdeposit is also covered in favour of the assessee by theaforesaid order in ITA No.395/Kol/2006 order dated25.08.2006 read with the order dated September 21, 2007passed on the MA against the aforesaid order. The materialfacts are that the assessee creates sinking fund by depositingfrom time to time the required amounts with Banks in theform of recurring deposits of varying periods ranging from 3to 10 years. Interest on such recurring deposits is notpayable at the end of previous year but is payable only ondeposit is also covered in favour of the assessee by theaforesaid order in ITA No.395/Kol/2006 order dated25.08.2006 read with the order dated September 21, 2007passed on the MA against the aforesaid order. The materialfacts are that the assessee creates sinking fund by depositingfrom time to time the required amounts with Banks in theform of recurring deposits of varying periods ranging from 3to 10 years. Interest on such recurring deposits is notpayable at the end of previous year but is payable only on the maturity of the period for which the respective recurringdeposits have been made. Such recurring deposits are made withthe sole object of having funds in hand at the time of redemption ofinfrastructure development bonds issued by the assessee to raisefunds for the purpose of pursuing its objects of providinginfrastructure finance. Since both interest and principal aredue and payable only upon maturity, the assessee did notaccount for any interest. According to the revenue, in case of arecurring deposit, interest is received and reinvested and as suchinterest is required to be taxed every year and not altogether at thetime of maturity. ... the maturity of the period for which the respective recurringdeposits have been made. Such recurring deposits are made withthe sole object of having funds in hand at the time of redemption ofinfrastructure development bonds issued by the assessee to raisefunds for the purpose of pursuing its objects of providinginfrastructure finance. Since both interest and principal aredue and payable only upon maturity, the assessee did notaccount for any interest. According to the revenue, in case of arecurring deposit, interest is received and reinvested and as suchinterest is required to be taxed every year and not altogether at thetime of maturity. ... 24. We also find that the Hon'ble Kerala High Court in CIT vFederal Bank Ltd., (2008) 301 ITR 188 (Ker) has held that interestin respect of securities became due and receivable only uponmaturity and there was no entitlement to interest prior to maturity.It is also pertinent to mention that the entire interest wasaccounted for and offered to tax by the assessee in theassessment year 2005-06. In this connection, attention is invitedto Note 6 of the assessee's accounts for the financial year endedMarch 31, 2005 at page 33 of the Paper Book in ITA No.1080/K/2009 for the assessment year 2005-06. It was submittedthat in the event the grounds relating to interest on recurringdeposit in the revenue's appeals for the assessment years2001-02, 2003-04 and 2004-05 are adjudicated against theassessee, the AC should be directed to exclude such interestaccounted for and offered to lax in the assessment year 2005-06from the assessment for that year. 25. On behalf of the revenue, reliance was placed on thejudgment of the Hon'ble Supreme Court in CIT v T.N.K.Govindarajulu Chetty, (1987) 165 ITR 231 (SC). That case related tointerest on land acquisition compensation and it was held that suchinterest accrued on year to year basis. In the instant case, therewas no accrual since the interest was neither due nor receivableuntil maturity. The decision of the Hon'ble Supreme Court inCIT v. A.Gajapathy Naidu, (1964) 53 ITR 114 (SC) sought tobe relied upon on behalf of the revenue actually supports theplea of the assessee in its contention that interest income istaxable only upon maturity when the right to receiveinterest accrued to the assessee. In Laxmipat Singhania v CIT,(1969) 72 ITR 291 (SC), relied upon on behalf of the revenue it washeld that where the amount had escaped assessment on accrualbasis it could not be taxed in another year on the basis of receipt.No such situation has arisen in the instant case inasmuch asaccrual of interest is only upon maturity and there is noquestion of any income escaping assessment on accrual basis. Onbehalf of the revenue, it was also submitted that the threedecisions relied upon in connection with non- provision of intereston NPA were also relevant for deciding the ground relating tointerest on recurring deposits. We are of the view that none of thesaid decisions is of any assistance to the revenue since there is noaccrual of interest prior to maturity.” 13.The findings of fact as recorded by the ITAT [afore-quoted] have not beendisputed by learned counsel for the appellant before us, besides the factthat the accrual of interest on recurring deposit / sinking fund was onlyupon maturity, it is also an admitted fact of the case that the entiredisputed by learned counsel for the appellant before us, besides the factthat the accrual of interest on recurring deposit / sinking fund was onlyupon maturity, it is also an admitted fact of the case that the entire 13.The findings of fact as recorded by the ITAT [afore-quoted] have not beendisputed by learned counsel for the appellant before us, besides the factthat the accrual of interest on recurring deposit / sinking fund was onlyupon maturity, it is also an admitted fact of the case that the entiredisputed by learned counsel for the appellant before us, besides the factthat the accrual of interest on recurring deposit / sinking fund was onlyupon maturity, it is also an admitted fact of the case that the entire accrued interest was accounted for by the assessee and was offered to taxin the assessment year 2005-06. Thus, the interest on such deposit/fundwhich was subjected to tax by the assessing officer in assessment year2001-02 and assessment year 2002-03 was offered for taxation by theassessee in the assessment year 2005-06 and was accordingly taxed.Under the circumstances, the impugned order of the ITAT cannot be saidto suffer from any manifest error of law. The substantial question of lawNo.3 in ITA/1/2018 and the substantial question of law No.2 inITA/331/2008 are, therefore, answered in favour of the assessee andagainst the revenue. 14.For all the reasons afore-quoted, we do not find any merit in both theappeals. Accordingly, both the appeals of the revenue are dismissed. Thesubstantial questions of law have been answered above accordingly.appeals. Accordingly, both the appeals of the revenue are dismissed. Thesubstantial questions of law have been answered above accordingly. (SURYA PRAKASH KESARWANI, J.) S. Kumar (RAJARSHI BHARADWAJ, J.)