Sunil Synchem Ltd., 17/18, Old Industrial Area, Alwar v. Commissioner Of Income-Tax, Alwar

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 343 / 2005 Sunil Synchem Ltd., 17/18, old industrial area, Alwar through its Chairman cum Managing Director Anil Kumar Khaitan S/o late ShriS.N. Khaitan aged about 49 years. ----Appellant Versus Commissioner of Income-Tax, Alwar. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar. For Respondent(s) : Mrs, Parinitoo Jain. _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment Per Hon’ble Jhaveri J. 24/01/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal for statistical purpose and modifying theorder of the CIT(A). 2.This Court while admitting the appeal on 01.12.2005 hasframed the following substantial question of law: “Whether the amount of Rs.3,55,850/- asdifference of interest payable to the IndianOverseas Bank, coming to the notice of theassessee-appellant during the year underconsideration on reconciliation of accountswith the Bank could be disallowed on theground that it did not pertain to the yearunder consideration?” 3.Counsel for the appellant has taken us to para 11 of theorder of the Assessing Officer, which reads as under: “The assessee Co. credited a sum ofRs.207.71 lacs in the P&L appropriation a/c.The assessee company was required inincome. It filed reply vide letter datedFeb.19,1998. As per this reply, the amountrepresented the liabilities which was writtenback consequent upon waiver of partialinterest by the institutions as a part ofscheme approved by the appellate authorityfor industrial and financial reconstructionvide their order dated 2[nd] April, 1993. Thebreak-up of the amount written back is asunder:-ICICIRs.17147051IRBIRs.1460054RIICORs.1560245RFCRs.959835IUB (-)Rs.355850 In respect of ICICI, a sum of Rs.10178520was added back u/s 43B from the assett.Years 1989-90 to 1991-92. The amt.Written off is Rs.17147051/. The companyoffered the amount of Rs.6968531 fortaxation vide letter dated Rb. 19, 1998subject to the claims made in subsequentparagraphs of that letter. In R/o RIICO asum of Rs.4266861/- was added u/s43B.The assessee waiver of Rs.1560245/. Thebalance amount of Rs.2706636/- has beenfunded back. As per the company, fundingoutstanding interest into loan means thatthe interest has been paid and a new loaninto picture, hereinafter the assesseeclaimed a sum oe Rs.2706636/ u/s 43B. Inrespect of RFC, a sum of Rs.2706636/- u/s43B. A sum of Rs.95985 has been waived.As per assessee company, a sum ofRs.1096972 has been converted into loan.Therefore, the outstanding interest shouldbe treated as paid and should be allowed asreduction. In respect of IRBI the amountadded u/s 43B amounted to Rs.1531492while the waiver is of Rs.1460054/. Sincethe write back is less than the amountedu/s.43B, therefore, no addition is requiredto be made I/s.41(1) of the Income TaxAct. In respect of 10B, it was mentioned thatthe assessee has made a short provision ofRs.355850/-. Therefor, the assesseecompany made a claim that a sum ofRs.355850/- should be allowed asdeduction. However, another submissionwas also made vide letter dated February1998. According to the ‘A’ company, theremission will be completed when theassessee company pays back the amountswhich remains outstanding after write offpart of the interest. Hence, remission is notcomplete and no amount can be added u/s41(1) of the Income Tax Act. In respect of 10B, it was mentioned thatthe assessee has made a short provision ofRs.355850/-. Therefor, the assesseecompany made a claim that a sum ofRs.355850/- should be allowed asdeduction. However, another submissionwas also made vide letter dated February1998. According to the ‘A’ company, theremission will be completed when theassessee company pays back the amountswhich remains outstanding after write offpart of the interest. Hence, remission is notcomplete and no amount can be added u/s41(1) of the Income Tax Act. After considering the above reply of theassessee, letters were sent to RFC andRIICO. The assessee company issubmitting that the interest which hasremained outstanding after write off hasbeen converted into a loan, and therefore,outstanding interest should be treated aspaid and deduction allowed u/s 43B. It ispertinent to mention that RFC and RIICOare maintaining their a/cs on cash basis. Ifthe outstanding interest has been receivedby those concerns and has been convertedinto fresh loan, then those amount shouldbe taxable in their hands is income on cashbasis. Replies have been received from RFCand RIICO which is reproduced for readyreference:- From RFC letter:- “The Corporation isfollowing cash system of accounting andinterest realized by it is offered to tax in theyear of receipt. Interest funded by theCorporation is not treated as income. Inthe year of receipt of the funded interest isoffered to tax by the Corporation. Aseparate account under memorandumbooks of accounts is opened for maintainingthe account of funded interest. Hence, itdoes not term part of basic books ofaccounts. The Corporation had funded the interestcharged from the unit vide decision takenby the Board of Directors of the Corporationin their meeting held on 7.11.1997. Thiswas done in pursuance of orders of AAIFR.So far as the details of simple interest andpenal interest levied for the financial year1995-96 to 92-93 is concerned, it is toinform you that the details may be collecteddirectly from our branch office, Alwar.” From RIICO letter- “With reference toabove, the information is under preparationand will be submitted within a short time.It is submitted that the corporation isfollowing the cash system of accounting incase of interest realisation. Accordingly, asand when the interest is received by theCorporation, the same is treated as incomeof the corporation and offered for the tax.The same treatment has been given in theinstant case. The funded interest is treatedas income only as and when the amount isactually received by the corporation. Thecorporation keeps memorandum books ofaccounts for maintaining the record ofinterest account of the parties. In the instant case of corporation hasfunded the overdue interest and waived thepenal interest. Necessary details will begiven afterwards” Copies of the above-referred letters weresupplied to the ‘a’ company. The relevantpart of the reply is as under:- “Now we would like to draw your kindattention to the page No.2 of the said Deedof modification agreed and signed by RFCunder the sub-heading of RepaymentScheduled, point No.(iii), which clearlystates as under: “In addition to the above aseparate loan account of the BorrowerCompany will be opened by the Corporationunder the name and style as FundedInterest Term Loan Account as follows: In the instant case of corporation hasfunded the overdue interest and waived thepenal interest. Necessary details will begiven afterwards” Copies of the above-referred letters weresupplied to the ‘a’ company. The relevantpart of the reply is as under:- “Now we would like to draw your kindattention to the page No.2 of the said Deedof modification agreed and signed by RFCunder the sub-heading of RepaymentScheduled, point No.(iii), which clearlystates as under: “In addition to the above aseparate loan account of the BorrowerCompany will be opened by the Corporationunder the name and style as FundedInterest Term Loan Account as follows: Outstanding Interest of Rs.2957078/ as a01.10.1992 shall be funded in this loanaccount at zero rate of interest. This fundedinterest term loan shall be payable in 24equalquarterlyinstallmentsw.e.f.01.10.1994.” The same wording is used inthe Deed of Modification executed withRIICO, submitted with your goodself. Fromthe above it is very clear that the liability ofinterest has been discharged and new termloan name Funded Interest Term LoanAccount has come into existence. In viewof the above the amount of interestconverted into term loan should be treatedas payment and therefore the said amountmay kindly be allowed to the to thecompany. The company has paidRs.488600/- to RIICO and Rs.446425 toRFC during 1994-95 but not claimed asdeduction as it is repayment of Term Loan.” I have considered the submission of theassessee company and have gone thoughthe replies filed by RFC and RIICO. As persection 43B of the Income Tax Act, anydeduction which is otherwise allowable inrespect of any sum payable as interest onany loan or borrowing from some specificinstitution inaccordance with the terms &conditions of the agreement governing suchloan or agreement is to be allowed only incomputing the income referred in Section28 of that previous year in which such sumis actually paid by him. The word actuallyhas been used before the word paid. Thedictionary meaning of the actually inrelation to finance means somethingactually received. The financial institutionsRIICO and RFC are maintaining theiraccounts on cash basis and the interestwhich has been funded back to theassessee company has not been offered fortaxation. It means that interest has notbeen actually received by those concerns.In respect of the assessee company also, itcannot be said that the amount of interesthas been actually paid. Therefore, I am notinclined to accept the contention and theassessee company, that the amount ofinterest which has been funded back shouldbe allowed as deduction u/s. 43B. TheCentral Board of Direct Taxes had anoccasion to consider the alloability of sales-tax u/s 43B in view of the deferral schemesprovides by the State Governments. TheCBDT vide circular No.254A dated25.09.1987, observed at para 4 of thecircular- “The matter has been examined inconstitution with the Ministry of Law andthe various States Governments. TheMinistry of Law has opined that if StateGovernments make an amendment in thesales-tax Act, to the effect the sales-taxdeferred in the scheme shall be treated asactually pad, and such a deemed provisionwill be meet the requirements of section43B.” In view of the above circular, it isclear that until and unless as rule of law ismade by RFC and RIICO that interestdeferred under the so-called deferredscheme is treated as actually paid, theinterest cannot be treated as actually paid.Obviously there is no such provision in therules & regulations of the financialinstitutions, because they are not offering such income for tax on cash basis. Hence,the so-called funded-back interest is notallowed as interest u/s. 43B. In respect ofanother submission that the remission ofliability is not taxable u/s.41(1) of theIncome Tax Act for the assessment yearunder consideration on the plea that theremission is conditional. I have gone through the agreement. As perthis agreement a settlement has beenarrived at. In the event of default, on thepart of the assessee, financial institution, orwritten notice to the assessee company,were entitled to withdraw concessions.Therefore, the concession was final and incase of default, such concession could havebeen withdraw after receipt of notices. Itis, therefore, held that remission of liabilityof taxable u/s 41(1) of the Income Tax Act,for the year under reference. In view of theabove direction, the amount which isrequired to be added back u/s. 41(10 of theIncome Tax Act is as under:- Remission of Liability by ICICI 6968531/- No deduction is allowed in respect of so-called funding back of interest by RIICOand RFC. In respect of IOB, the provisionin earlier years was made less andtherefore, the same cannot be allowed inthe assessment year under consideration.Therefore, the claim of Rs.355850/- isrejected. Hence a sum of Rs.6968531/- isadded u/s 4191) of the Income Tax Act.” 4.He has further contended that the CIT(A) as in para 18 considered the case as under: “In ground No.11, the appellant hasclaimed deduction for interest payable toIOB for Rs.3,55,850/-. It was pointed outthat in terms of the claim approved byAAIFR there were partial waiver of interest.The effect of the same was given duringthe year. While reconciliation of theaccounts with the Financial Institutions itwas noticed that provision for interestpayable to IOB is less by Rs.3,55,850/-.Accordingly, the effect during the year andallowable as deduction. The A.O. was ofthe view that the liability did not pertainand therefore, not allowable. It was pointed out that on the basis of the claimthe A.O. has himself brought to tax anamount of Rs.69,68,531/- u/s 41(i) thoughthis waiver pertains to the earlier years. Itwas thus argued that when A.O. ischarging to tax the waiver of interest asincome then there is no reason to not allowthe short provision of interest which wasnoticed during the year on reconciliation. Ihave considered the argument of theappellant and find force in it. Since, thedifference is located during the year onconciliation of account it is a liability for theyear and therefore, the A.O. is directed toallow the claim of interest payable to IOBat Rs.3,55,850/-” 5.However, Tribunal while considering the case has reversedthe finding of CIT(A) and held that if the credit amount which hasbeen taken by the Assessing Officer, the CIT(A ) has rightly given.Therefore, he contended that the appeal deserves to be allowed. 6.Counsel for the respondent has supported the order of theTribunal and contended that the income which has been claimed isrequired to be claimed for the relevant year. 7.Heard counsel for both the parties. 8.In view of the figures which have been referred to by theAssessing Officer and the reasoning adopted by the CIT(A), we areof the opinion that if the income is to be considered then the lossis also to be considered for the relevant year. 9.In that view of the matter, the appeal deserves to be allowedand the issue is answered in favour of the assessee and againstthe department. 10.The appeal stands allowed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. Asheesh Kr. Yadav/74