Advocate Akhilesh Kumar Sah
ITO Vs Mother Dairy Fruit & Vegetable Pvt. Ltd. & vice-versa (ITAT Delhi)
Mother Dairy Fruit & Vegetable Pvt. Ltd. Appeal: AO Failed To Establish A Legal Basis For The Addition On Account Of Disallowance Of Interest Expense, When The Assessee Had Not Even Claimed It As Expenditure Or Deduction, Addition Unjustified
Recently, in ITO vs. Mother Dairy Fruit & Vegetable Pvt. Ltd. & vice-versa [ITA No:- 4705/Del/2014 (A.Y.: 2005-06 and C.O. No.-46/Del/2015 Arising from ITA No:- 4705/Del/2014 (A.Y.: 2005-06), decided on 05.02.2019], briefly, return of income was filed by Assessee on 28.10.2005 passed under section 139 of Income Tax Act, 1961 (“ the Act”, for short) declaring total income Nil of Rs. 1,09,04,160/-. The return was processed under section 143(1) of the Act on 30.03.2006. Notice under section 148 of the Act was issued to the Assessee on 19.09.2011, requiring the Assessee to file the return of income. In response, the Assessee filed letter dated 05.10.2011 requesting to treat the aforesaid return filed on 28.10.2005 under section 139 of the Act as return filed in response to notice under section 148 of the Act.
In the aforesaid Assessment Order dated 30.03.2013, the AO made an addition of Rs. 1,79,92,000/- on account of “disallowance of Interest Expenses not actually paid”. The relevant portion of the Assessment Order is reproduced as under:
“5. In schedule 6 of the Accounts, the assessee has shown an amount of Rs. 1,79,92,000/- on account of “interest accrued but not due” under the head Current Liabilities. This shows that this amount of Rs. 1,79,92,000/- has not been paid during the year under consideration.
As per Mercantile Accounting System, every transaction entered into the books has two impacts one is debit and other is credit. The amount shown under current liabilities is the credit aspect of the transaction of Rs. 1,79,92,000/- however, the other aspect is to be ascertained before reaching to the conclusion of the nature of the transaction and its allowability as per the Income Tax Act, 1961. In this regard, the AR of the assessee was asked to explain the same along with the allowability. In response, the AR of the assessee submitted reply vide letter dated 28/01/2013 which is reproduced below for reference:
Interest accrued but not due
In the reasons of opening assessment u/s 147 of Act, your good self has stated that interest liability amounting to Rs. 1,79,92,000/- has been increased but the same is not due and paid as per Schedule 6 “current liabilities & provisions of balance sheet. Therefore, underassessment of income occurs by Rs. 1,79,92,000.
In this regard, we wish to submit that the above interest of Rs.1,79,92,000 was neither debited in the profit and loss account prepared for financial year 2004-05 and not it was claimed as expenditure for the year by the assessee.
The interest liability had accrued on security deposits received from customers by Mother Dairy Foods Processing Limited (MDFPL), a fellow subsidiary of assessee’s holding company.
The security deposits were received by MDFPL on behalf of Assessee Company. The security deposits together with interest liability thereon were been transferred by MDFPL to assessee company during the year under consideration.
The aforesaid fact in relation of security deposits together with interest liability accrued thereon have been stated in audited financials. Please refer note 9 of notes forming part of accounts i.e. Schedule 12 of audited financials. (Audited Financial are attached as Annexure-2).
The assessee had booked aforesaid transfer of security deposits and interest accrued thereon as liability in its books of accounts. In the balance sheet for the year ending March 31, 2005, the security deposit and interest accrued thereon have been shown as payable under the head current liabilities. Please refer schedule 6 of audited financials.
In view of the above, your good self will appreciate that question of disallowing an interest liability not claimed as expenditure by assessee does not arise.
Further without prejudice to above facts, we wish to state that as the interest liability stated above is neither payable to public financial institution and nor to scheduled bank, the same is outside the purview of disallowance u/s 43B of Act. Relevant extract of section 43B of the Act is reproduced below for ready reference:
“Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this act in respect of-
…………….
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a state financial corporation or a State Industrial Investment Corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or (e) any sum payable by the assessee as interest on any loan or advances from a schedule bank in accordance with the terms and conditions of the agreement governing such l an or advances,
OR
…………….
Shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly reemployed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him…..”
From perusal of provisions of section 43B of the Act, it can be observed that it provides for disallowance of unpaid interest only in the case of loans/borrowings from public financial institutions, state financial corporation, state industrial investment corporation or scheduled banks. In the present case the interest payable is not in respect of any of the aforesaid entities. As state above, the interest is payable to customers on security deposits and does not fall under the purview of provisions of section 43B of the Act.
6. The submission of the assessee has been examined in the light & circumstances of the present case. The assessee in its reply contended that M/s Mother Dairy Food Processing Ltd. (MDFPL) has received security deposits from various customers on behalf of the assessee company. The interest has been accrued on the security deposits and the security deposits along-with interests were transferred to the assessee company during the year under consideration. The assessee in its reply has narrated the facts relating to the accrued interest but it has not put light on the debit aspect of the transaction entered in its books. Moreover, the assessee company has not brought on record the supporting documents evidencing its contention in the case, in respect of transactions made with the MDFPL. The interest expenses are of the revenue in nature and at the year end the expenses cumulative in the interest account are transferred to the profit & loss account to get the fair picture of the profitability of the business of the entity. There is enough force in the conclusion that the interest accrued but not due to the tune of Rs. 1,79,92,000/- has been debited to the profit & loss account after crediting to the current liabilities. As such the interest expenses of Rs. 1,79,92,000/- has not been actually paid, the same need to be disallowed as it is not an allowable deduction under the Income Tax Act, 1961.
In view of the same, the amount of Rs. 1,79,92,000/- is hereby disallowed and added back to the total income of the assessee company for the year under consideration. For the reasons mentioned above, I am satisfied that the assessee has furnished inaccurate particulars of its income, therefore, penalty proceedings u/s 271(1)(c) of the Act are initiated separately for failure to disclose the true particulars of income.”
Aggrieved, the Assessee filed appeal before the CIT(A), who, vide order dated 13.06.2014, deleted the aforesaid addition of Rs. 1,79,92,000/-.
The Counsel for Assessee before ITAT Delhi drew attention to reconciliation of Interest Expenses and reconciliation of disallowance made by the AO, which was furnished by the Assessee in the Paper Book as follows:
Reconciliation of interest expense debited in P & L Account (Refer Schedule 11 at page 37 of paper book of audited financials):
