Case Law Details

Case Name : M/s. Dangat Media P. Ltd. Vs Income Tax Officer (ITAT Mumbai)
Appeal Number : ITA no. 3046/Mum./2011
Date of Judgement/Order : 24/05/2012
Related Assessment Year : 2007–08
Courts : All ITAT (4418) ITAT Mumbai (1458)

The assessee has obtained a term loan from The Mahanagar Co–operative Bank Ltd., Fort Branch. It had also obtained an over draft facility. The bank debited the term loan account periodically with interest due and thereafter credited the term loan account with interest as received by debiting the over draft account in the bank. In effect, the term loan interest was paid by debiting the overdraft account. The Assessing Officer held this to be a conversion of interest liability into a loan or advance and, hence, not liable for deduction under section 43B.

After considering the arguments of both the sides, we find that the over draft account in question has a positive balance as on 31st July 2007. Thus, prior to the due date of filing of the return of income, the assessee has re–paid the bank not only the interest on the term loan but also the interest on the over draft account as well as the principal amount in the over draft account. On these facts, we have to necessarily allow the claim of the assessee.

 INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA no. 3046/Mum./2011 – (Assessment Year: 2007–08)

M/s. Dangat Media P. Ltd.

V/s

Income Tax Officer

Date of Order – 24.05.2012

 O R D E R

PER J. SUDHAKAR REDDY

The present appeal preferred by the assessee, is directed against impugned order dated 8th November 2010, passed by the Commissioner (Appeals)–I, Mumbai, for assessment years 2007–08.

2. Facts in brief:– The assessee, a company, is engaged in the business of printing of newspapers and periodicals. It filed its return of income declaring total income at Rs.  nil on 30th October 2007. The Assessing Officer passed an order under section 143(3) of the Income Tax Act, 1961 (for short  “the Act”) on 29th December 2009. He made disallowance under section 40(a)(ia) and under section 43B of the Act.

3. Aggrieved, the assessee carried the matter before the first appellate authority, wherein the Commissioner (Appeals) granted part relief. Further aggrieved, the assessee is in appeal before the Tribunal, on the following grounds:–

“1. The Assessing Officer has erred in disallowing Rs. 19,13,123 under section 40(a)(ia) of the Act.

2. The Assessing Officer has erred in disallowing Rs.  31,05,699, under section 43B of the Act.”

4. We have heard the learned Counsel, Mr. Vijay Mehta, representing the assessee and the learned Departmental Representative, Mr.

5. On the first ground, the basis of disallowance is brought out at Para– 5.4/Page–4 of the assessment order, which is extracted below fore ready reference:–

“5.4 It is observed from the party-wise details of purchases that the following parties have supplied graphic material, Vulcan plates, Tauras plates etc. which includes the supplies as per customer specification. For example, the specifications of Vulcan plates are as under: These are medium run economy plates used in mid-range sheet-fed and web-offset printing. The features of this plates includes printed identification number for quality assurance, dependable run length of upto 50000 impressions, strong image contrast, wide exposure and development latitude, resistance to press chemicals etc. These plates comes with product specification like plate type, substrate, gauge, maximum width, safe light, spectral sensitivity, recommended ugra, recommended stouffer, micro-lines resolution, colour change, storage & handling, shelf-life etc.

For example, the specifications of Tauras plates are as under: 

These are medium run economy plates used in mid-range sheet-fed arid web-offset printing. The features of these plates includes printed identification number for quality assurance, dependable run length of upto 150000 impressions, strong image contrast, wide exposure and development latitude, resistance to press chemicals etc. These plates comes with product specification like plate type, substrate, gauge, maximum width, safe light, spectral sensitivity, recommended ugra, recommended stouffer, micro-lines resolution, colour change, storage & handling, shelf-life etc.

6. The assessee has filed a paper book running into 69 pages. It contains copies of bills / invoices of purchases made by the assessee. A perusal of Para–5.4 of the assessment order, makes it clear that it is a case where all goods purchased, are having certain features and certain specifications. This is not a case where goods are taylor made to suit the requirements of the assessee. In fact, no materials were supplied by the assessee for manufacturing of the product purchased. In fact, the definition of the word “work”, as appearing in sub–clause (iv)(e) of Explanation below section 194C, reads as follows:–

“Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer;

But does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person other than such customer.”

7. Thus, on facts, it is clear that this is a case of purchase of goods of certain specification and features and not a case of a work contract. Therefore, provisions of section 194C is not attracted and the question of disallowance under section 40(a)(ia) does not arise. Consequently, the ground raised by the assessee is allowed.

8. Ground no.2, is on the disallowance under section 43B of the Act. The assessee has obtained a term loan from The Mahanagar Co–operative Bank Ltd., Fort Branch. It had also obtained an over draft facility. The bank debited the term loan account periodically with interest due and thereafter credited the term loan account with interest as received by debiting the over draft account in the bank. In effect, the term loan interest was paid by debiting the overdraft account. The Assessing Officer held this to be a conversion of interest liability into a loan or advance and, hence, not liable for deduction under section 43B.

9. After considering the arguments of both the sides, we find that the over draft account in question has a positive balance as on 31st July 2007. Thus, prior to the due date of filing of the return of income, the assessee has re–paid the bank not only the interest on the term loan but also the interest on the over draft account as well as the principal amount in the over draft account. On these facts, we have to necessarily allow the claim of the assessee.

10. As on facts, we have allowed the claim of the assessee, we do not wish to consider the other arguments that this is not a case of conversion that no disallowance can be made as interest on overdraft, etc. Consequently, this ground of the assessee is allowed.

11. In the result, assessee’s appeal is allowed

Order pronounced in the open Court on 24th May 2012.

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0 responses to “Disallowance of Interest on Term Loan U/s. 43B”

  1. suresh paharia says:

    I fail to understand what will be the position if the amount is debited by Bank to CC account , which is normal practice of Banks , which always has a debit balance within the sanction limits i.e. never has a POSITIVE balance . In such situation weather the amount will be disallowed by assessing officer ?

  2. CA Mukesh J Mandowara says:

    I completely satisfied with the judgement, 

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