In a One Time Settlement of principal & interest, it cannot be assumed that assessee has paid the interest due

The assessee has not produced any evidence to indicate the apportionment of the OTS amount of Rs.91 lacs towards principal and interest. It is obvious that a part of above amount was towards interest for the OTS amount was admittedly more than Rs.72 lacs (principal amount).

The assessee having failed to produce any  documents or other evidence in this regard, we see no reason to speculate in its favour. The working of the proportionate amount by the assessee is not based on what infact transpired between SICOM and itself. The basis is merely hypothetical. It is not inconceivable that the interest was waived and/or reduced.

 The reliance upon the rule that any amount received by creditors must first be adjusted towards interest and then towards principal cannot come to the assistance of the assessee. This is specially so where the assessee has not produced any evidence to indicate the true nature of the transaction in respect of the OTS.

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

INCOME TAX APPEAL NO. 5481 OF 2010

Akay Organics Ltd.

versus

Income Tax Officer 8(1)­1, Mumbai & Anr.

DATE : 5th September, 2012

P.C. :

1.  This is an appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal dated 21.08.2008 in ITA No. 4769/Mum/2006 relating to the assessment year 1999­2000.

2 The appellant seeks to raise the following questions of law:

i) Whether on the facts and circumstances of the case, interest of Rs.46,30,658/­ as claimed by the Appellant is allowable as deduction?

ii) Whether the order dated 21.08.2008 of the Tribunal is right in not following the well recognized rule of 3?

iii) Whether on the facts and circumstances of the case, the allocation of Rs.91,00,000/¬made by the Appellant between the principal amount and the interest due is correct in law?

3.  The appellant had availed a term loan from SICOM. As per its book of accounts an amount of Rs.1,46,63,160/­ was due and payable in respect thereof. The principal sum was Rs.72 lacs. The interest therefore was Rs.74,63,160/­. The appellant entered into a one time settlement (OTS) under which a sum of Rs.91 lacs was payable by the appellant to SICOM, as full and final settlement of the term loan.

4 The appellant claimed deduction of interest on a proportionate basis in the sum of Rs.46,31,658/­. The amount was worked out as follows:

5 The Tribunal upheld the order of the CIT (Appeals) by which the appellant was granted a deduction in respect of interest in the sum of Rs.19 lacs only. Rs.19 lacs constituted the difference between the OTS amount of Rs.91 lacs and the admitted principal amount of Rs.72 lacs.

6 The assessee has not produced any evidence to indicate the apportionment of the OTS amount of Rs.91 lacs towards principal and interest. It is obvious that a part of above amount was towards interest for the OTS amount was admittedly more than Rs.72 lacs (principal amount).

7    The assessee having failed to produce any  documents or other evidence in this regard, we see no reason to speculate in its favour. The working of the proportionate amount by the assessee is not based on what infact transpired between SICOM and itself. The basis is merely hypothetical. It is not inconceivable that the interest was waived and/or reduced.

8 The reliance upon the rule that any amount received by creditors must first be adjusted towards interest and then towards principal cannot come to the assistance of the assessee. This is specially so where the assessee has not produced any evidence to indicate the true nature of the transaction in respect of the OTS.

9 In these circumstances, the basis of the order cannot be said to be perverse. The authorities have taken a possible view. The same cannot and does not raise a substantial question of law. No order as to costs.