M/S. HAMOSONS EXPORTS PVT. LTD., CHENNAI V. DCIT, CORPORATE CIRCLE - 2 (2), CHENNAI

ITA 623/CHNY/2020

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Hamosons Exports P. Ltd. appealed against the order of the Commissioner of Income Tax (Appeals)-5, Chennai, which sustained the disallowance of a deduction claim for interest paid to Canara Bank. The company had entered into a one-time settlement with M/s.Edelweiss Asset Reconstruction Company for debts originally owed to Canara Bank, which had become non-performing assets. The primary legal contention was whether the interest component of the settlement payment, claimed as a deduction, was allowable under the Income Tax Act. The Tribunal noted a similar case involving the company's sister concern, M/s.Amex Garments Pvt. Ltd., where a similar deduction was allowed, and thus decided to allow the deduction for Hamosons Exports, subject to verification of tax compliance by M/s.Edelweiss.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134701 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 19-03-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 10-06-2020
• Other Referred Cases: M/s. Chemicals & Plastics India Ltd. Vs. CIT, Associated Pigment Ltd. Vs. CIT, M/s. Amex Garments Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Period of limitation; Time period of passing order; TDS; Set aside
• Section: 37; 43B; 40(a)(ia)

Judgement Text

आयकर अपीलीय अिधकरण, ‘ बी’ ायपीठ, चे ई IN THE INCOME TAX APPELLATE TRIBUNAL , ‘B’ BENCH, CHENNAI ी एबी टी. वक , ाियक सद एवं ी जी. मंजुनाथ, लेखा सद के सम# BEFORE SHRI ABY T. VARKEY, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER आयकर अपीलसं./I.T. A. No.6 2 3 / Chn y/ 2 0 2 0 (िनधा रण वष / A s s e s s m e n t Y e a r : 2 0 1 5 - 1 6 ) M/s. Hamosons Exports P.Ltd 15A, H.M. Centre, 1 st floor Nungambakkam High Road, Nungambakkam, Chennai-600 034. V s The Deputy Commissioner of Income Tax, Corporate Circle-2(2) Chennai. PAN: AAACH 0874H (अपीलाथ /Appellant) ( थ /Respondent) अपीलाथ कीओरसे/ Appellant by : Mr. N.Arjun Raj, C.A for Mr. S. Sridhar, Advocate थ कीओरसे/Respondent by : Mr. D. Hema Bhupal, JCIT सुनवाईकीतारीख/D a t e o f h e a r i n g : 20.03.2023 घोषणाकीतारीख /D a t e o f P r o n o u n c e m e n t : 24.03.2023 आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assesse company against the order of the Ld. Commissioner of Income Tax (Appeals)-5, Chennai dated 19.02.2020 for assessment year (AY) 2015-16. 2. At the outset, it was brought to our notice that there is delay of 41 days in filing the appeal. The Ld. AR for the assesse submitted that the delay was due to pandemic caused by Covid-19 and the period (41 days) are covered by the Hon’ble Supreme Court’s order [in Misc. Application No.665 of 2 ITA No. 623/Chny/2020 2021 vide wherein the Hon’ble Apex Court vide order dated 23.03.2020 had given direction that delay is to be condoned or limitation period to be extended as the case may be during the period between 15.03.2020 to 14.03.2021 which was further extended up to 28.02.2022 in Misc. Application No.21 of 2022 and again extended vide order dated 10.01.2022 up to 28 th May, 2022 suo-moto by the Apex Court]. Since, the Hon'ble Supreme Court has condoned delay of the aforesaid period; and the delay of 41 days falls in the aforesaid period, respectfully following the order of the Hon’ble Supreme Court supra, we condone the delay and admit the appeal for adjudication. 3. The main grievance of the assesse is against action of the Ld.CIT(A) in sustaining disallowance of the claim for deduction of interest paid to Canara bank in the computation of total taxable income without assigning any reasons. 4. Brief facts are that the assesse company which is in the business of purchase and sale of readymade garments had filed return of income declaring loss of Rs.4,99,06,873/- for the 3 ITA No. 623/Chny/2020 year under consideration. The return was selected for scrutiny and the AO noted that the assesse had claimed to have incurred expenses of Rs.5,20,39,358/- towards finance charges during the year under consideration. When asked to submit details, the assesse replied that it had credit facility with the Canara Bank and amount due to the bank as on 31.03.2002 was to the tune of Rs.2,92,60,642/- and the break-up of the same was as under:- Packing credit : 2,56,31,748 Bank OD : 26,72,281 Devolved LC Against purchases : 9,56,613 Total : 2,92,60,642 It is also brought to the notice of the AO that there was no transaction in the account thereafter (31.03.2002) ;and a stalemate continued till 31.03.2015, and since, it could not pay back loans with interest to the Canara Bank, it entrusted M/s.Edelweiss Asset Reconstruction Company (hereinafter M/s.Edelweiss) to enforce recovery of the dues and finally after several rounds of negotiations, loan/debt was settled by 4 ITA No. 623/Chny/2020 payment of Rs.8.13 crores; and which was in-turn obtained by assessee company from its sister concern M/s. T.S. Hajee Moosa & Co., No.33, Godwon Street, Chennai, which sold its property at No.33, NP Guindy Industrial Estate, Ekkaduthangal, Kalaimagal Nagar, Chennai-97 for Rs.30 crores. The finance charges were claimed as under: - Total amount paid on 31.03.2015 : Rs.8,13,00,000 Less: Amt due as on 31.03.2002 : Rs.2,92,60,642 Excess paid Rs. 5,20,30,358 In order to prove the aforesaid facts, the assessee filed before the AO, copy of balance sheet as on 31.03.2002 and allocation communication received from M/s.Edelweiss about the one time settlement. The AO acknowledged that the allocation communication received from M/s.Edelweiss gave account-wise details of allocation settlement with assessee as well as its other sister concerns which were as under:- i) Famtex Garments : Rs.7.83 crores ii) Amex Garments : Rs.5.04 crores iii) Hamosons Exports : Rs.8.03 crores Total : Rs.21.00 crores 5 ITA No. 623/Chny/2020 The AO, thereafter took note of M/s.Edelweiss letter about details of one-time settlement, wherein it has been agreed that outstanding liability would be settled for an amount of Rs.21 crores instead of Rs.23 Crs., if paid on or before 31.03.2015 and the bifurcation was given as under:- Name of Entities Principle outstanding Bifurcation ratio as per principle outstanding Settlement amount Famtex Exports P.Ltd 2.69 37.27% 7.83 Amex Garments P.Ltd 1.73 24.02% 5.04 Hamosons Exports P.Ltd 2.79 38.71% 8.13 Total 7.21 21.00 Thus, according to the assessee, total settlement made by the assessee towards principle outstanding of Rs.2.79 crores was to the tune of Rs.8.13 crores. And, the interest component would be Rs.8,13,00,000 (-) Rs.2,92,60,642 comes to Rs.5,20,39,358. Thus, according to the assessee, since interest for the money borrowed for the purpose of business need to be allowed on actual payment, the same should be allowed. However, the AO disallowed the same inter-alia on the ground that interest part is nothing but, penal in nature and so is not allowable as deduction as per section 37 of the Act. And since the finance cost incurred by the assessee, includes recovery charges collected by M/s.Edelweiss, which activity is not related 6 ITA No. 623/Chny/2020 to the business activity of the assessee company, he disallowed expenses claimed to the tune of Rs.5,20,39,358/-, since it has not been spent wholly or exclusively for the purpose of business. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A), who inter-alia, also found fault with the assessee for not deducting TDS on the repayment of interest and therefore, according to him section 40(a)(ia) of the Act is attracted, since payment has been made to M/s.Edelweiss and not to Canara Bank. Thus, he confirmed the action of the AO. Aggrieved, the assessee is now before us. 5. We have heard both the parties and perused records. We note that the issue as such is no longer res integra. It is noted that the assessee along with sister concerns, M/s. Famtex Garments and M/s. Amex Garments had taken loan in an earlier year from Canara Bank and as on 31.03.2002 (AY 2002- 03). It became Non-Performing Asset (NPA) [since assessee as well as its sister concerns had not repaid principle amount as well as interest on the amount borrowed from Canara Bank]. Thereafter, the Canara Bank had assigned the debt from assessee as well as sister concerns to M/s.Edelweiss vide letter 7 ITA No. 623/Chny/2020 dated 04.07.2014 (AY 2015-16); and thereafter, as a result of several rounds of negotiations one time settlement was arrived at between them. And as per settlement, the assessee as well as sister concerns has to remit total of Rs.23 crores. But, if the assessee and its sister concerns, paid on or before 31.03.2015, Rs. 21 crores to M/s.Edelweiss, then debit will be settled as given in the bifurcation chart (supra). Therefore, the assessee and its sister concerns made payment of Rs.21 crores before 31.03.2015 and thus, the assessee had repaid principle outstanding of Rs.2.79 crores by one-time settlement payment of Rs.8.13 crores. Therefore, interest component would be Rs.5.20 crores (Rs.8.13 – Rs.2.79) which was claimed as deduction, since actual payment of interest was made in this year. We note that similar issue had cropped up in the case of assessee’s sister concern i.e. M/s.Amex Garments Pvt. Ltd.,, wherein similar disallowance was made in the case of M/s. Amex Garments Pvt. Ltd., which came up before this Tribunal, in ITA No.2513/Chny/2018 for AY 2015-16, wherein the Tribunal accepted the Ld.CIT(A)’s action in that case, allowing deduction claimed by the assessee. We note that the Tribunal in assessee’s sister concern case Amex Garments 8 ITA No. 623/Chny/2020 Pvt. Ltd (supra) [vide order dated 30.11.2021] has held as under:- “8. We have heard both the parties, perused material available on record and gone through orders of the authorities below. We have also carefully considered reasons given by the learned CIT(A) to delete additions made by the Assessing Officer towards disallowance of interest paid to bank u/s.43B of the Income Tax Act, 1961. As regards first contention of the Revenue insofar as nexus between loans borrowed from bank and business activities of the assessee, the learned CIT(A) has recorded categorical finding that loans have been borrowed for purpose of business of the assessee and hence, there is no merit in the ground taken by the Revenue to challenge nexus between loans and its utilization in business of the assessee. As regards contention of the Revenue with regard to applicability of section 43B of the Income Tax Act, 1961, we find that as per provisions of section 43B(e) of the Act, interest on loans borrowed from banks and financial institutions is deductible on payment basis in the year in which such interest was actually paid to banks. The contention of the Revenue that before making claim for deduction, the assessee ought to have been recorded such interest in books of account of the assessee for the previous year to which said interest pertains, we find that as per mandate of provisions of section 43B of the Act, deduction is allowable in respect of sum paid including interest as per sub- section (e) of section 43B of the Act, is allowed only on actual payment basis in the year in which such 9 ITA No. 623/Chny/2020 interest has been actually paid to banks or financial institutions. 9. In this case, the learned CIT(A) has recorded categorical finding that the assessee has borrowed loan from Canara Bank, Thousand Lights branch, Chennai before 31.03.2002 and said loans become NPA in the year 2001-02. The learned CIT(A) has recorded further facts that the bank has classified those loans as NPAs and not provided for any interest from 31.03.2002 and until 31.03.2015. It was further noted that bank has assigned debt in terms of assignment agreement dated 26.04.2014 and assigned total debt due from the assessee company to Edelweiss Asset Reconstruction Companies Ltd. It was further noted that the assessee has settled outstanding debts by making one-time payment of Rs.5,04,00,000/- as against outstanding balance of Rs. 1,71,93,738/- and difference amount of Rs.3,32,06,262/- has been accounted as interest payable on loans. The assessee had claimed deduction for said interest u/s.36(1)(iii) on payment basis in terms of provisions of section 43B(e) of the Income Tax Act, 1961. The learned CIT(A) after considering relevant facts and also by following certain judicial precedents, including decision of the Hon’ble Madras High Court in the case of M/s. Chemicals & Plastics India Ltd. Vs. CIT (supra), had held that once loan availed from bank has been utilized for the purpose of its business, interest payable in respect of said loans is allowable as deduction. The learned CIT(A) further recorded that deduction towards interest was admissible in respective year to which it pertains, but same was allowable only on payment basis in terms of section 43B of the Act. Since the assessee has made payment of interest on loans for impugned assessment year, it has rightly claimed 10 ITA No. 623/Chny/2020 deduction towards said interest on payment basis, as per provisions of section 43B of the Act. The findings of fact recorded by the learned CIT(A) in light of facts brought out by the Assessing Officer and arguments advanced by the learned A.R for the assessee is in accordance with provisions of section 43B of the Act, which was further supported by decision of the Hon’ble Calcutta High Court in the case of Associated Pigment Ltd. Vs. CIT (1998) 234 ITR 589, where the High Court has considered similar issue and held that even though the assessee has not made any provision in books of account in respect of purchase tax in the earlier year to which it relates, but same is deductible on payment basis in terms of provisions of section 43B of the Act. The Revenue has failed to bring on record any evidences to counter findings of fact recorded by the learned CIT(A) nor bring on record any decision in favour of the Revenue to support its arguments that before claiming deduction on payment basis in terms of section 43B of the Act, the assessee needs to record such interest in the previous year to which such interest pertains. Therefore, we are of the considered view that there is no error in the reasons given by the learned CIT(A) to delete additions made by the Assessing Officer towards disallowance of interest paid to bank u/s.43B of the Income Tax Act, 1961. Hence, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue. 10. In the result, appeal filed by the Revenue is dismissed.” 6. Respectfully, following the decision of the Tribunal in the case of assessee’s sister concern in identical facts and 11 ITA No. 623/Chny/2020 circumstances, the deduction claimed regarding interest expenditure need to be allowed. However, in this appeal, the Ld.CIT(A) has confirmed the action of AO on one more ground to disallow the claim i.e. disallowance made since no TDS was deducted while making payment to M/s.Edelweiss under Section 40(a)(ia) of the Act,. In light of this particular reason emanating from this appeal, we set aside the impugned order of the Ld.CIT(A) and restore the matter back to the file of the AO with a direction that if M/s.Edelweiss has shown the amount in question in the return of income for AY 2015-16 and offered for tax the same, then there is no need of ANY disallowance u/s.40(a)(ia) of the Act. And for verification of this fact, the AO may call for necessary details, directly from M/s.Edelweiss and verify. Therefore, only for limited purpose, we remit this issue back to the file of the AO, and no disallowance is warranted if it is found that M/s Edelweiss has offered the same for taxation in its return of income, then in such an event, disallowance made to be deleted accordingly. Needless to say opportunity may be granted to assessee during verification as directed supra and assesee is at liberty to file relevant documents during the verification. 12 ITA No. 623/Chny/2020 7. In the result, appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 24 th March, 2023 Sd/- Sd/- ( जी. मंजुनाथ ) (एबी टी. वक (G. Manjunatha) ( Aby T. Varkey ) लेखा सद / Accountant Member !ाियक सद /Judicial Member चे#ई/Chennai, िदनांक/Dated 24.03.2023 DS आदेश की ितिलिप अ%ेिषत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु& (अपील)/CIT(A) 4. आयकर आयु&/CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF.