2017 (2) TMI 695 - HC - Income Tax

Applicability of provisions of Section 40(a)(i) r.w.p. of Section 10 (15)(iv)(c) - need for approval of the Central Govt. for approving the loan amount, rate of interest and the mode of repayment - Held that - Section 10(15)(iv)(c) provision clearly bears the fact that its approval of the Central Government which is necessary not with respect to the transaction per se but with regard to the rate of interest. Given this objective factor, and the fact that the Revenue does not appear to have notified any specific agency i.e. the Department of Revenue/CBDT or any other Department by naming it (unlike Section 10B, Section 35(2)(a)(b) etc.), where either the specific power is granted or the concerned authority/agency itself is mentioned; the particular elusion to the Central Government cannot, in the opinion of the Court in any manner, undermine or render valueless the approval granted by one of the agencies or departments of the Government. This view is more crucially important - given the fact that in the present case, the Department of Revenue did not express any contrary opinion in its approval dated 15.01.1999. In this context, the Court holds the Revenue s arguments - that the amounts mentioned in the Department of Revenue s approval do not tally with the approval granted by the Department of Economic Affairs utterly unsubstantial. What the Department of Economic Affairs has approved is the transaction and the rate of interest. That the assessee availed a lesser amount of credit or loan did not mean that there was no approval. Particularly, because it is not the Revenue s case that the Department of Revenue approved an entirely different transaction. Thus the impugned order of the ITAT cannot be sustained. It is accordingly set aside. The assessee is held entitled to the benefit of claim of deduction of interest made by it, in its return. Decided in favour of the assessee.

Summary

Issues:
Interpretation of Section 10(15)(iv)(c) of the Income Tax Act - Approval by Central Government for rate of interest and compliance with statutory conditions.

Analysis:

Issue 1: Interpretation of Section 10(15)(iv)(c) of the Income Tax Act
The case involved the interpretation of Section 10(15)(iv)(c) of the Income Tax Act, which pertains to the approval of the Central Government regarding the rate of interest for loans taken by industrial undertakings for specific purposes. The assessee, engaged in printing and binding business, imported machinery on deferred credit and sought approval under this section. The Department of Economic Affairs and RBI granted approvals related to the loan amount, interest rate, and repayment terms. The dispute arose when the AO disallowed the deduction under Section 40(a)(i) of the Act for failure to deduct tax under Section 195. The CIT(A) granted relief, emphasizing compliance with statutory conditions based on approvals received. However, the ITAT overturned the decision, citing delayed approach to the Department of Revenue and failure to deduct tax as reasons for disallowance.

Issue 2: Approval by Central Government for rate of interest and compliance with statutory conditions
The critical contention revolved around whether the approvals obtained from the Department of Economic Affairs and Department of Revenue satisfied the requirement of Central Government approval as per Section 10(15)(iv)(c). The Court analyzed the approvals granted by both departments and emphasized that the essence of the provision was Central Government's approval concerning the rate of interest, not the specific department. The Court noted that the Department of Revenue's approval did not contradict the Department of Economic Affairs' approval and focused on the rate of interest. It held that the failure to deduct tax under Section 195 did not invalidate the approvals received, and the denial of relief by the ITAT was unwarranted. Consequently, the Court set aside the ITAT's decision, ruling in favor of the assessee and allowing the appeal for deduction of interest claimed in the return.

In conclusion, the judgment clarified the significance of Central Government approval under Section 10(15)(iv)(c) for the rate of interest in loan transactions, emphasizing compliance with statutory conditions based on approvals obtained from relevant government departments. The Court's interpretation upheld the assessee's entitlement to the deduction claimed, highlighting the importance of understanding statutory provisions and approvals in tax matters.