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2016 (9) TMI 157 - ITAT PUNE

2016 (9) TMI 157 - ITAT PUNE - TMI - Disallowance of whole of finance charges - accrual of incremental liability - assessee is stated to be an Investment Company investing in shares and securities - Held that:- In the present case, the assessee by virtue of assignment agreement has received certain amount which is to be replenished and repaid by higher sum computed by applying Net Present Value method at a discounting factor of 10%. The corresponding finance costs debited to Profit & Loss Accoun .....

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n event by any stretch of imagination. The Assessing Officer has disallowed the deduction for the liability on the ground that sum will have to be incurred and accordingly in his view the liability has not accrued. We do not find any rationale for holding such view. As noted, the obligation for repayment of enhanced liability corresponding to the financial charges has crystallized with the efflux of time. Thus, the facts of the case clearly indicates that enhanced liability and consequential dif .....

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atwa For The Respondent : Shri P. L. Kureel ORDER PER PRADIP KUMAR KEDIA, AM : The captioned appeal filed by the assessee is against the order of CIT(A)-I, Pune dated 03.02.2014 relating to assessment year 2007-08 passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. In this appeal, the assessee has assailed the action of the CIT(A) in disallowing the whole of finance charges and considering the same as income for the assessment year 2007-08. 3. Briefly stated, the asse .....

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ture of payment towards finance charges, the assessee submitted that Indian Seamless Steels and Alloys Ltd. (ISSAL) had availed interest free sales tax Deferral loans (STL) from Government of Maharashtra under Package scheme of incentives-1988 (The scheme). As per the scheme, ISSAL had collected the sales tax from its customers and retained as an interest free sales tax loan. It was stated that as per the scheme, the STL is required to be paid in 5 installments to SICOM being the agency appointe .....

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ny, the loan was accounted for at NPV at the time of assignment. It was claimed that the loan liability taken over for a consideration is a part of the business of financing and in the process the company took over not only the liability to the extent of actual consideration received determined at NPV but also even the future liability. It was submitted before the Assessing Officer that the difference between net present value as on 31/03/2007 and 31/03/2006 has been debited as finance charges o .....

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f the business and not interest and therefore no TDS has been deducted from the payment. The Assessing Officer, however, was not impressed with the claim of the assessee towards finance charges. The Assessing Officer was of the opinion that the expenditure is not a revenue expenditure and liability does not exist in presenti but is a contingent liability. The Assessing Officer, in conclusion, disallowed the claim of finance charges of ₹ 44,71,126/- and added to the total income of the asse .....

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eproduced hereunder :- 4.5 The various contentions raised by the Ld. Counsel for the appellant on the admissibility of the expenditure towards finance charges are carefully examined in the light of the material placed on record and the provisions of sec. 37 of the I.T. Act. In the first place it is to be mentioned that admittedly the appellant is an associate concern of Indian Seamless Steels & Alloys Ltd., (ISSAL). As per details furnished by the appellant, ISSAL is manufacturer of steel an .....

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ected for the financial year 1994-95 would have to be repaid in five equal annual installments beginning with financial year 2005- 06 and so on. As stated in the agreement dated 09.04.2001 claimed to have been entered into by the appellant ISAAL during the period from 01.04.2001 to 31.03.2001, ISSAL had availed of sales tax deferral of ₹ 835.98 lacs and the repayment schedule of which is as follows: Sales Tax Deferred During 2000-01 Repayment Schedule Total Rs. in lacs Year ending on Rs. I .....

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2001 (Rs. in lacs) 64.46 58.60 53.27 48.43 44.03 268.79 4.5.1 Thus, by virtue of the said agreement the appellant has taken over the deferred sales tax liability of ₹ 835.98 lacs of ISSAL payable in five installments commencing from 30.04.2011 for a consideration of ₹ 268.79 lacs which is stated to be the Net Present Value (NPV) of the deferral liability as on 31.03.2001. This net present liability of 268.79 lacs as on 31.03.2001, which got enhanced to 288.63 lacs as on 31.03.2002 wa .....

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, the differential amount is added to the outstanding NPV and the cumulative liability is being shown in the balance sheet every year till the year 2011-12. Following the same method in this year, the difference in NPV as on 31.03.2007 and as on 31.03.2006 amounting to ₹ 44,71,126/- was debited to the P&L account for the year under consideration as expenditure under the head 'finance charges' and as it was not actually paid, the amount was added to the existing outstanding liab .....

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etermination in the present case are whether the liability in question i.e. the difference in NPV of ₹ 44,71,126/- is liability in praesenti as claimed by the appellant. If it is liability in praesenti, whether the same is an allowable deduction u/s 37 of the I T Act. (i) whether the impugned liability is liability in praesenti: 4.5.2 In the present case, assignor ISAAL was liable to pay sales tax amounts collected from 01.04.2000 to 31.03.2001 to the sales tax department. However, payment .....

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ence in NPV at the end of the every year and the expenditure is claimed under the head finance charges. But, the fundamental question that arises is as on 31.03.2007 to whom the appellant was liable to pay the so called finance charges for which the provision was made in the books of account. The amount was not payable to ISSAL as under the agreement it has assigned the entire liability to the appellant in the year 2001 itself. As on 31.03.2007 the amount was also not payable to the sales tax de .....

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consideration of ₹ 268.79 lacs NPV the Assignee hereby takes over the said loans of the assignor and agrees to pay' the said loans to sales tax department as per the payment terms. In case the liability for payment of sales tax increases during the assessment, the differential liability would be paid by the assignor on respective due dates. In case such liability reduces during the assessment, the differential liability would be paid by the assignee to the assignor on respective due da .....

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to the sanction of SICOM Ltd., and Sales Tax Authorities, if required and the parties shall execute necessary documents, if any to give effect to such sanction as and when received. It is further expressly agreed between the parties that the transfer of Sales Tax Liability as aforesaid shall be subject to and take effect from the appointed date of the proposed amalgamation of Indian Seamless Steels & Alloys Ltd, and Jejuri Steels & Alloys Private Ltd. In the event the proposed amalgamati .....

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it was taken over in the year 2001 though it is to be discharged from the year 2011 is not tenable. Needless to emphasize that there is a distinction between the actual liability in praesenti and a liability de futuro which for the time being is only contingent. In the present case, as on 31.03.2007 there was no liability in praesenti and the appellant has made a provision for a liability de futuro. In such circumstances, the decision of Apex Court in the case of Bharat Earth Movers (112 Taxman .....

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Act. As clearly spelt out in the said agreement, though the amount is charged to the P&L account under the head 'finance charges', yet it actually represents amount of sales tax payable to SICOM or the sales tax department from the year 2011. The terms and conditions of the agreement and the Eligibility Certificate clearly show that the amount payable is nothing but sales tax to the sales tax department after the deferral period of ten years and it is not repayment of loan as claime .....

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fore, the amount payable, even presuming to be accrued and present liability, cannot be allowed as deduction in view of the express provisions of sec. 43B of the I. T. Act. It may also be mentioned here that the Board circulars cited by the appellant are of relevance to the case of ISAAL and not to the case of the appellant. The other judicial precedents relied upon by the appellant were rendered in a different factual context i.e. early redemption of deep discount bonds and the same cannot be a .....

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e Assessing Officer is justified on facts and in law in taking the view that liability in question is not liability in praesenti and disallowing the provision made by the appellant for such liability. Accordingly the addition of ₹ 44,71,126/- made by the Assessing Officer on this ground does not call for any interference and the same is upheld. Grounds of appeal No. 1 to 4 fail. 5. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. 6. The Ld. Authorized Re .....

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ived was computed at a discount rate identified at 10%. It was submitted that the loan is returnable in five equal installments starting from financial year 2011-12 and ending on financial year 2015-16 and in the books of the company, the loan was accounted for at NPV at the time of assignment and as such the loan liability so taken over is an integral part of business of financing for an agreed consideration. It was stated that in the process, the company took over not only the liability to the .....

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n agent appointed by the Government of Maharashtra, who will receive the installment of part payment of loan and not as interest income. The difference between the consideration and the liability determined at NPV is claimed to be accrued expenditure of business. It was contended by the Ld. AR that this is not a case of exchange of loan on better repayment terms but a case of receipt of loan at pre-determined costs, which cost gets crystallized with the efflux of time and is an actual liability .....

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and contended that while the liability will be discharged at future date, it has definitely accrued in present time and it does not make a difference if the future date on which the liability has to be discharged is not ascertained. The Ld. AR went on to argue that in the present case, it is certain that the liability has been incurred and is also capable of estimated with reasonable certainty. He submitted that the reliance placed on the various decisions by the Assessing Officer is quite misp .....

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ed as per well established accounting practices. He finally contended that the impugned finance charges in question is neither a contingent liability nor a capital expenses and therefore the action of the Revenue in rejecting the claim of the assessee is unwarranted and requires to be set-aside. 7. The Ld. Departmental Representative (DR) Shri P. L. Kureel, on the other hand, relied upon the order of the CIT(A) and submitted that no actual liability in presenti has been incurred by the assessee. .....

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ity of the assignor for repayment of the sales-tax deferral loan amounting to ₹ 835.98 lakhs as noted above was acquired by the assessee for a consideration of ₹ 268.79 lakhs. The liability of the assignor was accepted by the assessee for a sum of ₹ 268.79 lakhs received from the assignor stated to be determined by applying discounting factor of 10% as per Net Present Value method based on repayment schedule. 8.1 The relevant extract of the assignment agreement is reproduced he .....

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shtra in five equal annual installments upon expiry of ten years from the date of availment i.e. to say the sales tax collected for the financial year 1994-95 would have to be repaid in five equal annual installments beginning with financial year 2005-06 and so on. 5. Accordingly, during the year from 1st April, 2000 to 31st March, 2001 the Assignor have availed of sales tax deferral loan of ₹ 835.98 lacs (hereinafter referred to as the said loans) the repayment schedule for which is as pe .....

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arrived at @ 10% NPV based on the repayment schedule. NOW THIS DEED OF ASSIGNMENT WITNESSES THAT The Assignor hereby declare that he is liable as per his books of account, to make payment of the sales tax loans of ₹ 835.98 lacs availed during the period from 1st April, 2000 to 31st March, 2001 (hereinafter known as the said liabilities) as per repayment schedule 1 appended herewith. The loan amount is subject to assessment by sales tax authorities and would become final only on completion .....

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e assignee to the assignor on respective due dates. In the event of any default by the Assignee, in making the payment on or before due date, the Assignor will make payment of Sales Tax in which case the Assignee shall be liable to pay the amount thus paid and interest thereon @ 18% p.a. from the date of default and the Assignee shall also be liable to reimburse the penal interest payable on account of delayed payment of Sales tax. 8.2 It is the case of the assessee that in terms of the agreemen .....

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al year relevant to the assessment year as per Net Present Value method and consequential finance charges debited to the Profit & Loss Account is an accrued liability or a contingent liability ? 8.3 In terms of section 145 of the Income Tax Act read with section 211 of the Companies Act, a company has to mandatorily prepare its account on accrual basis. The term Accrual has been defined in the Accounting Standard - 1 prescribed by the Institute of Chartered Accountants of India as well as by .....

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mined with certainty and represents only the best estimate in the light of available information. Under the Mercantile System of Accounting, the expenditure items for which legal liability has been incurred are immediately debited even before the amount in question are actually distributed. 8.4 In terms of section 28 read with section 145 of the Income Tax Act, income chargeable under the head profit and gains of business or profession cannot be determined unless and until the expenses or obliga .....

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ofits and gains are being computed. On the other hand, if a liability has not accrued during the relevant year, same is actually known as contingent liability. Therefore, the short question is whether the liability towards impugned finance charges is an accrued liability or is a contingent liability in the instant case. Needless to say, an accrued liability is allowable whereas a contingent liability is not allowable deduction for the purposes of determination of taxable income. 8.5 The judicial .....

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tingent in contrast, refers to possibility of an obligation or liability to arise on occurrence or nonoccurrence of one or more uncertain future events. As per Mercantile System of Accounting, an accrued liability is required to be accounted for in the books of account. In respect of the liability, which has accrued, but quantification for which is still pending, a provision is required to be made in the books of account. 9. In the present case, the assessee by virtue of assignment agreement has .....

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