HIGH COURT OF DELHI CIT v Gujarat Guardian Ltd.

 
 


 
Allowability of interest paid in respect of loans obtained from Public Financial Institutions


 
In terms of section 43B(d) of Income-tax Act once it is ascertained that the payment is in the nature of “interest” in terms of section 36(1)(iii) read with section 2(28A) of the Act, and the assessee fulfills the conditions provided in section 43B(d) i.e., it is the interest paid in respect of loans obtained from public institutions, the interest will have to be allowed as a deduction only in the year of payment, notwithstanding the fact that, the liability to pay such sum was incurred in an earlier year based on the method of accounting regularly employed by the assessee.


 
 





HIGH COURT OF DELHI

CIT

v

Gujarat Guardian Ltd.

ITA No. 669/2008

January 23, 2009



RELEVANT EXTRACTS:

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17.1 According to us, as correctly held by the Tribunal, the assessee’s claim for deduction had to be allowed, in one lump sum, keeping in view the provisions of Section 43B(d) which provides that any sum payable by the assessee as interest on any loan or borrowing from any financial institution shall be allowed to the assessee in the year in which the same is paid irrespective of the provisions in which the liability to pay such sum is incurred by the assessee according to the method of accounting regularly applied by the assessee. Since the authorities below have not disputed that pre-payment premium paid to IDBI, in the instant case, is nothing but ‘interest’ or that it was paid to a public financial institution i.e., IDBI then, in terms of, Section 43B(d) the assessee’s claim for deduction could only have been allowed in the year in which the payment had actually been made. It is not disputed that payment has been made in the previous year relevant to the assessment year under consideration i.e., assessment year 1996-97. Therefore, there is no scope for spreading over the liability over a period of 10 years as was sought to be done by the Assessing which was, according to us, erroneously sustained by the CIT(A). The ratio of the judgment of the Supreme Court in the case of Madras Industrial Corporation (supra) is not applicable to the present case. The facts of the instant case are different. Madras Industrial Corporation (supra) pertains to treatment of discount on debenture issued by the assessee. The Supreme Court’s observations that a claim for deduction by an assessee be spread over as deduction in one year would distort the picture of profits, cannot be applied to the instant case, as the mechanism for claiming deduction on account of ‘interest’ paid on loans obtained by the assessee from a public financial institution, is specifically provided for in the statute under Section 43B(d) of the Act. Therefore, in terms of Section 43B(d) once it is ascertained that the payment is in the nature of ‘interest’ in terms of Section 36(1)(iii) read with Section 2(28A) of the Act, and the assessee fulfills the conditions provided in Section 43B(d), that is, it is the interest paid in respect of loans obtained from public institutions, it follows that, the interest will have to be allowed as a deduction only in the year of payment, notwithstanding the fact that, the liability to pay such sum was incurred in an earlier year based on the method of accounting regularly employed by the assessee. In these circumstances, in our opinion the Assessing Officer failed to appreciate the ratio of the judgment of the Supreme Court in Madras Industrial Corporation (supra), which is, really an application of the principle of accountancy of matching income with expenditure, where the Act makes no specific provision for claim of deduction. The said principle enunciated by the Supreme Court was not contemplated to apply to situations where the Act makes a distinct and specific provision. See Observations made by the Supreme Court in Tuticorin Alkali Chemicals v. CIT; (1997) 227 ITR 172 at pages 183-184. In the result, no fault can be found with the approach of the Tribunal in respect of this issue.

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