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Section 36(1)(iii) of the Income-tax Act, 1961

Posted on 31 July 2009 by Nirav Pankaj Shah

Court



Brief



Citation



Judgement

IN THE ITAT DELHI BENCH ‘H’

Housing & Urban Development Corporation Ltd.(HUDCO)

v.

Deputy Commissioner of Income-tax, Circle 12(1), New Delhi

G.C. GUPTA, JUDICIAL MEMBER

AND K.G. BANSAL, ACCOUNTANT MEMBER

IT APPEAL NOS. 2826 AND 2827 (DELHI) OF 2004

[ASSESSMENT YEARS 2000-01 AND 2001-02]

APRIL 9, 2009

I. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 2000-01 and 2001-02 - Ministry of Urban Development and Poverty Alleviation, Government of India had allotted to assessee-company a land, a part of which was to be utilized by assessee for construction and development of community centre complex - Initially, money was invested by assessee for implementation of project, on which interest was to be paid by Government to assessee at rate of 17 per cent - As money started flowing in as sale proceeds, investment made by assessee was recovered and yet there was a surplus money left with it for payment to Ministry - Assessee wrote a letter to Government seeking clarification in matter about surplus money as disputes arose between Income-tax Department and assessee - Government issued a clarification to effect that Ministry of Urban Development and Poverty Alleviation had absolute right over balance available with assessee, which was payable to it on demand or was to be utilized as per directions of Ministry only - Final allotment letter issued by Government to assessee provided, inter alia, that surplus funds generated by assessee from development and disposal of properties, if lying idle over a period, might be invested by assessee in short-term investment - Further, in meeting held between officials of Ministry and assessee, a provision had been made for interest on such surplus funds and assessee had to pay interest at rate applicable to fixed deposits taken by State Bank of India - Assessee also wrote a letter to Government, in line with aforesaid minutes, suggesting payment of interest at rate of 7.5 per cent - Ministry had agreed with proposal of assessee, but stated that its decision regarding said interest was purely provisional and it would be finalized when Government would take a decision on project and interest rate - For relevant assessment years, assessee claimed deduction of certain amount under section 36(1)(iii) as being interest expenditure - Assessing Officer disallowed assessee’s claim on grounds that there was no obligation on part of assessee to pay any interest to Government on surplus funds remaining with it; that contractual obligation was that if surplus funds were invested in deposits, only then interest thereon would be credited to surplus fund account and then available as deduction; and that there was no understanding on rate of interest to be charged on surplus funds - Whether correspondence between assessee and Government did lead to finding that interest liability was fastened upon assessee in respect of surplus fund account - Held, yes - Whether said liability could not be said to be unascertained liability simply because Ministry was to take a final view on project and interest rate at a future date - Held, yes - Whether, therefore, assessee was entitled to deduct interest in computing its income - Held, yes

II. Section 80G of the Income-tax Act, 1961 - Deductions - Donation to certain funds, charitable institutions - Assessment year 2001-02 - Whether a cheque is a movable property and an unconditional handing over of cheque by donor to donee leads to transfer of property in cheque to donee - Held, yes - Whether, where donee has failed to encash cheque and a new cheque is issued in lieu thereof and it is encashed, donation will relate back to date when old cheque was handed over to donee - Held, yes

FACTS-I

The Ministry of Urban Development and Poverty Alleviation, Government of India allotted to the assessee-company a piece of land, a part of which was to be utilized by the assessee for construction and development of community centre complex. The community centre was to be constructed and developed by the assessee out of its own funds as per decision taken in the meeting between the officials of the Ministry and the assessee. The assessee was allowed interest at the rate of 17 per cent per annum on the funds employed by it in the construction and development of community centre. The interest so received was offered for taxation by the assessee. It was laid down in final allotment letter issued by the Ministry that the surplus funds, if lying idle over a period, might be invested by the assessee in short-term investment, provided the returns from such investment would be utilized for the overall implementation of the project. As money started flowing in as sale proceeds, the investment made by the assessee was recovered and yet there was a surplus money left with it for payment to the Ministry. The assessee wrote a letter to the Government seeking clarification in the matter about the surplus money, as disputes arose between the Income-tax Department and the assessee. The Government issued a letter dated 7-11-2000 and further letter dated 26-3-2001, clarifying that the Ministry had absolute right over the balance available with the assessee, which was payable to it on demand or was to be utilized as per the directions of the Ministry only. For the relevant assessment years 2000-01 and 2001-02, the assessee claimed deduction of certain amounts under section 36(1)(iii) as being interest expenditures. The Assessing Officer disallowed the assessee’s claim for deduction of interest expenditure-in-question, on ground that there was no obligation on the part of the assessee to pay any interest to the Government on surplus funds remaining with it on account of the excess sale proceeds of properties over the expenditure incurred on the project. He further held that the contractual obligation was that if surplus funds were invested in deposits, only then the interest thereon would be credited to the surplus fund account and then allowable as deduction. The Assessing Officer also held that there was no understanding on the rate of interest to be charged on the surplus funds. On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer.

On second appeal :

HELD-I

The aforesaid two letters dated 7-11-2000 and 26-3-2001 clearly established that the surplus money available with the assessee belonged to the Government and not to the assessee. Thus, a relationship of creditor and debtor arose between the Government and the assessee soon after such surplus was generated. It was also clear that the assessee, in its discretion to be exercised after analyzing the cash flow, could deposit surplus or part thereof in short-term deposits. The interest receivable on such deposits was to become a part of the surplus fund account. However, the money was not deposited in short-term fixed deposits and, thus, no interest was earned on the money available in surplus fund account. Therefore, in terms of the letter dated 26-3-2001 of the Government, the assessee was to return only the amount available in surplus fund account to the Government. This, however, did not lead to the conclusion that the assessee was liable to pay interest to the Government as contended by the assessee. However, it appeared that further correspondence took place between the assessee and the Government in respect of interest on surplus fund account and certain minutes were drawn according to which if the surplus funds would remain idle for a period of time, such funds were to be invested by the assessee in short-term investment. In the minutes, it was also mentioned that provision had been made for interest on such surplus at the rate of 13 per cent for the periods 1-4-1996 to 31-10-1996 and at the rate of 12.50 per cent between 1-11-1996 to 31-3-1997. However, there was a fall in the rate of interest and return on investments had also fallen between 8 to 8.5 per cent. Therefore, the assessee would pay interest in the year 1997-98 at the rate applicable to fixed deposits taken by the State Bank of India for one year, which may vary from time-to-time. Therefore, the assessee wrote a letter to the Government on 9-3-1998, in line with the aforesaid minutes, suggesting the payment of interest at the rate of 7.5 per cent. The Ministry replied vide its letter dated 8-9-1998 to the effect that it agreed with the proposal of the assessee, but the decision was purely provisional and it would be finalized when the Government would take a decision on the project and the interest rate. Since there was no binding contract on the rate of interest, the liability

was contingent, which could be crystallized only when the rate of interest was finally fixed and agreed to between the parties. [Para 4]

It also transpired from the correspondence that the assessee might become liable to pay interest, possibly based upon the rate of interest offered by the State Bank of India on the deposits for the period of 180 to 365 days. However, no final decision about the rate of interest had been taken by the Government. A unilateral offer to pay the interest did not lead to fastening of a fixed and ascertained liability on the assessee. The assessee was following mercantile system of accounting and in any case, being a company, it was obliged to follow the aforesaid system as per the Companies Act, 1956. It is well-settled that under the mercantile system of accounting, a liability which has definitely arisen cannot be regarded as a contingent liability merely because it is to be discharged at a future date and the cost of discharging it is not definite. In the instant case, the correspondence between the assessee and the Government did lead to fastening of the interest liability on the assessee in respect of surplus fund account. This was tentatively agreed to by the Ministry also. This liability could not be said to be an unascertained liability simply because the Ministry was also to take a final view on the project and the interest rate at a future date. Thus, while the Assessing Officer could have estimated the liability on the basis of the correspondence, he could not have disallowed the whole of the liability. From the correspondence between the assessee and the Government, it was clear that the assessee had offered to pay interest at the rate of 7.5 per cent. Therefore, the liability was not going to be lower than the liability to be computed by the assessee in the books of account. Even if it so happens, then the excess provision made could be brought to tax under section 41(1) in the year in which the rate is finally fixed. Therefore, the assessee was entitled to deduct the interest in computing the income. [Para 4.1]

FACTS-II

The assessee had issued a cheque of Rs. 25 lakhs to the National Sports Development Fund dated 12-6-2000. This cheque was cancelled on 18-7-2000 and a fresh cheque of that date was issued to the National Sports Development Fund. This cheque was stated to be not presented for clearance by the recipient. Therefore, the same was replaced in May, 2001. The assessee claimed deduction under section 80G in respect of said amount for the assessment year 2001-02. The lower authorities disallowed the assessee’s claim.

On appeal :

HELD-II

The words used in sub-section (2) of section 80G are “any sums paid by the assessee in the previous year as donations”. A cheque is a movable property and an unconditional handing over of the cheque by the donor to the donee leads to transfer of property in the cheque to the donee; therefore, if the donee fails to encash the cheque, a new cheque is issued in lieu thereof and it is encashed; the donation will relate back to the date when the old cheque

was handed over to the donee. The facts regarding encashment of new cheque were not on record, although it was agitated before the Commissioner (Appeals) that in case the deduction was not allowed in relevant year, the same may be allowed in the assessment year 2002-03. Thus, the matter was to be restored to the file of the Assessing Officer to ascertain whether the new cheque was encashed or not in the subsequent year and, if yes, the deduction may be allowed in that year. [Para 11.2]

EDITOR’S NOTE

1. The interest which accrued on foreign currency loans was deductible in computing the income of the assessee, even though said interest had not become due for payment. [Para 5]

2. As regards the order of the Commissioner (Appeals) disallowing the expenditure incurred by the assessee on issue of bonds, debentures and other borrowings, it was held that the matter was to be restored to the file of the Assessing Officer for decision afresh by taking into account the decisions in the case of CIT v. Thirani Chemicals [2007] 290 ITR 196/[2006] 155 Taxman 233 (Delhi) and Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC). [Para 6]

3. Since the assessee was neither a lending library nor a professional, it was entitled to depreciation on books owned by it at the rate of 60 per cent and not at the rate of 100 per cent as claimed. [Para 7]

4. Expenditure by way of stamp duty payable can be allowed only on payment basis. [Para 8]

5. If profit derived from the business of providing long-term finance increases due to the additions made, then the deduction under section 36(1)(viii) should also be increased up to 40 per cent of the profits, but it should be restricted to the amount of special reserve created in the books of account. [Para 9]

6. Where the assessee had not been able to prove that it was required to make contribution towards the construction and other infrastructure requirements in the resettlement colonies and further, no expenditure was incurred by the assessee, lower authorities rightly disallowed the assessee’s claim for deduction of said expenditure from urban development fund. [Para 10.2]

CASES REFERRED TO

Madhav Prasad Jatia v. CIT [1979] 118 ITR 200/1 Taxman 477 (SC) (para 2.10), CIT v. Bazpur Co-operative Sugar Factory Ltd. [1989] 177 ITR 469/44 Taxman 281 (SC) (para 2.11), CIT v. Motor General Finance Ltd. [2002] 254 ITR 449/122 Taxman 447 (Delhi) (para 3.1), Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) (para 4.1), CIT v. Thirani Chemicals [2007] 290 ITR 196/[2006] 155 Taxman 233 (Delhi) (para 6) and Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) (para 6).

K.D. Dwivedi for the Appellant. V.K. Tiwari for the Respondent.





Tags :- section 36 1iiiincome act1961




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