CIT vs Aafloat Textile (India) Ltd.

The questions of law raised by the Revenue in this appeal reads thus:

(a) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that the non-convertible debentures had not been issued to Gujarat Lease Financing Ltd. (GLFL)?

(b) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that the assessing officer was not justified in applying the provisions of section 193 of the Act since in the case of GLFL the unpaid interest has been fully waived on a settlement reached between the assessee and the said party disregarding the fact that in the case of GLFL the debentures were issued prior to due date of credit of interest in view of the MoU dt. 29-9-1997 and the interest on such debentures was credited to the account of GLFL in the assessees books of account and it was mandatory for the assessee to deduct and pay tax in view of section 193 of the Act?

The assessment year involved herein is assessment year 1998-99.

From the questions raised by the Revenue, it is clear that the basic dispute in the present case is, whether the Income Tax Appellate Tribunal was justified in setting aside the order passed u/s 201(1)/201(1A) of the Income Tax Act, 1961 by holding that the assessee had not issued convertible debentures to Gujarat Lease Financing Ltd. in spite of the fact that pursuant to the Memorandum of understanding dt. 29-9-1997, debentures were issued to Gujarat Lease Financing Ltd. and the interest on such debentures were credited to the account of Gujarat Lease Financing Ltd. in the assessees books of account.

Relevant facts are that the assessee had taken advances facilities from banks and financial institutions including Gujarat Lease Financing Ltd. As per the terms of contract, the assessee was required to repay the same with interest. Sometime in March 1997 the assessee expressed its inability to pay the interest on account of financial difficulties. Thereupon, the banks and financial institutions including Gujarat Lease Financing Ltd. insisted that their advances be converted into debentures so as to create a charge on the assets of the assessee. Accordingly, a memorandum of understanding was arrived at between the parties and the assessee after passing necessary resolution to that effect, credited the debenture interest to the account of Gujarat Lease Financing Ltd.

During the course of search held on 3-12-2002, it was noticed that while crediting the interest to the account of Gujarat Lease Financing Ltd., the assessee had not deducted the tax at source. Accordingly, proceedings were initiated and order was passed u/s 201(1) and section 201(1A) of the Income Tax Act, 1961, imposing penalty upon the assessee.

On appeal filed by the assessee, the CIT(A) and thereafter the Income Tax Appellate Tribunal have held that though the resolution was passed to issue debentures and interest was credited as debenture interest, in fact, no debentures were issued as the necessary formalities required by the Registrar of Companies for issuance of debentures could not be complied with. Accordingly, in the return of income filed for the assessment year in question, the assessee had treated the amount of interest paid or provided to the banks/financial institutions on the non-convertible debentures proposed to be issued, as interest paid or provided on outstanding loans/lease rentals/finances and made disallowance of the same u/s 43B of the Income Tax Act, 1961.

It is not in dispute that in the regular assessment, the assessing officer has accepted the method of computation of total income made by the assessee. Once it is accepted in the regular assessment that interest paid by the assessee was not the debenture interest, it was not open to the Income Tax Officer (TDS) to treat that interest paid were debenture interest and pass an order u/s 201(1)/201(1A) of the Income Tax Act, 1961 on the ground that the assessee has failed to deduct tax at source while paying the debenture interest to the assessee. In these circumstances, no fault can be found with the decision of the Income Tax Appellate Tribunal in setting aside the order passed by the Income Tax Officer (TDS) u/s 201(1)/201(A) of the Income Tax Act, 1961. The appeal is accordingly dismissed with no order as to costs.