Deputy Commissioner Of Income Tax Central Circle 26 vs One Hub Chennai Private Limited

PER MANISH AGARWAL, A.M.:

The present appeal is filed by Revenue against the order dated 02.09.2025 passed by Ld. Commissioner of Income Tax (A)-29, New Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-29/10453/2019-20 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 30.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2017-18.

Brief facts of the case are that the assessee is a company, e-filed its return of income declaring loss of INR 31,25,94,854/- on 30.11.2017. The case of the assessee was selected under CASS for scrutiny and in terms of assessment order passed on 30.12.2019 total disallowance of INR 1,85,73,267/- was made comprising of interest on delayed payment of INR 1,44,43,256/- and interest on delayed refund of advances of INR 41,30,011/-. Accordingly, total income of the assessee company was assessed at a loss of INR 29,40,21,587/-.

Against the said order, assessee filed an appeal before ld. CIT(A) who vide impugned order dated 02.09.2025, has allowed the appeal of the assessee and deleted the disallowance so made.

Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before the Tribunal wherein the Revenue has taken various Grounds of appeal as per appeal memo.

Ground of appeal No.1 raised by the Revenue is with respect to the deletion of disallowance of INR 1,44,43,256/- made u/s 37(1) of the Act out of interest on delayed payment of contract bills.

Before us, ld. Sr. DR for the Revenue submits that the interest on delated payment was penal in nature and was paid for the default committed by the assessee in meeting out the contractual obligations and terms and conditions and thus, cannot be allowed as business expenditure u/s 37(1) of the Act. Ld. Sr. DR submits that payment of interest payment had no relationship with the project completed by the assessee and was paid for the delayed payment and therefore, the said amount cannot be allowed as business expenditure and deserves to be disallowed. He prayed accordingly.

On the other hand, ld.AR for the assessee vehemently supported the order of ld. CIT(A) and submits that the assessee was engaged in the business of development of integrated township, leasing and selling of developed industrial plots and rendering operations and maintenance services of infrastructure facilities. The assessee was entered into an agreement dated 29.11.2012 and further on 28.02.2013 with M/s L&W Construction P. Ltd. (“L & W”) for development of infrastructure work for Phase-I Development of the Industrial Hub. The work was completed by L&W on 30.04.2014 and liability period was completed on 31.05.2015. The assessee has shown the constructed structure at Phase-I as part of the total inventory in the Balance Sheet. Out of the total cost incurred, due to financial crisis for the balance amount payable of INR 10.81 crores, an agreement was entered into between the parties on 30.09.2015 for deferment of dues payable by the assessee to L&W as per which assessee has to pay interest @ 13.75 % per annum starting from 01.06.2015 and accrued interest from FYs 2015-16 & 2016-17 were claimed as revenue expenditure. As per ld.AR, the interest was paid under business obligation due to paucity of funds and in the larger interest of business, it was decided to defer the payment and interest was paid. As per ld.AR, it was a prudent businessman decision and AO cannot walk into the shoe of the businessman to take decision on day to day business activity carried out. Ld.AR submits that ld. CIT(A) has appreciated these facts and deleted the disallowance made by placing reliance on the judgement of Hon’ble Jurisdictional High Court in the case of CIT vs Desiccant International Pvt. Ltd. reported in 347 ITR 32 (Delhi) and of the Co-ordinate Bench of Mumbai Tribunal in the case of Krunal Industrial Estate Developers (P.) Ltd. vs ITO reported in 87 taxmann.com 70 [Mum-Trib.]. He prayed accordingly.

Heard the contention of both the parties at length and perused the material available on record. The issue is whether the interest paid to contractor on delayed payment in terms of Deferment Agreement is allowable expenditure u/s 37(1) of the Act or not. There is no doubt about the amount payable of INR 10.81 crores as full and final settlement towards the work done by the Contractor L&W. In terms of Agreement dated 30.09.2015 entered into between the assessee and the contractor, assessee had agreed to pay interest @ 13.5% per annum effective from 01.06.2015 on the outstanding balance and in terms of Clause (2) of the Agreement if the entire outstanding amounts is not settled upto March, 2016, the assessee shall be liable to pay interest @ 18% on the balance amount. The assessee in terms of the said agreement has paid the amount of interest after deducting tax at source as per law. Once the parties have agreed under the business expediency to defer the payment, the Revenue cannot challenge such decision taken in the larger interest of business and under business exigency. Even otherwise, Hon’ble Jammu & Kashmir High Court in the case of CIT vs New Alpine Forests reported in [2000] 113 taxmann.com 316 (J&K HC) has held as under:-

The Hon’ble Supreme Court in the case of Mahalaxmi Sugar Mills Company vs CIT reported in [1980] 123 ITR 429 (SC) and in the case of Prakash Cotton Mills (P.) Ltd. reported in [1993] 201 JR 684 held that “when an amount paid by an assessee as interest or damages or penalty could be regarded as compensatory in character, the authority has to allow deduction u/s 37(1) of the Act if it has been lead out wholly and exclusively for the purpose of business.” In the instant case, assessee has withheld the payment of final amount due to the contractor to safeguard its own interest and had enjoyed the funds for its business purposes. Had that amount was paid by taking fresh borrowings, the interest paid on such borrowings should be allowed as business expenses. Deferment of final payment and further payment of interest was purely the prudent businessman decision taken in the interest of business and the AO cannot ask the assessee for making specific performance contrary to the interest of the business. Therefore, the interest being paid wholly and exclusively for the benefit of business and thus is allowable as business expenditure. Ld. CIT(A) appreciated these facts and deleted the disallowance by making following observations:-

Before us, the Revenue has failed to controvert the aforesaid findings of ld. CIT(A) and reiterated the allegations made by the AO in the assessment order ignoring the facts that interest was paid for the benefit of the business therefore, we find no error in the order of ld. CIT(A) in deleting the disallowance made by AO. Accordingly, Ground of appeal No.1 raised by the Revenue is dismissed.

Ground of appeal No. 2 raised by the Revenue is with respect to the deletion of disallowance of INR 41,30,011/- being interest paid on the delayed refund of the advance received from customers against booking.

Before us, ld. Sr. DR for the Revenue submits that the interest was paid to the parties for failure to perform the contractual obligation and thus, is not allowable as business expenses being penal in nature. He therefore, submits that ld. CIT(A) has wrongly deleted the disallowance and requested for the restoration of the disallowance made by the AO.

On the other hand, ld.AR for the assessee vehemently supported the order of ld. CIT(A) and submits that AO has failed to appreciate the true character of the payment made to the parties which was on account of delayed payment of refund against the advance bookings. Ld.AR submits that it was business expenditure incurred in the normal course of business expenditure and part of the contractual obligation arising due to delay in delivery of goods to the buyers. Thus, it is business expenditure and ld. CIT(A) has rightly deleted the disallowances so made by the AO. He prayed accordingly.

Heard the contention of both the parties at length and perused the material available on record. Brief facts leading to this issue are that in the year 2015, appellant has entered into Term Sheets with 9 prospective buyers for sale of developed plots in Phase-3 development and received advance with the pre-conditions that necessary approval would be obtained from the authorities within 31.12.2015 failing which the advance so received would be refunded with interest. Due to unavoidable circumstances of natural calamity of flood in the vicinity of project of the assessee in the year December, 2015, assessee could not be able to get the necessary approval from the authorities i.e. Collectorate of Kanchipuram District, Tamil Nadu till 31.12.2015 and therefore, the advance collected from the customers was liable to be refunded alongwith interest. Since the payment was made to discharge the contractual obligation and was not for any offence/fault committed under any other law, therefore, explanation 1 to section 37 is not applicable. Accordingly, in our considered opinion, the said payment is not of the penal in nature and ld. CIT(A) has rightly deleted the disallowance made which order is hereby, upheld. Accordingly, Ground of appeal No.2 raised by the Revenue is dismissed.

In the result, appeal of the Revenue is dismissed.