2004 (9) TMI 27 - HC - Income Tax

Carrying charges Allowability - Business Expenditure - assessee earned commission on sales and claimed that the carrying charges were to be paid to the bankers towards utilisation of certain credit facilities by the assessee. The carrying charges generally included bank charges, bank interest, etc., which the assessee was allegedly required to reimburse held that amount having been laid out or expended for the purpose of earning the income, even though payable in future, shown in its account under the mercantile system of accounting is eligible for deduction under section 37.

Issues Involved:
1. Whether the Tribunal was justified in law in holding disallowance of carrying charges of Rs. 27,90,717.
2. Whether the finding of fact is perverse.
3. Whether the income could be assessed at the hands of the assessee.
4. Whether the assessee is entitled to claim deduction of the interest payable under section 37 of the Income-tax Act, 1961.
5. Whether the amount was spent or expended for the business.

Detailed Analysis:

1. Justification of Disallowance of Carrying Charges:
The assessee, a private limited company, claimed carrying charges paid to the bankers of M/s. Bilaspur Spinning Mills and Industries for utilizing credit facilities. The Assessing Officer disallowed these charges, amounting to Rs. 27,90,717, a decision upheld by the Commissioner of Income-tax (Appeals) and the Tribunal. The appeal was filed to challenge this disallowance.

2. Perverse Finding of Fact:
The appellant argued that the amount retained from Bilaspur Industries was used for business purposes, and the income earned was shown under "Income from business or profession." The appellant contended that the carrying charges should be deductible under section 37 of the Income-tax Act, 1961, as they were expended wholly and exclusively for earning income. The respondent countered that the carrying charges were a device to avoid taxes and were not shown as a liability by Bilaspur Industries.

3. Assessment of Income at the Hands of the Assessee:
The court determined that the income earned by the assessee from the retained amount is assessable in its hands, regardless of how Bilaspur Industries treated it in their accounts. The court emphasized that the potential tax avoidance by Bilaspur Industries is irrelevant to the assessment of the assessee's income.

4. Deduction under Section 37:
The court examined whether the amount could be considered as spent or expended wholly and exclusively for earning income. The court referenced the mercantile system of accounting, where liabilities accrued but payable in the future can be deducted when calculating profits and gains. The court cited precedents, such as Calcutta Co. Ltd. v. CIT and Bharat Earth Movers v. CIT, to support the view that accrued liabilities, even if discharged later, are deductible.

5. Expenditure for Business Purposes:
The court considered the definition of interest under section 2(28A) and concluded that the retained amount constituted a debt or credit facility. Any compensation for using this fund would be considered interest payable. The court rejected the respondent's argument that the absence of a contract for paying interest or carrying charges negated the liability. The court held that the liability or income of Bilaspur Industries is a separate issue and does not affect the assessment of the assessee's income.

Conclusion:
The court concluded that the income earned by the assessee from the retained amount is assessable in its hands and that the carrying charges, shown as an accrued liability under the mercantile system, are deductible under section 37. The appeal was allowed, and the Tribunal was directed to reassess the question in light of these observations.

Order:
The appeal succeeded, and the Tribunal was instructed to reassess the matter according to the court's observations. The questions were answered in favor of the assessee and against the Department. An urgent xerox certified copy of the judgment was made available to the parties on usual terms.

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