2014 (8) TMI 1068 - HC - Income Tax

Entitlement for deduction of deferred interest liability - Held that - It is clear that the assessee in order to purchase food grains was getting government aid. However, they were claiming deductions of the interest proportionate to the food grains sold and in respect of the interest relatable to the food grains unsold was carried forward to next year and after the sale of food grains, deductions was claimed. This is the practice which was followed by the assessee. However, from 1985-86, they switched on to mercantile system of accounting. In that year, they claimed deductions of interest in respect of food grains which were sold and unsold and also the interest proportionate to the food grains sold which were of the previous year. There was no double claim. The authorities proceeded with an assumption that there is a double benefit claim. They also proceeded on the assumption that once mercantile system is adopted, the assessee looses the benefit of claiming deductions of interest which should have been claimed in the previous year. The denial of the appellant s claim by the authorities is not justifiable. The assessee is entitled to the benefit of claiming the said deductions relatable to the previous year i.e., for the assessment year 1985-86 - Decided in favour of the assessee

Summary

Issues:
1. Deduction of deferred interest liability not claimed in the previous year.
2. Disallowance of claim of deduction of deferred interest liability for food grains purchased in the previous assessment year but sold in the relevant assessment year.

Analysis:

Issue 1:
The Tribunal referred two substantial questions of law regarding the deduction of deferred interest liability. The assessee, a Government undertaking, claimed interest expenditure for the assessment year 1985-86, including a portion as deferred interest from the previous year. The Assessing Authority disallowed this claim, stating no provision for deferred revenue expenditure. The Appellate Commissioner upheld this decision as the deferred amount was not claimed in the previous year. The Tribunal concurred, emphasizing the impact on the revenue results for both years. The assessee argued that the change to mercantile accounting in 1985-86 did not result in double benefits. Citing legal precedents, the High Court ruled in favor of the assessee, allowing the deductions for the assessment year 1985-86.

Issue 2:
The second question pertained to disallowing the deduction of deferred interest liability for food grains purchased in the previous year but sold in the relevant assessment year. The assessee's accounting practice involved carrying forward interest related to unsold food grains. The authorities assumed a double benefit claim and that adopting the mercantile system precluded claiming interest from the previous year. However, the High Court referenced legal interpretations emphasizing the accrual of liabilities for deductions, not limited to actual payments. Citing a relevant case, the Court concluded that the denial of the appellant's claim was unjustifiable, allowing the deductions and setting aside the orders of the authorities.

In conclusion, the High Court ruled in favor of the assessee on both issues, allowing the deductions for deferred interest liability and directing the Assessing Authority to provide the claimed benefits. The judgment highlighted the transition to mercantile accounting and the accrual of liabilities for deductions, ensuring consistency and fairness in tax assessments.