2008 (9) TMI 981 - AT - Income Tax

Summary

Issues involved: Appeal against order u/s 143(3) for AY 2003-04 regarding deduction of interest expenses.

Summary:
The only issue in this appeal was the deduction claim of interest expenses amounting to Rs. 15,66,172 by the assessee, a land development company. The Assessing Officer disallowed the expenses treating them as prior period expenses, citing a reference to a relevant case law. The CIT(A) upheld this decision, stating that the resolution passed by the company's Board of Directors cannot override the provisions of section 145 of the Income-tax Act. The CIT(A) emphasized that the liability to pay interest must accrue in the relevant year, not in prior years. The assessee contended that the interest liability arose in the current year as per the resolution passed by the Board of Directors, following the mercantile system of accounting. After considering both parties' arguments and reviewing the facts, it was established that the interest liability crystallized when the agreement was canceled and the decision to refund the earnest money with interest was made. As per the mercantile system, the liability to pay interest accrued in the current year and was allowable as a deduction. Consequently, the ITAT allowed the appeal, directing the Assessing Officer to modify the assessment order accordingly.

This decision was pronounced on 5-9-2008.