2011 (1) TMI 85 - HC - Income Tax

Question of law Allowance or Disallowance of Interest - The assessee had taken a credit facility from J&K Bank Ltd on the closing balance of Rs. 1,11,40,966/-, the assessee claimed that interest amounting to Rs. 16,59,292/- as deduction on accrual basis - The reasoning appears to be that since interest for the relevant period was neither shown by the assessee in its books of accounts nor by the Bank, the interest stopped accruing and hence, was in the nature of a contingent liability - Supreme Court in the case of Bharat Earth Movers v. Commissioner of Income Tax; (2000 -TMI - 5816 - SUPREME Court) Held that The law is settled if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesent though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. -The question of law is answered in favour of the assessee and against the department Dis-allowance of expenses to the extent of Rs. 50,000/- as against an amount of Rs. 1,48,782/- claimed by the assessee - There is no basis for an ad-hoc dis-allowance of Rs. 50,000 - ITAT has accepted the case of the assessee that for minor amounts relating to conveyance etc. and other business expenses, it is impractical to have vouchers and that internal vouchers of the staff/employees of an organization will suffice - Question of law ought to be also answered in favour of the assessee - The appeal is allowed

Summary

Issues Involved:
1. Deduction of interest payable on loans from J&K Bank as accrued liability.
2. Disallowance of expenses on estimate basis against actual claim.

Analysis:

Issue 1: Deduction of Interest Payable on Loans
The appeal pertains to the assessment year 1992-93 and revolves around the deduction of interest amounting to Rs.16,59,292/- claimed by the assessee on accrual basis from a credit facility obtained from J&K Bank Ltd. The Assessing Officer disallowed the interest claimed, which was upheld by the CIT (Appeals) and the Income Tax Appellate Tribunal (ITAT). The main contention against allowing the deduction was that the interest was not shown in the books of accounts by either the assessee or the Bank, leading to the view that it was a contingent liability. However, the Supreme Court precedent in Bharat Earth Movers v. Commissioner of Income Tax was cited, emphasizing that if a business liability has arisen in the accounting year and can be estimated with reasonable certainty, it should be allowed as a deduction. The Court noted that the Bank had filed a suit claiming interest, indicating an ascertained liability. The absence of interest accrual in the Bank's books did not render the liability contingent. The Court ruled in favor of the assessee, directing the Assessing Officer to verify the payment of interest during final assessment.

Issue 2: Disallowance of Expenses on Estimate Basis
The second question pertains to the disallowance of expenses amounting to Rs.50,000/- against a claim of Rs.1,48,782/- for cartage, labour, and sealing expenses. The CIT (Appeals) disallowed a part of the expenses, citing lack of convincing evidence and ad-hoc reasoning for the disallowance. However, the Court found the reasoning unsatisfactory as there was no clear basis for the ad-hoc disallowance. Reference was made to a previous ITAT decision in favor of the assessee for similar expenses in a prior assessment year. The Court emphasized the need for a consistent approach and found the disallowance unjustified. Consequently, the Court ruled in favor of the assessee on this issue as well, directing that the appeal be allowed.

In conclusion, the High Court ruled in favor of the assessee on both issues, allowing the deduction of accrued interest and overturning the disallowance of expenses, emphasizing the need for a clear basis and consistency in assessing such claims.