2011 (5) TMI 816 - HC - Income Tax

Whether Tribunal was right in law in allowing deduction of claim of ONGC liability, disregarding the fact that during the year assessee has not paid any amount towards this liability - assessee s liability to pay interest to the ONGC was finally decided by the Supreme Court in its judgment Held that - if a business liability has definitely arisen in the accounting year, the deduction should be allowed, Tax Appeal dismissed Bharat Earth Movers(2000 - TMI - 5816 - SUPREME Court)

Summary

Issues:
- Whether the Tribunal was right in allowing deduction of ONGC liability when no payment was made by the assessee during the assessment year?

Analysis:
1. The Revenue appealed against the Tribunal's judgment allowing deduction of ONGC liability, questioning the correctness of the decision. The dispute arose from the assessee's claim of Rs.8,11,99,503/- as interest payable to ONGC for the assessment year 2005-2006. The Assessing Officer disallowed the claim, stating that the liability had not accrued during that year. The CIT (Appeals) upheld the disallowance, leading the assessee to appeal to the Tribunal, which ruled in favor of the assessee, prompting the Revenue's appeal to the High Court.

2. The assessee argued that the liability towards ONGC was crystallized following a Supreme Court decision, requiring payment by the assessee. The assessee set aside the claimed amount as a minimum payment towards the liability. On the other hand, the Revenue contended that the liability was not crystallized until 2007 when the assessee settled the entire claim with ONGC for a higher sum. The Tribunal favored the assessee, citing the Supreme Court's decision in the case of Bharat Earth Movers vs. CIT.

3. The Revenue's counsel emphasized that under the mercantile system of accounting, a liability is incurred only upon amicable settlement or final adjudication of the dispute, especially if it is not a statutory liability. Referring to the Alembic Chemical Works case, the Revenue argued that until the Supreme Court appeal was resolved, the liability remained contingent. However, the High Court differentiated the present case from Alembic, noting that the Supreme Court had already directed the assessee to pay interest to ONGC in 2004, making the liability certain and not contingent.

4. The High Court aligned with the Tribunal's decision, emphasizing the principle that a business liability, once arisen in the accounting year, should be allowed as a deduction even if quantification and payment are deferred. Quoting the Supreme Court in Bharat Earth Movers, the High Court reiterated that the certainty of incurring the liability is essential, regardless of the exact payment date. Consequently, the High Court found no error in the Tribunal's decision, dismissing the Tax Appeal as no legal question arose from the case.