2013 (2) TMI 236 - HC - Income Tax

Interest on loan sanctioned from state government - @ 8% or interest free - assessment year - applicant is a wholly U.P. Government owned corporation established for the purposes of promoting Small Scale Industries - Held that - It is not in dispute that the State Government when it had sanctioned the loan of Rs.10,00,000/- on 6.7.1972 had clearly stipulated that the loan would carry an interest of 8% per annum. Merely because the assessee had disputed its liability to pay the interest and the loan could be treated interest free loan would not make any difference. The stand of the State Government was consistent throughout and the State Cabinet thoroughly stuck to the earlier stand. The assessee had been following mercantile system of accounting and, therefore, the liability for payment of interest for all the previous assessment years cannot be claimed or allowed in the relevant assessment year. Applying the principles laid down in Swadeshi Cotton and Flour Mills Private Ltd. 1964 (4) TMI 8 - SUPREME COURT & New Victoria Mills Co.Ltd 1965 (7) TMI 39 - ALLAHABAD HIGH COURT to the facts of the present case admittedly the applicant was under an obligation to pay an interest at the rate of 8% per annum on the amount of loan advanced by the State Government and merely because it has disputed its liability by contending that it should not be charged, the liability to pay interest was always there and this plea is of no consequence. The liability was ascertained and, therefore, the Tribunal had rightly held that the claim of interest relating to the previous assessment years is not admissible for deduction during the assessment year in question - in favour of Revenue.

Summary

Issues:
Validity of deduction of Rs.367966 for assessment year 1979-80.

Analysis:
The case involved a question referred by the Income-tax Appellate Tribunal regarding the validity of a deduction of Rs.367966 for the assessment year 1979-80. The applicant, a U.P. Government-owned corporation, received a loan for promoting Small Scale Industries in U.P. The State Government sanctioned the loan with an 8% interest rate, but the applicant disputed the interest payment, claiming the loan should be interest-free. Despite the applicant's objections, the State Cabinet decided the loan would carry 8% interest. The applicant, following a mercantile accounting system, did not provision for interest payment in previous years. The Income Tax authorities disallowed the deduction beyond Rs.80000 for the assessment year, stating the liability was not accrued in that year. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this decision.

The Tribunal emphasized that in a mercantile system, a liability accrues only when ascertained and enforceable. The loan agreement clearly stated the interest terms, and the applicant's objections did not change the ascertained liability. The Tribunal rejected the applicant's argument that the liability was unascertained until the State Cabinet's decision. The Tribunal highlighted the consistent stance of the State Government regarding the interest rate, affirming the liability's ascertainability. The applicant's plea for interest deduction for previous years was dismissed as inadmissible for the relevant assessment year.

The applicant relied on legal precedents to support its argument, citing cases related to liability determination under the mercantile system of accounting. However, the Court differentiated the present case, emphasizing that interest on the loan was a deductible expense as it was an ascertained liability from the loan agreement. The Court rejected the applicant's contention that disputing the liability made it unascertained, affirming that the liability was determined and enforceable from the loan agreement terms.

In conclusion, the Court ruled in favor of the Revenue, upholding the disallowance of the deduction beyond Rs.80000 for the assessment year 1979-80. The Court affirmed that the interest liability on the loan was ascertained and enforceable from the beginning, despite the applicant's objections. The consistent stance of the State Government regarding the interest rate solidified the liability's ascertainability, leading to the rejection of the applicant's claim for interest deduction from previous assessment years.