2013 (3) TMI 33 - HC - Income Tax

Deduction of Interest liability - accrual of interest - ascertained liability - held that - Applying the principles laid down in the Swadeshi Cotton and Flour Mills Pvt. Ltd.(1964 (4) TMI 8 - SUPREME COURT) and Kedarnath Jute Mfg. Co.Ltd.(1971 (8) TMI 10 - SUPREME COURT), to the facts of the present case, we find that admittedly in the present case 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. - Decided in favor of revenue.

Summary

Issues:
Validity of deduction of Rs.367966 for Assessment Year 1979-80.

Analysis:

1. Background of the Case:
The case involved a wholly U.P. Government-owned corporation established to promote Small Scale Industries in the state. The State Government sanctioned a loan of Rs.10,00,000 on 6.7.1972 to aid small industries in backward areas of U.P. A dispute arose regarding the payment of interest on the loan, with the applicant contending it should be interest-free based on common policy. However, the State Cabinet decided the loan should carry 8% interest, leading to the question of whether the sum of Rs.367966 was a valid deduction for the assessment year 1979-80.

2. Dispute over Interest Payment:
The applicant claimed a deduction of the entire interest payable on the loan during the assessment year, arguing that the liability for interest was highly disputed, and thus, no provision was made in previous years. However, the Income Tax authorities did not accept this claim, stating that the liability did not accrue in the relevant year and should have been provided for on an accrual basis. The authorities restricted the deduction to Rs.80,000 for the assessment year 1978-79, disallowing the remaining amount.

3. Mercantile Accounting System and Liability Ascertainment:
The Tribunal upheld the authorities' decision, emphasizing that under a mercantile system of accounting, a liability must be ascertained to be enforceable. The Tribunal ruled that as the interest liability was clearly specified in the loan agreement and had not been subject to litigation, it was an ascertained and enforceable liability. Therefore, only the interest liability of Rs.80,000 for the assessment year in question was allowable.

4. Legal Precedents and Arguments:
The applicant argued that the liability became ascertained during the relevant assessment year when the State Cabinet finalized the interest rate, citing legal precedents supporting their position. However, the State's consistent stand on the interest rate and the mercantile accounting system led the Court to reject this argument.

5. Court's Decision:
After considering the arguments and legal principles, the Court held that the liability for interest payment was ascertained from the beginning, despite the applicant's dispute. The Court concluded that the claim for interest from previous assessment years was not admissible for deduction in the relevant assessment year. Therefore, the Court ruled in favor of the Revenue and against the assessee, affirming the disallowance of the deduction of Rs.367966 for the Assessment Year 1979-80.