2013 (11) TMI 579 - HC - Income Tax

Allowability of deduction u/s 36 (1) (iii) of the Income Tax Act - Interest liability on loans received from the State Government - Assessee - opposite party is a company of the State Government. The State Government has advanced interest bearing loan to the assessee company. But the assessee has not paid any interest to the Government but claimed the deduction pertaining to the interest under section 36(1)(iii) of the Act. The A.O. has disallowed the same by observing that the interest has not been actually paid Held that - After discussing number of case laws observed that the assessee is entitled for the deduction under section 36 (1)(iii) of the Act, as the assessee is maintaining the books of accounts on mercantile system of accounting Decided against the Revenue.

Summary

Issues:
1. Disallowance of provision for interest liability on loans received from the State Government under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Allowability of deduction under Section 36(1)(iii) of the Income Tax Act only on a paid basis.

Analysis:
Issue 1:
The appeal was filed by the department under Section 260-A of the Income Tax Act, 1961 against the judgment and order of the Income Tax Appellate Tribunal, Lucknow. The main contention was the disallowance of provision for interest liability on loans received from the State Government under Section 36(1)(iii) of the Act. The assessee, a company of the State Government, had not paid any interest to the Government but claimed the deduction under this section. The Assessing Officer disallowed the deduction as the interest had not been actually paid. However, the first appellate authority and the Tribunal deleted the addition. The High Court, after considering previous judgments, held that the assessee, following the mercantile system of accounting, was entitled to the deduction under Section 36(1)(iii) as the provision for payable interest was made in the books of accounts, even though no interest was paid by the assessee.

Issue 2:
The second substantial question of law raised was regarding the allowability of the deduction under Section 36(1)(iii) of the Income Tax Act only on a paid basis. The department argued that the unpaid liability should not be considered an allowable deduction under this section. However, the High Court, based on previous judgments and the fact that the assessee maintained books of accounts on the mercantile system of accounting, upheld the Tribunal's decision to allow the deduction for the unpaid liability of interest on loans received from the State Government. The court found no infirmity in the impugned order passed by the Tribunal and dismissed the appeal filed by the department, ruling in favor of the assessee and against the revenue.