2014 (8) TMI 900 - HC - Income Tax

Accrual of expenditure - interest liability on excise duty - interest for the period 1.4.82 to 31.3.83 payable pursuant to the Gujarat High Court order dated 6.4.1984 Held that - Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. - There was no actual liability in praesenti - no demand was raised against the assessee - The assessee did not admit any liability and showed cause refuting the allegations made in the show-cause notices - the cause shown by the assessee was accepted by the excise authorities and proceedings initiated by the show-cause notices were dropped - the liability claimed by the assessee as a liability on account of excise duty was merely a contingent liability which cannot constitute expenditure for the purposes of income-tax Decided against Assessee.

Summary

Issues:
Assessment years 1983-84 and 1984-85 - Claim of interest on Excise duty refund - Disallowance of deduction by Assessing Officer - Tribunal's decision - Interpretation of liability under mercantile system of accounting.

Analysis:
For the assessment years 1983-84 and 1984-85, the tribunal issued a common order on 1st February 1995 concerning the claim of interest on an Excise duty refund. The issue arose from the assessee's appeals against Income Tax (Appeals) orders. The Assessing Officer disallowed the deduction for interest payable according to a Gujarat High Court order, stating it should be allowed only when actually paid. The Commissioner of Income Tax (Appeal) upheld this decision. The tribunal, considering the mercantile system of accounting, found the liability contingent until the refund was disbursed, hence disallowing the deduction (paragraphs 3-4).

The tribunal, in its 1995 order, maintained the disallowance based on the pending refund and the Gujarat High Court order received in April 1984. It referred to prior assessments and held that the liability could not be accounted for until the refund was received. The tribunal rejected the assessee's claim, citing the pending Supreme Court matter and the need for actual payment before claiming deduction (paragraph 5).

In agreement with the revenue's argument, the court referenced previous cases to support its decision. It cited the necessity of an actual liability existing in the year of account for deduction, distinguishing between present and future liabilities. The court emphasized that contingent liabilities do not constitute expenditure under the mercantile system of accounting. Applying this reasoning to the present case, where no actual liability existed until the refund was received, the court upheld the disallowance of the deduction (paragraph 6).

The court concluded that the assessee's claim for deduction of interest on the Excise duty refund was not permissible under the Income Tax Act. It aligned with the principles established in previous judgments regarding the distinction between actual and contingent liabilities for tax deduction purposes. The court found that the liability claimed by the assessee was contingent until the refund was received, thus not constituting a deductible expenditure. Consequently, the questions of law were resolved in favor of the revenue, and the reference was disposed of accordingly, upholding the disallowance of the deduction (paragraph 6).