1986 (2) TMI 14 - HC - Income Tax

Summary

Issues:
Deduction of interest on arrears of royalty for non-payment by the due date.

Analysis:
In this case, the assessee, engaged in a colliery business, was assessed for the assessment year 1970-71. The assessee had claimed a deduction of Rs. 25,000 for interest payable to the State Government due to a delay in paying royalty. The Income-tax Officer disallowed the deduction, considering it a mere provision. The Appellate Assistant Commissioner upheld this decision, stating that the liability for interest arises only upon the issuance of a notice of public demand by the Certificate Officer. However, the Tribunal disagreed, noting that interest liability automatically arises upon default in royalty payment and continues until payment. The Tribunal allowed the deduction as the liability had accrued and was reflected in the accounts. The Revenue challenged this decision, questioning whether the liability to pay interest accrued automatically or was contingent on a demand notice.

The High Court observed that the Revenue did not dispute that interest was payable for delayed royalty payments. Previous assessments had allowed deductions for such interest. The Court disagreed with the Appellate Assistant Commissioner's view that the liability arises only upon a demand notice under the Public Demands Recovery Act. Both the Appellate Assistant Commissioner and the Tribunal had considered the interest accrued on arrears of royalty during the relevant period. The Tribunal's decision to allow the deduction based on the accrued interest was deemed appropriate. Therefore, the High Court answered the question in favor of the assessee, affirming the Tribunal's decision to allow the deduction for interest on arrears of royalty.

The judgment highlights the importance of recognizing accrued liabilities in financial accounts for tax deduction purposes. It clarifies that interest on arrears of royalty becomes due automatically upon default, irrespective of the issuance of a demand notice. The decision emphasizes the need for consistency in tax assessments and deductions based on actual liabilities reflected in the accounts.