2007 (5) TMI 230 - HC - Income Tax

Business expenditure - Assessee is claiming deduction of the amount refunded which they earlier received as interest on loan interest received on loan assessed in prior years since books of account of the assessee were open when the decision to refund the amount was taken and therefore the assessee has been rightly held entitled to make adjustment entries in the books of account and make the claim accordingly - question referred is answered against the revenue

Summary

Issues:
1. Deduction of a sum of Rs. 207428 for the assessment year 1977-78.

Analysis:
The judgment delivered by the High Court of Punjab and Haryana involved a dispute regarding the deduction of a sum of Rs. 207428 for the assessment year 1977-78. The assessee, a corporation known as Punjab State Industrial Development Corporation, had advanced loans to Punjab Con-cast Steels Ltd. during previous assessment years. However, due to a policy change by Industrial Financial Corporation (IFCI) disallowing promoters to charge interest until their equity contribution is completed, the assessee was required to refund the sum of Rs. 207428. The issue arose whether this amount should be treated as an expenditure or loss for the assessment year under consideration.

The Inspecting Assistant Commissioner of Income Tax initially opined that the amount was neither a loss nor an expenditure for the year under consideration as it was not directly related to the income and expenditure of that year. Consequently, the deductions claimed by the assessee were disallowed. On appeal, the Commissioner of Income Tax upheld the decision of the Inspecting Assistant Commissioner. However, the Income Tax Appellate Tribunal ruled in favor of the corporation-assessee, allowing the deduction of the entire amount of Rs. 207428.

The Tribunal's decision was supported by legal precedents, including the judgment of the Supreme Court in the case of Sassoon J. David and Co., which emphasized that expenses incurred for promoting business and earning profits, even voluntarily and without compelling necessity, are deductible. The Tribunal found that the amount to be refunded was based on commercial expediency, as decided by the Board of Directors before the end of the accounting period. The Tribunal concluded that the corporation was entitled to claim the deduction for the amount refunded to Punjab Con-cast Steels Ltd.

The High Court, after considering the arguments and legal principles, upheld the Tribunal's decision, stating that the corporation had no other option but to refund the amount due to the objection raised by IFCI. The Court found no legal infirmity in the Tribunal's decision and noted that the corporation had appropriately made adjustment entries in its books of account. The Court also cited the judgment in the case of Sassoon J. David and Co. to support the Tribunal's decision. Consequently, the Court answered the question referred against the revenue and in favor of the assessee, thereby disposing of the reference accordingly.