2017 (4) TMI 974 - HC - Income Tax

Disallowance of Interest payable to Alimenta on the amount awarded - Confirmed liability or contingent liability - AO noticed that the liability was not even acknowledged in the books of accounts - as a result of the stay order granted by the DB of this Court, the liability of NAFED to pay interest @ 18% to Alimenta remained suspended from the date of such stay - Held that - In the present case, with the Award having been made rule of the Court by a learned Single Judge of this Court, the mere fact that the said judgment and decree was stayed by a DB would not relieve NAFED of its obligation to pay interest in terms thereof to Alimenta. Such liability commenced in the previous year in which the said judgment and decree was passed by the learned Single Judge. To borrow the phraseology of the Supreme Court in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association 1992 (4) TMI 183 - SUPREME COURT held a distinction has to be made between quashing of an order and stay of operation of an order. Quashing of an order results in the restoration of the position as it stood on the date of the passing of the order which has been quashed. The stay of operation of an order does not, however, lead to such a result. It only means that the order which has been stayed would not be operative from the date of the passing of the stay order and it does not mean that the said order has been wiped out from existence This Court is unable to sustain the impugned order of the Special Bench of the ITAT. Accordingly, the question framed is answered in the negative i.e., in favour of the Assessee NAFED and against the Revenue.

Summary

Issues involved:
1. Interpretation of liability to pay interest under a decree.
2. Allowability of deduction for interest payable in computing business income.
3. Effect of stay order on the liability to pay interest.

Analysis:
1. The appeal involved a question regarding the liability of the Appellant to pay interest to Alimenta under a decree dated 28th January, 2000, which was stayed by the Division Bench of the Court on 28th February, 2001. The Court framed the issue as to whether the Appellant incurred the liability to pay interest to Alimenta as directed by the decree.

2. The Special Bench of the ITAT held that under the mercantile system of accounting, a deduction can only be granted when the liability is certain. It differentiated between contractual and statutory liabilities, stating that a legal obligation to pay arises when a competent court passes an order and a suit is decreed against the Assessee. The ITAT concluded that due to the stay order, the liability of the Appellant to pay interest remained suspended until a subsequent judgment was passed.

3. The High Court disagreed with the ITAT's reasoning, citing precedents to explain the effect of an interim order. It highlighted that the stay of operation of an order does not wipe out the order's existence. Referring to various judgments, the Court emphasized that the liability to pay interest arose when the Award was made rule of the Court, and the stay order did not relieve the Appellant of its obligation. The Court set aside the ITAT's order and ruled in favor of the Appellant, stating that the liability to pay interest to Alimenta was not extinguished by the stay order.

In conclusion, the High Court overturned the ITAT's decision, emphasizing that the stay order did not absolve the Appellant of its liability to pay interest under the decree. The Court clarified the legal position regarding the effect of stay orders on liabilities and allowed the appeal in favor of the Appellant.