2009 (9) TMI 31 - HC - Income Tax

Change in method of valuation of closing stock deduction of interest u/s 36(1)(ii) contingent liability or a crystallized liability Held that the change in the method of valuation of the closing stock was not bona fide for the A.Y. in question seeking of change in the method of valuation of the closing stock was in the year where there were huge rise in the profits of the assessee company and the change was adopted in order to reduce profits in the relevant year Interest accrued upto 31.3.1991 but payable from 1996 to 2000 - interest cannot be said to have accrued to become due and payable in the relevant P.Y. interest cannot be said to have accrued to become due and payable in the relevant previous year disallowance of interest u/s 36(1)(ii) read with S. 43B(d) upheld - Once this issue was alive and pending and the appellant company could have succeeded in the Special Leave Petition in the SC clearly the liability remained contingent and could not be said to have been crystallized assessee s petition dismissed

Summary

Issues:
1. Valuation of closing stock method change
2. Disallowance of interest deduction
3. Liability to pay interest on excess realization for levy sugar

Valuation of closing stock method change:
The appellant contested the addition of Rs. 1,68,71,980 on account of the valuation of closing stock due to a change in the method. The court found that the change was not bona fide as it was made to reduce profits conveniently. The appellant switched back to the old method the following year, indicating lack of consistency. While a company can adopt a scientific basis for valuation, it must be consistent and not for tax avoidance purposes. The court upheld the findings of all authorities below, emphasizing that the change was not bona fide.

Disallowance of interest deduction:
The appellant's claim for interest payable was disallowed under Section 36(1)(iii) and Section 43B(d) of the Income Tax Act. The court agreed with the authorities that interest can only be claimed when actually paid, not merely accrued. The provision of Section 43B(d) explicitly disallows deduction for interest due and payable until actually paid. The court rejected the appellant's argument that interest accrued should be allowed, as it goes against the purpose of Section 43B. The court also dismissed the appellant's reliance on a judgment of the Andhra Pradesh High Court, stating it would negate the intention of the provision.

Liability to pay interest on excess realization for levy sugar:
The appellant challenged the liability to pay interest on excess realization for levy sugar following legal proceedings. The court held that the liability remained contingent as the appellant had filed a Special Leave Petition before the Supreme Court. Had the appellant succeeded in the petition, the liability would not have crystallized. The court dismissed the appellant's argument that the liability was not contingent, emphasizing that the possibility of success in the Supreme Court made the liability uncertain. The court upheld the dismissal of the appeal, citing the valid reasons provided by all three authorities below and imposed costs on the appellant.

In conclusion, the High Court dismissed the appeal, upholding the decisions of the lower authorities on all three issues raised by the appellant. The judgment emphasized the importance of bona fide actions, actual payment for deductions, and the contingent nature of liabilities in legal proceedings.