2000 (9) TMI 231 - AT - Income Tax

Summary

Issues: Disallowance of interest income as a contingent liability

Issue 1: Disallowance of interest income
The appeal was filed against the CIT(A)'s order disallowing Rs. 1,31,853 out of interest income due to a dispute between the assessee and MMTC regarding the amount of interest. The AO considered the interest provision as a contingent liability and disallowed it. The assessee contended that the interest was charged by MMTC on funds provided for purchasing raw materials, which was disputed by the assessee. The liability remained unsettled, and the interest was claimed as expenditure. The Departmental Representative supported the lower authorities' orders, stating that the liability was disputed and not ascertainable, hence not allowable. The Tribunal observed that the liability for interest was disputed, not settled, and remained contingent, as confirmed by the auditor's report. The liability was created provisionally, and it might have been reduced or extinguished upon settlement. Referring to legal precedents, the Tribunal held that only existing liabilities could be considered for deduction, and contingent liabilities were not allowable. The Tribunal cited judgments emphasizing that disputed expenditure is deductible only when the dispute is settled, and contractual liabilities accrue when ascertained. The liability for interest must be unconditionally undertaken to be claimed as a deduction, accruing only upon final ascertainment.

Conclusion:
The Tribunal dismissed the appeal, upholding the disallowance of interest income as a contingent liability. The liability for interest could only be claimed as an allowable expenditure when it crystallized into an ascertainable and enforceable liability, not as a contingent liability. The decision was based on legal principles and precedents emphasizing the treatment of contingent liabilities in tax assessments.