2012 (9) TMI 433 - AT - Income Tax

Addition on account of prior period expense - Whether liability of earlier years has been crystallized in this year Assessee calculation of interest based on simple interest while the bank charging at compounded interest - Bank debit the interest of earlier years in current year - Interest liability booked by assessee as prior period expense - Held that - There would be some dispute or at least misunderstanding in the mind of the assessee about method of accounting the interest i.e. whether it should be simple interest or compound interest. The rate of tax for all these years remains the same. Therefore, following the decision in the case of CIT vs. Shriram Pistons & Rings Ltd and vs. Vishnu Industrial Gases Pvt. Ltd., assessee is entitled to deduct this amount in computing the income. Decision is in favor of assessee.

Summary

Issues:
- Deduction of interest paid to the bank for earlier years on crystallization of liability.

Analysis:
The appellant raised three grounds in the appeal, primarily challenging the Ld. CIT(A)'s decision to disallow the deduction of Rs. 28.48 lacs, representing interest paid to the bank for earlier years on crystallization of liability. The original assessment under section 143(3) resulted in an addition of Rs. 39,72,000, which was later deleted by the Ld. CIT(A). However, the Tribunal directed the Assessing Officer to examine whether this liability from earlier years had crystallized in the current year. The AO subsequently made an addition of Rs. 28.48 lacs, contending that no evidence proved the additional interest liability arose in the current year. The Ld. CIT(A) upheld this addition, stating that the appellant failed to demonstrate that the interest expenditure from earlier years crystallized in the current year.

The appellant argued that the liability arose due to differences in interest calculation methods between the bank and the assessee. The bank debited Rs. 2,48,60,371/- on 31.3.1998, including the liability from compound interest charges. The appellant contended that the liability crystallized in the current year, supported by audited accounts and notes on accounts reflecting the liability. The Ld. Sr. DR emphasized the need to establish the crystallization of the liability, which the appellant allegedly failed to do. The appellant reiterated that the liability crystallized in the current year as evidenced by the bank's debit entry.

The Tribunal evaluated the facts and submissions, noting the lack of a detailed breakdown of the bank's debit entry. Citing relevant case law, including CIT vs. Shriram Pistons & Rings Ltd. and CIT vs. Vishnu Industrial Gases Pvt. Ltd., the Tribunal emphasized the importance of determining the year of liability crystallization. Despite discrepancies in the interest debited by the bank and the assessee, the Tribunal concluded that the liability had crystallized in the current year based on the appellant's understanding and actions. Consequently, the Tribunal allowed the appeal, permitting the deduction of the disputed amount in computing the income.

In conclusion, the Tribunal's decision favored the appellant, emphasizing the importance of establishing the crystallization of liabilities for deduction purposes. The Tribunal's analysis considered the appellant's actions, bank entries, and relevant case law to determine that the liability in question had indeed crystallized in the current year, warranting its deduction.