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TMI Blog2015 (10) TMI 1901X X X X Extracts X X X X X X X X Extracts X X X X ..... iew gets strength from the judgment of the Hon'ble Supreme Court in CIT vs. SMIFS Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) which reiterates similar view taken in several earlier judgments includingCIT vs. Shoorji Vallabhdas & Co. (1962 (3) TMI 6 - SUPREME Court) . As such, we jettison this contention advanced on behalf of the Revenue as a reason for sustaining the disallowance of interest. We sum up our conclusion on the point that the assessee did not incur any liability for payment of interest to Alimenta as at the end of the years under consideration. Since no legally enforceable liability existed against the assessee, the deduction has been rightly denied. Applicability of provision of section 40(a)(i) - Held that:- In this regard, we find that this provision with marginal note of - 'Amounts not deductible' - applies to disallow the otherwise allowable deductions in the computation of income of the payer under the head "Profits and gains of business or profession", if any sum chargeable to tax under the Act is payable outside India; or in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f making addition by the Assessing Officer (AO) and then its echoing by the ld. Commissioner of Income-tax (Appeals) [CIT(A)] are similar for both the years, we are espousing the factual matrix relevant to the A.Y. 2001-02 for consideration and decision, which is mutatis mutandissimilar to the other year as well. 3.1. Succinctly, the facts apropos the issue for the assessment year 2001-02 are that the assessee filed its return and the assessment was completed on 27.2.2004 u/s 143(3) of the Income-tax Act, 1961 (hereinafter also called 'the Act'). During the course of assessment proceedings pertaining to the A.Y. 2003-04, a special audit u/s 142(2A) was carried out which divulged, inter alia, that the assessee had claimed deduction for interest payable to M/s Alimenta SA Switzerland (hereinafter called 'Alimenta') on account of arbitration award, which was still disputed by it. The AO observed that the assessee claimed deduction of interest amounting to ₹ 7.92 crore payable to Alimenta for the A.Y. 2001-02. Such amount of interest was not found to have been debited to the Profit Loss Account but directly reduced in the computation of total income. He furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest crystalised only in the period relevant to assessment year 2000-01 and hence no deduction was allowable in such years because the claim for interest at the end of such years was not an ascertained liability. He further took note of the view taken by him for the assessment years 2003-04 and 2004-05 in holding that the interest was not deductible. The assessee's contention about the finding of the Tribunal for the crystalization of liability on 28.1.2000 pursuant to the passing of the decree by the Hon'ble High Court against NAFED, was held by the ld. first appellate authority to be only an obiter dicta. He, therefore, upheld the view taken by the AO in making disallowance of interest amounting for both the years. 3.4. The assessee preferred second appeals contending that since the Tribunal in assessee's own case for the A.Ys. 2003-04 and 2004-05 had allowed deduction of interest, the same view be followed for the two A.Ys. under consideration. The Division Bench hearing the appeals for the extant years was not convinced with the reasoning given by the Tribunal in its order for the A.Ys. 2003-04 and 2004-05 in deleting the disallowance of interest and, accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al right to receive the amount. In the absence of the vesting of any such right in the claimant, neither he earns any income nor the assessee incurs a corresponding liability to pay, entitling him to claim deduction for the same. Crux of the matter is that except for the assessee accepting a contractual claim, his liability to pay does not arise until some legal obligation to pay is fixed on him. A legal obligation to pay is attached on an assessee when a competent court passes order and a suit is decreed against him and not during the pendency of litigation. This difference between a contractual and a statutory liability has been recognized by the Hon'ble Delhi High Court in assessee's own case since reported as National Agricultural Co-operative Marketing Federation of India Ltd. vs. CIT (2011) 338 ITR 36 (Del). 6. In order to decide the question of deductibility or otherwise of interest by the assessee to Alimenta, we need to have a look at the relevant factual details, which are as under:- 1979-80 (Export Policy) NAFED was appointed canalizing agency for export of HPS Groundnut. A quota of 50,000 MTs each was released to NAFED for 1979-80 and 1980-81. 12.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Hon'ble Supreme Court was later on modified by the Hon'ble Supreme Court on 8.1.2003 mandating that in case the assessee furnishes bank guarantee for the entire principal amount within four weeks, the execution proceedings should remain stayed. In the mean time, the assessee's appeal against the ld. Single judge's order dated 28.1.2000 came up for hearing before the Hon'ble Delhi High Court. Pursuant to difference of opinion, the ld. third Hon'ble Judge vide his order dated 6.9.2010 came to hold that that a letters patent appeal is not maintainable against the judgment dt. 28.1.2000 of the ld. Single Judge. The assessee filed SLP against this judgment of the Hon'ble Delhi High Court. Vide its order dated 25.10.2010, issuing notice, an interim stay was granted against the judgment dt. 6.9.2010 subject to the deposit of the amount due. A modification application was filed by the assessee, which was disposed of by the Hon'ble Supreme Court on 24.1.2011. One more modification application was filed, which was also disposed of by the Hon'ble Supreme Court on 7.4.2011 staying the execution of decree. On 17.1.2012, the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mained suspended from the date of stay granted by the Division bench of the Hon'ble High Court on 28.2.2001. It is only on the passing of the consequential judgment and decree by the Hon'ble Delhi High Court in September, 2010, subject to certain stays etc. granted against the operation of this judgment, that the assessee incurred a legally enforceable liability to pay such interest to Alimenta. 8. Now the moot question is whether the assessee is entitled to deduction for interest at the rate of 18% decreed by the ld. Single Judge of the Delhi High Court in the computation of income for the years under consideration. The answer will be in affirmative if the assessee had any legal obligation to pay such interest during the years in question and vice versa. We can do this by ascertaining if any legally enforceable liability existed against the assessee to pay interest in the years under consideration. Per contra, was Alimenta legally entitled to receive such interest income during the years in question? It is patent that the stay order against the judgment and decree of the ld. Single Judge was passed by the Division Bench on 28.2.2001, which is well within the financial y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the periods relevant to the A.Ys. 1996-97 to 1998-99, the deduction of interest for such three years was held to be available not in these years but on crystallization of liability on 28.1.2000. Albeit this judgment has been rendered on 3.6.2011, but the fact that the order and decree dt. 28.1.2000, which created liability to pay interest against the assessee, was stayed on 28.2.2001, appears not to have been brought to the notice of the Hon'ble High Court as it does not find mention anywhere in the judgment. Though this factor is otherwise crucial for our purpose, but does not have any material bearing on the conclusion about the non-deductibility of interest for the three years before the Hon'ble High Court inasmuch as the liability to pay such interest did not crystallize at the end of those three years de hors the stay on the judgment of the ld. Single Judge dated 28.1.2000. Be that as it may, the ratio decidendi of the judgment, which is not marred even by nonmentioning by the parties about the stay of the ld. Single Judge's order, is that deduction for interest can be allowed only when an enforceable liability to pay the same arises irrespective of the conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrues to the claimant, nor any deduction is earned by the opposite party. We are instantly confronted with the second type of situation in which the obligation created against the assessee by the judgment of the ld. Single Judge on 28.1.2000 was stayed by the judgment of the Division Bench on 28.2.2001, which position continued till the decree on the judgment dt. 6.9.2010 reviving the judgment of the ld. Single Judge, became enforceable. Even though the crystallization of liability of the assessee to pay interest pursuant to the developments after 6.9.2010 also covers earlier years including the years under consideration, but such liability of the assessee became due only on the acquisition of right by Alimenta to enforce the decree issued on the advent of the judgment dated 6.9.2010. Consequently, the assessee can claim deduction for such interest only at such a later stage and not during the years under consideration. 13. Our view about non-availability of deduction for the years in question is further fortified by the judgment of the Hon'ble Supreme Court in the case of CIT vs. Hindustan Housing Land Development Trust Ltd. (1986) 161 ITR 524 (SC) . The assessee in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitution of Special bench. We have gone through this order of the tribunal, a copy of which has been placed in the paper book. It can be observed that the Tribunal, in deciding this issue in favour of the assessee, has been swayed by the fact that the ld. Single Judge passed the order/decree against the assessee on 28.1.2000. There is no reference whatsoever in this order dated 18.7.2008 to the later development, being the order passed by the Division Bench on 28.2.2001 staying the operation of the earlier judgment and decree of the ld. Single Judge. This crucial fact of paramount importance was not brought to the notice of the Tribunal and it is on these half presented facts that the Tribunal allowed deduction of interest. 16. The ld. AR has relied on certain judgments of the Hon'ble jurisdictional High Court to bolster the deductibility of interest. We find such reliance as completely misplaced. The first judgment is R.C. Gupta vs. CIT (2008) 166 Taxmann 191 (Del) . The facts of the case are that the assessee therein made certain purchases from company 'H' in the year 1975 and the amount was payable, but, there was dispute on the liability to pay. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m deduction for interest only when the liability to pay such interest finally got crystallized on the passing of decree by the Hon'ble Delhi High Court in September, 2010, subject to certain stays etc. granted against the operation of this judgment and not the years in question when such liability to pay was absent at the respective year endings. 18. Similarly, we find that the case of CIT vs. Industrial Finance Corporation of India Ltd. (2009) 185 Taxmann 296 (Del) , relied by the ld. AR is not germane to the issue. In that case, the assessee entered into a forward contract for purchase of foreign currency on a future date at a predetermined rate and the difference between forward contract rate and exchange rate on the date of entering into the contract was recognised as deduction, which the AO refused to allow by treating it as a contingent liability. The Hon'ble Delhi High Court overturned the view taken by the AO and finally held that this is an ascertained and definite liability in terms of contract and, hence, eligible for deduction. In our considered opinion, this judgment has no relevance to the facts under consideration. 19. We consider it paramount to mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Though the deductibility or otherwise of an expenditure in the income-tax proceedings depends on the appreciation of the correct legal position under the Act and not what the assessee claims under any proceedings or its treatment as contingent liability in the books of account, the idea behind incorporating these facts in the order is to accentuate the incongruous stand of the assessee on the same issue. 21. Now, we espouse the alternative view point canvassed by the AO for disallowing interest, being the making of claim by the assessee directly in the computation of income without routing it through its Profit and loss account. It is trite that entries in the books of account are not conclusive of accrual of income or deductibility of expenses. If an entry is passed in the books of account for a deduction which is otherwise not available as per law, it does not make the claim per se deductible. In the like manner, if a claim is otherwise deductible, but no entry has been passed in the books of account, then there can be no denial of such a claim. Essence of the matter is the deductibility or otherwise as per law and not the passing of entries in the books of account. In our c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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