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TMI Blog2013 (11) TMI 1593X X X X Extracts X X X X X X X X Extracts X X X X ..... gh it accrued at the time of execution of first agreement through which loan was obtained by the assessee but that liability was disputed by the assessee by raising a dispute with regard to rate of interest through various correspondences and auditors notes attached to the balance sheet. Finally the dispute was resolved in the impugned assessment year through a supplementary agreement through which the rate of interest was reduced from 12% to 6% per annum besides other terms of payments. Therefore, the contractual liability is finally accrued on its crystallization in the impugned assessment year, and on the basis of the said agreement the assessee has made debit entry to the profit & loss account. Since the contractual liability has been crystallized in the impugned assessment year, the entries passed by the assessee in its accounts is in accordance with law and no disallowance can be made on the ground that the assessee has been following mercantile system of accounting and the debit entries are to made in corresponding assessment years. We have carefully examined the order of CIT(A) and we find that he has adjudicated the issue in right perspective following the judicial pron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the claim was not allowable. (viii) The cases relied by the CIT(A) are not applicable in the case of assessee since the facts are quite different. 3. The order of the Ld. Commissioner of income Tax (Appeals) being erroneous, unjust and bad in law be vacated and the order of the assessing officer be restored. 4. The appellant craves leave to modify any of the grounds of the appeal given above and or add any fresh grounds as and when it is considered to do so. 2. With regard to first ground, the brief facts, borne out from the record, are that the Assessing Officer has made an addition of ₹ 2,03,752/- after invoking the provisions of section 14A of the Act (hereinafter referred to as the Act ), against which an appeal was filed before the CIT(A) with the submissions that the assessee has not made any investment for the purpose of earning tax free income in the impugned assessment year. Moreover, no taxable income was earned by the assessee, therefore, the disallowance u/a 14A of the Act is not called for. It was also contended before the CIT(A) that the assessee company has sufficient surplus fund and no part of borrowed funds have been utilized for making any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant provisions of the Act, we find that as per the provisions of Section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under this Act. Meaning thereby the basic condition precedent for invoking the provisions of section 14A is that there should be income, which does not form part of the total income under this Act. Thus, wherever the assessee earned the interest free income, the corresponding expenditure incurred in earning that income is to be disallowed. In the absence of any interest free income, there cannot be any disallowance as no corresponding expenditures were incurred to earn a particular tax free income. For the sake of reference, we extract the provisions of section 14A of the Act as under: 14A. [(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Chhatishgarh) and its surrounding districts. The modus operandi of the business is selling of commercial vehicles supplied by the Tata Motors Limited. The vehicles were being supplied to the assessee on 45 days credit and as and when the sale proceeds were realized the assessee company made payment to Tata Motors Limited. Due to lack of demand and decline in sales, the credit balance in the name of TML increased considerably. 7.1 In the year 2000 an arrangement was made with TML through its group concern M/s Niskalp Investment and Trading Co. Ltd. to provide a loan of ₹ 4,80,76,000/- to the assessee company vide agreement dated 13/03/2000 @12% interest per annum. The said loan was immediately utilized by TML for squaring up its outstanding dues recoverable from the assessee company. Since the assessee was dealer of TML, it could not resist the conversion of credit balance into loan account by TML but no interest has ever been paid or provided on loan provided by NEL. A note to the this effect was made by the auditors in the notes to the accounts attached to the balance sheet each year. The matter became disputed and the assessee company did not either provide or pay the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to M/s Niskalp Energy Limited, was made at the behest of TML and the entire loan was immediately utilized by TML for squaring up its outstanding dues recoverable from the assessee company. Since the assessee company was dealer of TML, it could not resist the conversion of credit balance into the loan account but no interest was ever paid or provided on a loan provided by NEL. In support of its contention, attention of CIT(A) was also invited to the agreement and other documents. Finding force in the contention of the assessee the CIT(A) has accepted the claim of the assessee and deleted the disallowance. The relevant observations of the CIT(A) are extracted hereunder for the sake of reference: 6.1 The 1st important document in the instant dispute is the Loan Agreement dated 30/03/2000 between the appellant company and the Tata group. As per this agreement, the appellant company was required to pay interest @12% on the loan amount and also to make payment of principal interest amount within the stipulated time frame. However, facts on records suggest that the appellant company followed the said agreement more in its breach than in its compliance. The Ld. A.R has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability had no meaning. Even in mercantile system of accounting, only that liability is required to be accounted which get crystallized during the year. In this case, the appellant company even though had signed the agreement which fastened the liability of interest payment on the appellant company but in practical/commercial world, no such liability, could be said to have crystallized since facts on record (discussed above) clearly demonstrate that the appellant never had any intention to comply with the terms of that agreement as it had serious dispute/objections with the rate of interest payment and other conditions set out in the impugned agreement. Under these circumstances, even though such interest payment refer to earlier years, the liability to pay got crystallized only during the year under reference when the appellant company had no dispute/objection with terms of the fresh agreement on 12/04/2007. There is an old saying that the proof of pudding is in its eating ; the present base is a good example of this saying - What better proof is required of non-acceptance/ dispute/ objections by the appellant company with regard to the terms of the earlier agreement(s) when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly held as allowable deduction by the Tribunal in the year under consideration. 6.1.4 In this view of the matter, the disallowance made by the A.O. was uncalled for and the same is hereby deleted. 9. Aggrieved, the Revenue has preferred an appeal before the Tribunal with the submissions that the assessee has been following the mercantile system of accounting, therefore, the corresponding provisions for the payment of interest are required to be made in the relevant assessment years. He has also invited our attention to the terms of agreement with the submissions that in case of dispute the assessee should have approached arbitrator for the resolution of dispute but instead of doing so he did not pay the interest in the relevant assessment year and now the entire interest liability is claimed in the impugned assessment year on the basis of agreement which is not permissible in the eyes of law. 10. On the other hand the learned counsel for the assessee besides placing heavy reliance upon the order of CIT(A) has submitted that though the financial arrangement was made at the behest of the TML at a higher rate of interest at 12% per annum but no interest has ever been paid o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under for the sake of reference: No provision has been made in the account in respect of interest on dues relating to supply of vehicles converted to term loan from M/s Niskalp Investment Trading Co. Ltd. During the year amounting ₹ 62,82,841/-(Rupees Sixty two lac Eighty Two Thousand Eight Hundred Forty One Only). This has resultedin understating the loss by the same amount. 11.2 Similarly, in other years also the auditor has given a note on account to this effect with the same narration. The copies of balance sheets of different assessment years along with the notes on account are placed before us. Besides the assessee has also agitated the higher rate of interest through various correspondences, therefore, the dispute of higher rate of interest was under consideration. The correspondences exchanged between the assessee and the NEL are also placed on record. Finally, the controversy was resolved vide supplementary agreement dated 12/04/2007. Through this agreement, the rate of interest was reduced from 12% to 6% per annum on reducing balance method with effect from 01/04/2000. Besides the modalities of payments were also worked out. The details of modalities of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttled irrespective of the fact that the assessee has been following mercantile system of accounting. 11.4 In the case of Paramjit Singh vs. ITO [2010] 236 CTR )P H) 466, their Lordships have observed that according to provisions of the Indian Evidence Act, 1972 when terms of a contract, grant or other disposition of property have been reduced to the form of a document then no evidence is permissible to be given in proof of any such term or such grant or disposition of the property except the document itself or the secondary evidence thereof and no oral agreement contradicting/varying the terms of a document could be offered. 11.5 In the case of CIT vs. Motors General Stores (P.) Ltd. 66 ITR 692, their Lordships have observed that when the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. 11.6 Having carefully examined the various judicial pronouncements, we are of the considered view that wherever nature of liability is of a contractual liability, the liability of payment always accrues on its crystallization or final settlement of the dispute, if any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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