2004 (12) TMI 51 - HC - Income Tax

1. Whether Tribunal is correct in upholding the disallowance out of interest payable on the deposits accepted under the Companies (Acceptance of Deposits) Rules, 1975, by applying the provisions of section 40A(8) of the Income-tax Act, 1961? 2. Whether assessee is entitled to claim depreciation at the revised rates effective from April 2, 1983 for AYs 1980-81 and 1981-82? 3. Whether assessee is entitled to the deduction of the sales tax liability based on the demand pursuant to the completion of the assessment on February 18, 1980, under the Central sales tax while computing its income liable to tax for the AY 1981-82? - we do not find any merit in the claim of the assessee, and, accordingly, we answer the question in favour of the Revenue

Issues Involved:
1. Disallowance of interest payable on deposits under section 40A(8) of the Income-tax Act, 1961.
2. Entitlement to claim depreciation at revised rates effective from April 2, 1983, for the assessment years 1980-81 and 1981-82.
3. Deduction of sales tax liability of Rs. 28,41,461 for the assessment year 1981-82.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Payable on Deposits:
The primary issue was whether the Appellate Tribunal was correct in upholding the disallowance of interest payable on deposits accepted under the Companies (Acceptance of Deposits) Rules, 1975, by applying the provisions of section 40A(8) of the Income-tax Act, 1961, for the assessment years 1980-81 and 1981-82. The court noted that this issue had already been decided in the assessee's own case for the assessment years 1977-78 and 1978-79 (R.C. No. 44 of 1988, dated July 31, 1997). The court had previously found that the assessee had not created any charge prior to December 9, 1980, and thus was not entitled to any deduction. Consequently, the court answered this issue against the assessee and in favor of the Revenue.

2. Entitlement to Claim Depreciation at Revised Rates:
The second issue was whether the assessee was entitled to claim depreciation based on the revised rates effective from April 2, 1983, for the assessment years 1980-81 and 1981-82. The Tribunal had rejected the assessee's claim on the grounds that the revised rates of depreciation were introduced with effect from April 2, 1983, and were only applicable prospectively. The court referred to its decision in Andhra Cements Co. Ltd. v. CIT [1998] 232 ITR 364, which supported the Tribunal's view. Therefore, this question was also answered against the assessee and in favor of the Revenue.

3. Deduction of Sales Tax Liability:
The third issue involved the deduction of a sales tax liability of Rs. 28,41,461 for the assessment year 1981-82. The assessee argued that the sales tax demand was served on February 23, 1980, during the relevant previous year, and thus it was entitled to the deduction. The Assessing Officer disallowed the claim, noting that the sales tax liability pertained to the period 1976-77. The Tribunal upheld this view, citing that the assessee maintained its books under the mercantile system of accounting and the liability pertained to 1976-77, despite the demand notice being served in 1980.

The court considered various precedents, including the Supreme Court's decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, which established that an assessee following the mercantile system of accounting is entitled to deduct liabilities that accrued during the relevant period, even if the payment is made later. However, the court found that the assessee did not present any peculiar circumstances that would justify claiming the deduction in the year of demand instead of the year the liability accrued. The court referred to decisions from other High Courts, such as Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi), CIT v. East India Corporation Ltd. [1986] 159 ITR 712 (Mad), and CIT v. Woodland Oil Co. (P.) Ltd. [1992] 195 ITR 852 (Cal), which supported the view that deductions should be claimed in the year the liability accrued unless exceptional circumstances exist.

Given the lack of such exceptional circumstances, the court concluded that the assessee was not entitled to the deduction in the year of demand. Therefore, the court answered this question in favor of the Revenue and against the assessee.

Conclusion:
The court answered all three questions in favor of the Revenue and against the assessee, thereby upholding the disallowance of interest, rejecting the claim for revised depreciation rates, and denying the deduction of the sales tax liability for the assessment year 1981-82.

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