2003 (11) TMI 273 - AT - Income Tax

Summary

Issues involved:
1. Challenge to the initiation of proceedings under section 147 of the Income Tax Act.
2. Disallowance of interest payable to the bank and UP Finance Corporation Ltd.

Issue 1: Challenge to the initiation of proceedings under section 147:
The appeals by the assessee contested the consolidated order of the CIT(A) and challenged the initiation of proceedings under section 147 of the Income Tax Act. The proceedings were initiated based on suspicion regarding the understatement of closing stock in the balance sheet compared to the loan amount from the bank. The AO presumed the understatement led to the initiation of proceedings under section 147. However, during reassessment proceedings, it was found that the explanation provided by the assessee regarding the stock was correct and satisfactory. The AO disallowed the claim of interest payable to the bank, citing it as a contingent liability due to a suit filed by the bank. The CIT(A) confirmed this disallowance. The tribunal held that the proceedings under section 147 were initiated solely on suspicion without reasonable cause or belief, making the assessment invalid and bad in law. Citing legal precedents, the tribunal emphasized that mere suspicion or necessity of inquiry cannot justify proceedings under section 147.

Issue 2: Disallowance of interest payable to the bank and UP Finance Corporation Ltd:
The AO disallowed the assessee's claim of interest payable to the bank, deeming it contingent due to a lawsuit filed by the bank for loan recovery. The CIT(A) upheld this disallowance and directed the AO to disallow interest payable to UP Finance Corporation Ltd. as well. The CIT(A) invoked the provisions of section 43B(d) of the Income Tax Act to support the disallowance. However, the tribunal noted that section 43B(d) was introduced after the relevant assessment years and, therefore, the liability was not disallowable under this provision. Regarding the nature of the liability to pay interest, the tribunal held that when following the mercantile system of accounting, the liability accrues yearly, and the fact that a lawsuit is ongoing does not negate the liability. The tribunal differentiated between contingent liability and contingent payment, emphasizing that in this case, the liability had accrued and was known. Consequently, the tribunal reversed the CIT(A)'s decision, allowing the appeal by the assessee on the grounds that the liability to pay interest to the bank was an allowable expenditure in the year of accrual.

In conclusion, the tribunal found the proceedings under section 147 to be invalid and bad in law, leading to the cancellation of assessments for the relevant years. Additionally, the tribunal allowed the appeal by the assessee concerning the disallowance of interest payable to the bank, emphasizing that the liability was allowable as an expenditure in the year of accrual.