1987 (8) TMI 136 - AT - Income Tax

Summary

Issues:
Determining whether the sum claimed as deduction by the assessee had fallen due in the relevant accounting period for the assessment year 1980-81, and analyzing the nature of the claimed amount as either interest or risk.

Analysis:
The case involved a dispute over a deduction claimed by the assessee amounting to Rs. 3,40,000, characterized by the assessee as a provision for risk or anticipated loss, while the Income-tax Officer deemed it as interest simpliciter. The Tribunal was tasked with determining the true nature of the claimed amount. The assessee, an exporter to Sudan, argued that the risk associated with obtaining payment from Sudan necessitated the provision for anticipated loss. The assessee supported this argument with correspondence indicating the payment terms and the caution advised by the Indian Embassy regarding delays in remittances from Sudan. The assessee contended that the provision for interest was a method of evaluating the risk rather than a straightforward interest calculation. However, the Income-tax Officer disallowed the claim, stating that the liability for interest had not yet arisen in the relevant period.

The assessee further appealed to the CIT (Appeals), asserting that the provision for interest was essential due to the anticipated delay in payments, and thus, should be excluded from the income calculation based on the real income theory. Despite the assessee's arguments, the CIT (Appeals) upheld the disallowance, leading to the appeal before the Tribunal.

During the Tribunal proceedings, the assessee's representative reiterated the real income theory, emphasizing that the claimed amount represented a provision for trading loss arising from the inherent risk in exporting to Sudan. The representative argued that the provision was made at the outset of the transaction to cover the risk, and therefore, should be deductible. On the contrary, the departmental representative contended that the amount was merely a provision for a contingent liability as the bank would charge interest in the subsequent year. The departmental representative cited a previous Tribunal order and a High Court decision to support this position.

After deliberation, the Tribunal focused on determining the true character of the claimed deduction, questioning whether it was interest or a provision for risk. Despite the assessee's assertions, the Tribunal found that the claimed risk had no substantial basis beyond the factor of delay, which could be equated to interest. The Tribunal concluded that the claimed amount was, in essence, interest and not a provision for risk, thereby upholding the CIT (Appeals)'s decision to disallow the deduction. The Tribunal rejected the appeal, emphasizing that the authorities cited by the assessee were not relevant in the absence of substantial evidence supporting the existence of the claimed risk.