2006 (11) TMI 186 - HC - Income Tax

Interest payable to bank for A.Y. 1992-93 & 1993-94 revenue contend that liability to pay such interest not accrued during the assessment year in question Whether the assessee is entitled to claim a deduction of that interest in the A. Y. 1992-93 & 1993-94 as business expenditure without making any provision in that regard held yes assessee is following mercantile system of accounting so CIT & ITAT are justified in deleting the addition of the interest liability & allowing the claim

Summary

Issues:
1. Whether the Tribunal was justified in allowing the deduction claimed by the assessee on account of interest payable to the bank when no such liability accrued during the assessment year?
2. Can a sum claimed by the assessee as a deduction in total income be disallowed under section 14A of the Income-tax Act?
3. Is the assessee entitled to claim a deduction as business expenditure without making any provision or payment and without showing it in the books of account?

Issue 1:
The assessee, a limited company, filed a return for the assessment year 1992-93 showing a loss. The Assessing Officer disallowed the claim for deduction of interest payable to the Bank of Credit and Commerce International (BCCI) due to the bank's liquidation and subsequent revival as SBICI. The Commissioner of Income-tax (Appeals) deleted the addition of interest liability, which was upheld by the Tribunal. The Revenue contended that the assessee, not making a claim in the return for the relevant assessment years, was estopped from claiming the allowance. However, the High Court held that in the mercantile system of accounting, liability is recognized on an accrual basis, irrespective of actual payment. The Court referred to precedents emphasizing the importance of the transaction's true nature in determining profit or loss. The Revenue's approach was deemed erroneous, and the claim for deduction was allowed for the assessment years in question.

Issue 2:
The Revenue challenged the Tribunal's decision on interest attributable to amounts withdrawn from a CC account for investment in tax-free units and bonds. The Revenue contended that the interest liability was not provided for in the books of the assessee and was not shown in the return of income. The High Court noted that the liability to pay interest accrued in the relevant assessment years, and the Revenue erred in treating it as discharged in a later year. The Court emphasized that under the mercantile system of accounting, the date of accrual is crucial, regardless of actual payment during the year. Relying on the mercantile system and legal precedents, the Court dismissed the Revenue's appeal and upheld the allowance of the claimed deduction.

Conclusion:
The High Court dismissed both appeals filed by the Revenue under section 260A of the Income-tax Act, 1961. The Court held that the Revenue's contentions were not valid as the liability to pay interest had accrued in the relevant assessment years, and the assessee, following the mercantile system of accounting, was entitled to claim the deductions. The Court emphasized the importance of recognizing liabilities on an accrual basis and upheld the Tribunal's decision in favor of the assessee.