TMI Blog2013 (9) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... iability accrued. As per the ordinary principles of commercial accountancy, the said liabilities cannot be allowed as an expenditure in the earlier years. Payment of a liability is distinct from creation or accrual of the liability and under the mercantile system profits and gains of persons are computed on the basis of principle of accrual during the period for which profits and gains have to be computed. It is not material that the liability is to be discharged at a future date or by mistake or failure, no entry of the accrued liability was made in the books of accounts. An assessee will be entitled to a particular expenditure or deduction depending upon provisions of law and not on the basis of existence or absence of entries in the books, which are not conclusive. The same principle applies to accrual of income - Following decision of Additional Commissioner of Income Tax, Delhi-II versus Rattan Chand Kapoor [1984 (2) TMI 60 - DELHI High Court] - Decided against assessee. - Income Tax Appeal Nos. 84/2000 & 85/2000 - - - Dated:- 23-8-2013 - Sanjiv Khanna And Sanjeev Sachdeva,JJ. For the Appellant : Mr. Rajat Navet, Advocate. For the Respondents : Mr. N. P. Sahni, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo returns. However, during pendency of the assessment proceedings, the appellant filed revised returns (dates are not available) and claimed deduction of interest under Section 36(1)(iii) for the period 1st March, 1986 to 30th June, 1986 (four months) amounting to Rs.62,66,667/- and Rs.1,88,17,168/- for the period 1st July, 1986 to 30th June, 1987 (it is apparent that the accounting year of the assessee during the two years was from 1st July to 30th June of the relevant previous year). 4. The Assessing Officer did not accept the claim for interest on the ground that the liability had not accrued during the relevant previous years but had accrued subsequently only because of letter dated 4th April, 1988. 5. In first appeal, the appellant assessee did not succeed in the Assessment Year 1987-88 but succeeded in the Assessment Year 1988-89. 6. The appellant and the Revenue preferred appeals before the tribunal against the two conflicting orders passed by the first appellate authority. 7. The tribunal by their common order dated 6th December, 1999 has accepted the stand of the Revenue and observed that the liability to pay interest had not accrued during the relevant previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready been paid and the letter further records that interest may be paid to the Government of India immediately after making adjustment of dividend on Rs.16 crores with effective date of conversion of Rs.16 crores mentioned in the letters. 10. It is clear from the said correspondence that Government of India was earlier a shareholder and was entitled to dividend on share capital to the extent of Rs.16 crores, which had been issued or were allotted by the appellant-assessee. Pursuant to the letters dated 4th April, 1988 and 20th April, 1988 there was a change in the character of the relationship between the parties to the extent of Rs.16 crores, which became a loan for the first time. The relationship of a shareholder came to an end. The said conversion took place after end of the respective previous years, subject matter of the present appeals. We do not think, in these circumstances, it can be held that the liability had accrued or crystallised during the relevant assessment years. It is clear that the liability had accrued and had crystallised subsequently after the end of the previous years on 30th June, 1986 and 30th June, 1987. During the previous years, the appellant assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that reopening of accounts does not fit in with the scheme of the Indian Income Tax as was observed in Commissioner of Income Tax versus A. Ganpathy Naidu, 1964 (53) ITR 114, which relates to case of receipts but the proposition of law could be equally applied to expenses. [see also Laxmi Devi Sugar Mills Vs. CIT, (1993) 200 ITR 603 (SC)]. 13. In Metal Box Company of India Limited versus Their Workmen, 1969 (73) ITR 53, the Supreme court was concerned with liability towards gratuity under the statutory provisions and whether the amount calculated on actuarial valuation of the estimated liability could be treated as expenditure in the profit and loss account. It was observed that estimated liability under the gratuity schemes when properly ascertained, it was possible to arrive at proper discounted present value. Liability, though contingent provided it is discounted i.e. its present value, if ascertainable, could be taken as trading expenses once they were sufficiently certain, capable of valuation and if profits cannot be properly estimated without taking them into account. It was a case of an accrued liability in praesenti but payable in future. 14. Learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f principle of accrual during the period for which profits and gains have to be computed. It is not material that the liability is to be discharged at a future date or by mistake or failure, no entry of the accrued liability was made in the books of accounts. An assessee will be entitled to a particular expenditure or deduction depending upon provisions of law and not on the basis of existence or absence of entries in the books, which are not conclusive. The same principle applies to accrual of income. 17. The supreme Court in Bharat Earth Movers versus Commissioner of Income Tax, 2000 (245) ITR 428 has observed that quantification or discharge of a liability of future date is not relevant but what is to be determined for allowing a business liability is to ascertain whether the liability had accrued and that the assessee was certain about incurring the liability. In other words, the liability should be capable of being estimated with reasonable certainty though actual quantification may not be possible. If these requirements are satisfied, the liability is not contingent. The liability is in praesenti though to be discharged at a future date, even if the future date on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier assessment year stands filed or assessment proceedings have come to an end. This is not the factual position in the present case. In the present case, the liability itself had arisen much later with the letter dated 4th April, 1988. This is the date on which liability towards loan got created for the first time and the shares issued to the Government of India were treated as either cancelled or null and void and a loan and interest liability came into existence. It is on this date that the appellant became liable to pay interest, though for earlier period also. The letter dated 4th April, 1988 changed the nature of the transaction and relationship completely from that of a shareholder to a creditor and a debtor. Before the said date, the said liability did not exist as there was no relationship of a creditor and debtor between the Government of India and the appellant. The contention of the appellant that letter dated 4th April, 1988 was a unilateral letter, does not appear to be correct and in any case does not affect the outcome or legal position. The appellant accepted the said letter and has acted upon it. Therefore, the contention that it was a unilateral act is ill-f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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