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M/s National Agricultural Cooperative Marketing Federation of India Ltd. Versus Joint Commissioner of Income Tax, Range-32, New Delhi

2015 (10) TMI 1901 - ITAT DELHI

Deduction allowed for the interest claimed on damages while computing business income - Accrual of interest expenditure - Held that:- It is trite that entries in the books of account are not conclusive of accrual of income or deductibility of expenses. If an entry is passed in the books of account for a deduction which is otherwise not available as per law, it does not make the claim per se deductible. In the like manner, if a claim is otherwise deductible, but no entry has been passed in the bo .....

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rength from the judgment of the Hon'ble Supreme Court in CIT vs. SMIFS Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) which reiterates similar view taken in several earlier judgments includingCIT vs. Shoorji Vallabhdas & Co. (1962 (3) TMI 6 - SUPREME Court) . As such, we jettison this contention advanced on behalf of the Revenue as a reason for sustaining the disallowance of interest.

We sum up our conclusion on the point that the assessee did not incur any liability for payment o .....

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on", if any sum chargeable to tax under the Act is payable outside India; or in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200. Conversely, if deduction is otherwise not allowable under the head 'Profits and gains o .....

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tion for expense, becomes wanting.

In view of the foregoing reasons, we answer the question posted before this Special bench in negative by holding that in the facts and circumstances of the case, where claim of damages and interest thereon is disputed by the assessee in the court of law, deduction can't be allowed for the interest claimed on such damages in the computation of business income.

Now the instant appeals are directed to be placed before the Division Bench for d .....

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ting the following question for our consideration and decision:- "Whether on the facts and circumstances of the case, where claim of damages and interest thereon is disputed by the assessee in the court of law, deduction can be allowed for the interest claimed on such damages while computing business income?" 2. The assessee has raised similar grounds in both the captioned appeals against the confirmation of disallowance of interest on damages amounting to ₹ 7,92,52,013 and ͅ .....

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he assessee filed its return and the assessment was completed on 27.2.2004 u/s 143(3) of the Income-tax Act, 1961 (hereinafter also called 'the Act'). During the course of assessment proceedings pertaining to the A.Y. 2003-04, a special audit u/s 142(2A) was carried out which divulged, inter alia, that the assessee had claimed deduction for interest payable to M/s Alimenta SA Switzerland (hereinafter called 'Alimenta') on account of arbitration award, which was still disputed by .....

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see. In a nutshell, the AO opined that such interest was not deductible. Notice u/s 148 was issued 22.9.2006, which was duly served on the assessee. 3.2. The AO noticed during the course of assessment proceedings that deduction for interest was not backed by any corresponding liability to pay; the liability claimed by the assessee as deduction was not acknowledged due to the ongoing litigation and proceedings for compromise; the assessee was of the view that the principal amount should be wiped .....

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d till the date of realization; the judgment delivered by the Hon'ble High Court was binding; the liability was determined and ascertained because of the decree of the Hon'ble Delhi High Court notwithstanding the assessee filing appeal against it; and the term 'interest' used in section 40(a)(i) of the Act relates to loan and does not mean compensation and, hence, such provision was not applicable. The AO refused to accept the assessee's contentions by further noticing that i .....

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t on identical issue, the assessee preferred appeals before the Tribunal pertaining to assessment years 1996-97 to 1998-99 and the Bench was pleased to hold that the liability for payment of such interest crystalised only in the period relevant to assessment year 2000-01 and hence no deduction was allowable in such years because the claim for interest at the end of such years was not an ascertained liability. He further took note of the view taken by him for the assessment years 2003-04 and 2004 .....

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the Tribunal in assessee's own case for the A.Ys. 2003-04 and 2004-05 had allowed deduction of interest, the same view be followed for the two A.Ys. under consideration. The Division Bench hearing the appeals for the extant years was not convinced with the reasoning given by the Tribunal in its order for the A.Ys. 2003-04 and 2004-05 in deleting the disallowance of interest and, accordingly, made a reference for the constitution of a Special Bench in terms of section 255(3) of the Act. That .....

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ng, the liability to pay interest @ 18% p.a. became due by the order of the ld. Single Judge of the Hon'ble Delhi High Court and accordingly deduction for the same is permissible. 5. Under the mercantile system of accounting, an assessee gets deduction when liability to pay an expense arises, notwithstanding its actual quantification and discharge taking place subsequently. The relevant criteria for the grant of a deduction is that the incurring of liability must be certain. If the liability .....

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d becomes deductible at that point of time. The factum of the assessee raising a dispute against such a demand does not ruin the incurring of liability. On the contrary, a contractual liability is not incurred on a mere raising of demand by a claimant. It arises only when such a claim is either acknowledged or in a case of non-acceptance, when a final obligation to pay is fastened coupled with the claimant acquiring a legal right to receive such an amount. Unless the claimant acquires an enforce .....

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ion for the same. Crux of the matter is that except for the assessee accepting a contractual claim, his liability to pay does not arise until some legal obligation to pay is fixed on him. A legal obligation to pay is attached on an assessee when a competent court passes order and a suit is decreed against him and not during the pendency of litigation. This difference between a contractual and a statutory liability has been recognized by the Hon'ble Delhi High Court in assessee's own case .....

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between NAFED and Alimenta for export of 5,000 MTs HPS GN Kernels Jawa variety @ 765 USD PMT FOB from Saurashtra Port during January- May, 1980. Another agreement for supply of 4000 MTs HPS Groundnut Kernel jawa Variety @ USD 770 for supply during 1980-81 was executed on 3.4.1980. 1900 MTs shipped up to 31.5.1980. Balance could not be shipped in view of the non-declaration of vessel by the buyer. On 20.12.1980, NAFED informed Alimenta about restriction imposed by the Government of India on expo .....

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date of award) August 1993. Alimenta filed this award for Enforcement under Foreign Award (Recognition and Enforcement) Act, 1961. The ld. Single judge of the Hon'ble Delhi High Court vide its judgment dated 28.1.2000 made the award a rule of the court and further ordered that Alimenta shall be entitled to interest @ 18% p.a. from the date of the award till the date of realization. Decree was accordingly passed on the same date, that is, 28.1.2000. NAFED filed appeal against the judgment and .....

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dated 5.4.2002, modified the stay order passed by the Division Bench of the Hon'ble Delhi High Court, directing the NAFED to furnish either bank guarantee or proper security for the principal amount decreed within eight weeks, failing which the order of stay granted by the Hon'ble Delhi High Court was to be vacated. This order of the Hon'ble Supreme Court was later on modified by the Hon'ble Supreme Court on 8.1.2003 mandating that in case the assessee furnishes bank guarantee f .....

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ed SLP against this judgment of the Hon'ble Delhi High Court. Vide its order dated 25.10.2010, issuing notice, an interim stay was granted against the judgment dt. 6.9.2010 subject to the deposit of the amount due. A modification application was filed by the assessee, which was disposed of by the Hon'ble Supreme Court on 24.1.2011. One more modification application was filed, which was also disposed of by the Hon'ble Supreme Court on 7.4.2011 staying the execution of decree. On 17.1. .....

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rt that the ld. Single Judge of the Hon'ble Delhi High Court vide his judgment and decree dated 28.1.2000 directed, inter alia, the payment of interest to Alimenta at 11.25% up to the date of award as allowed by FOSFA and at 18% from the date of award till the date of realization. It is undisputed that no payment of the principal amount of damages or interest has so far been finally made, except for furnishing bank guarantees etc. to some extent. The assessee filed a letters patent appeal ag .....

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rd the appeal) finally decided the appeal of the assessee vide its judgment dated 6.9.2010 holding that a letters patent appeal is not maintainable against the judgment dt. 28.1.2000 of the ld. Single Judge. A consequential judgment was passed in September, 2010. Effect of this judgment is that the stay order of the Division Bench passed on 28.2.2001 got vacated and the judgment and decree of ld. Single Judge dt. 28.1.2000 again came to be revived. On 17.1.2012, the Hon'ble Supreme Court rej .....

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on 28.2.2001. It is only on the passing of the consequential judgment and decree by the Hon'ble Delhi High Court in September, 2010, subject to certain stays etc. granted against the operation of this judgment, that the assessee incurred a legally enforceable liability to pay such interest to Alimenta. 8. Now the moot question is whether the assessee is entitled to deduction for interest at the rate of 18% decreed by the ld. Single Judge of the Delhi High Court in the computation of income .....

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d. Single Judge was passed by the Division Bench on 28.2.2001, which is well within the financial year relevant to the assessment year 2001-02 under consideration and remained operative in subsequent years including the immediately succeeding year in appeal. This shows that the assessee did not have any legal obligation to pay interest during these two years. The hitherto obligation which was created by the judgment of the ld. Single judge against the assessee was eclipsed and frustrated by the .....

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the Hon'ble High Court, Their Lordships took up the question whether the liability could be said to have accrued to the assessee to pay this interest before the passing of the order by this Court on 28th Jan., 2000. Rejecting the assessee's contention, it was held that on the last date of all the three assessment years, namely, 1996-97, 1997-98 and 1998-99, there was no legal liability on the part of the appellant to pay interest and that liability was crystallized only on 28th Jan., 20 .....

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ence the assessee could not claim deduction of interest in the computation of income for the earlier years. The principle is that deduction becomes available only on coming into existence of a liability to pay and the liability to pay arises when it flows from a legally enforceable order. In such a situation, the period to which the expense originally pertained, loses its relevance. Since the decree in this case was passed by the ld. Single judge on 28.1.2000, which also covered interest for the .....

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n the judgment. Though this factor is otherwise crucial for our purpose, but does not have any material bearing on the conclusion about the non-deductibility of interest for the three years before the Hon'ble High Court inasmuch as the liability to pay such interest did not crystallize at the end of those three years de hors the stay on the judgment of the ld. Single Judge dated 28.1.2000. Be that as it may, the ratio decidendi of the judgment, which is not marred even by nonmentioning by th .....

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include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is co .....

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llowed in the year in which liability to pay finally arises. Once a person has not voluntarily accepted a contractual obligation and further there subsists no legal obligation to pay qua such contractual claim at a particular time, it cannot be said that the person incurred any liability to pay at that point of time so as to make him eligible for deduction on that count. Notwithstanding the fact that obligation relates to an earlier year, the liability to pay arises only in the later year, when .....

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and equally the opposite party without any legal obligation to pay the same. Neither any income accrues to the claimant, nor any deduction is earned by the opposite party. We are instantly confronted with the second type of situation in which the obligation created against the assessee by the judgment of the ld. Single Judge on 28.1.2000 was stayed by the judgment of the Division Bench on 28.2.2001, which position continued till the decree on the judgment dt. 6.9.2010 reviving the judgment of t .....

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g the years under consideration. 13. Our view about non-availability of deduction for the years in question is further fortified by the judgment of the Hon'ble Supreme Court in the case of CIT vs. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524 (SC) . The assessee in that case was dealing in land and maintained its accounts on mercantile basis. Some plots of the assessee were requisitioned by the Government and, subsequently, the land was acquired. Certain sum was awar .....

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to the assessee on the date of the award. When the matter finally came up before the Hon'ble Apex Court, Their Lordships held that no income accrued to the assessee as there was no absolute right to receive the amount at that stage inasmuch as the arbitrator's award enhancing compensation for acquisition of the assessee's land was put in jeopardy by the State Government on filing an appeal against that very right and nothing would be due if the appeal was decided against the assessee .....

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#39; 14. Presently, we are also dealing with an almost similar situation in which Alimenta's right to receive interest was in serious dispute at the end of the years under consideration because the corresponding liability of the assessee to pay stood stayed by the order of the Division Bench on 28.2.2001. By no standard, the assessee can be said to have incurred any liability for payment of interest to Alimenta at the end of the these two years. 15. The ld. AR has vehemently relied on the or .....

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assessee on 28.1.2000. There is no reference whatsoever in this order dated 18.7.2008 to the later development, being the order passed by the Division Bench on 28.2.2001 staying the operation of the earlier judgment and decree of the ld. Single Judge. This crucial fact of paramount importance was not brought to the notice of the Tribunal and it is on these half presented facts that the Tribunal allowed deduction of interest. 16. The ld. AR has relied on certain judgments of the Hon'ble juri .....

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n the ground that: 'the said amount did not relate to any purchases made during the previous year relevant to the assessment year in question.' The Hon'ble High Court eventually allowed deduction for the said amount. We do not find any parallel between the facts of that case and the case under consideration. In that case, an undisputed fact prevailed that the liability was incurred as the goods were in fact purchased by the assessee and the only dispute was of the timing of deductibi .....

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to the assessee, wherein demand was raised for ground rent and also towards interest charges for belated payment of such ground rent. The assessee debited the amount in its Profit & Loss Account for the assessment year 1981-82. The AO disallowed the amount of interest pertaining to earlier years on the ground that the said liability could not be construed to have accrued during the relevant previous year. Reversing the view taken by the AO, the Hon'ble High Court held that such amount of .....

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i High Court vide its order dated 28.1.2001. This judgment rather supports the Revenue's contention that the deduction can be claimed only when the liability is incurred. Going by the ratio decidendi of the judgement in Jasjeet Films (P) Ltd. (supra), we find that the assessee can claim deduction for interest only when the liability to pay such interest finally got crystallized on the passing of decree by the Hon'ble Delhi High Court in September, 2010, subject to certain stays etc. gran .....

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nd exchange rate on the date of entering into the contract was recognised as deduction, which the AO refused to allow by treating it as a contingent liability. The Hon'ble Delhi High Court overturned the view taken by the AO and finally held that this is an ascertained and definite liability in terms of contract and, hence, eligible for deduction. In our considered opinion, this judgment has no relevance to the facts under consideration. 19. We consider it paramount to mention that the asses .....

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uot;17. NAFED filed an application for modification of the order dated 25th October, 2010 passed by the Supreme Court of India in SLP (Civil) No.28325 of 2010 affirming as follows:- "The applicant submits that the aforesaid directions in the decree are not in accordance with and in fact in excess of the award as would be seen from page 117 of the SLP paper book has only directed payment of US$ 11.25% p.a. from February 13, 1981 to date of award i.e. September 14, 1990 and costs and expenses .....

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as deduction. There is an absolute mismatch between these two inconsistent stands taken by the assessee in income-tax and civil proceedings. Similar position is prevailing insofar as the assessee's understanding and reflection of such interest liability in its annual accounts is concerned. It has been brought to our notice by the ld. DR that the assessee in its Annual report for the year 2012-13 has claimed the amount payable to Alimenta as a contingent liability on the ground of the same be .....

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the correct legal position under the Act and not what the assessee claims under any proceedings or its treatment as contingent liability in the books of account, the idea behind incorporating these facts in the order is to accentuate the incongruous stand of the assessee on the same issue. 21. Now, we espouse the alternative view point canvassed by the AO for disallowing interest, being the making of claim by the assessee directly in the computation of income without routing it through its Profi .....

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se as per law and not the passing of entries in the books of account. In our considered opinion, entries in books are not conclusive of accrual of income or deductibility of expenses. On the contrary, it is the incurring of liability or accrual of income by means of a legally enforceable right, which decides about the deductibility of an expense or earning of income. Our view gets strength from the judgment of the Hon'ble Supreme Court in CIT vs. SMIFS Securities Ltd. (2012) 348 ITR 302 (SC) .....

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sessee, the deduction has been rightly denied. 23. Now we take up the AO's alternative point of view that the deduction, if at all permissible, is also hit by the provision of section 40(a)(i). In this regard, we find that this provision with marginal note of - 'Amounts not deductible' - applies to disallow the otherwise allowable deductions in the computation of income of the payer under the head "Profits and gains of business or profession", if any sum chargeable to tax u .....

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