TMI Blog1999 (6) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... of account is a contingent liability in view of the dispute between the assessee and the banks. The Assessing Officer accordingly denied the liability on the ground that the contingent liability is not allowable as a deduction. He has further observed that the assessee will be allowed a deduction as and when the liability is crystallised. 2. On appeal the Commissioner of Income-tax (Appeals) has deleted the additions by holding that there was no logic as to how the assessee could be denied the deductions as the liability had actually accrued and had been debited to the accounts. 3. The revenue is aggrieved. Our attention has been invited to the Auditors Report placed at Page 33 of the Paper Book to point out that the auditors have specifically referred to the liability as contingent liability. Relying upon the decision of the Bombay High Court in the case of CIT v. Phalton Sugar Works Ltd. [1986] 162 ITR 622 it was contended that in the case of contractual liabilities when a dispute is raised the liability accrues only in the year of the settlement of the dispute. Reliance was also placed on the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting notwithstanding the fact that the assessee has disputed the liability and that the amount is payable in future. 5. The learned D.R. in counter reply contended that the case law relied upon by the learned counsel for the assessee is relating to the statutory liabilities and not in respect of the contractual liability. 6. We have given our careful consideration to the rival contentions. There is no dispute about the fact that as per the terms and conditions of the agreement between the assessee and the two banks, viz. Corporation Bank and Indian Overseas Bank, the assessee was liable to pay interest at the agreed rate. However, a dispute had arisen between the assessee and the banks and the assessee had refused to pay the principal amount as well as the interest to the banks. When the Assessing Officer asked the assessee to give reasons for making a provision of ₹ 53,40,607 for assessment year 1986-87 vide order sheet entry dated 6-9-1988 the assessee submitted a written reply. The relevant portion is available at Page Nos. 2 3 of the assessment order for assessment year 1986-87 and we consider it worthwhile to reproduce the same as under :- B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Receiver who has taken the charge of Master Tapes . 8. From the above facts it becomes evident that the assessee had disputed the contractual liability of interest payable to the banks. The banks had filed a suit for recovery of the principal amount along with interest. As on the close of the previous year the suit was pending in the High Court. The issue before us is as to whether the liability provided in the books of account is an accrued liability or a contingent liability and as to whether it is allowable as a deduction. It is not in dispute that the assessee is following mercantile system of accounting. Before we consider the case law in regard to this issue, it may be pertinent to mention that there is a distinction between a statutory liability and contractual liability. The principles of law applicable in respect of the statutory liabilities differ with the principles of law applicable to contractual liabilities. In the case of statutory liability it is well-settled that the liability that is accrued under the statute is allowable as a deduction notwithstanding the fact that the assessee has disputed the liability either by way of an appeal or otherwise. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and from the date of the decision of the suit till the recovery of the amount. The accrual of interest from the date of filing of the suit till the decision is contingent and not definite. Therefore, there is no accrual of liability of interest for the year under appeal. The assessee was thus not entitled to deduction on account of interest in the year under appeal. 11. Similarly for assessment year 1987-88 the claim made by the assessee on account of a provision for payment of interest to bank amounting to ₹ 54,99,305 is not allowable in the year under appeal. 12. It may be pertinent to mention that the assessee had reached to a settlement with the bank and agreed to certain terms and conditions described as consent terms. In assessment year 1989-90 the assessee has offered the amount of interest as taxable under section 41. In other words, the assessee has ultimately not been held liable to interest for which a provision was made in the accounts for assessment years 1986-87 and 1987-88. We, therefore, restore the additions of ₹ 53,40,607 and ₹ 54,99,305 for assessment years 1986-87 and 1987-88 respectively. The assessee will be justified in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights (at cost ₹ 17,57,000 and video rights of English being ₹ 1,21,822) which had not been accounted for in the Profit Loss account and therefore amounted to suppression of income. The explanation of the assessee is stated to be given in their letter dated 29-7-1989. This explanation as given in the assessment order was that these rights represented unexploited rights and were not includible in the accounts. The Assessing Officer considered this explanation to be incorrect and could not conceive of the profit being correctly arrived at without inclusion of these two amounts of closing stock. The two amounts totalling ₹ 18,78,822 have been accordingly added to the total income agitated by the appellant in this ground of appeal. 6.1 I have gone through the assessee s letter dated 29-7-1989 and feel that this letter is what has caused all the confusion. What has actually happened is that the item of expenditure debited to the accounts under the head Material consumed ₹ 4,05,358 is the net figure of opening stock plus purchases less closing stock. This becomes clear from the statement of cost of sales of materials consumed which is a part of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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