TMI Blog2008 (8) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... penal interest of Rs. 14,69,905 as contingent liabilities were not within the scope of prima facie adjustments under section 143(1)(a) of the Income-tax Act, 1961?" 2. The facts leading to filing of this appeal are that the assessee-respondent filed its return of income for the assessment year 1997-98 on November 28, 1997, declaring its total income of Rs. 79,58,855. Audit reports as per section 44AB of the Income-tax Act and as per the provisions of the Companies Act, 1956, were filed along with the return of income. The return was processed under section 143(1)(a) of the Act as per the intimation dated November 17, 1998, which was served on the assessee on January 4, 1999. The Assessing Officer in the intimation had adjusted the total income at Rs. 1,53,08,599 and an additional tax of Rs. 6,32,077 was levied. 3. The assessee had claimed deduction on account of late delivery damages of Rs. 58,79,839 and penal interest of Rs. 14,69,905. In the audit accounts these two liabilities were categorised under the head "Contingent liabilities". It was stated that the liability on account of liquidated damages was due to delay or defect in supply amounting to Rs. 58,79,839 which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues. Learned counsel further submitted that the authorities below have not appreciated the fact that the claim put forth by the assessee were based on mercantile system of accounting and as such accrued during the previous year. 6. To appreciate the submissions raised at the Bar we have carefully perused the order passed by the Tribunal. On a scrutiny of the order it is discernible that the Tribunal has taken note of the fact that the claim made by the assessee in the computation of income were not accounted in the accounts and the Assessing Officer has treated the liability as contingent liability and dislodged the claim, on the basis of the notes of the auditors in schedule 16 of the balance-sheet. The Tribunal took note of the submissions made by the assessee before the Commissioner of Income-tax (Appeals) that the auditor's treatment of the liability as contingent liability cannot be regarded as inadmissible. It was also pointed out that no waiver had taken place and the assessee had not received Rs. 58,79,839 deducted by different customers and the bank had also recovered interest on various dates during the year as they were backed by contracts and the assessee had no r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and disallowed as prima facie inadmissible. Under the circumstances, we hold that the adjustments made by the Assessing Officer are not the kind of adjustments contemplated under section 143(1)(a). Accordingly, the additions made under prima facie adjustment are to be deleted." 8. The question that falls for consideration is whether the Tribunal is justified in its approach. In this context, we may refer with profit to the decision rendered in Kamal Textiles v. ITO [1991] 189 ITR 339 (MP) wherein it has been held as under (headnote): "The provisions of section 143(1)(a) of the Income-tax Act, 1961, are not opposed to natural justice and are not ultra vires. The intimation under the provisions is issued on the basis of the assessee's own return. What is permissible to be adjusted are (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction, allowance or relief, which is prima facie admissible on the basis of information available in the return but not claimed in the return, and, similarly, (iii) those claims which are on the basis of information available in the return, prima facie inadmissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant time, referred to prima facie adjustments. The first proviso permitted the Department to make adjustments in the income or loss declared in the return in cases of arithmetical errors or in cases where any loss carried forward or deduction or allowance which on the basis of information available in such return was prima facie admissible but which was not claimed in the return or in cases where any loss carried forward, or deduction or allowance claimed in the return which on the basis of information available in such return was prima fade inadmissible. In the present case, therefore, when there were conflicting judgments on interpretation of section 80-O, in our view, prima facie adjustments contemplated under section 143(1)(a) was not applicable and, therefore, consequently the appellant was not liable to pay additional tax under section 143(1A) of the 1961 Act." 11. Keeping in view the aforesaid enunciation of law the present factual matrix is to be appreciated. As is evincible the Assessing Officer had issued the intimation by giving a note which reads as under: "Liquidated damages accrued but not accounted as per notes on accounts amounting to Rs. 58,79,839 and bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for late delivery damages and qualified their report under section 44AB of the Income-tax Act. As has been held in the case of Sutlej Cotton Mills Limited [1979] 116 ITR 1 (SC) that for the purpose of computing income under the Income-tax Act the book entries are not conclusive. If under the Act a liability has accrued merely because no entry is made in the books of account it would not mean that the liability cannot be claimed or the income cannot be assessed. It is also noticeable, the penal interest was debited by the bank to the appellant's account and recovered on various dates during the financial year 1996-97. The assessee-appellant had made representations to the bank to exempt it from the said levy and in anticipation of exoneration it did not charge the same in the accounts. The request was finally rejected by the bank and, therefore, liability has been charged in the return. In the statement of computation of income for the year 1997-98, following the mercantile system the payment of interest was claimed as deduction which has been disallowed under section 143(1)(a). On a perusal of the factual aspects there can be no shadow or trace of doubt that the nature of ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (page 245): "In order to decide whether a particular amount is laid out or expended wholly or exclusively for the purposes of the assessee's business, the test to be applied is: Has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration? If the expense is found to bear an element other than the trade or business interest of the assessee, the expenditure is not an allowable one. To arrive at the conclusion that the expenditure was dictated solely by business consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure, as the case may be. When the assessee places all the facts and circumstances before the revenue authorities, the latter must examine the same and must make up their minds as to whether the expenditure was necessitated or justified by commercial expediency. The ultimate finding that the expense is allowable under section 10(2)(xv) is an inference of law to be deduced from the facts of the case. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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