TMI Blog1977 (4) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... atement of the case are as follows : The assessee-company was floated as a public limited company in the year 1947. It was soon realised by all concerned that the company would require large funds before it came into production. The Government stepped in and took over the management and at all material times, it was a Government undertaking. The assessee-company borrowed loans to the extent of Rs. 4,78,00,000 from the Government. The loans were taken on different dates during the accounting year 1949-50. Since the assessee required funds immediately it was understood that the terms of the loan as to the rate of interest and the mode of payment would be settled later. The Tribunal has found that the loan has not been granted under the scheme of C.P. and Berar State Aid to Industries Act, 1933. The Government by its letter dated February 28, 1952, for the first time, informed the assessee that the interest on loans would be payable at the rate of 3 1/4 per cent. per annum for the loan borrowed up to 1950-51, and at the rate of 1/2 % over and above the State Government's rate of borrowings on the loans advanced after that date. The assessee-company represented against the terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not agree to waive the interest. They wanted that the amount of interest should also be converted into equity shares. It, therefore, became necessary for the State Government to find out as to what was the amount of interest that they should charge. Shri B. Pandey, the Finance Secretary recorded a note-sheet (annexure " D-16 ") to the effect that since the interest has to be converted into share capital it was necessary that the rate of interest should be fixed. " The rate may well be 1/2 % above our own rate of borrowing and, in any case, not less than the borrowing rate itself ". The Finance Minister endorsed the note that it be placed before the cabinet for approval. The Government thus took a decision on March 27, 1957, and communicated its decision. The communication was made on May 14, 1957, by which the Government indicated the rate of interest which was to be charged to the company for the years 1949 to 1957. It was also stated that the board of directors' acceptance of the proposal may be obtained and communicated to the Government. In the annual profit and loss accounts of the company up to the assessment year 1956-57, the interest liability on loans from Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention, on the other hand, is that the loan was not given gratuitously and from February, 1952, onwards the rates of interest were fixed. The terms as to the repayment were to be settled with the company but as regards the rates of interest the position was made clear by the Government by their communication dated February 28, 1952. Moreover, after the rates of interest were communicated by the State Government the company continued to accept the amounts without any protest. The company has, therefore, impliedly accepted the rates of interest by its conduct. Particularly, having regard to section 8 of the Contract Act, the company, having accepted the consideration, would be deemed to have accepted the reciprocal promise to pay the interest at the rates indicated in the letter dated February 28, 1952. It was also stressed that the company was following the mercantile system of accounting and was thus bound to show the interests as it accrued year after year in the relevant accounting year. Therefore, the sum of Rs. 57,75,365 being for earlier years has rightly been disallowed as expenditure for the financial year ending March 31, 1957. The Tribunal found that the loan was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. The rate of interest indicated in this letter has already been referred to earlier. The arrears of interest, according to this communication, were to be paid in equal annual instalments. The first instalment was to be paid from the year in which the production started. It was stated that the approval of the board of directors of the company to the terms and conditions stated may be obtained and communicated to the Government. The company placed this communication in their board of directors' meeting dated March 31, 1952, at Bombay. The board did not agree to the rate of interest. They referred to the recommendations of Shri A. D. Shroff Committee, wherein the committee had recommended a major part of the loan to be converted into non-cumulative preference shares and debentures. The board was definitely of the view that the interest must be waived by the Government or, in the alternative, substantially reduced to 1% per annum. The board of directors authorised the chairman to negotiate the terms and conditions with the Government of Madhya Pradesh. By their letter dated 3rd October, 1952, addressed to the managing director of the company, it would appear that no final decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd loss accounts that they were not taking into consideration the interest liability on the amount advanced by the Government. They could not do better than that as it would not be proper to calculate the liability on the basis of the letter of the Government dated February 28, 1952, as the company had not accepted those terms. The circumstances would indicate that the question of interest remained in a melting pot till the Government thought of converting the amount of interest accruing on the loan into equity shares. The liability of interest, therefore, remained unascertained till May, 1957, and we think that the assessee was justified in treating it as a contingent liability till then. In case of a contingent liability, the law is well-settled that it need not be claimed until it has ripened into an enforceable liability. The assessee could, therefore, claim the interest as an allowable expenditure in the assessment year when it crystallized into an ascertainable liability and became enforceable. Looking to the circumstances of the case and the correspondence of the assessee with the Government, it would appear clear to us that the company had not accepted the rate of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest and whether in the absence of any protest before accepting the amount, they could, in law, be said to have accepted the term as to the rates of interest. The case in point where section 8 of the Contract Act was considered would be Haridas Ranchhoddas v. Mercantile Bank of India [1920] LR 47 IA 17 (PC). In that case, the bank had agreed to charge an yearly rate of interest on the daily balance of the overdraft. The bank was submitting pass books regularly showing that at the end of every month interest was added to the amount then due and the resultant balance which included the interest was carried forward to the debit of the customer as the balance due on the first of the following month. The customer did not raise any objection to such charging of interest. From this, the Judicial Committee observed that the fact that the defendant had not objected to the charge of compound interest in accounts which for several years he had annually received from the plaintiff afforded sufficient evidence of a promise by him to pay interest in that manner. Such a conduct would not be analogous to the case in question. In the Privy Council case, the rate was settled and the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greed upon or at the rate of 10 per cent. to which it was subsequently raised. The bank intimated its intention to raise the interest to 10 per cent. with effect from April 21, 1922, to which the customer, who was the plaintiff, made no reply and the question that arose for the consideration of the court was whether, in the circumstances of the case, there was an implied agreement on the part of the plaintiff to pay interest at the higher rate. In that case, the notice was an intimation to raise the rate of interest with effect from the date of notice. Their Lordships of the High Court of Allahabad held that the sending of the notice was not sufficient by itself to render the customer liable to pay interest at the higher rate ; but nevertheless their Lordships held that, since the customer had taken further advances from the bank even after the receipt of the notice, there was an implied agreement to pay the higher rate of interest. This conclusion was based upon a consideration of sections 7, 8 and 9 of the Indian Contract Act relating to implied agreement. The case is distinguishable as the loan had been expressly taken from the bank on a rate of interest agreed to by the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X
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