Commissioner of Income Tax vs M/s. Hanuman Sugar Industries Ltd.

The subject matter of challenge in the appeal is a judgment and order dated 16th April, 2001 pertaining to the assessment years 1990-91 and 1991-92. The learned Tribunal held, inter alia, as follows :

"When we look at the facts of the case, we find that the department has raised rather a very lame excuse in disallowing the claim of the assessee towards interest payment on the ground that the assessee did not debit the interest amounts in its accounts for the respective years upto the assessment year 1991- 92. As has been discussed by the CIT(A) in his appellate order for the assessment year 1991-92, the book entries are not at all decisive of allowance of any liability and, on the other hand, if the liability be found to have arisen under the mercantile system, the same is required to be allowed irrespective of whether the amount is debited to the accounts or not. The judgment of the Hon''ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) strengthens the argument in this regard.

However, the Division Benches of the ITAT, Calcutta, in their respective orders for the assessment years 1988-89 and 1989-90 seem to have been guided by the sole factor that on account of the suit filed by the Bank, the liability of the assessee towards interest payment should be considered to be sub-judice and not actually accrued. As has been discussed by us above, the Third Member, in his order for the assessment year 1986-87, has clearly found out that the suit under consideration related merely to recovery of dues of the bank and had nothing to do with the liability of the assessee for payment of interest. We consider that the judgment of the Third Member of the ITAT has got better strength and is more persuasive than those of the Division Benches for the other two years. We, therefore, prefer to follow the view of the Third Member Bench and decide the issue in favour of the claim of the assessee towards allowance of interest liability in the respective years.

So far as the assessment years 1990-91 and 1991-92 are, therefore, concerned, we reverse the orders of the lower authorities and direct that the claims of interest to the Bank be allowed irrespective of the fact that the amounts in respect thereof were not actually debited to the accounts of the assessee."

Mr. Saraf, learned Advocate appearing for the appellant revenue submitted that the real question to be considered in the appeal is whether the assessee can be allowed deduction on account of interest arising out of a liability which the assessee himself has disputed. He drew our attention to page 2 of the impugned order wherein the findings recorded by the Assessing Officer were noticed by the learned Tribunal which reads as follows :

"The AO found out that the Bank had filed a money suit against the company for realisation of the dues which were being disputed by the assessee."

Therefore, briefly stated, the facts are that the assessee appears to have borrowed money from bank. The bank has filed a suit for recovery of the money. The assessee has been disputing that liability. The exact nature of dispute is, however, not clear to us. But it appears that the assessee has made some payments on account of interest which has also been reflected in the books of accounts for which deduction has duly been allowed. The question arose whether the assessee can be permitted to claim deduction for an amount which has neither been paid nor has been shown to have been accrued in the books of accounts. It is this question which was answered by the learned Tribunal in the affirmative and in favour of the assessee on the basis of the following reasoning which is under challenge :

"As has been discussed by us above, the Third Member, in his order for the assessment year 1986-87, has clearly found out that the suit under consideration related merely to recovery of dues of the bank and had nothing to do with the liability of the assessee for payment of interest. We consider that the judgment of the Third Member of the ITAT has got better strength and is more persuasive than those of the Division Benches for the other two years."

Therefore, the question of liability has to be reframed as follows :-

Whether the assessee can be permitted to claim deduction for interest which was neither paid nor shown to have been incurred in the books of accounts ? Mr. Bhowmik, learned Advocate appearing for the assessee drew our attention to the judgment in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta reported in 1971 (82) ITR 363 (SC) which was a judgment with respect to statutory liability on account of sales tax. A statutory liability evidently stands on a different footing than a contractual liability. The suit filed by the bank is evidently on the basis of a contractual liability. The assessee has been disputing the liability. The reasoning adopted by the learned Tribunal that the dispute with regard to principal has nothing to do with the liability on account of interest, according to us, is patently illogical. If the liability on account of principal itself is disputed, there can be no basis for any liability on account of interest. The reasoning adopted by the learned Tribunal is evidently and demonstrably fallacious.

Mr. Bhowmik drew out attention to a judgment in the case of Commissioner of Income Tax v. Indian Metals and Carbide Ltd. reported in 1992 (198) ITR 444 (Orissa) wherein the following view was taken :

"On consideration of the rival submissions, we find that the approach of the Tribunal was correct. Admittedly, the assessee follows the mercantile method of accounting. As rightly observed by the Commissioner of Income-tax (Appeals) and affirmed by the Tribunal, the liability to pay interest did exist in terms of Section 36(1)(iii) of the Act. The quantification also has been done, though at a belated stage. The undisputed factual position as culled out from the orders of the authorities is that the holding company had advanced money to the assessee in the normal course of business. The assessee''s liability to pay interest accrued at the end of the accounting year or when the accounts were mutually settled. Such accrual is not dependent upon the passing of a resolution. It is not the case of the Revenue that there was any agreement not to charge interest. As indicated above, the quantification of the amount payable was done by the resolution. Liability to pay and quantification are different aspects, though having a live link for the purpose of assessment of income. The method of accounting being mercantile, belated entry in the books of account and/or passing of resolution was inconsequential. This conclusion gains sustenance from the view of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd.''s case (1971) 82 ITR 363, that a deduction may be allowed in respect of a statutory or other liability even if no provision is made for it in the accounts. Before completion of the assessment by filing a revised return, the assessee had indicated its liability and had claimed deduction. Merely because the resolution in question was adopted after the close of the accounting year, it cannot be a ground for disallowing a claim legally made, since the liability had already accrued because the mercantile system of accounting was followed by the assessee. The receipt has been taxed in the hands of the holding company also as observed by the Tribunal."

The aforesaid judgment, according to us, does not help the assessee because in the aforesaid case there was a belated entry in the books of accounts. There was also a resolution passed both by the lender and the borrower asserting and admitting the liability whereas in the case before us the assessee has been disputing the liability. Therefore, that judgment can have no application to the facts and circumstances of the case. The assessee before us has neither paid the liability nor has admitted the liability in its books of accounts. The assessee on the top of that has disputed the liability as indicated above. Therefore, the judgment in the case of Indian Metals and Carbide Ltd. is not applicable to the facts of this case. For the aforesaid reasons, the question formulated above is answered in the negative and in favour of the revenue. The appeal is thus allowed.