Commissioner of Income Tax vs Travancore Rayons Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following two questions of law for the decision of this court :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in finding that the assessee is entitled to deduction of interest of Rs. 1,33,000?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in holding that it cannot be called that the amount of Rs. 1,33,000 is an unascertained liability during the year ?"

The respondent, a public limited company, is an assessee under the Income Tax Act. It is a bulk consumer of electricity. The electricity supply tariff was revised with effect from July 1, 1975. The challenge against the said increase by the assessee was futile. The decision so rendered by the High Court was in August, 1976. We are concerned herein with the assessment year 1977-78 for which the accounting period ended on December 31, 1976. The assessee was directed to pay at the enhanced rate of tariff. Demand notices were served on the assessee by the Board. The High Court had allowed the assessee instalments to clear the arrears. The amount was paid in 1979 for the period covering July, 1975, to August, 1976. The total payments came to Rs. 18,67,615. Under Rule 27(e) of the Regulations issued by the Board, interest will be charged on late payments of bills. Such interest amounted to Rs. 1,33,000. The assessee claimed deduction of Rs. 18,67,615, the electricity charges paid, as also the interest of Rs. 1,33,000 by way of deduction in computing the income for the assessment year 1977-78. Deduction was allowed for payment of duty. It was held that though the payments were effected subsequently, the liability to incur the expenditure arose earlier. The claim for payment of interest was disallowed. The Income Tax Officer took the view that it was not an ascertained liability and it became a valid and enforceable liability only when a demand was made in that behalf by the Board. The assessee''s claim for deduction of interest was disallowed. It was upheld by the Commissioner of Income Tax (Appeals). The Appellate Tribunal, in its order dated July 30, 1984, in paragraph 7 of its order, held that interest was an ascertained liability since the rate of interest was mentioned in Regulation 27(e) and the arrears are already known and so the payment of interest Rs. 1,33,000, was deductible in the light of its earlier order in I.T.A. No. 56(Coch)/1981, dated November 6, 1982, in the case of Travancore Electro-Chemical Industries Ltd. Thereafter, at the instance of the Revenue, the Income Tax Appellate Tribunal has referred the above two questions for the decision of this court.

We heard counsel. In the statement of the case dated January 29, 1988, in paragraph 6, the Appellate Tribunal has stated that the issue regarding deductibility of interest came up before the Tribunal for the assessment year 1976-77. In its appellate order dated July 30, 1984, the Appellate Tribunal only followed its order in I.T.A. No. 56(Coch)/1981, dated November 6, 1982, in the case of Travancore Electro-Chemical Industries Ltd., which is annexure-D to the paper book. There, the question was whether the interest paid is penalty and so an expenditure for infraction of law and in that perspective whether it is an allowable deduction. In paragraph 3 of the order of the Appellate Tribunal dated November 6, 1982, the Tribunal referred to its earlier decisions in the case of Travancore Electro-Chemical Industries Ltd., I.T.A. No. 575/Coch/77-78 (assessment year 1971-72) and I.T.A. Nos. 427/Coch/78-79, 788/Coch/77-78, 494 & 495(Coch)/78-79 (assessment years 1972-73 to 1975-76) and held that in the said orders, it has been found that the payment took place in the course of business and so was an allowable deduction. The earlier decisions of the Tribunal, referred to in paragraph 3 of its order dated November 6, 1982, are not forwarded to this court along with the statement of the case. We do not know the reason or basis for holding that the payment of interest took place in the course of business and so was a permissible deduction. The question as to whether the interest was allowable for the assessment year 1977-78, for which the accounting period ended on December 31, 1976, is a question that falls for consideration in this case. It is not clear, whether such a plea was ever put forward in I.T.A. No. 56(Coch) of 1981, in the case of Travancore Electro-Chemical Industries Ltd. The Tribunal has not entered any definite finding that the interest paid is an allowable deduction with reasons therefor. The sole basis for allowing the deduction is the decision in Travancore Electro-Chemical Industries Ltd., which in turn has relied upon the earlier decisions of the Tribunal dated July 5, 1979, and February 24, 1981, in the case of that very assessee and the reasons for allowing the deduction in those cases are not clear or discernible. The entire reasoning and conclusion are based on fragile foundation and there is only a vague reference to the decision in I.T.A. No. 56/Coch of 1981, dated November 6, 1982. The said decision which is not clear does not lead us anywhere. We do not have a proper finding of the Tribunal. On the facts of the present case, it is unknown as to why and how the payment of interest of Rs. 1,33,000 is not an unascertained liability during the year and is a permissible deduction. That aspect requires cogent materials and finding on that score. It has not been so done in this case. We are not in a position to appreciate the rival pleas that are mooted for answering the question, in the absence of positive facts and findings and other materials.

We, therefore, decline to answer both the questions referred to this court. But, at the same time, we direct the Income Tax Appellate Tribunal to restore the appeal to file and dispose of the same in accordance with law, as early as possible.

The reference is disposed of as above.

A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.