2003 (12) TMI 50 - HC - Income Tax

High Court rules company can't deduct disputed customs duty in profit calculations under Section 115J

The High Court of Madras ruled in favor of the Revenue, holding that the company was not entitled to deduct disputed customs duty and funded interest in ... 'Whether, Tribunal was right in holding that the disputed customs duty payable and funded interest payable to the bank, which liabilities pertain to the earlier years, can be allowed as a deduction in computing the profits under section 115J of the Act?' - The question is answered in favour of the Revenue and against the assessee Issues:1. Interpretation of Section 115J of the Act regarding deduction of disputed customs duty and funded interest in computing profits.Analysis:The judgment delivered by the High Court of Madras involved a question regarding the deduction of disputed customs duty and funded interest in computing profits under Section 115J of the Act for the assessment year 1990-91. The company in question had not paid the customs duty it was disputing and had furnished a bank guarantee for the same. Similarly, the company had not made any payment towards funded interest for earlier years, as agreed with the bank. The company's profit and loss account did not include these amounts while computing book profits under Section 115J, resulting in a lower tax liability. The Tribunal allowed the deduction, but the High Court held that the company's accounts, while in conformity with the Companies Act, did not entitle it to deduct the disputed amounts as no payments were made, and the liabilities were not accepted or finalized due to pending litigation.The court analyzed Section 115J(1A) which mandates companies to prepare profit and loss accounts in accordance with Parts II and III of Schedule VI to the Companies Act. The court emphasized that the company's accounts should reflect the transactions of the relevant year as per the Companies Act. While the company argued that its accounts complied with the Act, the court held that the disputed amounts of duty and interest, not being paid and pending resolution, could not be deducted. The court noted that the company's own assertion of compliance with the Act meant it could not claim deductions for amounts not recognized in the accounts.Ultimately, the High Court ruled in favor of the Revenue, holding that the Tribunal's decision allowing the deduction of disputed customs duty and funded interest was unsustainable. The court concluded that as the liabilities were not acknowledged, no payments were made, and the disputes were unresolved, the company was not entitled to deduct these amounts in computing profits under Section 115J. Thus, the judgment clarified the interpretation of the Act regarding the treatment of disputed liabilities in profit calculations, emphasizing the importance of actual payments and finality of liabilities for deductions.