1995 (11) TMI 76 - HC - Income Tax

Interest provision deletion upheld under Companies Act amendment | Factual finding vs. question of law

The Tribunal's decision to delete the provision of interest was upheld, as it was found that the interest accrued during the transition from cash to ... Business Expenditure, Cash System, Deduction Of Interest, Mercantile System, Question Of Law Issues:1. Application under section 256(2) of the Income-tax Act, 1961 for direction to refer a question of law to the High Court.2. Disallowance of interest provision by the Assessing Officer.3. Appeal to Commissioner of Income-tax (Appeals) and subsequent appeal to the Tribunal.4. Tribunal's decision to delete the provision of interest.5. Rejection of reference application under section 256(2) by the Tribunal.6. Question of law regarding interest accrued during the transition from cash to mercantile system.7. Show-cause notice against admission of the reference application.8. Tribunal's decision on the genuineness of interest payments.9. Contention on whether the Tribunal's decision gives rise to a question of law.Analysis:1. The case involved an application under section 256(2) of the Income-tax Act, 1961, where the Commissioner of Income-tax sought a direction for the Income-tax Appellate Tribunal to refer a question of law to the High Court. The question revolved around the treatment of interest accrued during a transition from cash to mercantile accounting systems.2. The Assessing Officer disallowed a provision of interest made by the assessee, leading to an appeal to the Commissioner of Income-tax (Appeals). The Commissioner set aside the assessment for further verification on fund utilization, prompting a subsequent appeal to the Tribunal.3. The Tribunal, in its decision, deleted the entire provision of interest, citing that the interest accrued during the cash system period could be allowed due to the transition to the mercantile system by virtue of the Companies Act amendment.4. The Tribunal's decision was challenged by the applicant through a reference application under section 256(2), which was rejected by the Tribunal. The applicant proposed a question of law regarding the Tribunal's justification for allowing interest accrued during the transition period.5. A show-cause notice was issued against the admission of the reference application, leading to arguments presented by both parties on the Tribunal's decision and the existence of a legal question arising from it.6. The Tribunal's conclusion emphasized the genuineness of interest payments and transactions, stating that the tax authorities should focus on the reality of the transactions rather than introducing their judgment into the business affairs of the assessee.7. The Tribunal held that the decision on the genuineness of interest payments was a finding of fact and did not give rise to a question of law. The Tribunal's order was deemed to be based on proper application of facts, leading to the rejection of the reference application under section 256(2).8. The judgment highlighted precedents where findings of fact, not shown to be perverse, do not give rise to questions of law. The Tribunal's decision was upheld as not warranting a reference, leading to the dismissal of the application without costs.