2011 (1) TMI 85 - HC - Income Tax

Interest on unpaid bank loans held deductible when liability accrued, ITAT urged to apply consistency on business expenses

HC held that interest payable on bank loans constituted an accrued and ascertained liability for the relevant year and was allowable as deduction, ... Entitlement to deduction being interest payable on loans - accrued and ascertained liability in respect of the year in question - disallowance of expenses on estimate basis against actual claim - HELD THAT:- The mere fact that the Bank had not shown the accrual of interest in its books of accounts would not make the liability contingent. Insofar as the Bank was concerned, it had laid a claim by filing a suit. There is nothing to show that the Bank had not claimed interest for all the three periods i.e. pre-suit, pendente lite and future interest. Assessee has stated before us that not only has the interest in actuality been paid to the bank but also that no claim has been made on the basis of payment. In other words, the deduction is not claimed twice, that is, once on the basis of accrual and the second time on the basis of payment. We may also notice that the Department has not been able to bring to our notice any finding of authorities below that the assessee has not paid the interest for the relevant period. Thus, the question of law is answered in favour of the assessee and against the department. The only caveat, we would like to enter, is that, the Assessing Officer will ascertain the veracity of the statement made before us by the learned counsel for the assessee at the time of final assessment carried for the assessment year 1992-1993. Disallowance of expense - As a matter of fact, the ITAT has accepted the case of the assessee that for minor amounts relating to conveyance etc. and other business expenses, it is impractical to have vouchers and that internal vouchers of the staff/employees of an organization will suffice. For the said assessment year, the amount claimed towards expenses was under the similar heads, that is, cartage, labour and sealing expenses. In our view, the ITAT ought to have followed a consistent principle in the subsequent assessment years as well. For this as well as the reasons given above, we find even this question of law ought to be also answered in favour of the assessee. It is ordered accordingly. Appeal is allowed. Issues Involved:1. Deduction of interest payable on loans from J&K Bank as accrued liability.2. Disallowance of expenses on estimate basis against actual claim.Analysis:Issue 1: Deduction of Interest Payable on LoansThe appeal pertains to the assessment year 1992-93 and revolves around the deduction of interest amounting to Rs.16,59,292/- claimed by the assessee on accrual basis from a credit facility obtained from J&K Bank Ltd. The Assessing Officer disallowed the interest claimed, which was upheld by the CIT (Appeals) and the Income Tax Appellate Tribunal (ITAT). The main contention against allowing the deduction was that the interest was not shown in the books of accounts by either the assessee or the Bank, leading to the view that it was a contingent liability. However, the Supreme Court precedent in Bharat Earth Movers v. Commissioner of Income Tax was cited, emphasizing that if a business liability has arisen in the accounting year and can be estimated with reasonable certainty, it should be allowed as a deduction. The Court noted that the Bank had filed a suit claiming interest, indicating an ascertained liability. The absence of interest accrual in the Bank's books did not render the liability contingent. The Court ruled in favor of the assessee, directing the Assessing Officer to verify the payment of interest during final assessment.Issue 2: Disallowance of Expenses on Estimate BasisThe second question pertains to the disallowance of expenses amounting to Rs.50,000/- against a claim of Rs.1,48,782/- for cartage, labour, and sealing expenses. The CIT (Appeals) disallowed a part of the expenses, citing lack of convincing evidence and ad-hoc reasoning for the disallowance. However, the Court found the reasoning unsatisfactory as there was no clear basis for the ad-hoc disallowance. Reference was made to a previous ITAT decision in favor of the assessee for similar expenses in a prior assessment year. The Court emphasized the need for a consistent approach and found the disallowance unjustified. Consequently, the Court ruled in favor of the assessee on this issue as well, directing that the appeal be allowed.In conclusion, the High Court ruled in favor of the assessee on both issues, allowing the deduction of accrued interest and overturning the disallowance of expenses, emphasizing the need for a clear basis and consistency in assessing such claims.