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, notwithstanding that the bank had not recorded such interest in its books, since the bank had claimed interest (pre-suit, pendente lite and future) in its suit and the assessee had actually paid it. The HC noted there was no double claim of deduction. The AO was directed to verify this fact in final assessment for AY 1992-93. On disallowance of business expenses, HC held that ITAT should have followed a consistent approach and allowed similar claims, allowing the appeal.

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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 Loans
The 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 Basis
The 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.

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