High Court affirms Tribunal decision allowing interest deduction under mercantile system

The High Court upheld the Tribunal's decision, allowing the assessee's claim for interest payment as a deduction for the assessment year 1978-79. The Court emphasized that the liability had accrued under the mercantile system of accounting, and the subsequent resolution did not affect the validity of the claim. Relying on precedent, the Court ruled in favor of the assessee, stating that a deduction could be granted for a liability even without a provision in the accounts, ultimately ruling against the Revenue without costs.

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Issues:
Interpretation of section 256(1) of the Income-tax Act, 1961 regarding the allowance of interest payment as a deduction for the assessment year 1978-79.

Detailed Analysis:
The case involved a dispute over the allowance of a claim for interest payment amounting to Rs. 3,04,442 for the assessment year 1978-79. The assessee, a limited company, filed a revised return claiming the deduction of interest payable to the holding company. The Assessing Officer initially disallowed the claim, stating that no interest was charged by the holding company on the advances made to the assessee. The Commissioner of Income-tax (Appeals) allowed the claim, noting that the liability for payment of interest had accrued, and the method of accounting followed by the assessee was mercantile. The Tribunal upheld the Commissioner's decision, emphasizing that the interest amount had been reflected in the holding company's accounts and taxed accordingly.

The Revenue contended that without a resolution before the end of the accounting year, there was no liability for the relevant assessment year. Conversely, the assessee argued that the subsequent resolution clearly indicated the liability, the amount was incorporated in the books of account, and a revised return was filed. The Tribunal found the approach correct, stating that the liability to pay interest existed under section 36(1)(iii) of the Act, and quantification had been done, albeit belatedly. The holding company had advanced money to the assessee in the normal course of business, leading to the accrual of the liability to pay interest at the end of the accounting year. The method of accounting being mercantile, the belated entry in the books of account and passing of resolution were deemed inconsequential.

The High Court, concurring with the Tribunal's decision, held that the assessee's claim for interest payment should be allowed for the assessment year 1978-79. The Court emphasized that the liability had accrued due to the mercantile system of accounting followed by the assessee, and the subsequent adoption of the resolution did not invalidate the claim. The Court relied on the Supreme Court's precedent in Kedarnath Jute Manufacturing Co. Ltd.'s case, stating that a deduction may be allowed for a liability even without a provision in the accounts. The judgment favored the assessee, answering the question in the affirmative and against the Revenue, with no costs incurred.

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