Court denies interest liabilities claimed by appellant, disallows deductions under Section 36(1)(iii). Appeals dismissed.

The court held that the interest liabilities claimed by the appellant did not accrue during the relevant assessment years but only after the letters from the Government of India were issued. Consequently, deductions under Section 36(1)(iii) for the amounts of Rs.1,88,17,168/- and Rs.62,66,667/- were not allowed for the assessment years. The appeals were dismissed, and the questions of law were decided in favor of the respondent-Revenue and against the appellant-assessee, with no order as to costs.

---

---

Issues Involved:
1. Deductibility of Rs.1,88,17,168/- under Section 36(1)(iii) of the Income Tax Act for interest accrued on capital converted into a loan for the period 1st July, 1986 to 30th June, 1987.
2. Deductibility of Rs.62,66,667/- under Section 36(1)(iii) of the Income Tax Act for interest accrued on capital converted into a loan for the period 1st April, 1986 to 30th June, 1986.

Detailed Analysis:

Issue 1: Deductibility of Rs.1,88,17,168/- under Section 36(1)(iii) for the period 1st July, 1986 to 30th June, 1987

The appellant, a multi-State Cooperative Society, argued for the deduction of Rs.1,88,17,168/- as interest accrued on capital converted into a loan. The conversion of capital into loan was based on letters dated 4th April, 1988 and 20th April, 1988 from the Government of India. The Assessing Officer rejected the claim, stating that the liability had not accrued during the relevant previous years but only after the issuance of the letters. The tribunal upheld this view, asserting that the interest liability could only be claimed in the period relevant to the assessment year when the letters were issued.

The court emphasized that under the mercantile system of accounting, both accrued credits and liabilities must be considered. However, the conversion of equity into a loan and the consequent interest liability did not accrue during the relevant assessment years but only after the letters were issued. The court noted that prior to the letters, there was no indication or possibility of such a liability arising. Thus, the liability crystallized only after the end of the previous years in question, making the interest non-deductible for those periods.

Issue 2: Deductibility of Rs.62,66,667/- under Section 36(1)(iii) for the period 1st April, 1986 to 30th June, 1986

Similar to the first issue, the appellant claimed a deduction for Rs.62,66,667/- as interest accrued on capital converted into a loan. The tribunal, following the same reasoning as in the first issue, denied the deduction, stating that the liability accrued only after the letters dated 4th April, 1988 and 20th April, 1988 were issued.

The court reiterated that the appellant was following a mercantile system of accounting, where liabilities must be accounted for when they accrue. The court distinguished between contractual and statutory liabilities, noting that the present case involved a contractual liability that only became due after the letters were issued. The court concluded that since the liability to pay interest did not exist during the relevant assessment years, the deduction could not be allowed.

Conclusion:

The court concluded that the interest liabilities claimed by the appellant had not accrued during the relevant assessment years but only after the letters from the Government of India were issued. As a result, the deductions under Section 36(1)(iii) for the amounts of Rs.1,88,17,168/- and Rs.62,66,667/- were not permissible for the assessment years in question. The appeals were dismissed, with the questions of law answered in favor of the respondent-Revenue and against the appellant-assessee. No order as to costs was made.

---