2016 (3) TMI 147 - HC - Income Tax

Tribunal Upholds Decision on Interest Liability under IT Act for A.Y. 2002-03

The Tribunal's decision to delete the addition made by the CIT under section 263 of the IT Act, 1961 for A.Y. 2002-03 was upheld. The Tribunal found that ... Revision u/s 263 - Accrual of liability - whether contingent - interest liability debited in profit and loss account and accordingly allowed the same on the principle of mercantile accounting by AO - Held that:- At any rate the assesse’s liability to pay interest computed at simple rate was crystallized on 26.7.2001, and at no later point of time. Merely because the asseessee was negotiating with the ONGC alongwith other members of the association for softer terms and for charging simple interest instead of compound interest would not mean that this liability was in any manner contingent. The assessee when debited such amount in the profit and loss account towards interest liability, the same was therefore rightly granted by the assessing officer. The Commissioner therefore committed legal error in disturbing such order of assessing officer. - Decided in favour of assessee Issues:1. Whether the ITAT was right in deleting the addition made by the CIT u/s.263 of the IT Act, 1961 for A.Y. 2002-03Rs.2. Whether the liability to pay interest crystallized during the assessment year 2002-03Rs.3. Whether the judgment of the Supreme Court dated 26.7.2001 determined the liability of the assessee to pay interestRs.4. Whether the Tribunal erred in reversing the decision of the Commissioner of Income-taxRs.Issue 1: The appeal challenged the ITAT's decision to delete the addition made by the CIT u/s.263 of the IT Act, 1961 for A.Y. 2002-03. The substantial question of law framed was regarding the deletion of the addition of Rs. 3,67,18,706. The Tribunal reversed the decision of the Commissioner of Income-tax, relying on the judgment of the Supreme Court in a similar case. The Tribunal found that the claim of interest was crystallized by the Supreme Court's decision and that there was no dispute regarding the liability for the interest amount. The Tribunal held that the CIT would have been justified if the assessee had claimed compound interest during the relevant year. The revenue challenged this decision, arguing that the liability to pay interest crystallized only when ONGC offered revised terms of payment in April 2002, which the Board of Directors accepted in July 2002.Issue 2: The key question was whether the liability to pay interest crystallized during the assessment year 2002-03. The Commissioner of Income-tax disallowed the claim of interest made by the assessee, stating that the liability did not crystallize during that year. The assessee had debited the interest liability in its profit and loss account based on negotiations with ONGC and subsequent acceptance of an offer in 2002. The Tribunal, however, held that the liability was crystallized by the Supreme Court's decision in 2001, and the assessee correctly claimed the interest amount.Issue 3: The judgment of the Supreme Court dated 26.7.2001 played a crucial role in determining the liability of the assessee to pay interest. The Supreme Court's decision applied the principles of restitution and permitted ONGC to recover the dues with interest, specifying the rate at which interest was to be charged. The liability of the assessee to pay interest was considered to have crystallized by this judgment, and negotiations for softer terms did not make the liability contingent. The assessing officer correctly allowed the claim based on the Supreme Court's decision.Issue 4: The Tribunal's decision to reverse the Commissioner's order was challenged by the revenue. The revenue argued that the liability to pay interest only crystallized when ONGC offered revised terms in 2002, and until then, it was a contingent liability. The Tribunal, however, found that the liability was crystallized by the Supreme Court's judgment in 2001, and the Commissioner erred in disallowing the claim. The High Court dismissed the tax appeal, holding in favor of the assessee based on the clear facts presented in the case.