1999 (6) TMI 486 - AT - Income Tax

Tax Appeal Outcome: Interest restored for 1986-87, expenses upheld, stocks suppressed for 1987-88.

Deputy Commissioner of Income-tax Versus Esquire Video Film Services (P.) Ltd.

The appeal for the assessment year 1986-87 was allowed, restoring the addition of interest payable to banks. For the assessment year 1987-88, the appeal ... - Issues Involved:1. Deduction of interest payable to banks for assessment years 1986-87 and 1987-88.2. Disallowance of foreign travel expenses for assessment year 1987-88.3. Disallowance of telephone expenses for assessment year 1987-88.4. Addition on account of suppression of stocks for assessment year 1987-88.Issue-wise Detailed Analysis:1. Deduction of Interest Payable to Banks:The central issue in both assessment years (1986-87 and 1987-88) concerns the deduction of interest payable to Corporation Bank and Indian Overseas Bank. The assessee had debited Rs. 53,40,607 and Rs. 54,99,305 respectively as accrued interest payable to these banks. The Assessing Officer (AO) denied the deduction, treating the interest as a contingent liability due to ongoing disputes with the banks. The Commissioner of Income-tax (Appeals) [CIT(A)] allowed the deduction, stating that the liability had accrued and was debited in the accounts. However, the revenue contested this, citing decisions from the Bombay High Court and the Supreme Court, arguing that contingent liabilities do not constitute expenditure under the mercantile system of accounting. The Tribunal upheld the AO's view, emphasizing that the interest liability was contingent upon the settlement of the disputes and hence not allowable as a deduction in the years under appeal.2. Disallowance of Foreign Travel Expenses:For assessment year 1987-88, the AO disallowed Rs. 11,597 on account of foreign travel expenses. The CIT(A) deleted this disallowance, recording a factual finding that the expenses were incurred for business purposes. The Tribunal found no evidence to rebut the CIT(A)'s finding and thus declined to interfere, upholding the deletion of the disallowance.3. Disallowance of Telephone Expenses:The AO disallowed Rs. 14,958 on account of telephone expenses for computing perquisites under section 40A(5). The CIT(A) deleted this addition, noting that a separate telephone was installed at the residence of the Managing Director, and its expenses were not charged to the company's accounts. The Tribunal found no infirmity in the CIT(A)'s order and upheld the deletion.4. Addition on Account of Suppression of Stocks:The AO added Rs. 18,78,822 for suppression of stocks, arguing that the closing stock from the previous year was not accounted for in the current year's accounts. The CIT(A) found that the confusion arose from the assessee's letter and clarified that the closing stock was indeed accounted for in the Profit & Loss account. The Tribunal noted that the CIT(A)'s findings were not rebutted by any evidence and upheld the deletion of the addition.Conclusion:The appeal for assessment year 1986-87 was allowed, restoring the addition of Rs. 53,40,607 for interest payable. For assessment year 1987-88, the appeal was partly allowed, restoring the addition of Rs. 54,99,305 for interest payable but upholding the CIT(A)'s deletions regarding foreign travel expenses, telephone expenses, and suppression of stocks.