Accrual-based interest deduction and TDS credit drive remand on book profit and interest recomputation

Interest expenditure may be allowed on accrual under the mercantile system where the liability has accrued and a direct nexus exists between borrowed funds and the income earned; here, the issue was sent back for verification and appropriate relief. Because the book-profit adjustment under section 115JB depended on that interest disallowance, the book-profit computation also went back as consequential. The note further states that interest under sections 234A, 234B and 234C remains chargeable in principle, but it must be recomputed after granting credit for tax deductible at source.

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Issues: (i) whether the disallowance of interest expenditure required verification and restoration to the Assessing Officer, (ii) whether the consequential computation of book profit under section 115JB survived, and (iii) whether interest under sections 234A, 234B and 234C required recomputation after giving credit for tax deductible at source.

Issue (i): whether the disallowance of interest expenditure required verification and restoration to the Assessing Officer.

Analysis: The assessee was a notified entity under the Special Court Act and the interest liability was claimed to have accrued on borrowed funds used for investments which later yielded interest income. The record showed past acceptance of similar claims, the existence of an accrued liability under the mercantile system, and a direct nexus between the borrowed funds and the term deposits. The issue was nevertheless taken as requiring verification in line with the direction followed in the group case.

Conclusion: The issue was restored to the Assessing Officer for verification and appropriate relief, in favour of the assessee.

Issue (ii): whether the consequential computation of book profit under section 115JB survived.

Analysis: The adjustment to book profit depended upon the fate of the interest disallowance. Once the interest issue was sent back for fresh consideration, the computation of book profit also became dependent on the recomputed outcome.

Conclusion: The issue was treated as consequential and went back with the interest issue, in favour of the assessee for statistical purposes.

Issue (iii): whether interest under sections 234A, 234B and 234C required recomputation after giving credit for tax deductible at source.

Analysis: The levy of interest under the charging provisions was upheld, but the quantum had to be recalculated after reducing the amount of tax deductible at source on the assessed income. The matter was therefore sent back for fresh computation on that limited aspect.

Conclusion: The interest levy was sustained in principle but the computation was remanded for recomputation, partly in favour of the assessee.

Final Conclusion: The appeal succeeded only to the limited extent of remand and recomputation, while the substantive issues were not finally decided in the assessee's favour at this stage.

Ratio Decidendi: Interest expenditure can be recognised on accrual under the mercantile system where the liability is shown to have accrued and a factual nexus with the earned income exists, and the levy of interest under sections 234A, 234B and 234C must be recomputed after giving due credit for tax deductible at source.

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