Section 43B and accrued liability principles applied to capitalised interest, statutory fund contributions, and crystallised prior period expenses.

Interest capitalised in work-in-progress and not claimed as a revenue deduction was treated as outside section 43B disallowance. Contributions to a statutory provident fund under the Provident Fund Act, 1925 were held to fall outside the recognised provident fund disallowance framework, so the related employee and employer additions were deleted. Prior period expenses were allowable where the liability crystallised during the year, even under the mercantile system. Provision for fuel cost adjustment, fixed cost adjustment and similar regulated tariff items was treated as an accrued liability, not a contingent or unascertained liability, and the addition was deleted.

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Issues: (i) Whether interest accrued to financial institutions, which had been capitalised in work-in-progress and was not debited to the profit and loss account, could be disallowed under section 43B of the Income-tax Act, 1961. (ii) Whether contributions to the general provident fund and pension-related fund maintained under the Provident Fund Act, 1925 were governed by section 43B, section 36(1)(va) and section 2(24)(x) of the Income-tax Act, 1961. (iii) Whether prior period expenses that crystallised during the year were allowable notwithstanding the mercantile system of accounting. (iv) Whether provision for fuel cost adjustment, fixed cost adjustment and similar accrued expenses was an unascertained or contingent liability.

Issue (i): Whether interest accrued to financial institutions, which had been capitalised in work-in-progress and was not debited to the profit and loss account, could be disallowed under section 43B of the Income-tax Act, 1961.

Analysis: The disputed amount represented interest that had been carried in the balance sheet as part of capital work-in-progress and not as an expenditure claimed in the profit and loss account. The relevant interest was either capitalised during construction or, to the limited extent charged to revenue, was paid shortly after the year end. On those facts, the statutory condition for disallowance under section 43B was not attracted because the amount was not a revenue deduction claimed on an unpaid basis.

Conclusion: The disallowance under section 43B was deleted, in favour of the assessee.

Issue (ii): Whether contributions to the general provident fund and pension-related fund maintained under the Provident Fund Act, 1925 were governed by section 43B, section 36(1)(va) and section 2(24)(x) of the Income-tax Act, 1961.

Analysis: The fund in question was held to be a statutory provident fund notified under the Provident Fund Act, 1925 and therefore outside the scope of the recognised provident fund regime in the Fourth Schedule to the Income-tax Act, 1961. The assessee was treated as an instrumentality of the State for this limited purpose, and the contributions credited to the fund were regarded as payments to a fund maintained under the statutory framework rather than as ordinary unpaid liabilities attracting the disallowance provisions. The same reasoning was applied to the related employee and employer contribution additions.

Conclusion: The additions on account of employer and employee contributions were deleted, in favour of the assessee.

Issue (iii): Whether prior period expenses that crystallised during the year were allowable notwithstanding the mercantile system of accounting.

Analysis: The liabilities related to expenses for which bills and supporting demands were received during the relevant year, so the liability crystallised in that year even though it related to an earlier period. Under the mercantile system, a liability that definitely arises during the year is deductible in that year, even if quantification or actual payment occurs later.

Conclusion: The prior period expenses were held allowable, in favour of the assessee.

Issue (iv): Whether provision for fuel cost adjustment, fixed cost adjustment and similar accrued expenses was an unascertained or contingent liability.

Analysis: The provision was made in the context of a regulated tariff regime where the relevant adjustments arose from the regulatory mechanism and were subsequently finalised by the Commission. The amounts were linked to recognised revenue adjustments under the regulatory framework and were not a mere estimate of a future shortfall. The liability was therefore treated as having accrued and not as a contingent or unascertained liability.

Conclusion: The addition was deleted, in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive tax disallowance issues, while one arithmetical issue was sent back for verification, so the overall result was substantially in the assessee's favour.

Ratio Decidendi: A deduction cannot be disallowed under section 43B when the amount is capitalised or when the statutory fund is governed by a special provident fund regime outside the recognised provident fund provisions, and a liability that crystallises during the year is allowable notwithstanding that the underlying transaction relates to an earlier period.

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