2007 (11) TMI 325 - AT - Income Tax

Assessee's Appeal Granted on Bank Interest Deduction and Sugarcane Price Provision

The Tribunal allowed the assessee's appeal regarding the deduction of bank interest, holding that the interest liability had crystallized during the ... Year Of Allowability Issues Involved:1. Deduction of bank interest of Rs. 3,72,10,370.2. Allowability of provision for sugarcane price of Rs. 29,72,592.3. Disallowance under section 37(1) of the Act.Issue-wise Detailed Analysis:1. Deduction of Bank Interest of Rs. 3,72,10,370:The primary issue was whether the bank interest claimed by the assessee was an ascertained liability or a contingent liability. The assessee, a company engaged in the manufacture of sugar, claimed a deduction of Rs. 3,72,10,370 as interest payable to the Bank of India. The Assessing Officer (AO) disallowed the claim, stating it was shown as a contingent liability in the annual report and had not crystallized during the year. The CIT(A) remanded the matter back to the AO for verification. The AO, upon remand, maintained the disallowance, arguing that the interest was not debited to the assessee's account and the liability had not crystallized. The CIT(A) upheld this view, stating the liability was finalized in 1991 when the BIFR passed an order waiving the interest.The Tribunal, however, disagreed with the AO and CIT(A), noting that the bank had issued letters demanding the payment of interest, which crystallized the liability during the relevant assessment year. The Tribunal held that the interest liability had crystallized when the bank issued the letters and not when the BIFR passed the order. Therefore, the assessee was eligible for the deduction of the entire amount during the relevant assessment year.2. Allowability of Provision for Sugarcane Price of Rs. 29,72,592:The AO disallowed the provision for sugarcane price, stating it would be allowable in the year of actual payment. The assessee argued that the provision pertained to the period from 1-10-1988 to 31-3-1989 and was erroneously shown as an earlier period expense. The CIT(A) directed the AO to verify the claim and allow it if it pertained to the relevant year. The AO rejected the claim, but the CIT(A), upon considering additional evidence, allowed the provision.The Tribunal upheld the CIT(A)'s decision, noting that the provision was made for the relevant assessment year and there was no discrepancy in the documents. The Tribunal found no violation of rule 46A and affirmed the CIT(A)'s direction to allow the provision.3. Disallowance under Section 37(1) of the Act:The AO disallowed Rs. 11,51,114 under section 37(1), which included a disallowance of Rs. 2,00,000 out of sundry expenses and 15% of the remaining balance of expenses. The CIT(A) restricted the disallowance to Rs. 2,00,000 as per his earlier order, deleting the balance of Rs. 9,51,114.The Tribunal agreed with the CIT(A), stating that the total disallowance should be restricted to Rs. 2,00,000 as directed by the CIT(A) in his earlier order. The Tribunal found the CIT(A)'s interpretation correct and upheld the deletion of the balance disallowance.Conclusion:The Tribunal allowed the assessee's appeal regarding the deduction of bank interest and upheld the CIT(A)'s decisions on the provision for sugarcane price and the disallowance under section 37(1). The revenue's appeal was dismissed.