2008 (9) TMI 419 - AT - Income Tax

Tribunal Upholds Deduction of Contingent Interest; Disallows Book Profit Reduction; Requires Recalculation of Interest Charge.

The Tribunal upheld the CIT(A)'s decision allowing the deduction of a contingent interest liability of Rs. 1,79,26,028, emphasizing the validity of the ... Business Expenditure - claimed deduction on interest payable - unascertained or contingent liability - Computation of income u/s 115JB - deduction of accrued liability of interest - Interest income, not credited to the accounts, could be added to the book profit under s. 115JB - Interest charged under s. 234B of the Act. Business Expenditure - claimed deduction on interest payable - unascertained or contingent liability - CIT allowed the interest expenditure - HELD THAT:- We find that the assessee had taken loan from the Pearless and there was some dispute pending in respect thereof in the Court. The dispute came to an end in this year. The Court directed the assessee to pay interest @ 21 per cent p.a. till the date of the order of the Court and @ 10 per cent p.a. thereafter. In these circumstances, it cannot be said that the liability was not an ascertained liability - Further, it is a trite law now to say that entries in the books of account are not conclusive about determination of the income and that if a liability has been incurred but not entered in the books, the same has to be allowed if the assessee follows mercantile system of accounting. It is also seen that following the aforesaid principle, the AO has brought to tax interest income although this income was not provided in the books of account. Therefore, the action of the AO is contradictory in nature in this behalf. The ld CIT(A) has examined the matter in correct legal perspective and on the basis of decision of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT[1971 (8) TMI 10 - SUPREME COURT]. In view thereof, we do not find any such error in the order of the ld CIT(A), which requires correction from us. Thus, this ground is dismissed. Computation of income u/s 115JB - deduction of accrued liability of interest - HELD THAT:- We are of the view that the AO cannot reopen the accounts of a company, which have been audited and certified by the statutory auditor, passed by the members of the company in general body meeting, filed before the RoC, and to which he has not taken any objection under that Act. The impugned amount was not entered in the books as liability and the auditor had made certain remarks only in regard to the impugned amount - No objection has been taken by the Registrar to the accounts filed before him. Therefore, the book profit has to be taken as per the aforesaid P&L a/c. No adjustment is permissible in the book profit in respect of aforesaid amount under any of the cls. (i) to (vii) of the Explanation to s. 115JB. In view thereof, it is held that the ld CIT(A) erred in directing the AO to reduce this amount from the book profit. Thus, this ground is allowed. Interest income of Rs. 1,19,07,474, not credited to the accounts, could be added to the book profit under s. 115JB - HELD THAT:- The AO does not have any power to reopen the accounts for this purpose, which have been filed after due process before the RoC and to which he has not taken any objection. Following our finding on that ground of the Revenue, it is held that the interest income of Rs. 1,19,07,474 could not have been added to the book profit under s. 115JB. Thus, this ground is allowed. Interest charged under s. 234B of the Act - HELD THAT:- The interest charged under s. 234B of the Act was stated to be consequential in nature. The AO is directed to recompute the interest after giving effect to this order. Appeal allowed in part. Issues:1. Deduction of interest liability as contingent liability.2. Treatment of interest liability in computing income under section 115JB.3. Deduction of expenses under section 14A of the IT Act.4. Treatment of interest income not credited in the accounts under section 115JB.5. Interest charged under section 234B of the Act.Issue 1: Deduction of interest liability as contingent liability:The appeal involved a dispute regarding the deduction of interest liability of Rs. 1,79,26,028 claimed by the assessee. The auditors had classified this liability as unascertained and contingent. The AO disallowed the deduction, citing the expiry of the loan agreement and the absence of provision for the liability after the loan's expiration. However, the CIT(A) allowed the deduction based on the Court's order fastening the liability on the assessee. The Tribunal upheld the CIT(A)'s decision, emphasizing that if a liability is incurred but not entered in the books, it should be allowed if the assessee follows the mercantile system of accounting.Issue 2: Treatment of interest liability in computing income under section 115JB:The second issue revolved around reducing the interest liability of Rs. 1,79,26,028 from the book profits for computing income under section 115JB. The CIT(A) allowed the deduction of the accrued interest liability, contrary to the auditors certifying it as unascertained and contingent. However, the Tribunal held that the AO cannot reopen audited accounts and must accept the authenticity of accounts filed as per the Companies Act. Therefore, the Tribunal disallowed the reduction of the interest liability from the book profits under section 115JB.Issue 3: Deduction of expenses under section 14A of the IT Act:The ground regarding the deduction of expenses amounting to Rs. 4,08,669 in respect of dividend income under section 14A of the IT Act was dismissed due to no tax effect.Issue 4: Treatment of interest income not credited in the accounts under section 115JB:The Tribunal addressed the treatment of interest income of Rs. 1,19,07,474 not credited in the accounts under section 115JB. It was held that if the interest liability not debited to the accounts could not be allowed under section 115JB, then the interest income not credited to the accounts could also not be added to the book profit under section 115JB. The Tribunal disallowed the addition of the interest income to the book profit under section 115JB.Issue 5: Interest charged under section 234B of the Act:The Tribunal mentioned that the interest charged under section 234B of the Act was consequential in nature, directing the AO to recompute the interest after giving effect to the order. A residuary ground not argued was dismissed.In conclusion, the appeal of the Revenue and the cross-objection of the assessee were partly allowed, addressing various issues related to the deduction and treatment of interest liabilities and income under different sections of the IT Act.