1987 (12) TMI 81 - AT - Income Tax

Tribunal allows appeal, permits interest deduction for earlier years based on hybrid accounting system.

The Tribunal allowed the appeal, setting aside the lower authorities' decisions, and held that the interest payment of Rs. 11,669, relating to earlier ... - Issues Involved:1. Whether the payment of interest of Rs. 11,669, which liability relates to earlier years, is allowable as a deduction in the assessment year 1982-83.Issue-wise Detailed Analysis:1. Allowability of Interest Payment as Deduction in Assessment Year 1982-83:The central issue in this appeal is whether the interest payment of Rs. 11,669, which pertains to earlier years, can be allowed as a deduction in the assessment year 1982-83. The assessee, a private limited company engaged in the manufacture and sale of soft drinks, had its assessment year ending on 31st March 1982. The Income Tax Officer (ITO) disallowed the interest amount on the grounds that it related to previous years. The total income of the assessee-company was determined at Rs. 9,35,367, which was then set off against earlier years' losses, resulting in a nil total income.The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the liability arose during the year in question as it was quantified and communicated by the Andhra Pradesh Industrial Infrastructural Corporation (APIIC) before the finalization of accounts for the year ending 31st March 1982. The CIT(A) rejected this contention, holding that since the assessee followed the mercantile system of accounting, the liability to pay interest had accrued in past years, and the subsequent quantification was irrelevant.Aggrieved by the CIT(A)'s decision, the assessee appealed to the Tribunal, arguing that the liability was quantified and communicated during the current assessment year and should be allowed as a business expenditure. The assessee also suggested that if the deduction could not be allowed in the current year, the CIT(A) should have directed the ITO to reopen the assessment of the previous year and allow it then.The Tribunal examined the evidence, including a letter dated 29th March 1982 from APIIC, which confirmed the outstanding amount, including the interest portion of Rs. 11,669. The Tribunal noted that the assessee had been following a hybrid system of accounting for this specific transaction, claiming deductions when the liability was quantified and communicated by APIIC.The Tribunal referred to several case laws to support its decision:- CIT Tamil Nadu-III vs. North Arcot District Co-op. Spinning Mills Ltd. (1984) 148 ITR 406 (Mad): The Madras High Court held that an assessee could adopt a hybrid system of accounting if it reflects true profits. In this case, the assessee recorded interest payments in the year they were confirmed, which was accepted by the Revenue in earlier years.- Shalimar Chemical Works Pvt. Ltd. vs. CIT (1987) 65 (Cal) 218: (1987) 167 ITR 13 (Cal): The Calcutta High Court allowed a deduction for a liability that became enforceable in a subsequent year due to a final demand by authorities, even though the statutory liability was created earlier.- CIT APII vs. Sri Sarvaraya Sugars Ltd. (1987) 163 ITR 429 (AP): The Andhra Pradesh High Court allowed an expenditure based on a resolution passed after the accounting year but before finalizing accounts, indicating the liability accrued in the relevant assessment year.Based on these precedents, the Tribunal concluded that the interest amount of Rs. 11,669, though relating to earlier years, was allowable as a deduction in the assessment year 1982-83. The Tribunal allowed the appeal, setting aside the orders of the lower authorities on this point.