2014 (5) TMI 518

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....ear 1990-91. On 17.03.2010, the appeal is admitted by a Co-ordinate Bench on the following substantial questions of law:- (a) Whether on the facts and in the circumstances of the case the Tribunal has erred in law in allowing the deduction of Rs. 17,10,011/- on account of provision for interest as it is a fictional liability? The brief facts of the case are that the assessee is a limited company deriving the income from manufacturing and sale of sugar and I.M.F.L. During the assessment year under consideration, the assessee has exported the country sprit, I.M.F.L. to Delhi. The excise duty was payable on these items as per the U.P. Excise Act. The assessee has not paid the duty payable to the government on export the goods outside ....

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....against the assessee in the assessment year under consideration. This has to be decided by taking into account all the facts and circumstances of the case. If the liability is an actual liability in praesenti in the year under consideration, it is deductible. If it is a contingent liability, it cannot be the subject matter of deduction even under the mercantile system of accounting. There is no dispute in the present case that in the years under consideration the liability to pay interest was an actual liability. It was no more contingent. There is no dispute on this count. The only ground on which the claim of the assessee for duduction was denied by the Income-tax Officer was that the assessee was disputing the liability by filing an appe....

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....sessee pertaining to the interest is allowable as it is not a contingent liability. To support his arguments, he relied on the ratio laid down in the following cases:- (1) Kedarnath Jute Mfd. Co. Ltd. v. Commissioner of Income-tax [1971] 082 ITR 0363 (SC); (2) Commissioner of Income-tax v. J.K. Synthetics Ltd. [1983] 143 ITR 0771 (SC); (3) Municipal Corpn. Of City of Thane v. Vidyut Metallics Ltd. And another (2007) 8 SCC 688; (4) Commissioner of Income-tax v. Poonam Chand Trilok Chand [1976] 105 ITR 0618 (Alld.); and (5) Union of India Vs. Kamlakshi Finance Corporation Ltd. 1991 (55) E.L.T. 433 (S.C.). Lastly, he made a request to dismiss the appeal filed by the department. We heard both the parties at length and gone ....

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....at actually paid can include a constructive payment. Deduction is allowable only on the basis of actual payment, irrespective of the method of the accounting adopted by the assessee as per the ratio laid down in the Sanghi Vs. Union of India 187 ITR 703 (Delhi); and C.I.T. Vs. Yashpal 110 Taxman 251 (Jammu). It also overrides Section-36(1) of the Act. For the convenience, Section-43B of the Income Tax Act is reproduced as under:- 43B. Certain deductions to be only on actual payment Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- .... (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or....

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....mmissioner of Income-Tax Vs. Kerla Solvent Extractions Ltd [2008] 306 ITR 54 observed that:- "Under Section 145 of the Income-tax Act, 1961, the income chargeable under the head "Profits and gains of business or profession" should be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. Section 43B of the Act in itself is not a provision providing for deduction of any item of expenditure which is otherwise not allowable under any of the provisions of the Act. The opening words of section 43 B show that the section deals with deductions otherwise allowable under the provisions of the Act. The section only lays down the conditions for eligibility for deduction of certain allow....

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....ous year in which the sum is actually paid by the employer to its employees." Thus, the benefit of Section 43B is available only on actual payment and is irrelevant to the method of accounting followed by the assessee. In the instant case, the assessee has neither paid the duty nor interest, but enjoyed the deduction of Section 43B in the name of mercantile system of accounting. The A.O. has already allowed the deduction under Section 43B pertaining to the duty which has wrongly been done. Be that as it may. Before us the only issue is pertaining to the liability of the interest of Rs. 17,10,011/-. The interest is nothing but an extended liability of the duty for the belated payment. It is compensatory in nature. The interest havin....