AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 1593
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....shkalp Energy Limited and Tata Motors Ltd. By ignoring the following facts: (i) The liability to pay interest was due on year to year basis as per agreement between assessee and Tata Motors Ltd. The accounting method was mercantile and the same has been maintained regularly on year to year basis. (ii) As per agreement the assessee was liable to pay interest on year to year basis. (iii) Assessee has never objected to pay interest and was doing business i.e. purchase and sale of Tata Vehicle. As such, there was no dispute. (iv) There was a clause for arbitration, in the case of any dispute arised. The parties had to approach to the arbitrator when there was a dispute. (v) Although it was contractual liability but it was due for payment on year to year basis as per agreement held in 2000 because there was no dispute between the parties and method of accounting was adopted mercantile. In fact assessee itself made default in making provision on payment of interest/installments. (vi) No suit has been lodged before the judicial authority for the settlement of dispute, if any arised. (vii) Therefore, the liability to pay interest relating to earlier years was not accrued in t....
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....issions that after the assessment year 2008-2009 the disallowances u/s 14A are to be computed as per the provisions of Rule 8D of the I.T. Rules. The assessee has made the investment in shares and the dividend income is exempt from tax, therefore, the Assessing Officer has rightly made the corresponding disallowance of expenditure to be incurred in earning the interest free income. 5. The learned counsel for the assessee, besides placing reliance upon the order of CIT(A), has submitted that the provisions of section 14A can only be invoked when the interest free income is included in the total income of the assessee. In the impugned assessment year the assessee has not earned any tax free income, therefore, the corresponding disallowance of the expenditures incurred in earning the tax free income cannot be made. The learned counsel for the assessee further invited our attention to the financial position of the assessee company with the submission that he had sufficient funds to make the investment in shares, therefore, no borrowed funds were invested in shares to earn the dividend income. 6. Having heard the rival submissions and from a careful perusal of the record in the light ....
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....s & Holdings Ltd. (Formerly known as Sterling Infotech Ltd.) vs. ACIT, Company Circle-VI(9) (supra). Therefore, the CIT(A) has rightly held that in the absence of tax free income, no disallowance u/s 14A is permissible. Since we do not find any infirmity in the order of CIT(A), we confirm his order. 7. Apropos ground No. 2, the facts in brief, borne out from the record, are that the Assessing Officer has noticed during the course of assessment proceedings that the assessee has claimed interest of Rs. 1,72,78,000/- under the head 'interest' in Schedule-17 forming part of profit & loss account. It was also noticed that as per notes on accounts of the annual report, the assessee company has provided interest of Rs. 1,64,51,000/- towards interest on loan from M/s Niskalp Investment and Trading Company Limited, now known as M/s Niskalp Energy Limited (NEL). on the basis of the final settlement. The assessee was asked to explain the details of interest and also to justify its claim. In response thereto, the detailed reply was filed along with the relevant documents stating therein that the assessee company is a dealer of M/s Tata Motors Limited (TML) in the territory of Bilaspur (Chhati....
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....e payment of interest to the profit & loss account. 7.2 The Assessing Officer was not convinced with the explanation of the assessee and made a disallowance of claim of interest of Rs. 1,72,78,000/- having observed that the assessee had followed mercantile system of accounting from year to year including previous year, therefore, the liability of payment of interest can be quantified and made in the corresponding assessment years. 8. The assessee preferred an appeal before the CIT(A) and reiterated its contentions. He has also placed heavy reliance upon the judgment in the case of CIT vs. Oriental Motor Car Co. Pvt. Ltd. 124 ITR 74 (All), CIT vs. Nathmal Tolaram [1973] 88 ITR 234 (Guj), Saurashtra Cement and Chemical Industries Ltd. Vs. CIT [1995] 213 ITR 523 and CIT vs. Nagri Mills Co. Ltd. [1958] 33 ITR 684 in support of its contention that where liability is contractual in nature, it would be allowed on its crystallization only and not in earlier years. The Learned counsel for the assessee further contended that undisputedly the assessee was a dealer of TML and the financial arrangement with M/s Niskalp Investment and Trading Company Limited, later changed to M/s Niskalp Energ....
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....no payments on account of interest were made by the appellant company even after that meeting. This impasse continued till 2007 when a fresh agreement, dated 12/04/2007 was signed (between the appellant company & the Tata group) wherein various concessions were allowed to the appellant company which included reduction of interest rate to 6% p.a. In accordance with this agreement, the appellant company made payment of interest of Rs. 1,64,51,896/- on and from April 2007 to July 2007 and claimed it as an expenditure during the F.Y. 2007- 08. 6.1.1 After going through the entire chronology of events, which I have tried to summarise as above, am of the considered view that the said interest liability (even though pertaining to earlier years) never crystallized in the hands of the appellant company since it had no intention to pay such interest as it had serious objections/dispute with the terms of the agreement. Such interest payment was not a statutory liability but only a contractual liability and if one of the parties to the contract (i.e. the appellant company) did not wish to honour the contract or practically reneges on the contract, such contractual liability had no meaning. E....
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....sions of Court referred hereinabove, clearly held that the liability of a contractual in nature accrues when it is finally settled. The facts of the present case is almost similar to the facts in the decision of this Court in the case of CIT v. Oriental Motors Car Co. (P) Ltd (supra), which has been referred hereinabove. In the said case, the decision of the Supreme Court in the case of Kedar Nath Jute Manufacturing Co. Ltd v. CIT reported in 82 ITR 363 has also been considered and distinguished on the ground that in the said case, liability of sales tax arose by virtue of the statute as soon as the sale was effected. The Division Bench of this Court clearly held that the contractual liability accrues when it is finally settled. From the fact stated hereinabove, it is clear that in the present case the liability was not in the nature of statutory liability. The demand raised by Automobiles Ltd was disputed, by the assessee which was in the nature of contractual liability which was finally settled only on 20th September, 1981 and thus, liability to pay accrued only on 20th September, 1981 relating to the year under consideration and has been rightly held as allowable deduction by th....
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....of TML, financial arrangements were made between the assessee and NEL, a subsidiary of Tata Group, and a loan of Rs. 4,80,76,000/- was provided to the assessee company @12% per annum. It is also undisputed fact that the entire loan was immediately utilized by TML for squaring up its outstanding dues recoverable from the assessee company. Though the financial arrangement was made @12% per annum but the assessee has never paid or provided any interest on loan provided by NEL and since beginning the assessee has been disputing the rate of interest with the lender i.e. NEL. A note to this effect was also made by the auditors in the notes to the accounts attached with the balance sheet each year. 11.1 We have also carefully examined the notes of auditors attached to the balance sheet since beginning. From the notes attached to the balance sheet as on 31/03/2011, in the first balance sheet the auditor has given a note at Item No. 10 that no provision has been made in the account in respect of interest on dues relating to supply of vehicles converted to term loan from M/s Niskalp Investment & Trading Co. Ltd. The contents of notes is as under for the sake of reference: "No provision h....
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.... part of amount to be adjusted against interest payment. Accordingly, the differential amount of interest liability arising out of computation of recovery of principal amount first against RMI determined on the basis of part payment of principal amount and interest will be computed at the end of tenure or in or about April 2010 when the appropriate amount of rebate may be considered on the basis of tract record of payment of RMI on stipulated dates till March 2010." 11.3 On the basis of this agreement through which the liability has been crystallized, the assessee has debited the interest of Rs. 1,72,80,000/- under the head interest in Schedule-17 forming part of profit & loss account and corresponding entries were passed in the books of account of the assessee. We have also carefully examined various judgments referred to by the parties. In the case of CIT vs. Raj Motors [2006] 284 ITR 489 (All), their Lordships of Jurisdictional High Court have held having examined various judicial pronouncements rendered on the subject that liability to payment accrued only when the contractual liability is finally settled irrespective of the fact that the assessee has been following mercantile....