Commissioner Of Income Tax ??? Ii vs M/S. Jain Studios Ltd.
2011 Latest Caselaw 4894 Del

                             Reportable

*            IN THE HIGH COURT OF DELHI AT NEW DELHI


+                       ITA No.607 of 2009


                                Reserved on: 19th September, 2011
%                             Pronounced on: 30th September, 2011



      COMMISSIONER OF INCOME TAX - II                 . . . APPELLANT

                              Through:    Mr. N.P. Sahni, Sr. Standing
                                          Counsel with Mr. Ruchesh
                                          Sinha, Advocate.

                               VERSUS

      M/s. JAIN STUDIOS LTD.                       . . .RESPONDENT

                              Through:    Mr. Ajay Vohra with Ms.
                                          Kavita Jha and Mr. Somnath
                                          Shukla, Advocates.


CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

      1.     Whether Reporters of Local newspapers may be allowed
             to see the Judgment?
      2.     To be referred to the Reporter or not?
      3.     Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

1. This appeal pertains to one issue only which concerns the

interest paid by the respondent-assessee on the borrowed

funds. There is no dispute that the interest was, in fact,

paid. The only issue is as to whether this interest had

accrued in earlier years or in the assessment year in

question, viz., 2000-01, in which year the assessee had

claimed the deduction thereof. According to the Assessing

Officer (AO), such as deduction was not permissible in this

year as the interest had accrued in the earlier years, which

should have been claimed in those years only.

2. The CIT (A), however, found otherwise and allowed the

deduction, which has been affirmed by the Income Tax

Appellate Tribunal (hereinafter referred to as „the Tribunal‟)

as well vide impugned decision dated 07.11.2008. Though

as many as five questions are proposed on the aforesaid

issue, following two questions, out of these would reflect the

nature of challenge which has been laid to the orders of the

Tribunal:

"1. Whether the Income Tax Appellate Tribunal was correct in law and on facts in deleting the addition of `51,49,180/-?

2. Whether, in view of the facts and circumstances of the case, the Tribunal and CIT (A) are correct in law in ignoring that the liability had crystallized in the

earlier years and it was incumbent on the assessee to make the provisions in those years?"

3. The genesis of the dispute can be underscored as follows:

On 14.08.1995, Board of Directors of the respondent

assessee resolved to borrow a loan of `1 Crore from M/s.

Reliance Capital Limited (hereinafter referred to as „RCL‟).

Loan Agreement dated 17.08.1995 was signed between the

assessee and RCL stating the terms and conditions on which

RCL agreed to grant the said loan of `1 Crore. This loan was

to carry an interest @ 24% per annum on quarterly basis on

the borrowed amount. In the event of default, the amounts

due would be payable along with additional penal amount @

2% per annum for the period of default on the basis of

compound interest. The assessee had also pledged some

shares of its company as a security for due repayment of the

said loan from RCL and therefore, the stipulation to the

agreement to the fact that if the loan is not repaid in time,

the RCL was free to transfer those shares in its name. Blank

transfer deeds were also lodged with RCL to facilitate the

transfer. Period of loan was six months and the entire loan

amount including interest was to be repaid by 20.02.1996.

The assessee had issued Post Dated Cheque for `1 Core for

repayment of the said loan.

4. The assessee, however, could not pay the loan amount due

to some financial problems and also due to the reasons that

negotiations were going on for sale of assets. It requested

RCL on 19.02.1996 not to deposit the said cheque. The

cheque was not deposited by the RCL. However thereafter,

some disputes arose between the parties. According to the

assessee, as a consequence of default in repaying the loan,

it was deemed that RCL had purchased the shares pledged

with it. With a result, the entire loan paid was paid off with

interest. The assessee rather claimed that the RCL owned

money to group concerns of the assessee. RCL disputed the

above and demanded the amount from the assessee when

the loan was not repaid, RCL filed Suit No.3527/1998 for

declaration against the assessee along with petition under

Article XII of the Letters Patent. The assessee contested this

Suit by filing its affidavit in reply to the notice of motion filed

by the RCL.

5. After sometime, RCL and the assessee entered into

settlement and consent terms dated 08.10.2001 were

recorded. On these consent terms, decree dated 08.2.2001

was also passed by the Bombay High Court. As per the

aforesaid settlement/decree, the assessee agreed to pay

principal sum of `1 Crore with simple interest @ 24% per

annum from 24.08.1995 till the date of payment and it was

further agreed that the amount would be paid on or before

01.6.2001. The assessee paid the amount of `1 Crore along

with interest from 24.8.1995.

6. Under these circumstances, the assessee claimed deduction

of the aforesaid interest in the year in question, as according

to the assess, the liability got crystallized when the consent

decree dated 08.2.2001 was passed which event occurred in

the assessment year in question.

7. The AO, on the other hand, took the view that there was no

dispute until 14.10.1997. Even when the assessee had

defaulted in making payment of exact amount, the liability to

pay the interest was always acknowledged to the assessee.

The dispute was raised vide letter dated 14.10.1997 and

therefore, till that date, there was no dispute. On this basis,

he opined that the only liability which did not seem to have

crystallized for the period after 14.10.1997 amounting to

`51,49,180/-, as according to him, which pertained to the

earlier years, which had been debited to the Profit & Loss

Account of the year in question. To this extent, he disallowed

the income and added back the same to the account of the

assessee. The computation of the interest upto 14.10.1997 is

as under:

                     Period             Interest @ 24% P.A.

       24.8.1995-30.9.1995                             2,49,180

       01.10.1995-31.12.1995                           6,00,000

       01.01.1996-30.03.1996                           6,00,000

       01.04.1996-30.06.1996                           6,00,000

       01.07.1996-30.09.1996                           6,00,000

       01.10.1996-31.12.1996                           6,00,000

       01.01.1997-31.03.1997                           6,00,000

       01.04.1997-30.06.1997                           6,00,000

       01.07.1997-30.09.1997                           6,00,000

       01.10.1997-14.10.1997                           1,00,000

       TOTAL                                          51,49,180

8. The CIT (A), however, accepted the contention of the

assessee that there was a dispute regarding payment of not

only on interest but on principal amount as well relevant to

assessment year 1996-97 itself when the reason for holding

this view given by the CIT (A) was that though the assessee

had, on 19.2.1996, requested RCL not to deposit the post

dated cheques for encashment due to financial difficulties

and that the RCL was requested to covert this loan into an

acknowledgment by acquiring part of the shares pledged by

the assessee, promoter companies with the RCL as the

assessee had realized that it was difficult for it to pay the

loan and the interest. According to the CIT (A), the dispute

which arose on 19.02.1996 kept on pending till the

compromise decree was passed by the High Court of

Judicature at Bombay. Accordingly, the AO was not right in

holding that there was no dispute till 14.10.1997 and it

arose only thereafter.

9. The Income Tribunal has simply endorsed the aforesaid view

of the CIT (A) on the basis of reasons provided by the CIT

(A).

10. We may say, at the outset, that Mr. N.P. Sahni, learned

counsel appearing for the Revenue submitted that when the

assessee was following mercantile system of account, it

could claim the deduction of the expenses, which had

accrued in a particular year and not in any year. For this

purpose, he referred to the following judgments:

             (i)     Indian       Timber         Corporation       Vs.

                     Commissioner of Income Tax [200 ITR 405

                     (Orissa)];

             (ii)    Bikaner Gypsums Ltd. Vs. Commissioner of

                     Income Tax [73 ITR 778 (Raj.)];

(iii) Commissioner of Income Tax Vs. SKG Sugar

Ltd. [96 ITR 194 (Pat.)].

11. There is no quarrel about the aforesaid proposition. The

entire dispute raised on the question, which needs to be

addressed, is that whether the AO was right in holding that

there was no dispute until 14.10.1997 and the liability to pay

the interest had accrued till that date and therefore, interest

payable was to claim as deduction during that period, i.e.,

24.08.1995 to 14.10.1997, in the relevant assessment years

and not in the assessment year in question, i.e., A.Y. 2000-

01 or whether the opinion of the CIT (A)/the Tribunal is

correct, viz., that there was a dispute throughout the period

and no liability to pay interest had accrued in real sense

which accrued only in the Assessment Year in question when

decree passed by the High Court of Judicature at Bombay

was passed.

12. In order to support the view taken by the AO, Mr. Sahni

referred to the judgment of this Court in the case of

Commissioner of Income Tax. Vs. Dalmia Dadri

Cement Limited [195 ITR 290] holding as under:

"In CIT v. Andhra Prabha Pvt. Ltd.. (1986) 158 ITR 416 (SC) a question had arisen as to whether an assessed was entitled to the deduction of the estimated gratuity payable under an agreement. The Supreme Court relying on its earlier decision in the case of Shri Saiian Mills Ltd., (1985) 156 ITR 585 held that the liability having arisen under an agreement accrued in the relevant year of accounts and that claim would be admissible provided the provision for gratuity was based on "a legal and scientific basis.

The real test, therefore, is that if the amount eventually payable could be properly ascertained and its value commercially determined by an actuarial valuation, which may be fastened on an assessed, in any year of accounting, that could be considered as deductible from its gross profits for the year, in which such a liability is incurred. Thus, the question to be considered in this case is whether the assesses had incurred enforceable legal liability under the aforesaid arrangement with Caco and ft was capable of being commercially valued in the relevant previous year by an actuarial valuation.

xxx xxx xxx

We are, therefore, of the view that the assessed is entitled to the deduction of the freight advantage, which it is liable to pass on to CACO, in the year in which this liability has been incurred under the said Scheme and the opinion expressed by the Allahabad High Court in Commissioner of Income Tax v. Oriental

Motor Car Co. (P) Ltd. (supra) is not applicable on the facts of this case. In that case, while holding that assessee's liability on account of infringement commission could not be allowed in the year when it was demanded by its principals, the Court had observed that the amount so claimed was negotiable and till the assessed admitted its liability at a particular rate, it was not an ascertainable liability, which, we feel, is a significant distinguishing feature in the present case. We are, therefore, in agreement with the conclusion of Tribunal that the assessed is entitled to a deduction of the amount of freight advantage payable by it to CACO in respect of the previous years in question."

13. He also relied upon the judgment of the Rajasthan High Court

in the case of Commissioner of Income Tax Vs. Vijay

Laxmi Trading Co. Ltd. [147 ITR 372 (Raj.)] in support of his

submission that the interest had accrued from 14.08.1995 and

merely because the assessee was not able to pay the amount,

could not be a reason to say that the interest liability had not

accrued.

14. Mr. Ajay Vohra, learned counsel appearing for the assessee,

on the other hand, relied upon the views taken by the CIT

(A) as well as by the Tribunal and contended that no liability

of payment of interest had accrued till the passing of decree

in terms of settlement arrived at between the parties. To

demonstrate this, he has filed the pleadings in the suit filed

by the RCL against the assessee in the Bombay High Court

and the affidavit and reply of the assessee to the notice of

motion along with some other documents have been

produced before us. We have perused the same.

15. The facts emerging on record show that the RCL had filed

the suit claiming the principal amount along with the entire

interest including penalty interest had become due from

24.08.1995. The reply filed by the respondent discloses that

the respondent had controverted the allegations made in the

plaint filed by the RCL and had denied its liability. The

defence put forth by the assessee was that the RCL had

already exercised its right under the Pledge Agreements

after the incident of default, pursuant to these rights

exercised by the RCL, the companies whose shares were

pledged had already transferred those shares in the name of

RCL. The RCL had done so by filing another blank transfer

on 16.07.1997 . The RCL has also alleged that the transfer

in their name under cover of their letter dated 14.101997

accompanied by a resolution passed by the RCL under

Section 372 of the Companies Act. According to the

assessee, it had duly acted on the basis of RCL‟s request

and, therefore, when shares in question had already been

transferred to the name of the RCL in enforcement of the

RCL‟s right under the Pledge Agreements, no amount was

due and payable to the RCL. On the contrary, the assessee

claimed that a sum of `4,01,95,919/- was payable by RCL to

the assessee.

16. No doubt, on 19.02.1996, the assessee had requested the

RCL not to deposit the post dated cheques for encashment

due to financial difficulties. At the same time, the RCL was

also requested to convert this loan into an acknowledgement

by acquiring part of the shares pledged by Jain Studios Ltd.

Promoter companies with RCL, as the assessee realized that

it would be difficult to repay the loan and the interest. This

plea has not been disputed by the AO. Thus, on that date

itself, as far as the assessee is concerned, it had taken the

position that with the option given to the RCL to get the

pledged shares transferred in its name, liability for principal

as well as interest had ceased to exist. For this reason, the

assessee did not show this liability in its balance sheet for

the Assessment Year 1996-97 and onwards, as the assessee

kept on maintaining that nothing was payable. In our

opinion, the AO was not right in holding the view that the

assessee did not dispute the liability to pay interest upto

14.10.1997. It is difficult to accept that the dispute about

payment of interest was not prior to a particular date, but

arose after 14.10.1997. The pleadings in the Suit before the

Bombay High Court belie this view taken by the AO.

17. We, therefore, agree with the conclusion of the CIT (A) as

well as the Tribunal that the exact liability of the assessee to

pay the interest to RCL got settled finally only when

compromise decree was passed at High Court of Judicature

at Bombay. Since this compromise decree was passed on

08.02.2001, it was, but natural for the assessee to claim the

deductions of this liability in the year in question.

18. We, thus, hold that no question of law arises. This appeal is

bereft of any merit and the same is accordingly dismissed.

(A.K. SIKRI) JUDGE

(SIDDHARTH MRIDUL) JUDGE SEPTEMBER 30, 2011 pmc