JUDGMENT
A. Pasayat, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (in short” the Tribunal”), has referred the following question under Section 256(1) of the Income-tax Act, 1961 (in short “the Act”), to this court :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee’s claim regarding payment of interest amounting to Rs. 3,04,442 should be allowed for the assessment year 1978-79?”
2. The background facts, shorn of unnecessary details, are as follows :
M/s. Indian Metals and Carbide Limited (hereinafter referred to as “the assessee”) is a limited company. For the assessment year 1978-79, a return was filed on August 30, 1978, declaring a loss of Rs. 42,25,150. A revised return was filed on March 23, 1981, declaring a loss of Rs. 45,91,800. In the revised return, a sum of Rs. 3,04,442 was claimed as deduction of interest payable to the holding company, M/s. Indian Metals and Ferro Alloys Ltd. (in short ” IMFA “), in respect of the advance made by the said company to its subsidiary–the assessee company. The Assessing Officer did not accept this claim on the ground that though substantial amount of funds were made available to the assessee-company for carrying out the construction work and purchase of plant and machinery, no interest was charged by the holding company on these advances. There was also no resolution passed by the board of directors of the holding company for charging interest on these advances. The assessee-company had also not passed any resolution accepting the liability for interest payable to the holding company during the accounting year. There was no quantification of liabilities and no provision for the payment of such interest had been made in its accounts for the year. A resolution was passed on June 30, 1979, i.e., after the close of the accounting year, and a revised return was filed based on such resolution. Disallowance of the claim was assailed in appeal before the Commissioner of Income-tax (Appeals), Orissa, who held that the liability for payment of interest had accrued, and merely because there was no relevant entry in the books of account originally, the claim for deduction was not to be disallowed. He noticed that the method of accounting followed by the assessee was mercantile. Therefore, in view of the subsequent resolution adopted, it was open to the assessee to claim the amount as a deduction. It was observed that, if interest payable on the amount advanced relating to the assessment year in question is not allowed as a deduction, the same would be disallowed in subsequent years on the ground that it did not relate to the assessment year in which the claim was made. Relying on a decision of the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, the Commissioner of Income-tax (Appeals) allowed the claim. The Revenue assailed the correctness of the conclusions of the Commissioner of Income-tax (Appeals) in appeal before the Tribunal. The Tribunal affirmed the conclusions of the Commissioner of Income-tax (Appeals). In addition to the grounds indicated by the Commissioner of Income-tax (Appeals), it was observed that the receipt of the interest amount in question was reflected in the accounts of the holding company and had been brought to tax. The Tribunal, accordingly, dismissed the appeal filed by the Revenue. On being moved for a reference to this court, the question as indicated above has been referred.
3. The stand of the Revenue is that there being no resolution at the relevant point of time before the accounting year came to an end, there was no liability so far as the relevant assessment year is concerned. Learned counsel for the assessee, however, submits that the resolution of the company, though adopted subsequent to the close of the accounting year, clearly indicated the liability to pay the interest, that the amount in question was duly incorporated in the books of account and that a revised return was filed. It is also not in dispute that the amount in question has been reflected by the holding company in its books of account and has been subjected to tax in its hands.
4. On consideration of the rival submissions, we find that the approach of the Tribunal was correct. Admittedly, the assessee follows the mercantile method of accounting. As rightly observed by the Commissioner of Income-tax (Appeals) and affirmed by the Tribunal, the liability to pay interest did exist in terms of Section 36(l)(iii) of the Act. The quantification also has been done, though at a belated stage. The undisputed factual position as culled out from the orders of the authorities is that the holding company had advanced money to the assessee in the normal course of business. The assessee’s liability to pay interest accrued at the end of the accounting year or when the accounts were mutually settled. Such accrual is not dependent upon the passing of a resolution. It is not the case of the Revenue that there was any agreement not to charge interest. As indicated above, the quantification of the amount payable was done by the resolution. Liability to pay and quantification are different aspects, though having a live link for the purpose of assessment of income. The method of accounting being mercantile, belated entry in the books of account and/or passing of resolution was inconsequential. This conclusion gains sustenance from the view of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd.’s case [1971] 82 ITR ,363, that a deduction may be allowed in respect of a statutory or other liability even if no provision is made for it in the accounts. Before completion of the assessment by filing a revised return, the assessee had indicated its liability and had claimed deduction. Merely because the resolution in question was adopted after the close of the accounting year, it cannot be a ground for disallowing a claim legally made, since the liability had already accrued because the mercantile system of accounting was followed by the assessee. The receipt has been taxed in the hands of the holding company also as observed by the Tribunal.
5. Our answer to the question referred, therefore, is that the Tribunal was justified in holding that the assessee’s claim relating to payment of interest was to be allowed for the assessment year 1978-79. The question is answered in the affirmative, in favour of the assessee and against the Revenue. No costs.
S.K. Mohanty, J.
6. I agree.
