COMMISSIONER OF INCOME TAX ¿¿¿ II vs. M/s. JAIN STUDIOS LTD.

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:

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 2011:DHC:5135-DB

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. 2011:DHC:5135-DB

After sometime, RCL and the assessee entered into settlement and consent terms dated 08.10.2001 were 2011:DHC:5135-DB

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.

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 2011:DHC:5135-DB

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 2011:DHC:5135-DB

The Income Tribunal has simply endorsed the aforesaid view of the CIT (A) on the basis of reasons provided by the CIT (A).

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 2011:DHC:5135-DB

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 2011:DHC:5135-DB

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.

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.

Mr. Ajay Vohra, learned counsel appearing for the assessee, on the other hand, relied upon the views taken by the CIT

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 2011:DHC:5135-DB

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 2011:DHC:5135-DB

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.

We, thus, hold that no question of law arises. This appeal is bereft of any merit and the same is accordingly dismissed.