COMMISSIONER OF INCOME TAX Vs. MODERN SPINNERS LTD

JUDGEMENT

(1.) The short question that arises for consideration in the present Appeal is to the interpretation and meaning of the expression 'ascertained liability' in the facts and circumstances of the present case.

(2.) The assessee filed a return for the assessment year 1995-96 on 24.11.1995 declaring a loss of Rs. 57,99,781/-. The return was processed under Section 143(1)(a) of the Income Tax Act (hereinafter referred to as the Act) without making any adjustment. The Assessing Officer issued a notice to the assessee under Section 143(2) and 142(1) alongwith a questionnaire on 26th September, 1996 and the case was taken up for scrutiny. While dealing with some other matters in the order of the assessment, the Assessing Officer specifically required the assessee to show cause why provisions of interest of Rs. 49.23 lakhs should not be disallowed as the provisions amounted to unascertained liability. After granting opportunity to the assessee, the deduction for the said amount of interest was disallowed by the Assessing Officer vide his order dated 20th November, 1996. Against this order, the assessee preferred an appeal which was also dismissed by the Commissioner of Income Tax, Appeals, New Delhi vide his order dated 18th August, 1998. The view taken by the Assessing Officer as well as the Commissioner of Income Tax, Appeal, was set aside by the Income Tax Appellate Tribunal upon appeal by the assessee and vide its order dated 12th January, 2004 the Tribunal held as under : We have carefully considered the entire material on record. In view of the clauses (a) to (i) of the agreement dated 31.10.1992, the outstanding amount was to be paid with interest in phased manner. Since the assessee had not complied with the terms of the agreement the concession granted by the bank to the assessee was to be withdrawn. In view of the same, the rate of interest on the amount of Rs. 339 lakhs was Rs. 18.5%. The assesee had made provision of interest as per the agreement and not as per the original terms and conditions of the loan. Even if the amount of loan was not paid by the assessee as per the agreement, the liability cannot cease to exist. The assesee had provided interest liability only at the rate of 10% which as per agreement and not as per the original terms and conditions of loan. Therefore, it cannot be treated to be a contingent liability, rather it is an ascertained liability. The assessee cannot be penalised for claiming less interest liability. In view of the above, the arguments of the learned counsel are allowed.

(3.) It is not in dispute before us that the assessee had taken a loan from the Punjab National Bank and was in default of payment of its dues. The compromise was entered into between the Bank and the assessee and it was on 31st October, 1992 at the time of the compromise agreement, the total outstanding was Rs. 1165.23 lakhs including an recorded interest of Rs. 915.55 lakhs. This total liability was reduced to Rs. 499 lakhs payable in a phased manner with interest @ 10% per annum on reducing balance. It was also pointed out that the assessee had made payments in terms of this agreement in the earlier financial years and by making a provision for interest @ 10% as a default of compromise. As noticed in the order of the Commissioner of Income Tax under Clause (ii) of the Agreement, in case of delay by a period of one year in payment of respective instalments, interest @ 18.5% shall be charged and if there is a further delay the borrower assesee will not be entitled to the benefits of concessions envisaged in the compromise terms and will be liable to pay the outstanding with further interest at the agreed rate in terms of Clause (i) of the agreement.