SULAIMAN RAWTHER A Vs. STATE OF KERALA

JUDGEMENT

(1.) ONE Sulaiman Rowther, the predecessor of the petitioner in this petition under S. 78 of the Kerala Agrl. IT Act, 1991, was an assessee to tax under the Agrl. IT Act, 1950 ("the Act", for brevity). We shall refer to him as the assessee for purposes of convenience. He owned agricultural lands. He had been granted credit facility by way of overdraft in the current account by the State Bank of India on the security of these lands, for the purpose of his agricultural operations. The interest due was not paid, with the result the bank debited the amount of interest accruing for each quarter in the current account, capitalised it and treated it as part of the principal for the ensuing quarter, as per the terms of the agreement between the parties.

(2.) AN amount of Rs. 61,979.31 had thus been debited in the account as the interest payable during the year ending 31st March, 1981, and capitalised, treating it as part of the principal for the ensuing period. The assessee claimed deduction of this amount as allowable expenditure under cls. (e) and (f) of S. 5 of the Act. But the Agrl. ITO, refused to allow the claim. The Commr. of Agrl. IT, on a revision filed by the assessee, directed reconsideration of the matter, in the light of the provisions contained in cls. (e) and (f) of S. 5, as also in accordance with the method of accounting followed by the assessee. The Agrl. ITO did not, however, find his way to allow the deduction in the view that the assessee had not actually paid any amount by way of interest on the loan, the amount having been only debited in the loan account. The assessee took up the matter again in revision before the Commissioner reiterating his plea that once the amount of interest is debited in the current account, it tantamounts to actual payment thereof, creating an enforceable right in the bank to recover it along with the principal. It was further pointed out that the bank had, in fact, filed a suit for recovery of the principal and interest due. The Commissioner did not accept that contention, holding that the claim cannot be allowed in the absence of payment of the interest. Evidently, his view was also that actual cash payment (and not mere debiting in the account) was necessary, to enable the assessee to claim the deduction. The tax revision case is filed challenging the disallowance of the amount of interest by the authorities below.

(3.) DIFFERENT contingencies may be visualised in relation to such loan transactions and the debiting of interest therein. The assessee may have an overdraft/cash credit account upto a certain limit from which he may make periodical withdrawals for the purpose of his operations. If the interest due is not paid, it will be debited in the account and treated as part of the principal for the ensuing period. The interest so debited may or may not be within the limit granted, according to the circumstances of a given case. The other case is that of a simple loan of a lump sum, the whole of which is withdrawn, but in respect of which the defaulted instalments of interest are debited, and become part of the principal.