KAMLAPAT MOTILAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961. The reference relates to the assessment year 1963-64.

(2.) THE assessee is a partnership firm owning two sugar factories--one at Bhatni in district Deoria and the other at Motinagar in district Faizabad. At the end of the relevant previous year the assessee made a provision in its books of accounts for the payment of a sum of Rs. 1,04,023 towards interest due on arrears of cess and purchase tax, an amount which the assessee had become liable to pay but had not paid during the relevant previous year. THE yum of Rs. 1,04,023 is made up of two items, (i) Rs. 1,02,461 in respect of interest payable on arrears of cess, and (ii) Rs. 1,352 in respect of interest on arrears of purchase tax in respect of Bhatni Mills, THE assessee claimed to deduct this amount from its profits liable to income-tax. THE claim was disallowed by the Income-tax Officer on the ground that the provision for interest represented a contingent liability only. THE Appellate Assistant Commissioner of Income-tax did not agree with this view and held that the amount in question represented an accrued liability and, as such, was an allowable deduction. THE department took the matter in appeal before the Income-tax Appellate Tribunal.

(3.) NOW, let us examine the relevant provisions of the Income-tax Act, 1961. Section 28 deals with the profits and gains of business or profession. Section 29 then provides the manner in which the income from profits and gains of business or profession shall be computed. It says that the income referred to in Section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Sections 30 to 43A enumerate various deductions which have to be made while computing the net profits of a business. The material sections for our purposes are sections 36 and 37. Section 36{l)(iii) provides for the deduction of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. Here we are dealing with the interest no doubt, but interest is not on capital borrowed for the purposes of business or profession. So this provision will not be attracted. Section 37 is a residuary section and provides: