Full Judgment
(ii) Disallowance of a sum of Rs. 20,000, treating the same as capital expenditure.
(iii) Treating the lease rent from President of India of Rs. 7, 55, 515 as income from other sources.
(v) Claim of the expenditure as the project stood completed during the year.
(i) Disallowance of Rs. 24,58, 150 being the interest payable to K.J. Somaiya Trust.
(ii) The addition of interest of Rs. 2,460 payable to M/s. Viral Enterprises and Rs. 2,59, 832 payable to M/s. Shah Estate.
(iii) The claim of the expenditure as the project stood completed during the year.
(i) The order is passed without giving proper opportunity to the assessee.
(ii) Disallowance of Rs. 13, 86, 887 being interest payable to K. J. Somaiya Trust.
(iii) Disallowance of interest of Rs. 2,57, 565 payable to Lelladhar Devkinandan.
(iv) Claim of the expenditure as the project stood completed during the year.
(i) Disallowance of interest of Rs. 17, 38, 203 being the interest payable to KJ. Somaiya Trust.
2. The assessee is a firm engaged in the business of development and construction of office and residential premises at Ghatkopar. The assessee purchased a plot of land for their project from KJ. Somaiya Trust vide agreement dated 7-10-1983 for Rs. 4 crores. Rs. 35 lakhs were paid on execution of the agreement and remaining payment was to be made on different dates as per the agreement. There was no provision in the original deed for payment of interest in the event of delayed payment. However, the assessee had furnished bank guarantee for the amount payable. In July, 1984, on account of non-payment agreement was sought to be terminated by KJ. Somaiya Trust and the matter went before the Bombay High Court. In October, 1986, a suit was settled vide decree of Bombay High Court. Under the terms of settlement, apart from obligation to repay the principal amount under the original settlement, a sum of Rs. 64, 79, 964 was ordered to be paid by way of compensation/ damages/interest by the assessee to KJ. Somaiya Trust.
3. The first common ground of appeal is regarding the disallowance of the interest paid by the assessee to the KJ. Somaiya Trust. The Assessing Officer has observed in his order for the assessment year 1988-89 that the profit and loss account has been debited by construction and other expenses during the year at Rs. 1,40, 83, 540.
This includes a sum of Rs. 67, 56, 589 as interest to KJ. Somaiya Trust. The Assessing Officer also observed that the assessee was following the hybrid system of accounting especialy the interest paid and received on cash basis except the interest paid to KJ. Somaiya Trust which is accounted for on mercantile basis. It was contended before the Assessing Officer that the amount of Rs. 67, 56, 589 was provided on the basis of the consent terms dated 24-10-1986 passed by the Bombay High Court between Shri Karanshi Jethabhai Somaiya and others (Plaintiffs) and Chitranjan Damodardas Shah & Others (Defendants). The Assessing Officer has stated that the assessee was following the accounting method on cash basis both for receipt of interest and payment of interest. Therefore, there cannot be the mercantile system for a single transaction. According to him, there cannot be two systems under the same head1 of account. The Assessing Officer has further observed that the total consideration for the land was Rs. 4 crores, out of which, a sum of Rs. 2,71,25,000 was already paid leaving a balance of Rs. 1,28, 75,000. The interest was payable on the balance amount of Rs. 1,28, 75,000 at the rate of 24% per annum.
Compounded six monthly from 3-5-1985 till the payment of Rs. 78, 75,000 was made and from 12-10-1985 to the date of payment on the balance of Rs. 50 lakhs. Thus according to the Assessing Officer, the sum of Rs. 67, 56, 589 is the interest at 24% worked out in the manner specified above as per the consent terms and therefore, only the cash system of accounting would be applicable to the interest payable by the assessee.
The Assessing Officer has also further stated that the assessee has not paid the said sum during the accounting year under consideration, therefore, the same is not allowable. Similarly, for the assessment year 1989-90, the Assessing Officer disallowed the interest of Rs. 24, 58, 150 payable to K. J. Somaiya Trust, Rs. 2,460 payable to M/s. Viral Enterprises and Rs. 2,59, 832 payable to M/s. Shah Estates as the same was not paid during the previous year relevant to the assessment year 1989-90. For the assessment year 1990-91,the Assessing Officer observed that the assessee has also debited interest of Rs. 13, 86, 886 payable to M/s. K. J. Somaiya Trust and Rs. 2,57, 565 payable to Lelladhar Devkinandan. As the interest has been debited on the basis of mercantile system of accounting, the same has been disallowed as the assessee is following cash system for the payment and receipt of interest. For the assessment year 1991-92,the interest payable to K. J.Somaiya Trust amounted to Rs. 17, 38, 203 and the same has been disallowed as the assessee did not make the payments during the previous year relevant to the assessment year under consideration.
4. Before the learned CIT(A), it was contended that the additional amount being paid is not in the nature of interest but the same is in the nature of liquidated damages or compensation. The learned CIT (A), however, observed that the assessee had agreed before the court to pay the principal amount remained unpaid alongwith interest on the stipulated dates. According to him, up to the date of decree, the assessee had paid Rs. 2,71,25,000 leaving unpaid amount of Rs. 1,28, 75,000. As per the consent decree on 24-10-1986, the assessee made further payment of Rs. 63, 50,000. The assessee was to make further payment of Rs. 50 lakhs on or before 19-4-1987. Another amount of Rs. 80, 04, 964 comprising of Rs. 15, 25,000 being the principal amount and Rs, 64, 79, 964 being the aggregate interest calculated at the rate of 24% per annum compounded at six monthly rests was to be paid on or before 19-10-1987. The learned CIT(A), thus, observed that the assessee did not comply fully with the terms of the consent decree with the result that K. J. Somaiya Trust took the matter again to the court and another consent decree dated 18-1-1991 was passed whereby the assessee agreed to pay Rs. 73, 75, 604 which was to be paid as per the stipulation in this consent decree. The authorised representative of the assessee informed the learned CIT(A) that even these terms were also not complied with and therefore, the court receiver had been appointed in this case. The learned CIT(A) did not find any merit in the contention of the assessee that the interest payable to KJ. Somaiya Trust is different from other interests. The CIT(A) found that the assessee is engaged in the business of construction and interest has arisen on unpaid consideration of purchase price of land. According to him, this is as good as any other borrowings. The learned CIT(A) has referred to the consent terms wherein the assessee had categorically* admitted that amount to be paid over and above (sic) which is to be calculated at the rate of 24% with half-yearly rests. The learned CIT(A) has, therefore, fully agreed with the view taken by the Assessing Officer that the interest claimed as payable to K. J. Somaiya Trust and others during the relevant assessment years is not allowable as deduction from the total income as no part of the interest has been paid. Regarding the assessee's alternative contention that they are entitled to a claim of Rs. 25 lakhs which was actually paid by them before the end of their accounting year, the learned CIT(A) referred to the consent terms and has stated that the assessee was to pay on or before 19-4-1987, a sum of Rs. 50 lakhs. The assessee paid on 15-5-1987, a sum Rs. 10 lakhs on 29-5-1987, another amounts of Rs. 10 lakhs was paid and on 26-9-1987, another payment of Rs. 5 lakhs was paid to K. J. Somaiya Trust. According to the learned CIT(A), there was nothing to show that this payment was towards interest. As per the consent terms, they were to pay Rs. 50 lakhs on or before 19-4-1987.
Therefore according to the ld. CIT(A), the payment of Rs. 25 lakhs was towards a part payment of Rs. 50 lakhs to be paid by them as per the consent terms. Thus, the learned CIT(A) concluded that the assessee's contention that Rs. 25 lakhs were paid towards interest during the year was not acceptable.
5. At the time of hearing, the learned counsel for the assessee contended that the interest payable to KJ. Somaiya Trust was in terms of the court decree and was thus, an admissible business expenditure for the computation of total income. He also contended that the nature of the impugned expenditure was materially different from the interest expenditure regularly incurred by the assessee and in respect, thereof, the assessee was accustomed to recording the expenditure on cash basis.
He argued that the assessee was not at all committed to cash basis of accounting in respect of item of an impugned nature and was, therefore, free to adopt a method of accounting of their choice. He also argued that the assessee treated the interest payable to KJ. Somaiya Trust as different from the ordinary interest expenditure as clear from the fact that the impugned sum has been debited separately in profit and loss account. He contended that even if there was a change in the method of accounting, the same should have still been accepted as correct as it was not only bona fidebut also in complete conformity with the principles of accounting. The learned counsel contended that the project stood completed during the year, therefore, it was necessary and prudent for the assessee to record the impugned expenditure at the earliest point of time so as to present a true and fair view of accounts. He pointed out that the expenditure incurred is having a close nexus with the project and the same is, therefore, permissible while computing the total profits from the project. He also contended that under the Income-tax Act, an assessee has no discretion or freedom of choosing a method of accounting which tends to violate the fundamental assumption or concepts of accounting. In the alternative, the learned counsel pointed out that for the assessment year 1988-89, the amount of Rs. 25 lakhs had been paid during the year as an interest and the same should, therefore, be allowed fully: The learned counsel also contended that the assessee was not committed to cash basis of accounting in respect of item of an expenditure of this nature and was free to adopt a method of accounting of his choice. He also argued that the assessee is free to adopt a different method of accounting with regard to two different items belonging to the same nature of expenditure. He placed his reliance on the following court cases:CIT v. Andhra Pradesh Industrial Infrastructure Corporation [1999] 236 ITR 648 (AP) (ii) Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847 (Cal.) (vi) CIT v. Guranditta Mai Shanti Parkash Zira [1987] 164 ITR 7743 (Punj. & Har.) (vii) Bombay Steam Navigation (1953) Co. (P.) Ltd. v. CIR [1965] 56 ITR 52 (SC) The learned DR relied on the findings of the authorities below and contended that the assessee is following the hybrid system of accounting. For the interest paid and received, the assessee is following the cash system. Only for the interest paid to K. J. Somaiya Trust, the assessee has made the claim on the basis of mercantile system of accounting. According to him, the assessee is entitled to follow any system of accounting, but the assessee cannot have two systems of accounting for the same source of income or expenditure. He placed his reliance on the following court cases: 6. We have carefully considered the submissions made by the rival parties. We have also gone through the various documents produced before us during the course of hearing. The first main issue for consideration is regarding the system of accounting followed by the assessee. Among Indian businessmen, as elsewhere, there are current systems of book-keeping. There is firstly, the cash system in which a record is maintained of actual receipts and actual disbursement entries being posted when money or money's worth is actually received, collected or disbursed. There is secondly, the mercantile system in which the entries are posted in the books of account on the date of the transaction i. e. on the date on which rights accrue or liabilities are incurred, irrespective of the date of a receipt or payment. Whereas under the cash system, no account of what are called the outstanding of the business either at the consent or at the close of the year is taken, according to the mercantile method, actual cash receipt during the year and the actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstanding not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. Both the methods are somewhat rough. In some cases, these methods may not give a clear picture of the true profits earned and certainly not of taxable profits. Besides the cash system and mercantile system there are innumerable other systems of accounting which may be called hybrid or heterogeneous, in which certain elements and incidents of cash and mercantile systems are combined. An assessee following such a system may employ one method of accounting for one class of business or one class of customers or transactions and a different method for another class. Madras High Court in the case of CIT v. E.A.E.T. Sundararaj [1915], 99 ITR 226, held that, an assessee may employ one method of accounting for one part of his business or one class of customers and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis. If such different methods are employed regularly and consistently, the profits have to be computed in accordance with the respective methods, provided it results in proper determination of the true profits. In the case of Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124, Allahabad High Court held that "An assessee may even choose to adopt the mercantile system for certain transaction and the cash basis for other transactions, but having chosen and regularly employed that system, it is not open to him unilaterally at any time during the accounting year to say that he will not now follow that system in respect of particular transaction. " In the case of G.Padmanabha Chettiar & Sons (supra) relied upon by the learned DR, the Madras High Court held "The same basis has to be adopted for receipt and payment of interest and having regard to the mercantile system of accounting adopted by the assessee during the assessment years in question, the assessee could not be permitted to adopt the mercantile basis for payment of interest by it and claim the benefit of the cash system in respect of interest received by it. The addition of interest accruing on the amounts owed to the assessee was justified. " Similarly, the Gujarat High Court in the case of Super Scientific Clock Co. (supra) relied upon by the Department held that "The assessee, for any particular source of income, could adopt a different system of accounting, but in no case can he employ for part of the transactions or events relating to one source of income of different system of accounting. There cannot be piecemeal method of accounting in respect of the same business or the same source of income or expenditure. It cannot be said that for a source of income, one system is followed, but for expenses required to be incurred for earning income from that source, a different method of accounting can be employed. " The choice of method of accounting lies with the assessee, but the assessee must show that he has followed the method regularly for his own purposes.
Section 145 and the proviso read together, clearly make such a method regularly employed by the assessee a compulsory basis for the computation, unless in the opinion of the Assessing Officer, the income, profits and gains cannot be properly deduced, there from. If the true income, profit and gains cannot be ascertained on the basis of the assessee's method or where no method of accounting has been regularly employed, the income must be computed upon such basis and in such a manner as the Assessing Officer may determine. The assessee may choose to adopt the mercantile system for certain transaction and cash basis for other transactions, but having chosen and regularly employed that system, it is not open to him unilaterally at any time during the accounting year to say that he will now shift over to another system in respect of a particular transaction.
7. In the present case, the assessee is following the hybrid system of accounting. For the interest received and paid, the assessee is following the cash system of accounting regularly. However, for the interest payable to K. J. Somaiya Trust, the assessee changed over to mercantile system of accounting. As the assessee was following the cash system of accounting for the payment and receipt of interest, the change over to mercantile system of account for single transaction is not permissible as we have discussed in the preceding paragraphs. There cannot be two systems of accounting under the same head of account. The contention of the learned counsel that the interest paid to K. J.Somaiya Trust was an expenditure in the nature of liquidated damages and not in the nature of interest is also without any substance. In this connection, we would like to refer to the consent decree dated 24-10-1986 passed by the Bombay High Court. The relevant parts of the consent decree are reproduced as under: It is agreed between the parties that out of the total purchase price of Rs. 4, 00, 00,000 (Rupees Four Crores) the Plaintiffs have so far been paid Rs. 2,71,25,000 (Rupees Two Crores Seventy One Lakhs Twenty Five Thousand) and the balance of Rs. 1,28, 75,000 (Rupees One Crore Twenty Eight Lakhs Seventy Five Thousand) together with interest at the rate of 24% (twenty four percent) per annum compounded at six monthly rests from 3rd May 1985 till payment of Rs. 78, 75,000 (Rupees Seventy Eight Lakhs Seventy Five Thousand) and from 12-10-1985 till payment of the balance of Rs. 50, 00,000 (Rupees fifty lakhs) is payable by the Defendants to the Plaintiffs.
Decreed that the Defendants do pay to the Plaintiffs the said sum of Rs. 1,28, 75,000 (Rupees One Crore Twenty Eight Lakhs Seventy Five Thousand) together with interest thereon at the rate of 24% (twenty four per cent) per annum compounded at half yearly rests from the said dates till payment and payable in the manner hereinafter provided.
7(A) The defendants have besides the aggregate sum of Rs. 2,71,25,000 (Rupees Two Crores Seventy One Lakhs Twenty Five, thousand) paid earlier by them to the plaintiffs, further paid to the plaintiffs Rs. 63, 50,000 (Rupees Sixty Three Lakhs Fifty Thousand only) on or before the signing of these terms. The said sum of Rs. 63, 50,000 is paid by two separate cheques viz.
(i) For Rs. 62,25,000 (Rupees Sixty Two Lakhs Twenty Five Thousand) in favour of Karamshi Jethabhai Somaiya Trust.
(ii) Rs. 1,25,000 (Rupees One Lakh Twenty Five Thousand) in favour of Mulla and Mulla and Craigie Blunt and Caroe, being the Advocates for the Plaintiffs.
(B) The Defendants agree with the Plaintiffs and undertake to the Court to pay the Plaintiffs on or before 19th April 1987, the sum of Rs. 50, 00,000 (Rupees Fifty Lakhs).
(C) The Defendants agree with the Plaintiffs and undertake to the Court to pay to the Plaintiffs on or before 19th October 1987, the sum of Rs. 80, 04, 964 (Rupees Eighty Lakhs Four Thousand Nine Hundred Sixty Four only) comprising of Rs. 15, 25,000 being the balance consideration and Rs. 64, 79, 964 being the aggregate interest calculated at 24% per annum compounded at six months rests on the amounts as mentioned in clause 6 herein.
It is quite obvious from the above paras of the consent decree that the assessee had agreed to pay the balance of the principal amount together with the interest @ 24% per annum. Thus, there is no force in the arguments taken up by the learned counsel. We, therefore, fully support the findings of the authorities below that the interest paid to K. J.Somaiya Trust has to be allowed on the basis of cash system of accounting which is being followed by the assessee consistently. We would now like to discuss the various court cases relied upon by the learned counsel. In the case of Andhra Pradesh Industrial Infrastructure Corpn. (supra), the assessee had been advancing loans to various co-operative sugar factories. The interest received on such loans had been accounted for on accrual basis including for the accounting year ending on 31-3-1979. However, for the accounting year under consideration, namely, 1980-81,the assessee had chosen to account for such interest only on cash basis. The reason for this change was given in the director's report. The Directors had stated that for the year concerned, it had been decided to account for the interest on bridge loan advanced to co-operative sugar factories on receipt basis.
The Directors also passed a resolution to this effect and the interest due was not shown in the accounts. The Income-tax Officer was of the opinion that the interest on bridge loans could not be accepted on cash basis. The Tribunal found that the change in the method was consistent and bona fide, that no ulterior motive could be attributed to the change in the method, that it had been consistently followed in the subsequent years. It hejid that the changed method was in accordance with law. On reference, the Andhra Pradesh High Court held that the Tribunal found that the assessee was adopting the change in the method consistently and the only change in the accounting system was bona fide. In this case, there was a change in accounting method which was found bona fide and the income of the assessee could be properly deduced when the interest payable by the assessee was being accounted for on actual basis. But in the present case, there was no change of accounting method for the entire interest paid or received. The assessee continued to follow consistently, the cash method of accounting for the interest received and paid, except one transaction with K. J. Somaiya Trust. The assessee for any particular source of income, could adopt a different system of accounting, but in no case, can be employ for part of the transactions or events relating to one source of income, a different system of accounting. There cannot be piece meal method of accounting in respect of the same business or the same source of income or expenditure as has been laid down by the Gujarat High Court in the case of Super Scientific Clock Co. (supra).
Therefore, the facts of the above case relied upon by the assessee are entirely different from the facts of the present case. The facts of the case of Snow White Food Products Co. Ltd. (supra) relied upon by the learned counsel are different from the facts of the present case. The above case pertains to the change of the method of accounting whereas in the present case, the assessee has changed the method of accounting partially for the similar type of transaction which is not permissible under law. Therefore, this case has no application to the facts of the present case. In the case of City Bank N. A. (supra) relied upon by the learned counsel, the Bank was following the mercantile system of accounting for most of its transactions but was keeping separate account for problem loans. Interest on problem loans was being credited on the basis of actual receipt. This system of accounting was accepted by the Department in the earlier years. Under these circumstances, the Bombay High Court held that the interest on problem loans was not assessable on the basis of accrual. In this case, there were two different categories of loans and for each category, the assessee was following different system of accounting regularly. The assessee was employing the mercantile system of accounting for the interest on normal category of loans but was following the cash system of account for the interest received on problem category of loans. Thus, the bank was employing one method of accounting for one class of business or one class of customers or transactions and different method for another class. But in the present case, the transaction pertaining to the receipt and payment of interest are of similar nature and there are no two different classes of transactions. Hence, the above Bombay High Court decision is not applicable to the facts of the present case.
Similarly the Bombay High Court decision in the case of Smt. Vimla Sonwane (supra) relied upon by the learned counsel has no application to the facts of the present case because the above case pertains to the adoption of different methods of accounting for different sources of income, but the issue involved in the present case is whether the assessee can adopt different methods of accounting for the same source of income. Punjab & Haryana High Court decision in the case of Guranditta Mai Shanti Prakash Zira (supra) has no application to the facts of the present case as this case pertains to the method of accounting followed by the assessee. But the present case pertains to the different methods of accounting followed by the assessee for the same source of expenditure/ income. Similarly, the other cases relied upon by the learned counsel have no application to the facts of the present case. Under the circumstances, we do not find any infirmity with the findings of the authorities below and the same are confirmed.
8. The next issue is regarding the contention of the assessee that an amount of Rs. 25 lakhs has been paid towards interest during the assessment year 1988-89 and an amount of Rs. 75 lakhs has been paid towards interest during the assessment year 1989-90. According to the assessee, the interest amount of Rs. 25 lakhs has actually been paid during the year towards interest and the same should be allowed on the basis of cash system. The learned CIT(A) in his order has stated that as per the consent terms, the assessee was to pay on or before 19-4-1987, a sum of Rs. 50 lakhs. The assessee paid on 15-5-1987 a sum of Rs. 10 lakhs, on 29-5-1987, another amount of Rs. 10 lakhs and on 26-9-1997, another payment of Rs. 5 lakhs to K. J. Somaiya Trust. It is also observed by the learned CIT(A) that there was nothing to show that the payment was towards interest. As per the consent terms, they were to pay Rs. 50 lakhs on or before 19-4-1987. Thus, the learned CIT(A) held that the payment of Rs. 25 lakhs was part payment towards Rs. 50 lakhs payable by them as per the consent terms. For the assessment year 1989-90, the learned CIT(A) has observed that the assessee was to pay Rs. 50 lakhs on or before 19-4-1987 to K. J. Somaiya Trust. The assessee was also to pay on or before 19-10-1987, a sum of Rs. 80, 04, 964 comprising of Rs. 15, 25,000 being balance consideration of Rs. 64, 79, 964 being aggregate interest calculated at 24% per annum compounded at 6 months rests. Thus, according to the learned CIT(A), the assessee was to pay huge amounts towards principal amount itself. Therefore, there is nothing to show that the payments made by the assessee were towards interest while as per the terms of consent decree, they were to make payments towards the principal amount of Rs. 50 lakhs before 19-4-1987 and the rest before 19-10-1987. The learned CIT(A) has further stated that the assessee was asked to produce the confirmation letter from the creditor to the effect that they have actually received the amount as per the consent decree. The assessee, however, did not produce any evidence. In fact, the assessee has not made the payment on the stipulated dates as per the consent decree with the result that a court receiver has been appointed. Thus, the learned CIT(A) rejected the claim of the assessee.
9. At the time of hearing, the learned counsel contended that the payments made during the relevant years should be first adjusted towards the interest and only the balance, if any, should be treated as has been paid towards the principal amount. Without prejudice to the above, he argued that the total payment made to K. J. Somaiya Trust till the assessment year comes to Rs. 4, 34, 75,000. The agreement value of the plot was Rs. 4 crores. Therefore, according to him, during the assessment year 1989-90 interest payment to the Trust comes to Rs. 34, 75,000 on the basis that the payment is first adjusted towards principal amount. He placed his reliance on the Supreme Court decision of Meghraj v. Mst. Bayabai AIR 1970 (SC) 161,wherein the Hon'ble Supreme Court has laid down that "The normal rule in the case of a debt with interest is that any payment made by the debtor is in the first instance to be applied towards satisfaction of interest and thereafter to the principal. " The learned DR relied on the findings of the authorities below.
10. We have carefully considered the submissions made by the rival parties. The learned counsel has filed before us, the copy of the account of K. J. Somaiya Trust in their books (compilation page 7). As per this account, the assessee has to pay interest of Rs. 67, 56, 589 as on 31-10-1987 which has not yet been paid and it has been mentioned on the copy of account "31-10-1987 - By interest payable Rs. 67, 56, 589". At compilation page 27, it has been mentioned that interest accrued during the period 1-10-1986 to 30-9-1987 amounts to Rs. 67, 56, 589 which clearly indicates that no payment has been made towards interest during the assessment year 1988-89. Therefore, the learned CIT(A) has rightly confirmed the disallowance. Further, during the period 1-10-1987 to 31-3-1989, interest accrued amounts to Rs. 24, 58, 115. The total amount paid during the year amounts to Rs. 45, 00,000.
Therefore, it cannot be said that the payment of Rs. 75, 00,000 has been made towards interest. Moreover, the assessee was to make the payment of Rs. 50 lakhs to KJ. Somaiya Trust before 19-4-1987 and another amount of Rs. 80, 04, 964 was to be paid before 19-10-1987 as per the consent terms. The assessee had paid only Rs. 75, 00,000 upto 9-6-1988, therefore, the entire amount paid could have been adjusted against the principal amount and the question of allowing any interest during the assessment year 1989-90 does not arise. The case of Meghraj(supra) has no relevance to the facts of the present case.
Firstly, this case pertains to payment of decretal amount in court by mortgagor, but in the present case, the payments have to be made as per the consent terms laid down by the court. The assessee has failed to make the payments as per the consent terms and the court receiver has been appointed to recover the amounts. Secondly, the assessee has not produced any evidence either before us or before the tax authorities to support their case that part of the payment was being treated by KJ.Somaiya Trust towards interest. Therefore, the tax authorities were fully justified to make the disallowance and no interference is required from our side. This issue is, therefore, decided against the assessee.
11. Regarding the issue that the project stood completed during the assessment year 1988-89, therefore, the impugned expenditure should have been adjusted in the accounts pertaining to the relevant assessment year, we do not find any substance in the contention raised by the assessee as the expenditure has to be allowed in the year in which the same has been incurred. The interest is being paid regularly, therefore, it has to be allowed on the basis of the cash system which is being followed by the assessee in the year in which the same has actually been paid. As the project was completed in the previous year relevant to the assessment year 1988-89, therefore, the expenditure incurred in the subsequent years cannot be considered to be allowable in the assessment year 1988-89. As we have discussed above, the interest is being paid by the assessee as per the consent terms laid down by the Bombay High Court. It has been paid during the assessment years 1988-89, 1989-90, 1990-91 and 1991-92. Therefore, this is an expenditure which has been incurred by the assessee for its business and the same has to be allowed in the years in which the same are incurred as per the accounting system followed by the assessee.
Therefore, the contention raised by the assessee is without any basis and the same is rejected.
12. The next issue is regarding the disallowance of a sum of Rs. 20,000 being the shifting charges. This issue pertains to the assessment year 1988-89 only. The Assessing Officer has made this disallowance on the basis that the expenditure incurred is/of capital in nature. It has been stated by the Assessing Officer in his order that the assessee leased out an area of 39, 557 sq. ft. in Satyam Shivam Sundaram building at Ghatkopar to the President of India for the office of the Income-tax Department. However, an area of 10, 796 sq. ft. was occupied by the other parties who were requested to shift to other parts of the complex so as to make it convenient for the Income-tax Department to occupy the aforesaid area wholly. In doing so, the assessee incurred the expenditure of shifting the furniture etc., of the said other parties. Thus, the Assessing Officer concluded that the expenditure was incurred in connection with the leasing out of the property, therefore, the same is of capital nature. The learned CIT(A) fully agreed with the Assessing Officer. After considering the facts of this case, and hearing both the parties, we do not find any infirmity with the findings of the learned CIT(A) and his findings are upheld.13. The next issue is regarding the additions of interest of Rs. 2,460 payable to Viral Enterprises and Rs. 2,59, 832 payable to Shah Estate.
This disallowance has been made by the tax authorities on the basis that the interest has not been paid during the previous year relevant to the assessment year under consideration. As we have discussed above, the assessee is following the cash system of accounting, therefore, if the interest is not paid during the year under consideration, the same is not allowable. As these amounts have not been paid during the year under consideration, therefore, the learned CIT(A) has correctly confirmed the additions made by the Assessing Officer and his order does not require any interference from our side.
14. The next issue is regarding the addition of Rs. 2,57, 565 payable to Lelladhar Devkinandan. This issue pertains to the assessment year 1990-91 only. This interest has also not been paid by the assessee during the previous year relevant to the assessment year 1990-91.
Therefore, the same has been correctly disallowed by the tax authorities as the assessee is following the cash system of accounting for the interest received and paid. This issue is also, therefore, decided against the assessee.