A.V.M. Glass Industries Vs. Ito - Court Judgment

Excerpt:
all these three appeals by the assessee are against the consolidated order of the commissioner (appeals) dated 19-8-1997.in ita nos. 63 & 64 of 1997, the assessee in addition to challenging the order of commissioner (appeals) on merits, has challenged the initiation of proceedings under section 147 of income tax act.with regard to merits, the assessee in all these three appeals has objected to the disallowance of assessee's claim of interest payable to the bank as well as the up finance corporation ltd. at the time of hearing, none was present on behalf of the assessee nor any application for adjournment was received. under these circumstances, assessee's appeals are decided ex parte on merits after hearing the learned departmental representative who has supported the orders of the.....

Judgment:
All these three appeals by the assessee are against the consolidated order of the Commissioner (Appeals) dated 19-8-1997.

In ITA Nos. 63 & 64 of 1997, the assessee in addition to challenging the order of Commissioner (Appeals) on merits, has challenged the initiation of proceedings under section 147 of Income Tax Act.

With regard to merits, the assessee in all these three appeals has objected to the disallowance of assessee's claim of interest payable to the Bank as well as the UP Finance Corporation Ltd. At the time of hearing, none was present on behalf of the assessee nor any application for adjournment was received. Under these circumstances, assessee's appeals are decided ex parte on merits after hearing the learned Departmental Representative who has supported the orders of the Commissioner (Appeals).

So far as ITA Nos. 63 & 64 of 1997 are concerned, since the assessee has objected to the initiation of proceedings under section 147 of Income Tax Act, itself, I consider it necessary, first to deal with the issue because if the assessee succeeds then there is no necessity of deciding the appeals on merits.

The facts relating to the issue w.r.t. initiation of proceedings under section 147 as has been from the record/assessment order for assessment year 1989-90 are that returns for assessment years 1989-90 to 1990-91 declaring an income of Rs. 23,390 and Rs. 41,596 respectively were furnished on 31-8-1989 and 26-9-1990 respectively which were processed under section 143(1) (a) of Income Tax Act. Later on the assessing officer perused assessee's balance sheet and came to know that the assessee had shown closing stock as on 31-3-1989 at Rs. 2,51,701 whereas loan from the Bank was shown at Rs. 20,16,576. In view of this, the assessing officer presumed that the assessee has understated the closing siock because according to the assessing officer as per Bank rules, a loan of Rs. 20,16,576 could not be granted on security of stock of Rs. 2,51,701 and, therefore, he initiated proceedings under section 147 of Income Tax Act by issuing notice under section 148 of Income Tax Act.

During reassessment proceedings under section 147, the assessee submitted that he has shown the figure of closing stock correctly by explaining that the stock hypothecated/pledged with the Bank had been sold without the consent of the Bank for which the Bank has filed a suit for the recovery of the loan. The assessing officer found assessee's explanation correct and satisfactory and consequently accepted the figure of closing stock to be correct. However, the assessing officer noticed that the assessee had claimed deduction on account of interest payable to the Bank . The assessing officer disallowed this claim by holding that since the Bank has filed a suit the liability to pay the interest was contingent. In view of this, the assessing officer disallowed the assessee's claim of interest payable to the Bank .

On appeal by the assessee, the Commissioner (Appeals) confirmed disallowance of interest payable to the Bank and at the same time gave directions to the assessing officer that interest payable to UP Financial Corp. Ltd. may also be disallowed by involving the provisions of section 43B(d) of Income Tax Act. The assessee is in appeal against the aforesaid finding of the Commissioner (Appeals).

So far as assessee's objection against validity of proceedings under section 147 is concerned, learned Departmental Representative has supported the order of Commissioner (Appeals).

Having considered the facts and circumstances of the case and the orders of the revenue authorities, I am of the opinion that proceedings under section 147 of the Income Tax Act for assessment years 1989-90 and 1990-91 were initiated only on the basis of suspicion which the assessing officer entertained in view of the figure of loan from the Bank and closing stock shown by the assessee in the balance sheet, which, in my opinion cannot be said to be a justified reason which could make the assessing officer to have reasons to believe that income chargeable to tax escaped the assessment. Hon'ble High Court of Calcutta in the case of Dwarka Prasad Aggarwal v. Director of Inspection (1982) 137 ITR 456 (Cal), has held that the expression 'has reasons to believe' cannot be equated with expression reasons to suspect'. It is also settled law that reassessment proceedings under section 147 initiated for the purpose of verification of information available with the authority and this proposition of law is supported by the decision in the case of C.F. CST v. Modi Industries Ltd. 67 STC 341 (All), Gen. Electric Co. of India v. STO 33 STC 108 (All) and Kanahya Lal Dasoundy Dass v. CST 73 STC 404. It is also settled law that preliminary for having reasonable belief is that the material available on record should have direct nexus with the reasonable belief because requirement of recording reasons for having a reasonable belief necessarily postulates that because the assessing officer is satisfied to act under section 147 read with section 148 of Income Tax Act, he must be not (sic) ready as to why in his opinion or 'why he holds belief that income has escaped assessment. 'Why' for holding such belief must be reflected from the record on reasons and in case the reasons recorded do not make out, why, it cannot be said that there was material on record for having reasons to belief that income had escaped assessment. Mere suspicion or necessity of making inquiry cannot make the assessing officer to have reasons to believe as required under section 147 of Income Tax Act and the proceedings initiated only on the basis of suspicion cannot be sustained.

So far as the present cases are concerned, it is revealed that the reassessment proceedings under section 147 were initiated only on the basis of suspicion that loan from the Bank was more than Rs. 20 lakhs and stock was only about Rs. 2 lakhs. According to the assessing officer, this information has resulted in escapement of income which the assessee should have otherwise declared by way of more value of the closing stock. In my opinion, there was no material or information which could lead the assessing officer to have 'reasons to believe' that income had escaped assessment. Even otherwise, these reasons have no nexus with the income alleged to have escaped, moreso, when the information supplied by the assessee has been found to be correct. So far as the observations of the Commissioner (Appeals) are concerned, I am of the opinion that the very basis for initiation of proceedings under section 147 being vague the assessment of other income is not relevant or can't validate the invalid proceedings.

In view of the totality of the facts and circumstances, I am of the opinion that proceedings under section 147 for these two years, were initiated without there being any reasonable cause, what to say of entertaining reasonable belief and consequently the assessment framed as a result of such invalid proceedings are declared as invalid and bad in law. The orders of Commissioner (Appeals) for these two years are set aside and the assessments cancelled.

The facts relating to the issue are that the assessing officer disallowed the assessee's claim of interest payable to Bank by holding that liability to pay interest to the Bank who had filed a suit for recovery of the loan against the assessee, was contingent and not allowable under the law.

On appeal by the assessee, Commissioner (Appeals) not only confirmed the disallowance of assessee's claim of Bank interest but also directed the assessing officer to disallow interest payable to UPFC Ltd. by invoking the provisions of section 43B(d) of Income Tax Act as per paras 9 and 10 of its orders which read as under : "9. I have carefully considered the submissions made. It is an admitted fact that there is a dispute between the Bank and the appellant. Once the appellant is admitting that he has to pay at least 6 per cent of interest to the Bank irrespective of the decision of the Hon'ble civil Court, it is not understood then why he is not discharging his liabilities by paying this amount to the Bank . Therefore, he cannot have his cake and eat it too because he claims this deduction in income-tax for the purposes of not payment the tax on this amount simultaneously does not pay this amount to the Bank on the pretext that here is a dispute. For this purpose with effect from this year only an amendment to section 43B has been inserted by Finance Aqt, 1988 which says as under : '(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or State Industrial Investment Corporation in accordance with the terms and conditions of the agreement governing such loan or borrowing.' 10. Explanation 4(a) says that "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 and such Institution has been notified in Appendix in Income Tax Act and one of them is UP Financial Corporation. Therefore, how the assessing officer satisfied himself about the payment made to UPFC of Rs. 1,26,173 is not clear in the assessment order. He is directed to verify the payment of this amount and in case the appellant has failed to comply with the provisions of section 43B(d) he will take necessary action. Now regarding Rs. 1,37,584 this cannot be allowed in this year since the appellant himself is contesting this payment in the court of Law. By making a mere provision in the books of accounts, a claim cannot be entertained and becomes allowable. He may win the same entirely and had not to pay interest or he may have to pay a larger interest, therefore, it is not yet ascertainable and the order of the court cannot be anticipated. The appellant did not give any evidence as to why he provided for 6 per cent of interest why not more or less because the Bank interests are much higher than this amount specially in the overdraft accounts. Therefore, I hold that this is a contingent liability which is yet to be determined hence is not allowable as deduction from the income. Thus, the addition made on this account is confirmed subject to my remarks as above. The assessing officer would also explain the split up of Rs. 1,91,654 and find out whether the appellant has paid to UPFC interest of Rs. 1,26,173 otherwise resort to provisions of section 43B and disallow the correct amount of interest unpaid to UPFC and also disallow the full interest shown payable to Bank for the assessment year 1989-90. For the next two years the addition of Rs. 1,37,584 in the year 1990-91 and Rs. 1,37,584 in the year 1991-92 claimed as Bank interest is confirmed. The case of National News Print and Paper Mills quoted by the learned representative does not assist his argument because in his case the liability is yet to be ascertained." So far as the disallowance of interest payable to UPFC is concerned, the assessee is not in appeal. Therefore, there is no question dealing with the issue.

With regard to disallowance of interest payable by the assessee to Bank , first of all I am of the opinion that provisions of section 43B(d) having been brought on statute with effect from 1-4-1997 by the Finance (No. 2) Act, 1996 such liability was not disallowable under the provisions of section 43B of Income Tax Act.

So far as the question of nature of liability is concerned, I am of the opinion that when the assessee is following mercantile system of accounting, liability to pay the interest accrued year to year and the fact that the Bank has filed a suit for recovery and the assessee is contesting the same, is of no consequence. In such cases, liability to pay loan and the terms and conditions for having advanced loan, are already agreed to by both the parties. There is difference between the contingent liability and contingent payment. Contingent liability is one which accrues on the happening of the contingency whereas contingent payment is related to point of payment. In the present case, since the admitted facts are that the assessee was to pay loan to the Bank and terms and conditions for loan were also agreed it cannot be said that liability to pay interest had not accrued or was not known.

In my opinion, liability had accrued and the assessee was right in claiming the same in the years of accrual.

In view of the above facts and circumstances of the case, I am of the opinion that liability to pay interest to Bank was an expenditure allowable in the year of accrual and therefore, the order of Commissioner (Appeals) is reversed and the assessee's appeal is allowed.

In the result, assessee's appeal Nos. 63 & 64/Agr/1997 are allowed on the ground that proceedings initiated under section 147 were illegal and bad in law whereas ITA No. 65/Agr/1997 is allowed on merit.