By Jagdish D. Shah, Jagdish T. Punjabi, Chartered Accountants
fiogf49gjkf0d
New Page 1
Part B — Unreported Decisions
(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)
22 Urban Improvement Co. (P) Ltd. v.
Income-tax Officer, Ward 18(2)
ITAT ‘D’ Bench, Delhi
Before C. L. Sethi (JM) and K. D. Ranjan (AM)
ITA No. 3246/D/2006
A.Y. : 2003-04. Decided on : 5-9-2008
Counsel for assessee/revenue : Rano Jain/
Nikhil Choudhary
S. 145 of the Income-tax Act, 1961 — In terms of MOU the
assessee was liable to refund of the earnest money received by it along with
interest, on cancellation of the MOU in the events mentioned in the MOU — During
the previous year the assessee cancelled the MOU and refunded the amounts
received under MOU along with interest — Whether interest paid for the period
covering earlier years could be disallowed on the ground that it was prior
period expense — Held, No.
Per C. L. Sethi :
Facts :
The assessee-company is engaged in the business of developing
land. It debited to its profit & loss account a sum of Rs.15,66,172 towards
interest on earnest money. On 13th June 1997, the assessee had entered into a
memorandum of understanding (‘MOU’) with certain educational societies for
construction of school buildings and had accepted certain amounts as earnest
monies. The MOU provided that in the event that the permission for construction
from the concerned authority was not received, the assessee shall refund the
entire amount with interest. During the previous year relevant to the assessment
year under consideration, the Board of Directors of the assessee company passed
a resolution to refund the said earnest money together with interest. Since the
amount of interest paid pertained to the period from the date of receipt of the
amounts of earnest deposit, the Assessing Officer disallowed the sum of
Rs.15,66,172 as prior period expenses. The AO justified his action by making a
reference to the Madras High Court decision in the case of K. Sankaranarayana
Iyer & Sons. On an appeal, the CIT(A) upheld the action of the AO. The CIT(A)
observed that merely by passing a resolution by the Board of Directors of the
company, the assessee cannot create a liability in the year under consideration
when it was maintaining the books of account on mercantile system. Aggrieved by
the order of the CIT(A), the assessee preferred an appeal to the Tribunal.
Held :
The Tribunal held that the liability to pay interest had
accrued in the year under consideration when the resolution was passed and not
prior to that. The liability under consideration was a contractual liability and
was crystallised and ascertained only when the decision to refund the earnest
money along with interest was taken. Accordingly, the Tribunal set aside the
order of the authorities below and held that the assessee’s claim of deduction
of interest amounting to Rs.15,66,172 had actually accrued or crystallised or
ascertained in the present year under consideration and was therefore allowable
as a deduction.
Case referred to :
K. Sankaranarayana Iyer & Sons v. CIT, 110 ITR 571
(Mad.).
