Amount of liability in dispute when fixed by the Court in the concerned assessment year is an ascertained liability even though not provided in the books of account.

The assessee had taken a
loan from P. Ltd. for which there was some dispute pending in the Court. This
dispute came to an end in the assessment year under consideration. Accordingly
the assessee had an interest payable of Rs. 2.10 crore. There was one more item
of interest receivable of Rs. 1.19 crore.

The auditor’s report
mentioned that interest expenditure of Rs. 2.10 crore and interest income of Rs.
1.19 crore for the period 1-4-2000 to 31-3-2001 were not provided in the books
of account. Further it mentioned that P. Ltd. had filed a suit against the
assessee which was pending in the Court. The amount of liability was yet to be
fixed by the Court and so the same cannot be said to be an ascertained
liability.

The assessee however claimed
deduction of interest payable to P. Ltd. in its return of income. Similarly the
interest receivable was also offered to tax.

Considering the statement of
accounts filed and remarks of the auditor, the AO held that the assessee adopted
the policy of not providing for the liability of interest and therefore, the
liability was not allowed.

As regards, the interest
income, the AO, however, taxed the same.

(i) The dispute came to an
end in the concerned financial year. The Court directed the assessee to pay
certain interest at the rate of 21% till the date of order of the Court and at
the rate of 10% thereafter. Thus it is not an unascertained liability.

(ii) It is a trite law now
to say that entries in the books of account are not conclusive about
determination of income and that if a liability has now been incurred but not
entered in the books, the same has to be allowed.

(iii) The AO has taxed the
interest income although not provided, but not allowed interest expenses.
Therefore the action was contradictory in nature in this behalf.

While computing profits
u/s.115JB, the AO added a sum of Rs. 1.19 crore being interest income not
credited to the profit and loss A/c. However he did not allow any deduction for
interest liability of Rs. 2.10 crore not provided for in the books of account.

Considering the decision of
the Supreme Court in the case of Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273,
the Tribunal held that the AO cannot reopen the accounts of company which have
been audited and certified by the auditors. The impugned amount was not entered
in the books. The auditor had made certain remarks in this regard. No objection
was taken by the Registrar. Therefore, the book profit as per the profit & loss
account has to be taken.

Hence no adjustment needs to
be made for interest income not credited and interest liability not provided in
books.