The division bench of Delhi High Court held that, Deduction can be allowed on Claim of damages and Interest thereon is disputed by the assesse in the Court of law.
The Appellant National Agricultural Cooperative Marketing Federation of India Ltd (NAFED) entered into an Agreement with Alimenta SA Switzerland on 12th January, 1980 and 3rd April, 1980 for export of 5,000 and 4,000 MT HPS groundnut during the years 1979-80 and 1980-81.
The disputes that arose from said agreements were referred to arbitration. An Award dated 14th September, 1990 was passed in favour of Alimenta and against NAFED whereby NAFED was required to pay Alimenta a sum of US$ 45.26 lakhs as principal together with US$ 48.81 lakhs as interest from 13th February, 1981 till the date of the Award.
In computing its income for the AYs 2000-01 and 2001-02, for which returns were filed in October 2002 and 2003 respectively, NAFED, in terms of the decree dated 28th January 2000, claimed deduction of interest payable to Alimenta on the outstanding amount of the Award. Meanwhile, on an appeal filed by NAFED against the order dated 28th January 2000 making the Award rule of the Court, a Division Bench of this Court by an order dated 28th February, 2001 granted stay of the execution of the said decree.
The Assessing Officer framed the assessment for the AY 2001- 02 on 28th December, 2007 under Sections 147 read with 143(3) of the Act. The claim of interest payable to Alimenta on the amount awarded was disallowed by the AO by holding that the liability was contingent and not even acknowledged in the books of accounts. NAFED‟s appeals were dismissed by the ITAT as well.
While dismissing the Appeal, ITAT observed that, “under the mercantile system of accounting, a deduction can be granted only where the incurring of liability is a certainty. A distinction has been drawn between a contractual liability and a statutory liability. The latter is said to be incurred on the mere issuance of a demand notice which becomes deductible with the issuance of such notice. In such a case, the fact that the Assessee may have raised a dispute against such a demand “does not ruin the incurring of liability.” It arises only “when such a claim is either acknowledged or in a case of non-acceptance when a final obligation to pay is fastened coupled with the claimant acquiring a legal right to receive such an amount.” It is further noted that “a legal obligation to pay is attached on an Assessee when a competent court passes order and a suit is decreed against him and not during the pendency of litigation.”
Allowing the appeal, the division bench comprising of Justice S. Muralidhar and Justice Chandersekhar observed that, “with the Award having been made rule of the Court by a learned Single Judge of this Court, the mere fact that the said judgment and decree was stayed by a DB would not relieve NAFED of its obligation to pay interest in terms thereof to Alimenta. Such liability commenced in the previous year in which the said judgment and decree was passed by the learned Single Judge. To borrow the phraseology of the Supreme Court in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association (supra), it cannot be said that merely because there is a stay granted by the DB of this Court that the order of the learned Single Judge has been “wiped out from existence.”
The Court set aside the order passed by the Special bench of Income Tax Appellate Tribunal.
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