In the case of Oriental Bank of Commerce VS Additional Commissioner of Income Tax, Delhi High Court has held that provision made by bank for interest on overdue deposits can’t be disallowed.
Assessee in the instant case is a nationalized bank and governed by Banking Regulations Act 1974. While filing its return of income it has claimed an ascertained liability of Rs.17 crores towards the interest on overdue deposits during the assessment year.
However the Assessing Officer (AO) disallowed assessee’s claim while completing the assessment proceedings. He was of the view that the liability was not in present time and had not crystallized or arisen, therefor he disallowed the same.
On appeal CIT(A) passed an order in favor of the assessee. The authority observed that while perusing the material facts it is clear that it has accounted for interest on overdue deposits at the rate of savings bank deposits and the balance overdue interest is accounted for at the time of renewal as per the RBI Circular. Thus it is also clear that the above liabilities at the rate of savings bank deposits are ascertained liabilities crystallized during the relevant previous year. And the authority also declared that the claim of the assessee is allowable.
Further appeal of the revenue the Income Tax Appellate Tribunal upheld AO’s contention and also disallowed assessee’s claim.
Aggrieved by the order passed by the tribunal assessee was on appeal before the court.
A division bench comprising of Justice S.Ravindar Bhat and Justice A.K.Chawla observed that “in the present case the assessee is nationalized bank and governed by Banking Regulations Act 1974 and it is following the mercantile system of accounting. The assessee had rightly treated the interest on overdue deposits as per the circular of RBI and the same was rightly upheld by the CIT(A)”.
The court further observed that. “if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date”.
“The assessee was not only aware of its liability on the particular aspect, but, in fact, was able to crystallize it and set it out expeditiously in its returns. The possibility of likelihood of the depositor renewing the overdue deposit or for that matter, the payment being made later, in no way deflects from the reality that the assessee is able to identify its liability at the time, when it filed its returns, hence it can be considered as a provision made by it for interest on overdue deposit and the same is allowable”. The court also added.
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