Interest on Consumer Security Deposit is Statutory, Not Contingent Under Income Tax: Delhi HC in Tata Power Case [Read Order]

The Delhi High Court has held that interest payable on consumer security deposits is a statutory and contractual liability and cannot be treated as a contingent liability, while dismissing the Revenue’s appeal in the case of Tata PowerDelhi Distribution Limited.

The case arises from an appeal filed by the Income Tax Department challenging the order of the Income Tax Appellate Tribunal which had deleted the disallowance made by the Assessing Officer in respect of interest paid by the assessee on consumer security deposits.

The Assessing Officer had disallowed a portion of the interest expenditure on the ground that the liability relating to consumer security deposits was not fully recognized and was under dispute, and hence the corresponding interest liability was contingent in nature.

Before the High Court, the Revenue’s counsel argued that the assessee was disputing the principal liability relating to consumer security deposits, and at the same time claiming interest expenditure on such liability, which according to the Department was not allowable as it was contingent.

The assessee’s counsel argued that the payment of interest on consumer security deposits was a statutory obligation and was payable to consumers as per applicable regulations, and could not be treated as contingent.

The Division Bench of Justice Dinesh Mehta and Justice Vinod Kumar observed that every consumer who deposits security with the assessee is entitled to receive interest on such deposit. The Court observed that the liability to pay interest arises from statutory and contractual obligations and is not dependent on uncertain future events.

The court explained that the interest payable on such deposits cannot be considered contingent merely because there is a dispute regarding the principal amount. It pointed out that the liability to pay interest exists independently and must be allowed as an expenditure.

The court held that the Assessing Officer had erred in disallowing the interest expenditure on the ground that it was contingent, and affirmed the Tribunal’s decision allowing the claim. The court dismissed the Revenue’s appeal and upheld the allowance of interest on consumer security deposits as a valid deduction.

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