Commercial Automobiles Pvt.Ltd, Kanpur V. Dy. Commissioner of Income Tax, Kanpur

ITA 52/LKW/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78571 (ITAT-LUCKNOW)
• Duration Of Justice: 2 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-05-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 03-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GROUNDS RAISED ARE
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.52/LKW/2012 ASSESSMENT YEAR:2008 - 09 M/S COMMERCIAL AUTOMOBILES PVT. LTD., 84/105, G. T. ROAD, KANPUR. PAN:AACCC4267E VS. DY.C.I.T., RANGE - 6, KANPUR. (APPELLANT) (RESPONDENT) ITA NO.78/LKW/2012 ASSESSMENT YEAR:2008 - 09 DY.C.I.T., RANGE - 6, KANPUR. VS. M/S COMMERCIAL AUTOMOBILES PVT. LTD., 84/105, G. T. ROAD, KANPUR. PAN:AACCC4267E (APPELLANT) (RESPONDENT) O R D E R PER A. K. GARODIA, A.M. THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE, WHICH ARE DIRECTED AGAINST THE ORDER OF LEARNED CIT(A) - II, KANPUR DATED 30/11/2011 FOR ASSESSMENT YEAR 2008 - 09. 2. FIRST WE TAKE UP THE APPEAL FILED BY THE ASSESSEE. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: ASSESSEE BY SHRI RAKESH GARG, ADVOCATE REVENUE BY SHRI VIVEK MISHRA, CIT, D.R. DATE OF HEARING 13/05/2014 DATE OF PRONOUNCEMENT 1 3 /06/2014 2 1. BECAUSE THE CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS.21,49,096/ - BEING DISALLOWANCE OF INTEREST VIS - A - VIS INVESTMENT BY APPLYING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE I.T.RULES. 2. BECAUSE ON A PROPER APPRECIATION OF FACTS AND CIRCUMSTANCES OF THE CASE, THE PROVISIONS OF SECTION 14A OF THE ACT, READ WITH RULE 8D OF THE I.T.RULES IS NOT APPLICABLE TO THE ASSESSEE'S CASE, AND AS SUCH, THE ADDITION OF RS.21,49,096/ - BEING BAD IN LAW BE DELETED. 3. BECAUSE THE CIT(A) HAS FAILED TO APPRECIATE THAT THE INVESTMENT IN SHARES OF UNQUOTED COMPANIES BEING ALL OLD, SUBJECT TO CAPITAL GAIN, WHICH IS NOT EXEMPT FROM TAX, THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE AT THE VERY OUTSET. 4. BECAUSE THE CIT(A) HAS FAILED TO APPRECIATE THAT THE ENTIRE INVESTMENTS MADE IN TAX EXEMPT INSTRUMENTS, ARE ALL OLD AND OUT OF THE INTEREST FREE FUNDS AVAILABLE, THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE I.T.RULES IS NOT APPLICABLE, AND HAS T HEREBY ERRED IN MAKING THE SAID ADDITION. 5. THE APPELLANT CRAVES LEAVE TO MODIFY ANY OF THE GROUNDS OF THE APPEAL GIVEN ABOVE AND OR ADD ANY FRESH GROUNDS AS AND WHEN IT IS CONSIDERED TO DO SO. 3. IT WAS SUBMITTED BY LEARNED A.R. OF THE ASSESSEE THAT THE COMPARATIVE POSITION OF THE OWN FUNDS BEING CAPITAL AND RESERVE AND INVESTMENTS IN VARIOUS YEARS STARTING FROM ASSESSMENT YEAR 1998 - 99 TO ASSESSMENT YEAR 2007 - 08 ARE AVAILABLE ON PAGE NO. 12 OF THE PAPER BOOK. HE SUBMITTED THAT OWN FUNDS BEING CAPITAL AND RESERVE ARE MUCH MORE THAN THE INVESTMENT AND, THEREFORE, IT CANNOT BE SAID THAT ANY INTEREST EXPENDITURE WAS INCURRED FOR EARNING DIVIDEND INCOME. RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE B OMBAY HIGH COURT RENDERED IN THE CASE OF COMMISSIONER OF INCOME - TAX VS RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM) IN SUPPORT OF THI S 3 CONTENTION THAT WHERE M I X ED FUNDS ARE AVAILABLE, BOTH INTEREST FREE AND INTEREST BEARING, THEN A PRESUMPTIO N WOULD ARISE THAT INVESTMENT IS OUT OF INTEREST FREE FUNDS IF SUCH INTEREST FREE FUNDS ARE SUFFICIENT TO MAKE INVESTMENT . 4. AS AGAINST THIS, LEARNED D.R. OF THE REVENUE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND THE JUDGMENT CITED BY LEARNED A.R. OF THE ASSESSEE. WE FIND THAT IT IS NOTED BY THE ASSESSING OFFICER IN PARA 5 OF THE ASSESSMENT ORDER THAT THE ASSESSEE HAS MADE INVESTMENT IN QUOTED AND UNQUOTED SHARES AMOUNTING TO RS.63,87,663/ - AS AGAINST THE INVESTMENT OF RS.2,42,83,150/ - IN THE IMMEDIATELY PREVIOUS YEAR. THE ASSESSING OFFICER ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE DISALLOWANCE SHOULD NOT BE MADE U/S 14A OF THE ACT. IN REPLY, IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE COMPANY WAS HAVING SUFFICIENT SHARE CAPITAL TO THE TUNE OF RS. 8,89,28,000/ - AND APART FROM THIS, THE ASSESSEE COMPANY HAS ALSO ACCUMULATED PROFITS TO THE TUNE OF RS.2,45,48,553/ - TOTALING TO RS.10,94,76,553/ - AS AGAINST THE INVESTMENT IN SHARES OF RS.63.87 LAC. LEARNED D.R. OF THE REVENUE COULD NOT POINT OUT ANY MISTAKE IN THE FACTUAL SUBMISSIONS OF THE ASSESSEE WHICH IS ALSO SUPPORTED BY THE BALANCE SHEET. UNDER THESE FACTS, AS PER THIS JUDGMENT OF HON'BLE BOM BAY HIGH COURT, NO DISALLOWANCE CAN BE MADE IN RESPECT OF INTEREST EXPENDITURE U/S 14A BECAUSE AS PER THIS JUDGMENT , IT HAS TO BE PRESUMED THAT THE INVESTMENT WAS OUT OF OWN INTEREST FREE FUNDS AND NO PORTION WAS FROM INTEREST BEARING FUNDS. THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE OF RS.20,72,420/ - U/S 14A OUT OF INTEREST EXPENDITURE. THIS DISALLOWANCE IS BEING DELETED BY US BY RESPECTFULLY FOLLOWING THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT CITED BY LEARNED A.R. OF THE ASSESSEE AND ON THE BASIS O F ABOVE DISCUSSION. IN ADDITION TO THAT , THE ASSESSING OFFICER HAS ALSO MADE 4 DISALLOWANCE OF RS.76,676/ - OUT OF ADMINISTRATIVE EXPENDITURE BY ADOPTING THE FORMULA LAID DOWN IN RULE 8D BEING 0.5% OF AVERAGE INVESTMENT. RULE 8D IS APPLICABLE WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 AND HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORDERS OF THE AUTHORITIES BELOW ON THIS ASPECT. HENCE, WE CONFIRM THE DISALL OWANCE OF RS.76,676/ - . THE ASSESSEE GETS PART RELIEF. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 7. NOW WE TAKE UP THE APPEAL FILED BY THE REVENUE. IN ITS APPEAL, THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THAT THE LD. COMMI SSIONER OF INCOME TAX (APPEALS) - LL, KANPUR, HAS ERRED IN LA W AND ON FACTS BY IGNORING THE FACTS AND FINDINGS OF THE ASSESSING OFFICER THAT ASSESSEE HAS F OLLOWED MERCANTILE SYSTEM OF ACC OUNTING FROM YEAR TO YEAR INCLUDING PREVIOUS YEAR. SINCE THE LIABILITY WAS NOT DISALLOWED IN EARLIER YEAR U/S. 40(A)(IA) WH I CH COULD BE ALLOWED ON THE BASIS OF PAYMENT OF TDS DURING THE PREVIOUS YEAR. 2. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - II , KANPUR, HAS ERRED IN L A W AND ON FACTS BY IGNORING THE FACTS THAT THER E WAS DISPUTE BETWEEN LENDER AND BORROWER TO ACCEPT SETTLEMENT OF LOWER RATE OF INTEREST AND THERE WAS A PROVISION FOR ARBITRATOR IN AGREEMENT BUT ASSESSEE HAS NOT APPROACHED TO THE ARBITRATOR. 3. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - II , KANPU R, HAS ERRED IN LAW AND ON FACTS BY IGNORING THE FACTS AND FINDING OF THE ASSESSING OFFICER THAT T HE ASSESSEE HAS UNABLE TO GIVE JUSTIFICATION OF THIS ABNORMAL INCREASE IN REMUNERATION AS DIRECTOR'S REMUNERATION HAS JUMPED TO 559.29% AS AGAINST 10.81% INCR EASE IN SALES ON YEAR TO YEAR BASIS IN SPITE OF THE NET PROFIT BEFORE TAX HAS BEEN REDUCED AND A FINANCIAL RESULT HAS ALSO NOT SHOWN SATISFACTORILY. 4. THAT THE OR DER OF LD. COMMISSIONER OF INCOME TAX (APPEALS) BEING ERRONEOUS, UNJUST AND BAD IN LAW BE VAC ATED AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 5. THAT THE APPELLANT CRAVES LEAVE TO MODIFY ANY OF THE GROUNDS OF APPEAL GIVEN ABOVE AND/OR ADD ANY FRESH GROUND AS AND WHEN IT IS CONSIDERED NECESSARY. 5 8. LEARNED D.R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THIS ISSUE WAS DECIDED BY LEARNED CIT(A) AS PER HIS FINDING AND DECISION ON PAGES 43 TO 48 OF HIS O RDER. THE RELEVANT PORTION FROM THE ORDER OF CIT(A) IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: I HAVE CONSIDERED THE FACTS OF THE CASE, WRITTEN SUBMISSIONS AS FILED BY THE A.R. THE ISSUE INVOLVED IN THE PRESENT GROUNDS OF APPEAL LIES IN A VERY NARROW COMPASS. THE ISSUE IS FIRST, WHETHER THE LIABILITY TO PAY INTEREST IS A CONTRACTUAL OR A STATUTORY LIABILITY, SECONDLY WHETHER THE LIABILITY IS A DISPUTED LIABILITY AND LASTLY, WHETHER THE LIABILITY HAS BEEN CRYSTALLIZED DURING THE YEAR IN AS M UCH AS THE LIABILITY TO PAY INTEREST RELATING TO EARLIER YEARS, IS ALLOWABLE IN THE YEAR IN WHICH THE DISPUTE IS SETTLED, IRRESPECTIVE OF THE FACT THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE LIABILITY TO PAY INTEREST OR NOT TO PAY INTEREST ARISES ON THE BASIS OF THE AGREEMENT ENTERED UPON BETWEEN THE PARTIES. THE LIABILITY TO PAY INTEREST IS A CONTRACTUAL LIABILITY AND NOT A STATUTORY LIABILITY, IN - AS - MUCH AS THE LIABILITY TO PAY INTEREST HAS ARISEN OUT OF THE AGREEMENT ENTERED UPON BETWEEN THE ASSESSEE AND NEL, TFL + TML . AT THE SAME TIME IT IS AN ADMITTED FACT THAT INSP I TE O F THE AGREEMENT TO PAY INTEREST THE ASSESSEE HAS NEVER CLAIMED ANY INTEREST AS A DEDUCTION NOR PAID ANY AMOUNT TOWARDS INTEREST. THE LIABILITY TO PAY INTEREST WAS ALWAYS DISPUTED BY THE ASSESSEE. THE ASSESSEE HAS NEITHER PAID INTEREST NOR PROVIDED FOR INTEREST IN RESPECT OF ANY OF THE EARLIER YEARS. THE AUDITORS' NOTE TO THE AUDIT REPORT OF EACH YEAR ATTACHED TO THE BALANCE SHEET IS SELF EXPLANATORY. THE REASON WHY THE ASSESSEE HAS NOT CLAIMED THE LIABILITY TO PAY INTEREST IN THE EARLIER YEARS OR AS A MATTER OF FACT IN THE YEARS, TO WHICH THE SAME RELATES, IS THAT THE ASSESSEE WAS ALWAYS DISPUTING AND DENYING ITS LIABILITY TO PAY INTEREST. THE LIABILITY TO PAY IN TEREST COULD NOT BE CRYSTALLIZED. THE VERY RATE OF INTEREST WAS IN DISPUTE. INSPITE OF SPECIFICALLY AGREEING TO PAY INTEREST @ 12%, THE ASSESSEE CONTRAVENED THE TERMS OF THE AGREEMENT AND REFUSED TO PAY INTEREST FOR THE REASON THAT IT WAS BEING FORCED 6 UPON THE ASSESSEE. SEVERAL CORRESPONDENCE OF DIFFERENT DATES ARE PROO F OF THE ABOVE FACT ITSELF. NOT ONLY THIS THE COMPANY CLAIMING INTEREST AS RECEIPT (NEL. TML AND TFL) HAVE ALSO NOT ACCOUNTED FOR THE INTEREST IN THEIR ACCOUNT THOUGH THEY TOO WERE FOLLOWING THE MERCANTI L E SYSTEM OF THE ACCOUNTING. A BARE PERUSAL OF THE COPY OF THE ACCOUNT OF THE ASSESSEE AS APPEARING IN THE BOOKS OF NEL, TML &, TFL WOULD REFLECT THAT NEITHER ANY INTEREST HAS BEEN DEBITED NOR ANY INTEREST HAS BEEN CREDITED BY THE RESPECTIVE PA RTIES. ON THE CONTRARY WHATEVER INCOME WAS DUE TO THE ASSESSEE FROM TML EITHER BY WAY OF COMMISSION, INCENTIVE OR COMPENSATION HAVE ALL BEEN ADJUSTED AND RETAINED BY TML AND LATER ON ADJUSTED TOWARDS PRINCIPAL AMOUNT DUE. THERE IS NO DEBIT/CREDIT OF INTERE ST. THE FACT THAT THE DISPUTE WAS ON GOING AND A CONTINUOUS ONE IS SELF EXPLANATORY BY REPEATEDLY EXECUTION OF DIFFERENT AGREEMENTS TIME AND AGAIN OVER THE YEARS. THE CONSTANT DENIAL OF THE ASSESSEE TO PAY INTEREST AT ALL AND THAT TO @ 12% AND THE ULTIM ATE AGREEMENT ENTERED UPON WITH NEU TFL AND TML IN THE YEAR 2007 BY AGREEING TO ADJUST ALL THE AMOUNTS DUE TO THE ASSESSEE FIRST TOWARDS THE PRINCIPAL AND THEN TO CHARGE INTEREST @ 6% AGAINST THE AGREED RATE OF 12% RESIDUAL LOAN AMOUNT IS SUFFICE ENOUGH TO INFER AND ESTABLISH THAT ALL WAS NOT WELL BETWEEN THE ASSESSEE AND ITS CREDITORS AND THE DISPUTE WAS ON. I FIND FROM THE RECORD THAT THERE IS NO CONTROVERSY THAT THE DISPUTE BETWEEN THE PARTIES HAD ARISEN FROM DAY ONE WHEN THE AGREEMENT WAS ENTERED UPON I N THE YEAR 2000 ITSELF. NO INTEREST HAS BEEN PROVIDED FOR BY THE ASSESSEE EVEN AFTER ENTERING INTO THIS ARRANGEMENT. HAVING SAID THIS, IT BECOMES ABUNDANTLY CLEAR THAT THE RATE OF INTEREST B EING ITSELF DISPUTED AND UNSETTLED, THE LIABILITY TO PAY INTEREST BEING A CONTRACTUAL LIABILITY ITSELF BECAME UNASCERTAINED CONTINGENT LIABILITY. IT NEVER CRYSTALLIZED DURING ANY OF THE PAST YEARS. ADMITTEDLY, IN THE PRESENT CASE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IN MERCANTILE SYST EM OF ACCOUNTING, THE LIABILITY TO PAY IS TO BE ACCOUNTED FOR ON ACCRUAL BASIS BUT WHEREVER THE VERY FACT ON THE BASIS OF WHICH THE LIABILITY TO PAY IS TO BE ASCERTAINED IS IN DISPUTE, THE LIABILITY ASSUMES THE CHARACTER OF NOT BEING CRYSTALLIZE D SO REMAINS UNASCERTAINED. HOWEVER, LOOKING INTO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, THE LIABILITY TO PAY INTEREST WAS CRYSTALLIZED AND ASCERTAINED ONLY DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, WHERE THE AGREEMENT TO PAY INTEREST WAS CONCLUDED @ 6% AND NOT PRIOR TO THAT EVEN FROM THE SEQUENCE OF THE EVENTS, IT WOULD BE FOUND THAT THE 7 APPELLANT COMPANY, HAS BREACHED THE AGREEMENT MORE THAN COMPLYING WITH IT. LD. A.R. IS RIGHT IN TERMING THE AGREEMENT A S A FORCED DOWN AGREEMENT BY THE TATA GROUP NEL / TFL AND THE APPELLANT COMPANY, IT IS OBVIOUS THAT THE SAID INTEREST LIABILITY EVEN THOUGH PERTAINING TO EARLIER YEARS NEVER CRYSTALLIZED IN THE .HANDS OF THE APPELLANT COMPANY SINCE IT HAD NO INTENTION TO P AY SUCH INTEREST AS IT HAD SERIOUS OBJECTION/DISPUTE WITH THE TERMS OF THE AGREEMENT. SUCH INTEREST PAYMENT WAS NOT STATUTORY LIABILITY BUT ONLY A CONTRACTUAL LIABILITY AND IF ONE OF THE PARTIES TO THE CONTRACT I.E. THE APPELLANT COMPANY DID NOT WISH TO HO NOUR THE CONTRACT, SUCH CONTRACTUAL LIABILITY HAS NO MEANING. EVEN IN MERCANTILE SYSTEM OF ACCOUNTING ONLY THAT LIABILITY IS REQUIRED TO BE ACCOUNTED WHICH GETS CRYSTALLIZED DURING THE YEAR. IN THIS CASE, THE APPELLANT COMPANY EVEN THOUGH HAD SIGNED TH E AGREEMENT WHICH FASTENED THE LIABILITY OF INTEREST PAYMENT ON THE APPELLANT COMPANY BUT IN PRACTICAL/COMMERCIAL WORLD, NO SUCH LIABILITY COULD BE SAID TO HAVE CRYSTALLIZED SINCE FACTS ON RECORD (DISCUSSED ABOVE) CLEARLY DEMONSTRATE THAT THE APPELL ANT NEVER HAD ANY INTENTION TO COMPLY WITH THE TERMS OF THAT AGREEMENT AS IT HAD SERIOUS DISPUTE/OBJECTIONS WITH THE RATE OF INTEREST PAYMENT AND OTHER CONDITIONS SET OUT IN THE IMPUGNED AGREEMENT. UNDER THESE CIRCUMSTANCES, EVEN THOUGH SUCH INTEREST P AYMENT REFER TO EARLIER YEARS, THE LIABILITY TO PAY GOT CRYSTALLIZED ONLY DURING THE YEAR UNDER REFERENCE WHEN THE APPELLANT COMPANY HAD ACCEPTED THE TERMS OF THE FRESH AGREEMENT SIGNED ON 12.04.2007 THERE IS AN OLD SAYING THAT 'THE PROOF OF PUDDING IS IN ITS EATING THE PRESENT CASE IS A GOOD EXAMPLE OF THIS SAYING - WHAT BETTER PROOF IS REQUIRED OF N ON - ACCEPTANCES/DISPUTE/OBJECTIONS BY THE APPELLANT COMPANY WITH REGARD TO THE TERMS OF THE EARLIER AGREEMENT(S) WHEN THE FINAL AGREEMENT GIVES SUBSTANTI AL RELIEF/CONCESSION TO THE APPELLANT COMPANY. MY AFORESAID VIEW IS ALSO FORTIFIED BY THE DECISION OF HON'BLE JURISDICTION HIGH COURT IN THE CASE OF CIT VS . RAJ MOTORS (204 ITR 489 (ALL) WHEREIN THE QUESTION BEFORE THE HON'BLE HIGH COURT WAS: 'THE SHORT QUESTION FOR CONSIDERATION IS WHEN THE LIABILITY ACCRUES WHETHER LIABILITY TO PAYMENT ACCRUED IN THE YEAR 1971 WHEN AFTER THE DECISION OF THE APEX COURT THE DEMAND HAS BEEN RAISED BY M/ S PREMIER AUTOMOBILES LTD FOR RS. 3,39,571/ - OR THE 8 DATE WHEN THE SETTL EMENT HAD ARRIVED BETWEEN THE PARTIES ON 20'TH SEPTEMBER, 1981. THE AFORESAID CORRESPONDENCE CLEARLY SHOWS THAT IT IS THE CLA I M OF THE PREMIER AUTOMOBILES LTD THAT THE ASSESSEE WAS RESPONSIBLE FOR MAKING THE PAYMENT OF THE DIFFERENTIAL AMOUNT AND THE ASSE SSEE HAS NOT ACCEPTED SUCH LIABILITY. IN ANY .VIEW OF THE MATTER, THE NATURE OF THE LIABILITY WAS A CONTRACTUAL LIABILITY, WHICH WAS FINALLY SETTLED, VIDE AGREEMENT/LETTER DATED 20TH SEPTEMBER', 1981 AND, THEREFORE, THE LIABILITY TO PAYMENT ACCRUED ONLY WH EN IT HAS BEEN FINALLY SETTLED ON 2 0 TH SEPTEMBER, 1981. THE VARIOUS DECISIONS OF COURT REFERRED HEREINABOVE, CLEARLY HELD THAT THE LIABILITY OF A CONTRACTUAL NATURE ACCRUES WHEN IT IS FINALLY SETTLED. THE FACTS OF THE PRESENT CASE IS ALMOST SIMILAR TO THE FACTS IN THE DECISION OF TH E COURT IN THE CASE OF CIT V. ORIENTAL MOTORS CAR CO. ( P) LTD (SUPRA), WHICH HAS BEEN REFERRED HEREINABOVE. IN THE SAID CASE, THE DECISION OF THE SUPREME COURT IN THE CASE OF KEDAR NATH JUTE MANUFACTURING CO. LTD V. CIT REPORTED IN 82 ITR 363 HAS ALSO BEEN CONSIDERED AND DISTINGUISHED ON THE GROUND THAT IN THE SAID CASE, LIABILITY OF SALES TAX AROSE BY VIRTUE OF THE STATUTE AS SOON AS THE SALE WAS EFFECTED. THE DIVISION BENCH OF THIS COURT CLEARLY HELD THAT THE CONTRACTUAL LIA BILI TY ACCRUES WHEN IT IS FINALLY SETTLED. FROM THE FACT STATED HEREINABOVE, IT IS DEAR THAT IN THE PRESENT CASE THE LIABILITY WAS NOT IN THE NATURE OF STATUTORY LIABILITY. THE DEMAND RAISED BY M/ S PREMIER AUTOMOBILES LTD WAS DISPUTED BY THE ASSESSEE WHICH WAS IN THE NATURE OF CONTRACTUAL LIABILITY WHICH WAS FINALLY SETTLED ONLY ON 20 TH SEPTEMBER, 1981 AND THUS LIABILITY TO PAY ACCRUED ONLY ON 2 0 TH SEPTEMBER, 1981 RELATING TO THE YEAR UNDER CONSIDERATION AND HAS BEEN RIGHTLY HELD AS ALLOWABLE DEDUCTION BY THE TRIBUNAL IN THE YEAR UNDER CONSIDERATION. THE ASSESSEE'S CASE IS ALSO SQUARELY COVERED BY THE LATEST JUDGMENT OF HON'BLE DELHI HIGH COURT, REACHED IN THE CASE NATIONAL AGRICULTURAL COOPERATIVE MARKETING; FEDERATION OF INDIA LTD. VS CIT. 338 ITR 36 ( D EL), 2011, WHEREIN IT IS HELD THAT, INSPITE OF ASSESSEE FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, THE LIABILITY TO PAY INTEREST ARISES ONLY IN THE YEARS IN WHICH THE DISPUTE IS SETTLED AND THE TERMS ARE CRYSTALLIZED. IN VIEW OF THE ABOVE DISCUSSIONS, RELI ANCE PLACED ON VARIOUS JUDGMENTS BY THE A.R OF ASSESSEE INCLUDING THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF RAJ MOTORS (SUPRA), AND 9 ON ANALYSIS OF FACTS AND CIRCUMSTANCES OF THE CASE, IN PARTICULAR CASE, IT WOULD BE JUSTIFIED TO ALLOW THE CLAIM OF THE ASSESSEE OF INTEREST PERTAINING TO EARLIER YEARS ON ITS CRYSTALLIZATION IN THIS YEAR OF CONSIDERATION. ACCORDINGLY, THE ADDITION OF INTEREST OF RS.4,68,13,767/ - MADE BY THE A. O. STANDS DELETED. 10. WE ALSO FIND THAT BEFORE THE ASSESSING OFFICER , THE ASSESSEE HAS ALSO FILED COPY OF SUPPLEMENTARY AGREEMENT TO LOAN AGREEMENT MADE ON 12/04/2007 BETWEEN THE ASSESSEE COMPANY AND NISKALP INVESTMENT & TRADING COMPANY LIMITED. COPY OF THIS AGREEMENT IS AVAILABLE ON PAGE 57 TO 72 OF THE PAPER BOOK. FOR T HE SAKE OF READY REFERENCE , WE REPRODUCE EXTRACT FROM PAGE 63 OF THE PAPER BOOK AS UNDER: G. IN OR ABOUT MARCH 2007, THE BORROWER APPROACHED THE LENDER AND REQUESTED THE LENDER TO GRANT ADDITIONAL CONCESSIONS AND RELIEFS IN RESPECT OF THE AMOUNTS PAYABLE IN RESPECT OF THE LOAN AGREEMENT. ACCORDINGLY THE BORROWER HAS REQUESTED THE LENDER TO GRANT RELIEF AND CONCESSIONS AS SET OUT HEREINUNDER: (I) TO REDUCE INTEREST RATE @6% PER ANNUM ON REDUCING BALANCE METHOD WITH EFFECT FROM 1 ST APRIL, 2000. (II) ALL THE PAYMENTS MADE AFTER 1 ST APRIL 2000 AGAINST THE FINANCE FACILITIES TO ADJUST AGAINST PRINCIPAL AMOUNT. ] (III) TO WAIVE PENAL / ADDITIONAL INTEREST . (IV) TO ACCEPT THE REPAYMENT IN R EVISED MONTHLY INSTALLMENTS (' R MIS') TOWARDS REPAYMENT OF THE OUTSTANDING DUES IN 3 6 MONTHLY INSTALLMENTS OF RS.24,06,000/ - EACH WITH EFFECT FROM APRIL, 2007 TILL MARCH 2010 AND (V) THE LIABILITY IN RESPECT OF THE ACCRUED INTEREST @6% P.A, DUE AND PAYABLE ON THE REVISED PRINCIPAL AMOUNT OF RS.492.93 LACS AND INTERES T OF RS.372.99 FOR THE PERIOD UP TO 1 ST APRIL, 2007 TILL REPAYMENT OF THE PRINCIPAL AMOUNT WILL BE PAID BY THE BORROWER IN THREE EQUAL INSTALLMENTS COMMENCING FROM APRIL 2010 TO JUNE 2010. THE REVISED MONTHLY INSTALLMENT (RMI) INCLUDE THE PART OF AMOUNT TO BE ADJUSTED AGAINST INTEREST PAYMENT. ACCORDINGLY, THE DIFFERENTIAL AMOUNT OF INTEREST LIABILITY ARISING OUT OF COMPUTATION OF RECOVERY OF PRINCIPAL AMOUNT FIRST AGAINST RMI DETERMINED ON THE BASIS OF 10 PART PAYMENT OF PRINCIPAL AMOUNT AND INTEREST WILL BE COMPUTED AT THE END OF TENURE OR IN OR ABOUT APRIL 2010 WHEN THE APPROPRIATE AMOUNT OF REBATE MAY BE CONSIDERED ON THE BASIS OF TRACT RECORD OF PAYMENT OF RMI ON STIPULATED DATES TILL MARCH 2010. 10.1 FROM THE ABOVE PARA OF CIT(A), WE FIND THAT A CLEAR F INDING IS GIVEN BY CIT(A) THAT INTEREST LIABILITY IS CRYSTALLIZED DURING THE PRESENT YEAR ON EXECUTION OF SUPPLEMENTARY AGREEMENT IN APRIL, 2007 AND THIS FINDING OF CIT(A) COULD NOT BE CONTROVERTED BY LEARNED D.R. OF THE REVENUE. HENCE, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSU E . ACCORDINGLY, GROUND NO. 1 & 2 ARE REJECTED. 11. REGARDING GROUND NO. 3, WE FIND THAT THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER OF A PART AMOUNT OUT OF DIRECTORS REMUNERATION ON THE BASIS THAT THE DIRECTORS REMUNERATION HAS JUMPED TO 559.29% AS AGAINST 10.81% INCREASE IN SALES ON YEAR TO YEAR BASIS. ON THIS BASIS, THE ASSESSING OFFICER CAME TO TH E CONCLUSION THAT THE INCREASE I S EXCESSIVE. SUCH DISALLOWANCE WAS DELETED BY CIT(A) BY HOLD ING THAT UNLESS AND UNTIL THERE ARE MATERIALS ON RECORD TO EVALUATE THE SERVICES RENDERED AT A LOWER COST AS PAID BY THE COMPANY, NO DISALLOWANCE CAN BE MADE ARBITRARILY BY APPLYING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. WE ALSO FEEL THAT INCREAS E IN REMUNERATION CANNOT BE LINKED WITH THE INCREASE IN TURNOVER. MOREOVER, IF THE REMUNERATION PAID IN EARLIER YEAR WAS LOWER AND THE SAME IS BROUGHT TO MARKET LEVEL IN ANY GIVEN YEAR RESULTING IN SUBSTANTIAL INCREASE, THEN SUCH INCREASE CANNOT BE SAID T O BE EXCESSIVE REMUNERATION ONLY BECAUSE IN THE YEAR OF INCREASE OF THE REMUNERATION, THE INCREASE IN TURNOVER IS NOT COMPARABLE. IN FACT FOR MAKING DISALLOWANCE U/S 40A(2)(B), THE MATERIAL TO BE BROUGHT ON RECORD BY THE ASSESSING OFFICER SHOULD BE TO THE EFFECT THAT THE REMUNERATION PAID BY THE ASSESSEE COMPANY TO THE DIRECTORS AFTER THE INCREASE IS EXCESSIVE AS COMPARED TO SIMILAR REMUNERATION BEING PAID TO THE DIRECTORS OF SOME OTHER SIMILAR COMPANY. NOTHING HAS BEEN BROUGHT ON 11 RECORD BY THE ASSESSING OFFICER TO SHOW THAT THE REMUNERATION IS EXCESSIVE AND CONSIDERING ALL THESE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE. THIS GROUND IS ALSO REJECTED. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. 13. IN THE COMBINED RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 3 /06/2014 *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A) 5. D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR