(a) Income-tax---

----Income---Accrual of income---Interest on hire purchase of machinery on loans and penal interest---Interest had accrued and was assessable though due dates of payment fell after 31st March of relevant previous year.

(b) Income-tax---

----Business expenditure---Land taken by assessee from Government-- Estimated interest on cost of land---Contingent liability---Not deductible--- Indian Income Tax Act, 1961, S.37.

Held, (i) that the interest on hire purchase of machinery and on loans had accrued. The Tribunal noted that the assessee had admitted that the penal interest stood on the same footing. The Tribunal was right in holding that the accrued interest on hire purchase of machinery on loans and penal interest were liable to be included in the total income, notwithstanding the fact that the due dates of payment fell after March 31, of the relevant previous year.

(ii) That the amount estimated by the assessee as interest on land taken over from the Government had admittedly not been paid in the relevant year: Such estimation could not be regarded as an item of expenditure when the liability had not- accrued, and the amount also had not been paid. The amount was not deductible.

State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) and Kerala Financial Corporation v. CIT (1994) 210 ITR 129 (SC) applied.

P.B. Sampath Kumar for the Assessee. C.V. Rajan for the Commissioner.

JUDGMENT

R. JAYASIMHA BABU, J.---The questions referred to us for our decision . at the instance of the assessee for the assessment year 1977-78 are:

"(1)Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the accrued interest on hire purchase of machinery on loans and penal interest are liable to be included in the total income, notwithstanding the fact that the due dates of payment fell after 31st March, of the relevant previous year?

(2)Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 91,012 being estimated interest on the cost of land taken over by the assessee from the Government was not allowable as an expenditure as it was in the nature of contingent liability only?

As regards the first question, the Tribunal has, in the course of its order, noted at para. 3 that the accrued interest as also penal interest, it was admitted by the assessee, stood on the same footing involving identical consideration. This Court had occasion to consider the question as to whether the accrued interest is liable to be treated as the income of the assessee for the assessment year 1974-75. This Court after considering the argument that was advanced for the assessee that notwithstanding the fact that it was following the mercantile system of accounting, the interest payable by the borrowers had not accrued, as the date on which they were to pay the installment fell subsequent to the end of the accounting year, rejected that argument holding that the interest accrued every day after the disbursal of the loan. The Court followed the decision of the apex Court in State Bank of Travancore v. CIT (1986) 158 ITR 102. It has been held by the apex Court in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102, that the taxability of the income would not be affected by the manner in which the assessee chose to record the same in its books of account and the fact that the bank had entered the "interest due on sticky advances" in an interest suspense account, would not have the effect of making such amounts not taxable in the year in which the liability for payment of interest had accrued. That decision of the apex Court has been reaffirmed in the case of Kerala Financial Corporation v. CIT (1994) 210 ITR 129 (SC).

Counsel sought to make a distinction between accrued interest and penal interest though it was the case of the assessee before the Tribunal that the two are to be treated on the same footing. Penal interest becomes payable only in case of default in paying the interest and the two are interlinked. We do not find any error in the decision of the Tribunal holding that the penal interest also be treated in the same way as accrued interest having regard to the position admitted by the assessee before it.

Our answer to the first question, therefore, in the affirmative against the assessee and in favour of the Revenue.

As regards the second question, the amount estimated by the assessee as interest had admittedly not been paid in the relevant year. Counsel stated at the Bar that the amount has not been paid till date. Such estimation cannot be regarded as an item of expenditure when the liability had not accrued and the amount also had not been paid. Our answer to that question is, therefore, in the affirmative against the assessee and in favour of the Revenue.

Counsel sought to refer to the orders passed by the Tribunal in respect of the assessment for the year prior to as also subsequent to the assessment year in question. It is well-settled that the answers we are required to give to the questions referred to us are in the context of facts and circumstances to the case in which those questions arose for consideration. The right of the assessee to establish its claim for a larger benefit, having regard to the facts established in relation to the assessment of the other years, are, therefore, not affected by the order made for a different assessment year.

The answer given by us is in the context of the facts and circumstances of the case that were placed before the Tribunal and there is no scope for giving any answer other than the one recorded by us. The Revenue is entitled to cost of Rs. 500 (Rupees five hundred only).

M.B.A./678/FC

Order accordingly.