Allahabad High Court
Commissioner Of Income-Tax vs Kumaun Mandal Vikas Nigam Ltd. on 7 May, 1990
Equivalent citations: [1990]186ITR407(ALL)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT R.K. Gulati, J.
1. This application under Section 256(2) is filed at the instance of the Revenue. The following three questions have been raised in this application :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest on loan of Rs. 20 lakhs was allowable ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the loss of Rs. 17,726 in the concrete unit was allowable ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was in law justified in holding that the addition of Rs. 1,93,370 made by the Income-tax Officer in valuing the closing stock of barbed wire was uncalled for ?"
2. Upon hearing learned counsel for the parties, in our opinion, question No. 1 alone is a question of law and the remaining two questions are concluded by findings of fact and do not give rise to any question of law.
3. The brief facts relevant to the first question are these : The assessee was following the mercantile system of accounting.. Out of the sums debited to the profit and loss account under the head "Interest payable to the State of U. P.", the Income-tax Officer disallowed a sum of Rs. 1,80,000 being the interest on a loan of Rs. 20 lakhs which the assessee had obtained from the State Government. The disallowance was made because, admittedly, the terms and conditions as also the stipulation regarding the rate of interest in respect of the said loan were still unsettled when the previous year relevant to the assessment year in question was ended. However, the assessee based its claim on the footing that, in respect of another loan of Rs. 10 lakhs taken from the State Government, it was paying interest at 9% and presumably it would be required to pay a similar rate of interest on the loan of Rs. 20 lakhs also. The Income-tax Officer did not agree with the assessee. He held that there was no accrued liability in respect of the disputed amount entitling the assessee to deduction of the amount in the computation of its total income.
4. The assessee's case was, however, accepted in the first instance by the Commissioner of Income-tax (Appeals) and thereafter by the Income-tax Appellate Tribunal in second appeal when it rejected the appeal filed by the Revenue. The Tribunal took the view that the loan in question was neither a grant, nor aid, nor an interest-free loan. It was a loan on which eventually interest was payable which would be a permissible deduction in computing the total taxable income. Further, it would be wrong to say that liability to pay interest arises only when the amount is quantified or is communicated to the assessee. In other words, the liability to pay interest arises with the user of the capital. The appellate authority also observed that the rate of interest finally settled may be more or may be less but it does not affect the claim of the assessee, for, if an excess claim is allowed, the same can be brought to tax in the subsequent year and, conversely, if there was any deficiency the same can further be allowed in the year in which the terms of the loan were settled.
5. It is on these facts that the first question has been suggested in this application.
6. Generally speaking, a contingent liability is not expenditure and, therefore, cannot be the subject-matter of deduction even under the mercantile system of accounting. It is evident that the findings recorded by the Income-tax Appellate Tribunal are not purely within the realm of a question of fact. Where an ultimate finding on an issue is an inference to be drawn from the facts found, on the application of any principles of law, there arises a mixed question of law and fact and it is open to review in proceedings under Section 256 of the Income-tax Act (See Sree Meenak-shi Mills Ltd. v. CIT [1957] 31 ITR 28). In our opinion, question No. 1 set out above does give rise to a mixed question of law and fact if not to a pure question of law. Accordingly, we direct the Income-tax Appellate Tribunal to refer the said question for the opinion of this court.
7. Coming to question No. 2, the Income-tax Officer had disallowed a sum of Rs. 17,726 being loss in the cement and concrete block unit. The loss was claimed on the ground that certain blocks kept along the bank of the Kosi river were destroyed as a result of floods. The Income-tax Officer disallowed the claim on the finding that there was no evidence in respect of the said loss.
8. In appeal, the Income-tax Appellate Tribunal as well as the first appellate authority found that having regard to the nature of the loss, there could be no direct evidence in that respect. The Tribunal took into account the certificate filed by the managing director, the report from the site superintendent, the minutes of the meeting of the board of directors and a telegram from an employee at the site, and held that there was sufficient material on record to allow the claim of the assessee. Accordingly, the claim was allowed.
9. Now, the question whether, on the above facts, the Income-tax Appellate Tribunal was justified in holding that the loss in the concrete unit was allowable is a pure finding of fact. The Tribunal which is the final fact-finding authority, on the material placed before it, felt satisfied that the assessee was able to discharge its burden in proving the loss that it suffered. This, in our opinion, was the end of the matter. The prayer with regard to the second question is, accordingly, rejected.
10. Regarding question No. 3, a sum of Rs. 1,93,370 was added by the Income-tax Officer in valuing the closing stock of the assessee in respect of barbed wire. This addition was deleted by the Income-tax Appellate Tribunal. The principle that the valuation of the closing stock should be made either at the market price or at the cost price, whichever is lower, is not in dispute. The Tribunal found that in order to work out the cost of production per unit, the assessee took the total manufacturing cost and divided it by the quantity of finished goods. This, in the opinion of the Tribunal, was a recognised and well-defined method in the commercial world to value the closing stock. It was also found that the Income-tax Officer had not noticed any discrepancy in the quantity of finished goods. The adjustments made by the Income-tax Officer while disturbing the value of the closing stock were not found sustainable.
11. Learned standing counsel was unable to point out any factual or legal discrepancy in the view taken by the Income-tax Appellate Tribunal. Whether the stock-in-trade has been properly valued or not is a question of fact. In our opinion, the Income-tax Appellate Tribunal committed no error of law when it accepted the method of valuation adopted by the assessee. Question No. 3, being a pure question of fact, is not fit for reference under Section 256 of the Income-tax Act.
12. The application is allowed in part. In view of the divided success of the parties there shall be no order as to costs.