Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] – Business expenditure - Year in which deductible – Assessment year 1957-58 – Assessee, a Government undertaking, was advanced amounts by Government without specifying rate of interest during 1949-50 – Subsequently negotiations between assessee and Government took place regarding rate of interest and assessee pressed Government to waive interest on loans – Question of interest remained uncertain till Government finally fixed rate of interest in May, 1957 and decided to covert it into equity shares - Assessee was following mercantile system of accounting – It had not shown interest liability in profit and loss account upto assessment year 1956-57 – Interest paid on said amount of loan was claimed by assessee as deductible in relevant assessment year - But ITO disallowed amount which pertained to earlier years than year 1956-57 – Whether since liability of interest remained unascertained till May, 1957, assessee was justified in treating said interest liability as contingent liability till then and claiming it in assessment year in question in which it crystallized into ascertainable and enforceable liability - Held, yes FACTS The assessee-company was floated as a public limited company in the year 1947. It was soon realised by all concerned that the company would require large funds before it came into production. The Government stepped in and took over the management of the assessee and advanced loan to it during the accounting year 1949-50. The rate of interest and the mode of payment of loan would have to be settled later. The Government by its letter dated 28-2-1952, for the first time informed the assessee about the rate interest on loans. The assessee-company represented against the terms of loan as also against the rate of interest and wanted the same to be reduced. The Chairman of the company was of the view that the interest should be waived and the entire loan should be capitalized into equity shares. The Government agreed to the proposal of converting the loan into equity shares of the company but did not agree to waive the interest.…

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