Sabyasachi Mukharji, J. - (1.) Under Section 256(2) of the I.T. Act, 1961, as directed by this court, the Tribunal has referred to us the following two questions : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the liability for the payment of interest amounting to Rs. 16,080 did not accrue during the previous year relevant to the assessment year 1969-70, and accrued only during the previous year relevant to the year under consideration?
(2.) Whether, on the facts and in the circumstances of the case, and having regard to the fact that the assessee was following mercantile method of accounting, the Tribunal was correct in holding that the interest of Rs. 16,080 which was due in respect of the assessment year 1969-70, could be allowed as a deduction for the assessment year 1970-71 ?" 2. This reference relates to the assessment year 1970-71, the corresponding previous year being the year ended 30th April, 1969. The asses-see is a company. The ITO had disallowed interest for a sum of Rs. 16,080 on the ground that the expenditure was not pertaining to the relevant previous year. Being aggrieved by the said decision, the assessee went up in appeal before the AAC. He deleted the addition. According to him, the amount was allowable since the copy of the account along with the computation of interest was received by the assessee-company from the creditor during the relevant previous year.
(3.) Revenue felt aggrieved by the said decision of the AAC and took the matter up in appeal before the Tribunal. It was submitted on behalf of the Revenue that the assessee-company which -had been maintaining accounts according to the mercantile system had provided for interest in the accounts of the year in which the liability accrued and, therefore, the assessee-company should not have waited for the creditors' bills putting forward the claim for interest. On the other hand, on behalf of the assessee-company, it had submitted the correspondence between the creditor, M/s. Howrah Soap Company Ltd , and the assessee-company on the 29th September. 1967, 23rd September, 1968, and 27th December, 1968, the balance-sheet of the assessee-company for the relevant previous year and the balance-sheets for the years ended 30th April, 1968, and 30th April, 1969, and on this basis it was contended before the Appellate Tribunal that in view of its incurring losses for which waiver of interest was asked from the creditor-company, no entries were made in the accounts of the preceding year but whenever the creditor-company finally submitted its bills rejecting the assessee's representation necessary entries were made in the accounts. After considering the rival contentions, the Tribunal held as follows : "5. We have given our careful consideration to the rival submissions with reference to the documents placed before us on behalf of the asses-see-company. Two bills bearing No. 9282 dated 30th April, 1967, for Rs. 3,760-98 and No. 9400 dated 30th September, 1967, for Rs. 12,31897 were re-presented before the assessee-company by the creditor-company along with the letter dated 27th December, 1968, which fell within the previous year relevant to the instant assessment year under appeal before us. The assessee represented to the creditor-company by its letter dated 29th September, 1967, for waiving the claim for interest, as it had been suffering losses. The creditor-company by its letter dated 29th March, 1968, intimated the assessee-company that the matter was under consideration and final decision of the board of directors would be communicated. The matter was set at rest by their letter dated 27th December, 1968. The Revenue had not doubted the bona fide nature of the asses-see's claim. The claim for interest was not finally settled till 27th December, 1968 and, therefore, the assessee had been entertaining certain hopes regarding its representation for waiving the claim of interest. In this context we are of the opinion, keeping in view the principle of commercial expediency that the assessee-company had not in any manner violated the principle of mercantile system of accounting by debiting the interest in the accounts of the relevant previous year and, therefore, the Appellate Assistant Commissioner was justified in the decision deleting the disallowance from the instant assessment. In this regard we rely upon the ratio of the decision of the Gauhati High Court in CIT v. Nathmal Tolaram [1973] 88 ITR 234 (Gauhati), where the assessee who was maintaining its accounts under the mercantile system did not make any provision for payment of sales tax in its accounts in respect of business transacted by it during periods falling during 1949 and 1950 but made a debit entry in its accounts in the accounting year 1957-58 subsequent to the receipt of demand for sales tax in that year. The expenditure was claimed in the assessment for the assessment year 1958-59 and the same was allowed. Therefore, we are of the opinion that in the instant case before us the Appellate Assistant Commissioner was right in his decision.";