JUDGMENT judgment of court was delivered by S. K. Kulshrestha J. Both above appeals have been filed under section 260A of Income-tax Act, 1961, against order of Tribunal in I. T. A. Nos. 990/Ind/1995, dated November 22, 2002, for assessment year 1992-93 and 746/Ind/1997, dated April 4, 2003, for assessment year 1993- 94. questions formulated in I. T. A. No. 34 of 2003 read as under: (1) Whether Tribunal was justified in allowing assessee to claim deduction of Rs. 33,14,000 on account of interest said to be payable to bank SBICI when no such liability accrued during assessment year in question nor any such provision meeting with that liability was provided in books of account? (2) Whether sum of Rs. 33,14,000 claimed by assessee by way of deduction in his total income for assessment year in question can be disallowed by taking recourse to section 14A of Income-tax Act? (3) Whether assessee is entitled to claim deduction of Rs. 33,14,000 in assessment year in question as business expenditure without making any provision in that regard and without paying it and not showing it in his books of account? substantial questions formulated in Income-tax Appeal No. 81 of 2003 read as under: (1) Whether on facts and in law, hon ble Tribunal was justified in holding that interest, attributable to amounts withdrawn from CC account for purpose of investment in tax free units and bonds did not constitute direct expenditure liable to be disallowed under section 14A of Income-tax Act in spite of fact that clear nexus has been established between withdrawal made from accounts and investment made by company in exempted securities? (2) Whether, on facts and in law, hon ble Tribunal was justified in allowing relief of Rs. 66,20,623 on account of interest payable to SBICI even when no such liability arose during this year under consideration and no such liability was provided for in books of assessee and claimed in return of income filed for year? Learned counsel for Department has, at outset, submitted that he is seeking adjudication on facts and law pertaining to question No. 3 in Income-tax Appeal No. 34 of 2003 and question No. 2 in Income-tax Appeal No. 81 of 2003. said two questions being based on common grounds and contentions, both these appeals are being disposed of by this order. In facts mentioned in Income-tax Appeal No. 34 of 2003, it is stated that assessee is limited company which filed return for assessment year 1992-93 on December 31, 1992, showing loss of Rs. 5,10,72,920. This return was processed under section 143(1)(a) by way of intimation dated March 24, 1993, at rupees nil. intimation was subsequently modified by way of order under section 154 dated March 30, 1995. During pendency of proceedings, as revealed by order of Assessing Officer, it was brought to his notice that liability to pay sum of Rs. 33.14 lakhs had accrued in respect of interest payable to BCCI [ Bank of Credit and Commerce International (Overseas) Ltd. ], but on account of closure of said bank, amount could not actually be paid to said bank. Similarly, in assessment year 1992-93 pertaining to Income-tax Appeal No. 81 of 2003, amount could not be paid but by way of revised return, claim for deduction was made on account of interest liability which had already accrued in assessment year 1992-93. claim for deduction of amount from income of assessee was turned down by Assessing Officer by his order dated March 31, 1995, (Annex. P-10), paragraph 12 of assessment order reads as under: 12. During course of assessment proceedings assessee had made claim that claim of interest payable to BCCI shall be allowed. Facts of case are that assessee had obtained loan from BCCI (now SBICI) which has gone in liquidation on July 5, 1991, and therefore no provision of interest payable on various accounts on loan taken from this bank was created in financial year 1991-92 in hope that it will not be payable because bank had gone into liquidation. Later on this bank was taken over by State Bank of India styled as SBICI. SBICI demanded payment of principal amount as well as interest during financial year 1993-94. Photocopy of letter of SBICI dated February 21, 1994, addressed to Shri K. N. Maheshwari Vice-President, Shree Synthetics has been enclosed. assessee-company has also acknowledged it and was asked for payment as per its letter dated February 28, 1994. assessee has worked out that interest of Rs. 33.14 lakhs pertained to financial year 1991-92 and since assessment proceedings are pending deduction should be allowed. facts of case have been examined, BCCI had actually gone into liquidation in financial year 1991-92 and as such no interest was payable to assessee. assessee had accordingly not created any liability of interest in books. Later on bank was revived and demand was raised by bank dated February 21, 1994, calling for payment of all arrears. Thus, liability to pay these amounts given in February, 1994, when bank had pressed for payment whereas liability in financial year 1991-92 had ceased because bank itself was liquidated. assessee had not made this claim by filing revised return. He could have filed return before March, 1994, but claim has been made by way of note deduction for contractual liability arisen after end of financial year cannot be allowed even if this pertains to same financial year. Further, such claim cannot be admitted unless revised return is filed. During assessment proceedings only such claims which are legal in nature supported by facts but inadvertently not made in return can be preferred. claim of deduction of inter est payable to BCCI does not fall in such category and is not supported by revised return for which time was not available to assessee-company. In view of this claim of assessee is disallowed and shall be considered in assessment year 1994-95. Against this order, assessee approached Commissioner of Income- tax (Appeals) in appeal, who, by his order dated October 26, 1995, in Appeal No. IT/118/95-96/437, deleted addition of interest liability and allowed claim of interest. Department approached Tribunal. There also appeal was dismissed and order of Commissioner of Income-tax (Appeals) was maintained. It is against these orders that Revenue has filed above two appeals under section 260A of Income-tax Act, 1961. At outset, learned senior standing counsel for Revenue has stated that he is seeking relief based on question No. 3 in Income-tax Appeal No. 34 of 2003 and question No. 2 in Income-tax Appeal No. 81 of 2003, as, in principle, there is common controversy. Learned counsel for Revenue strenuously urged that assessee having not made any claim in return filed for assessment years 1992-93 and 1993-94, was estopped from claiming allowance for amount of interest liability and, therefore, when claim was made in assessment year 1994-95, direction to make deduction for this amount was made by authorities. Mr. S. C. Goyal, learned counsel for assessee, submits that approach of Assessing Officer in respect of income pertaining to assessment years 1992-93 and 1993-94 was erroneous inasmuch as in mercantile system of accounting, liability is included in accounts on accrual basis, notwithstanding that amount has actually not been paid or received. Learned counsel submits that even in case of receipts from parties, income is recorded in accounts and can be charged to income-tax without any amount having been paid to assessee. Under these circumstances, contends learned counsel, income-tax authorities should have permitted claim of assessee in respect of interest liability towards BCCI, notwithstanding that actually amount was not paid to bank on account of its closure and it was only when State Bank of India took over said bank and notice was received, liability was actually discharged. Reference has been made to decision in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, in which Supreme Court has held that in such matters what is necessary to be considered is true nature of transaction and whether, in fact, it has resulted in profit or loss to assessee. Reference has also been made to case in S. M. S. Investment Corporation P. Ltd. v. CIT [2003] 132 Taxman 279; [2005] 272 ITR 613, in which Rajasthan High Court has observed that in mercantile system of accounting, actual receipt of interest during relevant assessment year was not necessary as interest could have been taxed on accrual basis. In said case, assessee was following mercantile system of accounting where actual receipt of interest was not necessary and till 1972-73, interest was taxed on basis of accrual. Anchoring his case on above decision of Rajasthan High Court, learned counsel for assessee submits that in mercantile system what is material is date of accrual irrespective of fact whether amount has been received or paid during year in question. From fact that assessee was following mercantile system and it is not denied that liability to pay interest to bank accrued in years pertaining to assessment years 1992-93 and 1993-94, we are of view that Revenue erred in treating said liability as having been discharged in year 1994-95 without considering that in view of mercantile system of accounting, it should have been referred to year pertaining to assessment year 1992-93. We are, therefore, of opinion that notwithstanding that this amount was not paid to bank, in peculiar facts and circumstances of case as also fact that assessee was following mercantile system, Assessing Officer ought to have allowed claim in year 1992-93 and in other case in assessment year 1993-94. question raised by Revenue is thus, answered against Revenue and both appeals are dismissed with no order as to costs. This order be retained in Income-tax Appeal No. 34 of 2003 and copy be placed on record of Income-tax Appeal No. 81 of 2003. *** ASSISTANT COMMISSIONER OF INCOME TAX v. SHREE SYNTHETICS LTD.