Judgment ( 1. ) BOTH the above appeals have been filed under Section 260a of the IT Act, 1961, against the order of the Tribunal in ITA Nos. 990/ind/1995, dt. 22nd Nov. , 2002 for the asst. yr. 1992-93 and 746/ind/1997, dt. 4th April, 2003 for the asst. yr. 1993-94. The questions formulated in IT Appeal No. 34 of 2003 read as under: (1) Whether, the Tribunal was justified in allowing the assessee to claim a deduction of Rs. 33,14,000 on account of an interest said to be payable to bank SBICI when no such liability accrued during the assessment year in question nor any such provision meeting with that liability was provided in the books of account ? (2) Whether, a sum of Rs. 33,14,000 claimed by the assessee by way of deduction in his total income for the assessment year in question can be disallowed by taking recourse to Section 14a of IT Act ? (3) Whether, assessee is entitled to claim a deduction of Rs. 33,14,000 in the 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 ? ( 2. ) THE substantial questions formulated in IT Appeal No. 81 of 2003 read as under: (1) Whether, on facts and in law the Honble Tribunal was justified in holding that interest attributable to amounts withdrawn from CC account for the purpose of investment in the tax free units and bonds did not constitute a direct expenditure liable to be disallowed under Section 14a of the IT Act in spite of the fact that a clear nexus has been established between the withdrawal made from the accounts and the investment made by the company in the exempted securities ? (2) Whether, on the facts and in law the Honble 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 the books of the assessee and claimed in the return of income filed for the year ? ( 3. 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 the books of the assessee and claimed in the return of income filed for the year ? ( 3. ) LEARNED Counsel for the Department has, at the outset, submitted that he is seeking adjudication on facts and law pertaining to question No. 3 in IT Appeal No. 34 of 2003 and question No. 2 in IT Appeal No. 81 of 2003. The said two questions being based on common grounds and contentions, both these appeals are being disposed of by this order. ( 4. ) IN the facts mentioned in IT Appeal No. 34 of 2003, it is stated that the assessee is a limited company which filed return for the asst. yr. 1992-93 on 31st Dec, 1992, showing loss of Rs. 5,10,72,920. This return was processed under Section 143 (1) (a) by way of intimation dt. 24th March, 1993 at rupees nil. The intimation was subsequently modified by way of order under Section 154 dt. 30th March, 1995. During the pendency of the proceedings, as revealed by the order of the AO, it was brought to his notice that liability to pay a sum of Rs. 33. 14 lakhs had accrued in respect of the interest payable to BCCI ["bank of Credit and Commerce International (Overseas) Ltd. "], but on account of the closure of the said bank, the amount could not actually be paid to the said bank. Similarly, in the asst. yr. 1992-93 pertaining to the IT Appeal No. 81 of 2003, the amount could not be paid but by way of a revised return, the claim for deduction was made on account of the interest liability which had already accrued in the asst. yr. 1992-93. ( 5. ) THE claim for deduction of amount from the income of the assessee was turned down by the AO by his order dt. 31st March, 1995 (Annex. P/10 ). Paragraph 12 of the assessment order reads as under: 12. During the course of assessment proceedings assessee had made a claim that the claim of interest payable to BCCI shall be allowed. 31st March, 1995 (Annex. P/10 ). Paragraph 12 of the assessment order reads as under: 12. During the course of assessment proceedings assessee had made a claim that the claim of interest payable to BCCI shall be allowed. Facts of the case are that assessee had obtained loan from BCCI (now SBICI) which has gone in liquidation on 5th July, 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 the bank had gone into liquidation. Later on this bank was taken over by the State Bank of India styled as SBICI. The SBICI demanded the payment of principal amount as well as interest during the financial year 1993-94. Photocopy of the letter of SBICI dt. 21st Feb. , 1994 addressed to Shri K. N. Maheshwari the Vice President, Shree Synthetics has been enclosed. Assessee company has also acknowledged it and was asked for payment as per its letter dt. 28th Feb. , 1994. Assessee has worked out that the interest of Rs. 33. 14 lakhs pertained to financial year 1991-92 and since the assessment proceedings are pending deduction should be allowed. The facts of the 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 the books. Later on the bank revived and the demand was raised by the bank dt. 21st Feb. , 1994 calling for payment of all arrears. Thus the liability to pay these amounts given in February, 1994 when the bank had pressed for payment whereas liability in financial year 1991-92 had ceased because the bank itself was liquidated. The assessee had not made this claim by filing the revised return. He could have filed the return before March, 1994 but the claim has been made by way of note deduction for contractual liability arisen after the end of financial year cannot be allowed even if this pertains to the same financial year. Further such claim cannot be admitted unless the revised return is filed. During the assessment proceedings only such claims which are legal in nature supported by facts but inadvertently not made in the return can be preferred. Further such claim cannot be admitted unless the revised return is filed. During the assessment proceedings only such claims which are legal in nature supported by facts but inadvertently not made in the return can be preferred. The claim of deduction of interest payable to BCCI does not fall in such category and is not supported by revised return for which time was not available to the assessee company. In view of this claim of the assessee is disallowed and shall be considered in asst. yr. 1994-95. ( 6. ) AGAINST this order, the assessee approached the CIT (A) in appeal, who, by his order dt. 26th Oct. , 1995 in Appeal No. IT/118/95-96/437, deleted the addition of the interest liability and allowed the claim of interest. The Department approached the Tribunal. There also the appeal was dismissed and the order of the CIT (A) was maintained. It is against these orders that the Revenue has filed the above two appeals under Section 260a of the IT Act, 1961. ( 7. ) AT the outset, the learned senior standing counsel for the Revenue has stated that he is seeking relief based on question No. 3 in IT Appeal No. 34 of 2003 and question No. 2 in IT Appeal No. 81 of 2003, as, in principle, there is a common controversy. Learned Counsel for the Revenue strenuously urged that the assessee having not made any claim in the return filed for the asst. yrs. 1992-93 and 1993-94, was estopped from claiming allowance for the amount of interest liability and, therefore, when the claim was made in the asst. yr. 1994-95, direction to make deduction for this amount was made by the authorities. Mr. S. C. Goyal, learned Counsel for the assessee submits that the approach of the AO in respect of the income pertaining to the asst. yrs. 1992-93 and 1993-94 was erroneous inasmuch as in the mercantile system of accounting, liability is included in the accounts on accrual basis, notwithstanding that the amount has actually not been paid or received. Learned Counsel submits that even in the case of receipts from the parties, the income is recorded in the accounts and can be charged to income-tax without any amount having been paid to the assessee. Learned Counsel submits that even in the case of receipts from the parties, the income is recorded in the accounts and can be charged to income-tax without any amount having been paid to the assessee. Under these circumstances, contends the learned Counsel, the IT authorities should have permitted the claim of the assessee in respect of the interest liability towards BCCI, notwithstanding that actually the amount was not paid to the bank on account of its closure and it was only when the State Bank of India took over the said bank and a notice was received, the liability was actually discharged. Reference has been made to the decision in Sutlej Cotton Mills Ltd. v. CIT AIR1979 SC 5 , [1979 ]116 ITR1 (SC ), (1978 )4 SCC358 , [1979 ]1 SCR976 , in which the Supreme Court has held that in such matters what is necessary to be considered is the true nature of the transaction and whether, in fact, it has resulted in profit or loss to the assessee. Reference has also been made to the case in S. M. S. Investment Corpn. (P) Ltd. v. CIT (2003) 184 CTR (Raj) 365 : (2003) 132 Taxman 279 (Raj), in which the 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 the said case, the assessee was following mercantile system of accounting where actual receipt of interest was not necessary and till 1972-73, the interest was taxed on the basis of accrual. Anchoring his case on the above decision of the Rajasthan High Court, learned Counsel for the assessee submits that in mercantile system what is material is the date of accrual irrespective of the fact whether the amount has been received or paid during the year in question. ( 8. ) FROM the fact that the assessee was following mercantile system and it is not denied that the liability to pay interest to the bank accrued in the years pertaining to asst. yrs. 1992-93 and 1993-94, we are of the view that the Revenue erred in treating the said liability as having been discharged in the year 1994-95 without considering that in view of the mercantile system of accounting, it should have been referred to the year pertaining to the asst. yr. 1992-93. yrs. 1992-93 and 1993-94, we are of the view that the Revenue erred in treating the said liability as having been discharged in the year 1994-95 without considering that in view of the mercantile system of accounting, it should have been referred to the year pertaining to the asst. yr. 1992-93. We are, therefore, of the opinion that notwithstanding that this amount was not paid to the bank, in the peculiar facts and circumstances of the case as also the fact that the assessee was following mercantile system, the AO ought to have allowed the claim in the year 1992-93 and in the other case in the asst. yr. 1993-94. The question raised by the Revenue is thus, answered against the Revenue and both the appeals are dismissed with no order as to costs. This order be retained in IT Appeal No. 34 of 2003 and a copy be placed on the record of IT Appeal No. 81 of 2003.