High Court Of Andhra Pradesh
Kanakateegala Enterprises vs. CIT
Section 37(1)
Asst. Year 1988-89
M.H.S. Ansari & T. Ch. Surya Rao, JJ.
Case Refd. No. 8 of 1994
19th January, 2005
Counsel Appeared :
K.K. Viswanatham, for the Assessee : S.R. Ashok, for the Revenue
JUDGMENT
M.H.S. Ansari, J. :
This is a reference at the instance of the assessee. The question framed by the Tribunal for our consideration, arising out of its orders in ITA No. 1638/Hyd/1990, pertaining to the asst. yr. 198889, is as under :
“On the facts and in the circumstances of the case, whether the Tribunal is correct in law in its finding that the amount of Rs. 7,85,725 provided by the assessee as an accrued liability is contingent liability and hence not an allowable deduction ?”
2. The facts relevant for the purpose of disposal of this reference, briefly stated, are as under : The assessee is a registered firm carrying on the business of conducting various schemes for supply of motorcars, scooters and mopeds. It floated a scheme called “own your vehicle scheme”. There were three types of schemes, namely, luna scheme, scooter scheme and car scheme. In each scheme, 250 subscribers/members are enrolled. The duration of each scheme is 40 months. A subscriber is required to pay a monthly instalment. Different instalment amounts are prescribed for payment in respect of the car scheme, scooter scheme and the luna scheme. The common feature, however, is that a draw is conducted every month for each scheme for its members. The lucky member, who is successful in the draw, gets his prize, namely, luna, scooter or car, as the case may be. He need not pay the remaining monthly instalments or subscriptions. In this way, 40 draws will be conducted and 40 lucky members would be given prizes. The remaining 210 members out of 250 members, who were unsuccessful in the draws and who have paid monthly subscriptions completely without default, would get back the actual amount subscribed by each of them for 40 months with some extra amount.
3. For the assessment year in question, viz., 1988-89, the assessee claimed scheme loss of Rs. 9,33,085, which included an amount of Rs. 7,85,725 kept as a provision for future scheme loss. The same was disallowed by the assessing authority on the ground that the same is a provision for future loss and not an expenditure incurred during the accounting year relevant to the assessment year. The assessee carried the matter in appeal. The appellate authority, i.e., the CIT(A), confirmed the view taken by the ITO and sustained the disallowance, holding, inter alia, that the liability accrues only after the scheme is completed. As long as the liability is not foisted on the assessee, any provision created to meet that liability cannot be allowed. The assessee carried the matter in appeal before the Tribunal. One of the contentions raised before the Tribunal on behalf of the assessee was that the liability of the assessee to pay the extra amount or bonus amount to each of the unsuccessful subscriber accrues when the assessee signed the contract with the subscriber and not in the future. According to the assessee, payment is postponed to a later date, i.e., at the end of the scheme and, therefore, the liability is not contingent, but an accrued liability. The assessee follows the mercantile system of accounting and, therefore, is entitled to make a provision for loss or expenditure.
The learned Tribunal in its order observed that there is a distinction between a contingent liability and a payment depending upon the contingency. It was further observed and rightly so in our view that in the mercantile system of accounting, no provision can be allowed in respect of a contingent liability. The learned Tribunal held that no liability accrued to the assessee till such time the unsuccessful member pays the final and the 40th instalment. It was observed that the case on hand is not one where the payment depended upon a contingency. In the view of the learned Tribunal, the liability itself is a contingent one and not an accrued liability. In coming to the said conclusion, the learned Tribunal has observed that the liability undertaken by the assessee at the time of entering into the contract with the subscriber was not an unconditional one. It was subject to certain conditions, namely, that the member should pay all 40 instalments without default. There was no guarantee as to how many members continue to be subscribers to the scheme and how many members will remain in the scheme till the end.
Having considered the conclusions and findings arrived at by the Tribunal, we are of the view that in the case on hand the Tribunal has rightly come to the conclusion that no liability had accrued in the previous year relevant to the assessment year in question and as no liability has accrued, the same is a contingent liability. It is not a case where the liability has accrued and the payment is postponed.
Accordingly, we answer the question posed as above, in the affirmative, in favour of the Revenue and against the assessee.
Reference is answered accordingly.
[Citation : 275 ITR 448]
