High Court Of Gauhati
CIT vs. B And A Plantations & Industries Ltd.
Asst. Year 1989-90
J.N. Sarma & D. Biswas, JJ.
IT Appeal No. 23 of 2001
5th June, 2002
U. Bhuyan, for the Appellant : Dr. A.K. Saraf & S.K. Agarwal, for the Respondent
J.N. sarma, J. :
This appeal has been filed by the Revenue under s. 260A of the IT Act, 1961, against the order dt. 20th Feb., 2001, passed by the Tribunal, Gauhati Bench, Gauhati, in ITA No. 228 (Gauhati) of 1993 for the asst. yr. 1989-80.
2. The following are the substantial questions of law : “(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in upholding the order of the first appellate authority in allowing the contingent liability as an expenditure and is not the said decision perverse ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in upholding the order of the first appellate authority in deleting the addition of contingent liability for the purpose of computation of book profit which was added back as per the provisions of cl. (c) of the Explanation to s. 115JA ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in holding that no additional tax is imposable when total taxable income is loss after adjustment made under s. 143(1)(a) of the Act, in spite of the amended provision of sub-s. (1A) of s. 143 of the Act effective from 1st April, 1980 ?”
Regarding question No. (iii) that has already been decided against the Revenue by a Division Bench of this Court in W. A. No. 345 of 1998 by judgment dt. 12th April, 2002. [reported as CIT vs. Sati Oil Udyog Ltd. & Anr. (2002) 177 CTR (Gau) 242âEd.] So, question No. (iii) requires no further consideration. We shall decide the first two questions.
The respondent herein is an assessee under the IT Act, 1961, hereinafter called the Act. The status of the assessee is that of a company and the assessment year under consideration is 198990. An amount of Rs. 12,96,000 was claimed to be paid in excess up to December, 1988, by the assessee on the basis of an interim order of the High Court staying the enhanced demand of electricity charges made on the assessee by the Assam State Electricity Board (ASEB). This amount was kept by the assessee as advance in the name of ASEB as a contingent liability. Ultimately, the High Court by its final order and judgment upheld the demand made by the ASEB w.e.f. 20th March, 1987. During the course of the assessment proceedings for the said assessment year, the assessee explained that the contingent liability was converted into a confirmed liability and the advance payment of Rs. 12,96,000 was charged to the accounts and claimed deduction of the said amount. The AO, in the assessment order, took the view that the contingent liability was converted into a confirmed liability only on 25th Sept., 1989, which was beyond the previous year relevant to the assessment year under consideration. The AO held that since the liability was not determined during the relevant previous year, the assessee cannot charge it to the accounts in the said assessment year even though the liability may relate to the period within the previous year. The AO, therefore, held that the amount of Rs. 12,96,000 cannot be allowed as a deduction for the year and added back the same. The AO added the said contingent liability to the ASEB to the book profit of the assessee for computation of income under s. 115JA of the IT Act. Sec. 115JA is deemed income relating to certain companies and there is also an Explanation to it. It is not necessary to quote the section in order to decide the present controversy.
The AO also charged additional tax under s. 143(1A) of the Act on the assessee to the extent of Rs. 3,26,578. The assessee preferred an appeal before the first appellate authority, i.e., the CIT (A), Gauhati, and the appellate authority following the decision of the apex Court in Metal Box Co. of India Ltd. vs. Their Workmen (1969) 73
ITR 53 (SC), took the view that the amount of Rs. 12,96,000 had lost its contingent character and became finalised before the finalisation of the accounts. The appellate authority therefore held that the amount of Rs. 12,96,000 should be allowed as deduction. Regarding charging of additional tax under s. 143(1A) of the Act, the appellate authority held that there was no justification in charging the same as the income of the assessee was still at a loss after making the adjustment.
Being aggrieved by the aforesaid decision, the Department preferred an appeal before the Tribunal, Gauhati Bench, Gauhati. The said appeal was registered as ITA No. 228 (Gauhati) of 1993 for the asst. yr. 1989-90. The Tribunal vide its order dt. 20th Feb., 2001, held that the liability of Rs. 12,96,000 arose to the assessee during the year itself even prior to the passing of the interim order by this Court, that the liability not only pertained to the year under consideration but was also raised and paid. The Tribunal therefore held that the said amount is required to be allowed as deduction in the year under consideration. The Tribunal upheld the order of the first appellate authority. Hence, this appeal.
We have heard Shri U. Bhuyan, learned counsel for the appellant, and Dr. A.K. Saraf, assisted by Mr. S.K. Agarwal, learned counsel for the assessee. Mr Bhuyan raises the question that the contingent liability can be deducted only if the amount is sufficiently certain. Mere raising a demand itself is not sufficient to allow a deduction by the company. In this case, the basic difference is that not only was the demand raised but the amount was also paid and the same was sufficiently certain as it was duly quantified and as a result this contention of Shri Bhuyan has no force. In support of his contention, Mr. Bhuyan placed reliance on the decision rendered by the apex Court in Metal Box Co. of India Ltd. vs. Their Workmen (supra) wherein the law has been laid down as follows : “Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the P&L a/c. This is recognised in trade circles and there is nothing in the Bonus Act which prohibits such a practice. Such a provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed a
âreserveâ. Therefore, the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year.” So, what the Supreme Court has said instead of helping the learned advocate for the appellant helps the respondent and rightly that was taken into consideration by the appellate authority in allowing the claim of the assessee. The Supreme Court has pointed out that even if the liability is a contingent liability, provided the discounted value is ascertainable it can be taken into account. Here, in this case, as indicated above, there was no dispute with regard to the demand made by the ASEB and that amount was paid. So, the amount can naturally be deducted. Mr. Bhuyan has also placed reliance on Indian Molasses Co. (P) Ltd. vs. CIT (1959) 37 ITR 66 (SC), wherein the Supreme Court held as follows : “The Income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the traderâs pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the IT laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. vs. Stedeford (1948) 30 Tax Cases 496 (CA). No doubt, that case was decided under the system of Income-tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real.”
The aforesaid case is also of no help to the appellant. That is a case where it is stated that a company may keep an account to meet a future liability, but in the case at hand the situation is otherwise. The amount was already paid in terms of the order of the Court. So, the company is entitled to that. Further, in this case, it may be an unforeseen expenditure and that is not the situation of the case. Here, demand and payment have been made, but there was a proceeding before the Court.
9. On the other hand, Dr. Saraf, the learned advocate for the assessee, joining issue with Shri Bhuyan, has placed reliance on Pope the King Match Factory vs. CIT (1963) 50 ITR 495 (Mad). This case was later on approved by the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), wherein the Supreme Court pointed out in the facts of the case that if the liability had even been quantified and demand had been created by means of a notice the liability would not cease to be one for which deduction can be claimed as because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. The Supreme Court pointed out that an assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed and the Supreme Court categorically stated that the decision of the Madras High Court in Pope the King Match Factory vs. CIT (supra) lays down the law correctly. The Supreme Court further pointed out that the liability remained intact even after the assessee had taken appeals to the higher authorities or Courts which failed. The same is the situation in this case. Here also the claim made by the assessee was challenged before the writ jurisdiction of this Court and ultimately, failed. The case of the Madras High Court has been further explained in Standard Mills Co. Ltd. vs. CIT (1997) 142 CTR (Bom) 16 : (1998) 229 ITR 366 (Bom) by the Bombay High Court. The Bombay High Court pointed out as follows : “Similarly, where a demand of tax or duty is served on the assessee maintaining the mercantile system of accounting in the accounting year, the amount so demanded would be deductible as an accrued liability even though the assessee objects to it and seeks to get the order of the concerned authority reversed, subject, however, to any statutory provision to the contrary (viz., s. 43B of the IT Act, 1961, as inserted by the Finance Act, 1983, w.e.f. 1st April, 1984, which provides that certain liabilities can be deducted only on actual payment).”
We respectfully agree with the judgment of the Bombay High Court and, accordingly, question Nos. (i) and (ii) both are to be decided against the Revenue in view of the law settled by the apex Court and various High Courts as indicated above. We do not find any merit in this appeal and the same shall stand dismissed.
[Citation : 257 ITR 694]