High Court Of Gujarat
CIT vs. Ashwin Vanaspati Industrial (P) Ltd.
Section 37(1)
Asst. Year 1982-83
D.A. Mehta & Ms. H.N. Devani, JJ.
IT Ref. No. 109 of 1993
22nd March, 2005
Counsel Appeared
Mrs. M.M. Bhatt for Manish R. Bhatt, for the Revenue : S.N. Soparkar for Mrs. Swati Soparkar, for the Assessee
JUDGMENT
D.A. Mehta, J. :
The following question has been referred by the Tribunal, Ahmedabad Bench, under s. 256(1) of the IT Act, 1961 (the Act), at the instance of the CIT :
“Whether the Tribunal is right in law and on facts, in allowing relief of Rs. 20,78,000 as revenue expenditure though the claim was disputed by the assessee ?”
2. The assessment year is 1982-83 and the accounting period is the previous year commencing on 1st July, 1980, and ending on 31st Dec., 1981. The assessee, in the return of income filed on 10th Jan., 1983, claimed deduction of a sum of Rs. 20,78,000 being the liability towards purchase loss payable to Army Purchase Organisation. According to the assessee, it had entered into a contract to supply 4,600 MTs of Vanaspati (Hydrogenated oil) to Army Purchase Organisation as per purchase order dt. 3rd Oct., 1980. As the market price of the goods went up in comparison to the price at which the assessee had agreed to supply the goods, the assessee chose not to supply 1,150 MTs of the goods remaining to be supplied as per the tender. Thereupon, Army Purchase Organisation wrote to the assessee on 3rd June, 1981, that the assessee had cancelled the contract of supply at its own risk and the loss that may occasion to the Army Purchase Organisation, by purchasing the goods from open market, would be recovered from the assessee. Subsequently, on 10th Nov., 1981, the said organisation intimated that the loss so incurred was valued at Rs. 20,78,000 and the assessee was called upon to make the payment within 15 days. The assessee did not make the payment and hence, the organisation withheld payment of bills amounting to Rs. 22,13,600 which were outstanding towards goods supplied earlier in point of time. Army Purchase Organisation took the matter to civil Court and ultimately, the dispute was referred to a sole arbitrator. It is recorded in the orders that till the appeals were decided, the arbitrator had not pronounced his award.
The AO disallowed the claim treating the same to be a notional loss and not a real trading loss based on the judgment in case of Tripty Drinks (P) Ltd. vs. CIT 1978 CTR (Ori) 35 : (1978) 112 ITR 721 (Ori). He also assigned additional reasons to the effect that no provision had been made in the account books even though the assessee was following mercantile system of accounting and in fact, the amount had not been paid.
The assessee carried the matter in appeal and the CIT(A) held that the amount was allowable as revenue expenditure because if the assessee had supplied the goods, it would have incurred loss as the market rate prevailing at the relevant point of time was much more than the rate quoted in the tender.
The Revenue challenged the decision of CIT(A) before the Tribunal, who upheld the order of CIT (A) vide its order dt. 30th Sept., 1991, by assigning the following reasons : “We find from the assessment order that accounting period ended for this year on 31st Dec., 1981, that means the letter creating the demand had been issued before the close of the financial year. This is relevant to decide whether if at all the liability arose during this year or not. Undoubtedly, it is a contractual liability but this is also seen that the appellant had behaved by stopping the supply like a shrewd businessman to reduce its loss. This is not disputed at all. If the assessee had continued to supply, he would have suffered more losses than the damages were to be paid. Therefore, since the notice was received before the closing of the financial year and assessee avoided the higher losses against the damages to be paid as demanded by the defence organisation, this should be called a business loss despite the fact that the ratio of law laid down in Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) is not applicable. Yet, the loss becomes allowable as a business loss of the year and, therefore, the action of the CIT(A) is fully justified and hence confirmed. The Departmental appeal fails on this ground.”
6. Mrs. M.M. Bhatt, the learned standing counsel appearing on behalf of the applicant-Revenue, submitted that no liability had accrued during the accounting period and only a demand had been raised, which was disputed by the assessee; in other words, it was a liability which had not crystallised. It was further submitted that the liability was contractual in nature and not statutory, and that the loss was only a notional loss as it was neither final nor paid and thus, the claim was based on a contingent liability. That the Tribunal had erred by proceeding on the footing that once demand had been raised during the year, liability had been incurred by the assessee and a deduction thereof was allowable on revenue account. In support of the submissions made, she placed reliance on following decisions : (1) Alembic Chemical Works Ltd. vs. Dy. CIT (2003) 185 CTR (Guj) 389 : (2004) 266 ITR 47 (Guj) (2) CIT vs. Shree Digvijay Cement Co. Ltd. (1983) 144 ITR 532 (Guj) (3) Indian Smelting & Refining Co. Ltd. vs. CIT (2001) 166 CTR (SC) 510 : (2001) 248 ITR 4 (SC) (4) Tripty Drinks (P) Ltd. vs. CIT (supra) (5) Standard Mills Co. Ltd. vs. CIT (1997) 142 CTR (Bom) 16 : (1998) 229 ITR 366 (Bom) (6) Addl. CIT vs. Rattan Chand Kapoor (1984) 43 CTR (Del) 283 : (1984) 149 ITR 1 (Del).
7. Mr. S.N. Soparkar, the learned senior advocate appearing on behalf of respondent-assessee, submitted that the assessee’s previous year ended on 31st Dec., 1981, and the demand had been raised by Army Purchase Organisation on 10th Nov., 1981. Therefore, the Tribunal had rightly come to the conclusion that the liability had accrued during the previous year. He further submitted that the assessee, as a prudent businessman, had taken steps to avoid a larger loss, inasmuch as against the claim made by the Army Purchase Organisation of Rs. 20,78,000, the assessee would have been required to supply goods at the rates quoted in the tender resulting in assessee incurring a loss of a larger sum considering the market rate prevailing at the relevant time.
7.1 The other limb of this contention was that a sum of Rs. 22,13,600 due from Army Purchase Organisation and receivable by the assessee had been withheld and in these circumstances, the assessee was justified in making decision not to supply the goods. That merely because the liability was disputed, it did not cease to be an accrued liability. Responding to the reason assigned by the AO that no provision had been made in the accounts, he submitted that an absence of entry or making of entry would not determine the allowability of an item, if it was otherwise allowable, and, on the other hand, taxability of an item, if it was otherwise taxable. He placed reliance on the observations made by this Court in Dy. CIT vs. Core Healthcare Ltd. (2001) 169 CTR (Guj) 416 : (2001) 251 ITR 61 (Guj) in this context. He also placed reliance on the decision in case of Madira Kraya Vikraya Sangh vs. CIT (1994) 116 CTR (Raj) 540 : (1993) 203 ITR 530 (Raj) to submit that even if a liability was disputed, pendency of litigation was not relevant and in this context, provision of s. 41(1) of the Act was pressed into service to submit that if disputed liability is not allowed, s. 41(1) of the Act would become redundant.
8. The last contention may be disposed of at the outset. Applicability or otherwise of provision of s. 41(1) of the Act is not the part of controversy referred to this Court. The question which is raised and referred for the opinion of this Court is only in relation to allowability or otherwise of the sum of Rs. 20,78,000 as revenue expenditure. In the circumstances, the Court is not required to expand the scope of controversy and render its opinion in relation to an issue for which no foundation has been laid before the Tribunal.
9. The issue in question is no longer res integra. This Court in the case of Alembic Chemical Works (supra), after reference to the apex Court decision in the case of CIT vs. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC) has stated : “Thus, the settled position in law is that in case of an assessee following the mercantile system of accounting, a liability is sought to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, where the liability in question is not a statutory liability.”
9.1 In the facts of the present case, it is an admitted position that when the authorities, including the Tribunal, were called upon to decide the issue, the dispute between the parties was pending adjudication before the sole arbitrator. In the circumstances, the reason which weighed with the Tribunal, namely, that if the assessee had continued to supply goods, it would have suffered more losses than the damages that the assessee may be required to pay, is besides the point. Though the Tribunal has termed it as a business loss, in fact, no loss has been incurred during the year under consideration. A demand from a third party calling upon the assessee to make the payment would not result in a situation whereby the assessee would incur a loss, if the assessee is disputing demand so made. The Tribunal having accepted that the liability was a contractual liability and had not been discharged during the year under consideration, committed an error in law in holding that it was a business loss allowable for the year under consideration.
10. It is necessary to take note of the fact that out of various decisions cited on behalf of applicant-Revenue, the following decisions pertain to statutory liability and can have no bearing in relation to the dispute in the present case : (1) Addl. CIT vs. Rattan Chand Kapoor (supra) (2) Standard Mills Co. Ltd. vs. CIT (supra) (3) Indian Smelting & Refining Co. Ltd. vs. CIT (supra).
10.1 Similarly, the decision in case of Tripty Drinks (P) Ltd. vs. CIT (supra) also is not a decision whose ratio can be applied to the facts of the present case.
11. In the result, the question referred to this Court is answered in the negative, i.e., in favour of the Revenue and against the assessee. The Tribunal was not right in law in holding that the sum of Rs. 20,78,000 was allowable as revenue expenditure though the claim was disputed by the assessee.
12. During the course of hearing, it was submitted by Mr. Soparkar that the Tribunal may be directed to issue appropriate directions to grant necessary relief in the year in which the assessee has actually incurred the liability. Needless to state that the Tribunal, while giving effect to this judgment and order, under s. 260(1) of the Act, may pass an appropriate order in accordance with law in case any such request is made by the assessee before it.
13. The reference stands disposed of accordingly. There shall be no order as to costs.
[Citation : 283 ITR 439]
