Business expenditure--

---- Year in which expenditure is allowable---Ordinance levying market fees issued on 15-5-1980---Demand for market fees made by Collector on 4-3-1983---Market fees deductible in assessment year 1983-84---Indian Income Tax Act, 1961, S.37.

The question whether an assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the price which the assessee might take of his rights, nor can the existence of absence of entries in his books of account be decisive or conclusive in the matter.

In the course of the assessment proceedings for the assessment year 1983-84, the Assessing Officer found in the case of the assessee-company that a sum of Rs.3,07,334 was debited on March 31, 1983, on account of market fee levied in the financial year 1980-81. He further found that the amount was included in the purchase account. The market fee of Rs.3,07,334 was levied in 1977-78 up to March 31, 1979, the liability for which was provided for and was written off in 1979-80. Again, this liability was relieved in 1980-81 and liabilities provided. The entry itself indicated that the market fee was levied in the accounting period 1980-81. This liability for market fee arose on May 15, 1980, when the Governor of Haryana issued an Ordinance in this respect. The Market Committee of Sirsa asked the assessee to deposit Rs. 3,37,579.90 by December 10, 1980. The Income Tax Officer held that the amount was not deductible in the assessment year 1983-84. However, the Tribunal accepted the contention put forth on behalf of the assessee-company that the liability became enforceable in this assessment year, i.e. 1983-84, because the demand was made during the accounting period by the Collector on March 4, 1983. On a reference:

Held, that the statutory liability no doubt was created when the Government of Haryana issued the Ordinance in this respect and when the Market Committee of Sirsa asked the assessee to deposit he amount by December 10, 1980, but the said liability became real and enforceable in the relevant subsequent year though the demand was referable to the earlier years. From a commercial point of view, the assessee was at that stage entitled to treat the demand for the market fee as final and enforceable and contend that the liability accrued on the basis of the said demand at that stage. Hence, the market fee was deductible in the assessment year 1983-84.

CIT v. Orient Supply Syndicate (1982) 134 ITR 12 (Cal.) and Shalimar Chemical Works (Pvt.) Ltd. v. CIT (1987) 167 ITR 13; (1987) 71 FJR 67 (Cal.) fol.

Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) ref.

JUDGMENT

SHYAMAL KUMAR SEN, J.---On an application under section 256(1) of the Income Tax Act, 1961, the following questions are referred to this Court for opinion:

"(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal was perverse in law in applying the decisions of the High Court in the two cases of CIT v. Orient Supply Syndicate (1982) 134 ITR 12 (Cal.) and Shalimar Chemical Works (Pvt.) Ltd. v. CIT (1987) 167 ITR 13 (Cal.), in the present case for allowing a deduction of market fees amounting to Rs. 3,07,334 levied in 1977-78 up to March 31, 1979, the liability of which was provided for and written off in 1979-80 and the same was re-levied in 1980-81, in the assessment year 1983-84 although the facts and circumstances of the present case are not similar to those of the cases relied on by the Tribunal?

(2) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the claim of deduction of Rs.3,07,334 being market fees levied in 1977-78 up to March 31, 1979, from two percent. to three percent., the liability of which was provided and was written off in 1979-80 but the same was re-levied on 1980-81, was an allowable deduction in the assessment year 1983-84?"

The facts, inter alia, as appear from the statement of case are that the assessee is a resident company. The assessment year involved in question is 1983-84. The accounting period relevant to the assessment year ended on March 31, 1983. The Assessing Officer completed the assessment for the assessment year 1983-84 under section 143(3) of the Income Tax Act, 1961, on February 28, 1986. In the course of the assessment proceedings, the Assessing Officer found that a sum of Rs. 3,07,334 was debited on March 31, 1983, on account of market fee levied in the financial year 1980-81. He further found that the amount was included in the purchase account. The Assessing Officer relied on the relevant entry in the journal in respect of this amount by translating the extract from the journal book for the year ending on March 31, 1983. These entries are as follows:

being market fees levied in 1977-78 upto March 31, 1979, from two percent. to three per cent liability provided and was written off in 1979-80. Again, this liability was re-levied in 1980-81 and liabilities provided. The entry itself indicated that the market fee was levied in the accounting period 1980-81, which is relevant to the assessment year 1981-82, and it had no relevance to the assessment year 1983-84. This liability for market fee arose on May 15, 1980, when the Governor of Haryana issued the Ordinance in this respect. This date, according to the Revenue, is relevant to the assessment year 1981-82. The Market Committee, Sirsa, asked the assessee to deposit Rs.3,37,579.90 by December 10, 1980. This date was also relevant to the assessment year 1981-82. The Assessing Officer further found that neither the demand had arisen in the accounting period relevant to the assessment year 1983-84 nor had it been paid during that period. Accordingly, he disallowed the assessee's claim of deduction of Rs.3,07,334 in the assessment year 1983-84.

The assessee-company being aggrieved by the disallowance made by the Assessing officer took the dispute before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) heard the assessee? company and, after considering its contentions, passed the following order:

"The facts stated by the Income Tax Officer are not disputed by the authorized representative. The only argument advanced is that the assessee was under a bona fide belief that it will get relief in this Court and, therefore, the provision was not made in the earlier years. The argument has no merit. The liability arose in the preceding years and there is subsequently no justification for the assessee's action in claiming this amount as a provision in the current year. The disallowance is upheld."

The assessee-company being further aggrieved by the order of the Commissioner of Income-tax (Appeals) brought the dispute of disallowance of the market fees before the Tribunal. The Tribunal heard the assessee as well as the Department. The Tribunal accepted the contention put forth on behalf of the assessee-company that the liability became enforceable in this assessment year, i.e. 1983-84, because the demand was made during the accounting period by the Collector on March 4,1983. The Revenue's grievance is that the letter, dated March 4, 1983 from the Tehsildar was only for the realization of arrears of demand as the demand has rightly been raised when the Market Committee, Sirsa, asked the assessee to deposit the amount of Rs.3,37,579.90 by December 10, 1980. The Tribunal took the facts and legal aspects of the demand of market fees into consideration. The Tribunal relied on the two judgments of this Court in the cases of CIT v. Orient Supply Syndicate (1982) 134 ITR 12 and Shalimar Chemical Works (Pvt.) Ltd. v. CIT (1987) 167 ITR 13 and held that the liability was allowable in the assessment year 1983-84. The Department's grievance is that the Tribunal has ignored the principles laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363.

It has been submitted by learned counsel for the Revenue that the decision in CIT v. Orient Supply Syndicate (1982) 134 ITR 12 (Cal.) is not applicable to the facts of the present case. It is well-settled that, unlike the cash system of accounting, in the mercantile system of accounting, the assessee is entitled to the deduction in that year, at the time the liability arises, and not in the year when the liability is enforced or discharged.

We have considered the respective submissions of the parties and decisions cited from the Bar, which are as follows:

(1) CIT v. Orient Supply Syndicate (1982) 134 ITR 12 (Cal.);

In this case, the assessee-firm which followed the mercantile system of accounting claimed a deduction of Rs.29,008 for the assessment year 1964-65 as provident fund contribution made by the assessee under the Employees' Provident Funds Act, 1952. The Income Tax Officer and the Appellate Assistant Commissioner disallowed the claim on the ground that the contribution related to earlier years. On further appeal, the Tribunal found that though this was a statutory liability under the Employees' Provident Funds Act to make contributions, it was never enforced under the Act in the earlier years, and it was only in the year under appeal that the Regional Provident Fund Commissioner called upon the assesee to make the statutory contributions for the entire period from November, 1957, and that since the demand for the statutory contribution was made by the authorities for the first time during the year under appeal, the entire amount paid in that year was an allowable deduction. A letter addressed to the assessee by the Regional Provident Fund Commissioner indicated that a decision was pending for compliance with the statute for the period November 1, 1957, to December 31,1960.

On the aforesaid facts, it was held on a reference that part of the statutory liability admittedly accrued in the year in question and in part became real and enforceable in the year in question though referable to the earlier years. The sum of Rs.29,008 was, therefore, allowable as a deduction for the assessment year 1964-65.

It is not in all cases correct to say that a statutory liability discharged in a particular year became eligible for deduction in the year in question under the mercantile system of accounting. It depends on the facts and circumstances of the case on the statutory provisions.

(2) Shalimar Chemical Works Private Ltd. v. CIT (1987) 167 ITR 13 (Cal.):

In this case, under the Employees' State Insurance Act, 1948. as originally promulgated, only the employees who worked in the factory of an employer came under the purview of the Act. By Act No. 44 of 1966, other categories of employees also were brought within the purview of the Act. The employees did not accept the extended definition of "employees" in the substituted section and challenged the validity of the same in different High Courts. The Calcutta and Delhi High Courts held against the employers but the Madras High Court took a different view. The Employees State Insurance Authorities preferred appeals from the decision of the Madras High Court.

The assessee-company which came within the purview of the substituted section 2(9) of the Act became liable to contribute for insurance to the Employees State Insurance Corporation but did not make any contribution as required by the substituted section nor did it initiate any proceedings challenging the substituted section 2(9). The Employees' State Insurance Authorities informed the assessee in January, 1974, about the decisions of the Courts and also demanded contributions as per the substituted section. On a further demand being made by the Authorities on February 20, 1974 the assessee agreed to pay the contribution as demanded.

For the assessment year 1975-76, the assessment claimed deduction of Rs.45,191 as expenditure incurred on account of contribution to the ,Employees' State Insurance Corporation for the period from January 28, 1968 to June 30, 1973. The Income Tax officer rejected the claim for deduction on the ground that the same was not a liability for the year under consideration. The Appellate Assistant Commissioner affirmed the order of the income Tax officer on the ground that as the assessee followed the mercantile system of accounting, the liability accruing under a statute was allowable as a deduction in the year when the liability accrued and since the liability accured under the statute itself as amended and the assessee did not make any provision for such liability in the earlier years, the same was not an allowable deduction for the assessment year 1975-76. The Tribunal affirmed the order of the Appellate Assistant Commissioner. On the aforesaid facts, it was held, on a reference that, though the statutory liability was created by Act No.44 of 1966, the liability became real and enforceable in the relevant subsequent year though the demand was referable to the earlier years. The position was clarified by the High Courts upholding the validity of the extension of the statute after which the assessee was called upon to discharge its liability. From a commercial point of view, the assessee was at that stage entitled to treat the demand of the Employees' State Insurance Authorities as final and enforceable and the liability as having accrued on the said demand at that stage. Therefore, the sum of Rs.45,191 was allowable as a deduction for the assessment year 1975-76.

In the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), the facts, inter alia, are that the assessee-company, which followed the mercantile system of accounting, incurred a liability of Rs.1,49,776 on account of sales tax determined by the sales tax authorities to be payable on the sales made by it during the calendar year 1954, the previous year relevant to the assessment year 1955-56. The sales tax demand was raised pending the income?-tax assessment for that year. The Income Tax Officer rejected the assessee's claim for deduction of that amount on the ground, (i) that the assessee had contested the sales tax liability in appeals, and (ii) that it had made no provision in its books with regard to the payment of that amount. The appeals to higher authorities or Courts taken by the assessee contesting its liability to pay the sales tax ultimately failed. On the aforesaid facts, it was held that the moment a dealer made either purchases or sales, which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee which followed the mercantile system of accounting was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year. The assessee was entitled to the deduction of the sum of Rs.1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assesee did not prevail. Further, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction either under section 10(1) or under section 10(2)(xv).

Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.

The general principles laid down by the Supreme Court Kedarnath Jute Manufacturing Co. Ltd. (1971) 82 ITR 363 (SC), are no doubt binding but the- said general principles are not inflexible and, in the special facts and circumstances, an exception could be made. The facts in the instant case are quite different and it is not necessary to apply the principles laid down in the case of Kedarnath Jute Manufacturing Co. Ltd. (1971) 82 ITR 363 (SC).

In our view, on the facts and circumstances of the instant case, the principles laid down by this Court in Orient Supply Syndicate's case (1982) 134 ITR 12 (Cal.) become applicable. The statutory liability no doubt was created when the Government of Haryana issued the Ordinance in this respect and when the Market Committee of Sirsa asked the assessee to deposit the amount by December 10, 1980, the said liability became real and enforceable in the relevant subsequent year though the demand was referable to the earlier years. As held by the Division Bench of this Court in the case of Shalimar Chemical Works (Private) Ltd. v. CIT (1987) 167 ITR 13 (Cal.) to which one of us was a party, we are also of the opinion that, from a commercial point of view, the assessee was at that stage entitled to treat the demand of the market fee as final and enforceable and contend that the liability accrued on the basis of the said demand at that stage. The earlier decision of the Division Bench of this Court is binding on us. In any event, we are not inclined to take a different view and refer the matter to a larger Bench.

For this reason, the aforesaid question No.l is answered in the negative and in favour of the assessee.

Question No.2 is also answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

AJIT K. SENGUPTA, J.---I agree.

M.B.A./167/T.F.????????????????????????????????????????????????????????????????????????????????? Order accordingly.