Income-tax---

----Business expenditure---Time of accrual of liability---Cooperative society sponsored by State Government manufacturing and selling exercise books to students as per order of State Government ---Assessee charging more than the price stipulated by State Government---State Government ordered after end of accounting year to remit excess sale price to State Government---Liability to remit excess sale price arose by virtue of Government order---Liability not deductible in accounting year although assessee maintained its accounts on mercantile system---Indian Income Tax Act, 1961, S.37.

The assessee was a cooperative society sponsored by the Government of Kerala. It was maintaining its accounts on the mercantile system. Under orders of the Government of Kerala, the assessee manufactured and distributed exercise books for students. Pursuant to an order passed by the Government on December 22, 1978, the assessee was required to sell the books in accordance with the directions given by the Director of Public Instructions at the price fixed by the Government from time to time. The Government had fixed a price of Rs.1.12 per note book containing 192 pages. The assessee on April 5, 1979, made a representation to the State Government for enhancing the price to Rs.1.20. The Government, by its order, dated June 6, 1979, rejected the said request and directed the assessee to distribute the books at the concessional rates provided in the Government order, dated December 22, 1978. The assessee on June 12, 1979, made a further request for increasing the rate. The Government, by order, dated August 17, 1979, rejected the said claim and directed that the enhanced price collected by the assessee in anticipation of the increase should be remitted to the Government immediately. The assessee made a provision in the books of account for the excess amount of Rs.3,48,405 payable to the Government. Admittedly, this provision had been made after the end of the accounting year, presumably as a follow-up action to the Government order, dated August 17, 1979. The assessee claimed deduction of the said amount on the basis of the provision so made. The assessing authority rejected the said claim on the ground that the liability, if any, had arisen only after the close of the accounting period and that too only by virtue of the Government order, dated August 17, 1979. The Tribunal confirmed this order. On a reference:

Held, that the liability for payment of the excess collection had arisen only by virtue of the Government order, dated August 17, 1979, which admittedly fell outside the accounting period ended on June 30, 1979. Therefore, it was clear that the provision made in the accounts after the close of the accounting period was not a permissible deduction.

T. R. Raman Pillai for the Assessee

P.K.R. non and N.R.K. Nair for the Commissioner

JUDGMENT

G. SIVARAJAN, J.---The Income-tax Appellate Tribunal, Cochin Bench, has referred for decision of this Court, the following question:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no accrual of liability for the assessee in a sum of Rs.3,48,405 for the assessment year 1980-81 being the provision made in the account towards refund of price collected in excess of the price fixed by the Government?"

The assessment year concerned is 1980-81. The relevant accounting period ended on June 3'0, 1979. The assessee is a registered cooperative society formed in 1966 with the object primarily to co-ordinate and facilitate the working of affiliated societies and to assist in the promotion and development of consumer cooperation. It is sponsored by the Government of Kerala. The main activities of the assessee are to purchase consumable goods from production centers and distribute the same for sales though district and primary cooperative societies and through retail outlets.

During the accounting period relevant to the assessment year in question, as per the orders of the Government of Kerala, the assessee manufactured and distributed exercise books for students. This is pursuant to an order passed by the Government on December 22, 1978, by which the assessee was required to _ sell the books in accordance with the directions given by the Director of Public Instructions at the price fixed by the Government from time to time. The Government had fixed a price of Rs.1.12 per notebook containing 192 pages. The assessee on April 5, 1979 made a representation to the State Government for enhancing the price to Rs.1.20. The Government by its order, dated June 6, 1979 rejected the said request and directed the assessee to distribute the books at the concessional rates provided in the Government order, dated December 22, 1978. The assessee on June 12, 1979, made a further request for increasing the rate. The Government by order, dated August 17, 1979 (Annexure "E" to the paper book) rejected the said claim and directed the assessee that the enhanced price collected by the assessee in anticipation of the increase should be remitted to the Government immediately.

The assessee is maintaining the accounts following the mercantile system of accounting. For the assessment year in question, the assessee made a provision in the books of account for the excess amount of Rs.3,48,405 payable to the Government. Admittedly, this provision had been made after the end of the accounting year, presumably as a follow up action to the Government order, dated August 17, 1979. In the assessment proceedings evidenced by Annexure "A", the assessee claimed deduction of the said amount on the basis of the provision so made stating that there is a liability to the State Government in regard to the excess amount collected. The assessing authority rejected the said claim on the ground that the liability, if any, had arisen only after the close of the accounting period and that too only by virtue of the Government order, dated August 17, 1979. The detailed reasons are contained in Annexure "A" under item 7. On appeal by the assessee, both the Appellate Assistant Commissioner of Income-tax (Appeals) and the Appellate Tribunal confirmed the order of the Income-tax Officer and dismissed the appeals.

The short question arising for consideration is as to whether, in the instant case, the liability to pay a sum of Rs.3,48,405 has arisen during the accounting period relevant to the assessment year in question. The admitted facts are: the assessee as per Government order, dated December 22, 1978, manufactured and sold note books to the students, that the Government order provided for the sale of note books, each containing 192 pages at Rs.1.12 that the assessee, contrary to the said directions and based on the representations, dated April 5, 1979, filed before the Government, sold the note books at the rate of Rs.1.20 that the Government rejected the said claim of the assessee by order, dated June 6, 1979, that further representation made by the assessee for increase in the rate was also rejected by the Government by order, dated August 17, 1979, and that the Government in the said order, dated August 17, 1979, specifically directed the assessee to immediately remit to the State Government the excess price collected by it. It is relevant to note at this juncture that neither the Government order, dated December 22, 1978, nor the Government order, dated June 6, 1979, provided far remittance of any excess amount collected by the assessee contrary to the stipulations contained in the said orders and that the liability for the first time has arisen only by virtue of the Government order, dated August 17, 1979. These facts are not disputed by the assessee.

The assessee who is maintaining the accounts following the mercantile system of accounting is entitled to made a provision for any liability that may be legally incurred during the accounting period notwithstanding the fact that the assessee had not effected payment of the same during the accounting period itself. Here, as we have already found the liability for payment of the excess collection had arisen only by virtue of the Government order, dated August 17,1979, which admittedly falls outside the accounting period ended by June 30, 1979. Therefore, it is clear that the provision made in the accounts after the close of the accounting period pursuant to the Government order, dated August 17, 1979, based on which the assessee has put forward a case is not a permissible deduction. We, accordingly, hold that the authorities under the Act are perfectly justified in disallowing the claim for deduction of a sum of Rs.3,48,405.

In view of what has been stated above, we answer the question referred for our decision in the affirmative, that is, against the assessee and in favour of the Revenue.

A copy of this judgment under the seal of this Court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench.

M.B.A./1565/FC

Reference answered