VS, 2000 PTD-KERALA-HIGH-COURT-INDIA 2737 (1999)

Income-tax---

----Business expenditure---Accounting---Mercantile system of accounting-- Assessee manufacturing plywood entering into agreement with Government for removal of timber from forests---Failure to remove timber within stipulated time---Additional ground rent claimed by Government in accounting year relating to assessment year 1983-84---Assessee disputing liability and filing a suit---Liability was contractual---Liability was disputed and would not accrue till dispute was settled---Amount was not deductible in assessment year 1983-84---Indian Income-tax Act, 1961, S.37.

If the assessee follows the mercantile system of accounting and the liability which accrued is disputed then the same could be claimed only when the dispute is settled. However, a statutory liability can be claimed in the year of accrual, notwithstanding of the fact that the same is disputed.

The assessee was engaged in the business of manufacture of plywood. The assessee was allotted various coupes and it could fell trees, cut and remove timber required for the manufacture of plywood. Under the terms of the agreement, the assessee had to cut and remove the timber by a specified date. The assessee failed to remove timber within the stipulated period on account of some labour trouble. The assessee, then applied for extension of time to remove the timber. Extension was allowed up to December 31, 1981, for removal of the logs subject to realisation of ground rent at double the maximum rate prescribed in the condition of the agreement. For the assessment year 1983-84, the assessee claimed before the Assessing Officer a deduction of a sum of Rs.4,42,330 being additional ground rent payable to the Divisional Forest Officer. The Tribunal found that the assessee was following the mercantile system of accounting and that the liability was contractual in nature and the same was disputed by the assessee as the civil suit was still pending. However, it allowed the deduction. On a reference:

Held, that the Tribunal itself clearly stated in its order that the additional ground rent was claimed by virtue of certain provisions in the agreement. There being no provision in the Act or in the Rules framed thereunder, the liability stemmed from the conditions as contained in the agreement entered into between the assessee and the Government. The assessee was seriously disputing the liability inasmuch as a civil suit was filed which was going on between the parties. The additional ground rent was not deductible in the assessment year 1983-84.

CIT (Addl.) v. Buckau Wolf New India Engineering Works Ltd. (1986) 157 ITR 751 (Bom.) distinguished.

Kedamath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) ref.

P.K.R. Menon, Senior Advocate and N.R.K. Nair for the Commissioner.

M. Rajagopal and C. S. Balagangadharan for the Assessee.

JUDGMENT

OM PRAKASH, C. J.---At the instance of the Revenue, the Income-tax Appellate Tribunal referred the following question relating to the assessment year 1983-84 for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the additional ground rent claimed by the Government was liable to be deducted as a liability in the computation of the assessee's business income in the year 1983-84?"

The facts, as found by the Appellate Tribunal, are that the assessee claimed before the Assessing Officer a deduction of a sum of Rs.4,42,330 being additional ground rent payable to the Divisional Forest Officer, Chalakudy. The assessee is engaged in the business of manufacture of plywood. The assessee was allotted various coupes and it could fell trees, cut and remove timber for the manufacture of plywood. Under the terms of the agreement, the assessee had to cut and remove the timber by a specified date. The assessee failed to remove the timber within the stipulated period on account of some labour trouble. The assessee, then, applied for extension of time to remove the timber. Extension was allowed up to December 31, 1981, for removal of the logs subject to realisation of ground rent at double the maximum rate prescribed in the condition of the agreement. This is how the Department raised a demand of Rs.4,42,330 which was disputed by the assessee firstly under a writ petition which was later withdrawn. The Tribunal found that the assessee later filed a civil suit which is still pending. The Tribunal clearly found in its order as under:

"In the case it is not in dispute that the additional ground rent that was claimed was by virtue of certain provisions in the agreement between the Government and the party."

From the above, it is amply clear that the liability to pay ground rent was contractual. Two facts are clearly established from the order of the Appellate Tribunal that the liability was contractual in nature and the same-is disputed by the assessee as the civil suit is till pending. The only question for consideration is that if a contractual liability is seriously disputed by the assessee, whether the same can be claimed on an accrual basis by the assessee who admittedly, followed the mercantile system of accounting in the relevant year. The Tribunal found as follows:

"The rule under which the Government is authorised or vested with the powers to charge the ground rent is under the Forest Act. The arrears of ground rent, it is not seriously disputed, could be collected if not paid by the assessee as arrears of land revenue. The demand for the additional sum of Rs.4,42,330 was made under a Government order. Even though initially the rights of the parties, namely, the Government's right to demand the payment and enforce the same took a statutory colour later. The rules framed by the Government have the force of law. Therefore, it cannot be said that what is involved in this case is a mere contractual liability."

' The Tribunal further observed as under:

"Where, the assessee follows the mercantile system of accounting, it would be open to the assessee to claim a liability in the year in which it accrued or if the same is disputed, in the year in which the dispute is settled if it is so chooses."

Learned standing counsel for the- Department vehemently argues before us that there is no provision in the Act relating to this liability and, therefore, the liability is not statutory in nature. Learned counsel for the assessee is not able to find out any provision in the Act or in the rules framed thereunder in this behalf. Moreover, the Tribunal itself clearly stated in its order that indisputably the additional ground rent was claimed by virtue of certain provisions in the agreement. The finding recorded by the Tribunal is, therefore, incongruous. On the one hand, the Tribunal found that the liability took a statutory colour and, on the other hand, the Tribunal clearly said that the liability stems from the conditions of the agreement. There being no provision in the Act or in the rules framed thereunder, we take it that the liability stems from the conditions as contained in the agreement entered into between the assessee and the Government.

The next question is whether there is any option in the case of an accrued liability to the assessee that the same can be claimed either in the year of accrual or in the year when the dispute is settled. We do not agree with the view taken by the Appellate Tribunal that the assessee is free to exercise such option under the law. It is well-settled that if the assessee follows the mercantile system of accounting and the liability which accrued is disputed then the same could be claimed when the dispute is settled. The assessee is seriously disputing the liability, inasmuch as a civil suit is filed which is going on between the parties. We are, therefore, of the considered view that the seriously disputed accrued liability could be claimed in the year when the dispute is settled. The position would have been different if it were a statutory liability. The statutory liability can be claimed in the year of accrual, notwithstanding the fact that the same is disputed.

The Tribunal reiterated as below:

"Where a liability has accrued, the same will have to be allowed even though some dispute might have been raised by an assessee. "

In support of the above view, the Tribunal relied on the decision of the Bombay High Court in Addl. CIT v. Buckau Wolf New India Engineering Works Ltd. (1986) 157 ITR 751, which, in turn, relied on Kedamath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC). The facts emerging in Buckau Wolf New India Engineering Works Ltd.'s case (1986) 157 ITR 751 (Bom.), are entirely different. In that authority, the assessee entered into an agreement in July, 1966, for the sale and transfer in Germany of technical know-how, workshop drawings and other requirements in connection with the manufacture of continuous centrifugal machines for a sugar industry in India. Under clause 5 of the said agreement, the consideration fixed for sale and transfer of this technical information, knowledge, know-how, experience, workshop drawing, and other documents was Rs.1,00,000. But the same was to be paid by five equated annual instalments. The first of such instalments was to be paid on or before the first day of October, 1966, and the remaining instalments were payable on or before the first day of October in each succeeding year. The assessee kept its accounts on the mercantile system. The assessee claimed the entire amount as deduction in the assessment year 1967-68 although it had not debited the entire amount in its books. The Tribunal held that the amount payable for know-how was revenue expenditure and the entire amount was deductible in the assessment year 1967-68. On these facts, the Bombay High Court held that the agreement between the assessee and its foreign collaborator clearly provided for a consideration of Rs.1,00,000 and that since the assessee followed the mercantile system of accounting, the entire amount was deductible in the assessment year 1967-68. It will be seen that in that authority, the accrued liability was not disputed and, therefore, reliance placed by the Tribunal in the instant case on this authority is misplaced.

In the result, we answer the above stated question in the negative, that is, in favour of the Revenue and against the assessee.

M. B. A./5/FC Reference answered.