COMMISSIONER OF INCOME-TAX VS KESAR SUGAR .WORKS LTD.
2001 P T D 743
[239 I T R 398]
[Bombay High Court (India)]
Before Dr. B. P. Saraf and Smt. Ranjana Desai, JJ
COMMISSIONER OF INCOME‑TAX
versus
KESAR SUGAR WORKS LTD.
Income‑tax Reference No.325 of 1987, decided on 15/06/1999.
(a) Income‑tax‑‑‑
‑‑‑‑Income‑‑‑Accrual of income‑‑‑Sugar industry‑‑‑On a writ, High Court by interim order allowing assessee to realise price in excess of levy price fixed by Government‑‑‑Dispute regarding price‑‑‑Amount realised by assessee in excess of levy price did not accrue to assessee‑‑‑Indian Income Tax Act, 1961.
The assessee was a company engaged in the business of manufacture and sale of sugar. In the previous year relevant to the assessment year 1979‑80, the assessee collected certain amounts in excess of levy price of sugar fixed by the Government of India by notification under the Sugar (Price) Determination Order, 1973. The collection was made in the following circumstances. The assessee challenged the notification and fixation of price by the Central Government thereunder before the Allahabad High Court by filing a writ petition. In the said writ petition, the High Court passed an interim order allowing the petitioner to charge Rs.175.45 per quintal of D‑20 grade sugar as against Rs.155.30 fixed by the Government and to retain the amount so collected as deposit on furnishing a bank guarantee in respect thereof. It was also mentioned in that order that in the event of the dismissal of the writ petition, the assessee would be required to pay interest at the rate of 12 percent. per annum on the said amount. During the previous year relevant to the assessment year 1979‑80, the assessee collected a sum of Rs.5,56,366 pursuant to the above order of the High Court and credited the same to the enhanced sugar price account in its books of account. The assessee did not include the said amount in its income. In the course of its assessment for the assessment year 1979‑80, the assessee contended before the Income‑tax Officer that the amount in question having been collected by the assessee pursuant to the interim order of the High Court subject to several conditions did not constitute its income until finalisation of the dispute by the High Court. The Income‑tax Officer did not accept this contention and included the amount of Rs.5,56,366 in the income of the assessee. The assessee appealed to the Commissioner of Income‑tax (Appeals), who accepted the contention of the assessee and directed the Income‑tax Officer not to include the said amount in the income of the assessee. The above order of the Commissioner (Appeals) was upheld by the Tribunal.
Later, the writ petition was dismissed by the High Court and the assessee was directed to refund the amount collected by it alongwith interest at the rate of 12 percent. per annum. The assessee‑company claimed that on account of dismissal of the writ petition it was required to pay interest at the rate of 12 percent. per annum on the said amount whereas it was receiving interest thereon at the rate of 6 percent. per annum. The difference was claimed by the assessee as deduction in the computation of its income for the assessment years 1978‑79 and 1979‑80. The Income‑tax Officer disallowed the deduction on the ground of pendency of appeal before the Supreme Court against the order of the Allahabad High Court. The assessee appealed to the Commissioner of. Income‑tax (Appeals) who allowed the deduction. The order of the Commissioner (Appeals) was confirmed by the Tribunal. On a reference:
Held, (i) that the amounts collected by the assessee at the enhanced rate could not be assessed as the income of the assessee (as income accrued to the assessee) until the finalisation of the dispute pending before the Court in favour of the assessee.
CIT v. Seksaria Biswan Sugar Factory (Pvt.) Ltd. (1992) 195 ITR 778 (Bom.) and CIT v. Sharda Sugar Industries Ltd. (1999) 239 ITR 393 (Bom.) fol.
(b) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Interest‑‑‑Sugar industry‑‑‑Price realised in excess of levy price fixed by Government‑‑‑High Court directing refund excess with interest at the rate of 12 percent. per annum‑‑‑Liability to pay interest was an actual liability‑‑‑Appeal to Supreme Court did not alter position‑‑‑Amount of interest was deductible‑‑‑Indian Income Tax Act, 1961, S.37.
Admittedly, the claim for deduction of interest in this case was made by the assessee only after the dismissal of the writ petition by the Allahabad High Court with a direction to refund the amount alongwith interest at the rate of 12 percent. per annum. After the order of the Allahabad High Court the liability on account of interest became an actual liability in praesenti. It was no more a liability de futuro. The assessee was maintaining mercantile system of accounting. In such a situation, deduction cannot be denied to the assessee on the ground that the assessee was disputing the liability in appeal before the Supreme Court. It was no more a contingent liability. That being so, the assessee was entitled to deduction of the amount of interest in the years under consideration.
Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 and (1971) 28 STC 672 (SC) applied.
P.S. Jetley with R.V. Desai for the Commissioner.
S.J. Mehta with I. M. Munim for the Assessee.
JUDGMENT
DR. B.P. SARAF, J.‑‑‑By this reference under section 256(1) of the Income Tax Act, 1961, the Income‑tax Appellate Tribunal has referred the following questions of law to this Court for opinion at the instance of the Revenue:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs.5,56,366 credited by the assessee to the enhanced levy sugar price account' in the books of account for the previous relevant year of the assessment year 1979‑80, was not income which had accrued in that year and was not, therefore, chargeable to income‑tax for the assessment year 1979‑80.
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest of Rs.69,529 and Rs.1,30,097 on the excess amount received on delivery of levy sugar in pursuance of the interim order of the High Court, dated May 17, 1975, constituted deductible liability in the computation of profits and gains of the business of the assessee for the assessment years 1978‑79 and 1979‑80, respectively?"
This reference pertains to the assessment years 1978‑79 and 1979‑80, the relevant accounting years being the years ended on September 30, 1977, and September 30, 1978, respectively. The material facts giving rise to question No. 1 areas follows:
The assessee is a company engaged in the business of manufacture and sale of sugar. In' the previous year relevant to the assessment year 1979‑80, the assessee collected certain amounts in excess of levy price of sugar fixed by the Government of India by notification under the Gugar (Price) Determination Order, 1973. The collection was made in the following circumstances. The assessee challenged the notification and fixation of price by the Central Government thereunder before the Allahabad High Court by filing a writ petition. In the said writ petition, the High Court passed an interim order allowing the petitioner to charge Rs.175.45 per quintal of D‑20 grade sugar as against Rs.155.30 fixed by the Government and to retain the amount so collected as deposit on furnishing a bank guarantee in respect thereof. It was also mentioned in that order that in the event of the dismissal of the writ petition, the assessee would be required to pay interest at the rate of 12 percent. per annum on the said amount. During the previous year relevant to the assessment year 1979‑80, the assessee collected a sum of Rs.5,56,366 pursuant to the above order of the High Court and credited the same to the enhanced levy sugar price account in its books of account. The assessee did not include the said amount in its income. In the course of its assessment for the assessment year 1978‑80, the assessee contended before the Income‑tax Officer that the amount in question having been collected by the assessee pursuant to the interim order of the High Court subject td several conditions did not constitute its income until finalisation of the dispute by the High Court. The Income‑tax Officer did not accept this contention and included the amount of Rs.5,56,366 in the income of the assessee. The assessee appealed to the Commissioner of Income‑tax (Appeals), who accepted the contention of the assessee and directed the Income‑tax Officer not to include the said amount in the income of the assessee. The above order of the Commissioner (Appeals) was upheld by the Income‑tax Appellate Tribunal ("the Tribunal"). At the instance of the Revenue, the Tribunal has referred question No. 1.
We have heard learned counsel for the parties. The controversy in question No. 1 stands concluded by the decision of this Court rendered today in Income‑tax Reference No.93 of 1987‑‑‑CIT v. Sharda Sugar Industries Ltd. (1999) 239 ITR 393 and the earlier decision in CIT v. Seksaria Biswan Sugar Factory (Pvt.) Ltd. (1992) 195 ITR 778, wherein it has been held that the amounts collected by the assessee at the enhanced rate could not be assessed as the income of the assessee (as income accrued to the assessee) until the finalisation of the dispute pending before the Court in favour of the assessee. In CIT v. Sharda Sugar Industries Ltd. (1999) 239 ITR 393, the legal position has been summed up thus (page 398):
"The law is, thus, well‑settled that where the right to receive payment is in dispute, no income will arise or accrue. In the present case, admittedly, the amounts in question were collected and retained by the assessee as deposits pending the final decision of the writ petition by the Allahabad High Court pursuant to the interim order of that Court and that too subject for furnishing a bank guarantee in respect thereof. There was a serious dispute about the right of the assessee to receive the amount collected by the assessee. In other words, the right to receive the amount was inchoate or contingent. The extra amount did not accrue to the assessee until the finalisation of the dispute pending in the Court in favour of the assessee. The assessee was accountable for the excess collection and obliged to refund the same if so directed by the Court. Such amounts collected by the assesses are not assessable as the income of the assessed.
Following the above decision, question No. 1 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
The controversy in question No.2 pertains to deductibility of the interest from the differential amount received by the assessee on levy sugar in two assessment years, viz., 1978‑79 and 1979‑80, which became repayable together with interest at the rate of 12 percent. per annum in the years under consideration. As stated earlier, the assessee collected certain amounts in excess of levy sugar prices fixed by the Central Government and retained the same as deposit pursuant to the interim order of the Allahabad High Court, dated May 17, 1974, on condition that in the event of dismissal of the writ petition, such amounts shall be refunded alongwith interest at the rate of, 12 percent. per annum. The assessee was also required to furnish a bank guarantee. The assessee deposited the amounts collected by it pursuant to the order of the High Court in fixed deposits and was receiving interest thereon at the rate of six percent. per annum. Later, the writ petition was dismissed by the High Court and the assessee was directed to refund the amount collected by it alongwith interest at the rate of 12 percent. per annum. The assessee‑company claimed that on account of dismissal of the writ petition it was required to pay interest at the rate of 12 percent. per annum on the said amount whereas it was receiving interest thereon at the rate of six percent. per annum. The difference was claimed by the assessee as deduction in the computation of its income for the assessment years 1978‑79 and 1979‑80. The Income‑tax Officer disallowed the deduction on the ground of pendency of appeal before the Supreme Court against the order of the Allahabad High Court. The assessee appealed to the Commissioner of Income‑tax (Appeals) who allowed the deduction. The order of the Commissioner (Appeals) was confirmed by the Tribunal. Hence, this reference of question No.2 to this Court at the instance of the Revenue.
We have carefully perused the order of the Tribunal in the light of the facts of the case. Admittedly, the claim for deduction in this case was made by the assessee only after the dismissal of the writ petition by the Allahabad High Court with a direction to refund the amount alongwith interest at the rate of 12 percent. per annum. The question that arises for consideration is whether even after the dismissal of the writ petition by the High Court the liability continued to be a contingent liability.
We have carefully considered this controversy. The Income‑tax law makes a distinction between 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 controversy to be decided in this case, therefore, whether the present liability accrued against the assessee in the assessment years under consideration. This has to be decided by taking into account all the facts and circumstances of the case. If the liability is an actual liability in praesenti in the year under consideration, it is deductible. If it is a contingent liability, it cannot be the subject‑matter of deduction even under the mercantile system of accounting. There is no dispute in the present case that in the years under consideration the liability to pay interest was an actual liability. It was no more contingent. There is no dispute on this count. The only ground on which the claim of the assessee for deduction was denied by the Income‑tax Officer was that the assessee was disputing the liability by filing an appeal to the Supreme Court: This view of the Income‑tax Officer did not find favour with the Commissioner (Appeals) arid the Tribunal. The law in this regard is well‑settled by the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363, that if there is actual liability in praesenti, deduction cannot be denied on the ground that the assessee is disputing the liability. As a result, in the case of an assessee maintaining the mercantile system of accounting, The amount payable by the assessee 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., section 43B of the Income Tax Act, 1961, as inserted by the Finance Act, 1983, with effect from April 1, 1984, which provides that certain liabilities can be deducted only on actual payment).
In the present case, after the order of the Allahabad High Court dismissing the writ petition with direction to the assessee to pay the amount with interest at the rate of 12 per annum, the liability on account of interest became an actual liability in praesenti. It was no more a liability de futuro. The assessee was maintaining the mercantile system of accounting. In such a situation, deduction cannot be denied to the assessee on the ground that the assessee was disputing the liability in appeal before the Supreme Court. The assessee is entitled to get a deduction on account of interest in the years in which the liability ceased to be liability de futuro. It was no more a contingent liability. That being so, the assessee was entitled for deduction of the amount of interest in the years under consideration. The Tribunal was justified in allowing the deduction on account thereof. In view of the above, we answer question No.2 in the affirmative, i.e., in favour of the assessee and against the Revenue.
This reference stands disposed of accordingly with no order as to costs.
M.B.A./230/FCOrder accordingly