Income‑tax‑‑‑

‑‑‑‑Business expenditure‑‑‑Electricity company‑‑‑Accounts maintained on mercantile system‑‑‑Statutory "consumers' rebate reserve fund" not created and liability disputed‑‑‑Dispute settled in 1972‑73 and reserve created in that year for past years also‑‑‑Contribution relating to 1972‑73 alone allowable as deduction‑‑‑Indian Income Tax Act, 1961, S.37.

The assessee was an electricity company and maintained its accounts on the mercantile system of accounting. It was obliged under the Electricity (Supply) Act, 1948, to create a consumers' rebate reserve fund, but did not create any such statutory reserve in the accounting years 1950‑51 to 1964‑65. The assessee disputed its liability to make the reserve. The assessee settled the dispute and created a reserve of Rs.6,76,921 for all these years in 1972‑73. The taxing authorities; including the Tribunal, allowed deduction in respect of the reserve created for the accounting year 1972‑73 alone amounting to Rs.50,705 and disallowed the deduction in respect of the other accounting years. On a reference:

Held, that the sum of Rs.6,76,921 contributed during the previous year to the reserve for rebate to consumers in respect of the accounting years 1950‑51 to 1964‑65 was not to be deducted in arriving at the taxable profits of the assessee for the year 1972‑73.

CIT v. Central Provinces Manganese Ore Co. Ltd. (1978) 112 ITR 734 (Bom.) rel.

Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Pope The King Match Factory v. CIT (1963) 50 ITR 459 (Mad.) ref.

P.H. Aravind Pandian for Subbaraya Aiyar, Padmanabhan and Ramamani for the Assessee.

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

C. Kochunni Nair and S. Vinod Kumar for the Assessee.

JUDGMENT

OM PRAKASH, C.J.‑‑‑As per direction given under section 256(2) of the Income Tax Act, 1961, the Income‑tax Appellate Tribunal referred the following question relating to the assessment year 1978‑79 for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in finding that the assessee was entitled to a deduction of Rs.50,006 paid to Rajan and that the provisions of section 40A(3) do not stand in the way of the payment being allowed?"

The facts as found by the Appellate Tribunal are that the assessee made local purchases of cashew kernels. These purchases include purchase of 1,134 kgs. of cashew kernels worth Rs.50,000 made from one Sri Rajan. The Assessing Officer discovered that the payment was made through the bearer cheque, dated June 10, 1977, drawn on Federal Bank Ltd., Quilon. To test the genuineness of the payment, the Assessing Officer issued summons to Rajan, who was never produced for examination before him or before any other authority by the assessee. The cheque was honoured by the bank. The Assessing Officer, however, held that the payment was not made either by crossed cheque or by a crossed demand draft and the same was not even covered by the provisions of rule 6DD of the Income‑tax Rules, 1962. The Assessing Officer, therefore, applying section 40A(3) of the Act, disallowed deduction of Rs.50,000 and added the same to the returned income of the assessee.

The view taken by the Assessing Officer was accepted by the Commissioner of Income‑tax (Appeals) in this behalf. On further appeal, the Appellate Tribunal found as follows:

"(32)So we should hold that cashewnuts are horticultural produce and, therefore, payment made towards purchase of such cashewnuts is directly covered under the provisions of rule 6DD and comes under one of the exemptions under section 40A(3)."

Subsection (3) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of. which payment is made, after March 31, 1969, in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. Since payment is said to have been made by the bearer cheque to Rajan, the Assessing Officer took the view that the provisions of subsection (3) were attracted to the case and applying subsection (3) of section 40A he disallowed deduction of Rs.50,000.

In para 29 of its order the Appellate Tribunal also observed that the Assessing Officer also held that the payment was not covered by the provisions of rule 6DD. The Tribunal, however, held that the payment of Rs.50,000 made to Rajan is covered by rule‑6DD.

The Appellate Tribunal in its order, dated August 18, 1991 Annexure D in the paper book, observed as under:

"(5)????? The next question, to be seen is whether the payment, in the circumstances of the case, would come under rule 6DD(j) of the Income‑tax Rules. It is the Income‑tax Officer's case that the payment is not covered by exceptions provided in the rules. In our considered view though the payment made to a broker is not by way of an account payee cheque, inasmuch as the broker is only a conduit for other suppliers, circumstances might warrant the payment otherwise than by an account payee cheque. In such circumstances, exception is not ruled out under rule 6DD (j) of the Income Tax Rules."

From the perusal of the Tribunal's order it is patent that except the observations made under Annexure D in the paper book, no clear finding is recorded by the Tribunal as to under which clause of rule 6DD the payment made to Rajan by the bearer cheque is covered. The Tribunal simply observed that the payment made by the bearer cheque to Rajan is covered by rule 6DD. This finding of the Tribunal will lead us nowhere, inasmuch as rule 6DD contains clauses (a) to (j). It was, therefore, the duty of the Tribunal to record a clear finding as to under which clause of rule 6DD the payment in question falls. The learned senior standing counsel for the Revenue urges before us that cashewnuts are not the products of horticulture and, therefore, the same is not covered by rule 6DD(f). He further submits that rule 6DD(f) will apply only where the payment is made for the purchase of the products of horticulture to the cultivator, grower or producer of such articles, produce or products. The submission of learned senior standing counsel is that even in the order, dated August 13, 1991, Annexure D which was passed under rectification proceedings by the Tribunal, no finding was recorded that the payment was made by the assessee to growers or producers of the products of horticulture; rather the finding was that the payment was made to Rajan, who was a broker and a conduit for other "suppliers". It is correct that under the order Annexure D, the Tribunal simply held that the payment was made only to the broker, who was only a conduit for other suppliers. It is not elaborated by the Tribunal.

R. Sivaraman for C.V. Raj an for the Commissioner.

JUDGMENT

M.S. JANARTHANAM, J.‑‑‑The assessee, namely the South Madras Electric Supply Corporation Ltd., Tiruchirapalli, claimed a sum of Rs.8,15,903 being the contribution to "consumers' rebate reserve fund" for the assessment years 1951‑52, 1952‑53, 1955‑56, 1956‑57, 1960‑61 to 1965‑66, 1971‑72 and 1972‑73 relatable to the accounting years 1950‑51, 1951‑52, 1954‑55, 1955‑56, 1959‑60 to 1964‑65, 1970‑71 and 1971‑72. The assessee in fact was following the "mercantile system of accounting".

According to the provisions of the Electricity (Supply) Act, 1948, the assessee has to make a provision for rebate to consumers. The assessee denied its responsibility to create reserve for rebate to the consumers. The Government, however, did not agree with the contention of the company and the company had to create a reserve. There is a charge on the company. If only such reserve had been created in the relevant accounting years, it should have been allowed as a charge on the profits of the company.

Even when the Government quantified the reserve to be created, the company ignored such a direction and kept quiet. Finally, it had now claimed the entire contribution to the consumers' rebate reserve fund in the year in question, namely 1972‑73. It cannot claim the contribution, which the company should have made for earlier years against the profit of this year. It cannot be the case of the assessee that it was not aware of such provision in the Electricity (Supply) Act and the amount had been quantified and the liability had been fastened to the company only in the accounting year. The very fact that correspondence was going on between the Government and the company for a number of years establishes that it abdicated its responsibility to create the reserve and claim such contributions against the profit of the company in the relevant years. So, it cannot claim the arrears for earlier years against the profit of the year in question.

Accordingly, the Inspecting Assistant Commissioner of Income‑tax (Assessment) Trichy (for short "the IAC"), in the assessment year 1972‑73, allowed the contribution to the consumers' rebate reserve in a sum of Rs.50,705 and thus made disallowance of the rest of the claim for the earlier assessment years, that is to say, 1951‑52, 1952‑53, 1955‑56, 1956‑57, 1960‑61 to,1965‑66 and 1971‑72, relating to the accounting years 1950‑51, 1951‑52, 1954‑55, 1955‑56, 1959‑60 to 1964‑65 and 1970‑71..

On appeal, the Commissioner of Income‑tax (Appeals) VI, Madras 34, (for short "the CIT(A)"), concurred with the view of the Inspecting Assistant Commissioner.

On further appeal, the Income‑tax Appellate Tribunal, Madras Bench‑"D", Madras (for short "the Tribunal"), also concurred with the view of the Commissioner of Income‑tax (Appeals).

It is on these facts, the Tribunal, at the instance of the assessee, referred the question of law, as below, for the opinion of 'this Court:

"Whether, on the facts and circumstances of the case, the Income?tax Appellate Tribunal, is right in holding that a sum of Rs.6,76,921 contributed during the previous year to the reserve for rebate to consumers in respect of the accounting years 1950‑51 to 1964‑65, is not to be deducted in arriving at the taxable profits of the assessee?"

Arguments of Mr. P.H. Aravind Pandian, of Subbaraya Aiyar, Padmanabhan and Ramamani, learned counsel appearing for the assessee, and Mr. R. Sivaraman, learned counsel, representing Mr. C.V. Rajan, learned junior standing counsel, representing the Revenue, were heard.

It is not in dispute that the assessee did not create any such statutory reserve in the accounting years 1950‑51 to 1964‑65. Yet another fact, about which there is no dispute, is that the assessee had all along been disputing its claim to make a reserve and the assessee once and for all settled the dispute and created a reserve for all these years only in 1972‑73. The taxing authorities, up to the level of the Tribunal, allowed deduction in respect of the reserve created in the accounting year 1972‑73 and disallowed the deduction in respect of the other accounting years. The disallowance or deduction in respect of the other years is the issue covered by the question under reference. We have already referred to that the assessee had been maintaining his books of account in the "mercantile system of accounting".

Our attention had been drawn to the decision of a Division Bench of the Bombay High Court in the case of CIT v. Central Provinces Manganese Ore Co. Ltd. (1978) 112 ITR 734, wherein their Lordships ‑‑‑Kantawala C.J., and Chandurkar J. (as he then was), held the view that if a statutory liability arises in a particular year, then, an assessee maintaining his books of account on the mercantile system of accounting is entitled to claim a deduction in the year in which the liability arises notwithstanding the fact that he is taking steps to dispute his liability and he fails or omits to make entries in his books of account. The mere fact that such a deduction was not claimed before the Income‑tax Officer is not of much importance. If the liability arises, then a claim can be made bona fide at any stage before any higher authority, who is competent to grant relief.

In holding such a view, their Lordships applied the cases in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Pope the King Match Factory v. CIT (1963) 50 ITR 495 (Mad.). We respectfully agree with the view taken by their Lordships of the Bombay High Court.

On the face of the said decision, we are of the view that the Income?tax Appellate Tribunal is right in holding that the sum of Rs.6,76,921 contributed during the previous year to the reserve for rebate to consumers in respect of the accounting years 1950‑51 to 1964‑65 is not to be deducted in arriving at the taxable profits of the assessee. The question is answered accordingly.

The tax case (reference) is thus disposed of. There shall, however, be no order as to costs, on the facts and‑ in the circumstances of the case.

M.B.A./343/FC ????????????????????????????????????????????????????????????????????????????????? Order accordingly.