TMI Blog1991 (4) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... " 3. The assessee M/s. A.P. Paper Mills Ltd. is a Public Limited Company engaged in the business of manufacture of paper, the basic materials for the manufacture of paper being bamboo and hardwood. The assessee entered into a lease agreement on 20-7-1977 with the Government of Andhra Pradesh for the supply of 1 lakh tonnes of bamboo annually. The agreement was for the period from 1-10-1975 to 30-9-1980. According to this agreement, the assessee was to pay royalty on bamboo at the rate of Rs. 60 per ton up to 30-9-1980. This agreement provided that the rate of royalty shall be revised by the Government at an interval of not less than 5 years. The five year period of this agreement came to an end on 30-9-1980. In pursuance of the clause contained in the agreement for revision of royalty for supply of bamboo, the Government of A.P. sent a letter on 6-2-1981 to the assessee stating that the royalty was to be revised from 1-10-1980 and that the matter was under the consideration of the Government and that a decision in this regard was likely to take some time. Pending the fixation of the revised rates, the State Govt. required the assessee to furnish an undertaking in the prescribed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of this stand namely that the liability accrued during the accounting period relevant to the assessment year 1982-83, reliance was placed on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The Commissioner of Income-tax (Appeals) reached the conclusion that the liability to pay the revised rates of royalty had accrued the moment the bamboos were felled and collected by the assessee and the assessee was well within its rights to provide for this liability as it was following the mercantile system of accounting. He accordingly allowed the appeal of the assessee and deleted the addition of Rs. 95,93,706 representing the enhanced royalty liability. 6. The present appeal by the Revenue is against the aforementioned order of the Commissioner of Income-tax (Appeals). The learned counsel for the department submitted that the Commissioner of Income-tax (Appeals) ought to have held that there was no enforceable liability to pay the enhanced amount of royalty by the assessee has accrued during the period relevant to the assessment year 1982-83. It is further submitted that the liability arising in this case is a contractual liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome contingent. On the other hand, the submission is that the liability accrued the moment the assessee had felled and collected the bamboos though the quantification of the liability was made vide G.O. dated 4-11-1981 subsequent to the closing of the accounting year. In support of this, reliance was placed on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. It is also submitted that even if the liability that arose in this case is not statutory in nature, but only contractual, yet the ratio of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. would still be applicable. In other words, the contention is that the principles laid down with regard to the accrual of liability in the case of Kedarnath Jute Mfg. Co. Ltd. would be applicable to liabilities that accrue or arise out of contractual obligations also. In support of this, reliance was placed on the decisions of the Madras Bench of the Tribunal in the case of ITO v. South India Viscose Ltd. [1988] 27 ITD 501 of Calcutta Bench of the Tribunal in the case of ITO v. Asoka Foundry Metal Works (P.) Ltd. [IT Appeal No. 778 (Cal.) of 1984 dated 12-9-1985], of the Bombay Bench i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the aforesaid Clause of the Agreement a revision in this case fell due on 1-10-1980. However, the revised rates of royalty could not be notified by the State Government by 1-10-1980. Therefore, the Government vide its letter dated 6-2-1981 informed the assessee-company that the proposed revision of rates was likely to take some time and in the meanwhile the assessee was requested to furnish an undertaking to the effect that it would abide by the new rates of royalty applicable 'to bamboo being supplied from 1-10-1980 onwards. In response to this letter, the assessee-company gave an undertaking dated 14-2-81 to the effect that it would continue to pay the old rates for the supplies made from 1-10-1980 subject to the condition that it shall pay the difference between the old rate and the new rate for all supply of bamboo from 1-10-1980 soon after the new rates are determined and communicated to it. In pursuance of this undertaking, the lessor permitted the assessee to fell and collect the bamboos during the period from 1-10-1980 to 30-6-1981. In this context, the first question that comes up for consideration is whether the liability of the assessee to pay the additional roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability 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 assessee did not prevail. 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." From the above, it is seen that the Court has laid down the following proposition : (i) that the Sales-tax liability accrues the moment a sale or purchase takes place, (ii) the liability does not cease to be a liability merely because proceedings had been taken by the assessee before the higher authorities for getting the sales-tax liability reduced or wiped out, (iii) although the liability could not be enforced till the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The undertaking imported a liability on the appellant which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed." 12. Applying the aforesaid decision to the facts of the present case, it follows that the undertaking given by the assessee to the Government of Andhra Pradesh to abide by the revised rates of royalty imports a liability. In other words, this undertaking of the assessee results in accrual of liability with regard to the revised rates of royalty. Since this undertaking was given on 14-2-1981, it was well within the last day of the accounting year, i.e., 30-6-1981 and there cannot be any doubt that the liability towards the revised rates of royalty had accrued during the period relevant to the assessment year 1982-83. 13. Further, in pursuance of the undertaking furnished by the assessee to the effect tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not cease to be an accrued one merely because the quantification of such liability was deferred beyond the last date of the accounting period. 15. The next question that arises for consideration is that since the assessee had challenged the revised rate of royalty fixed by the Government vide G.O. dated 4-11-1981 before the Andhra Pradesh High Court by way of a writ petition and that since the same was pending before the Court the liability of the assessee with regard to the revised rates of royalty would remain a contingent liability as contended by the learned Standing Counsel by placing reliance on the decision of the Supreme Court in the case of Hindustan Housing Land Development Trust Ltd. 16. In the case of Hindustan Housing Land Development Trust Ltd. certain lands belonging to the assessee were acquired by the State Govt. and the Land Acquisition Officer awarded compensation of Rs. 24,97,249. On appeal preferred by the assessee the Arbitrator enhanced the amount of compensation to Rs. 30,10,873. The State Government preferred an appeal to the High Court challenging the award of enhanced compensation by the Arbitrator and this appeal was pending before the Court. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies with regard to the payment of enhanced rates of royalty. Despite the agreement and also the undertaking given by the assessee to pay the revised rate of royalty, the assessee has chosen to challenge the reasonableness of the revised rates of royalty by filing a writ petition. It may be pertinent to note that in the writ petition filed by the assessee before the High Court, the assessee only questioned the extent of revision of the rates of royalty but not the right of the Government to revise the rates or the existing royalty. Thus, it may be seen that the challenge made in the writ petition pertains to the realm of quantification of the liability and not to the right of the Government to revise the rate of royalty. Therefore, even if the writ petition of the assessee was allowed, it would have only effected the extent of the revision and not negate the very right of revision of royalty of the Government. Therefore, with respect, we are of the view that the decision of the Supreme Court in the case of Hindustan Housing Land Development Trust Ltd. is distinguishable and the ratio laid down therein would not be applicable to the present case. 17. As already stated, the liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der dated 4-11-81. This being the factual position, the question as to whether the accrued liability loses its character as accrued liability since the assessee had chosen to challenge the revised rates of royalty before the High Court, no longer survives. 19. In view of what has been stated above, we hold that the liability to pay the enhanced amount of royalty on bamboo amounting to Rs. 95,93,706.75 had accrued to the assessee during the accounting year relevant for the assessment year 1982-83 and the same, therefore, qualifies for deduction in computing the assessable income of the assessee for that year. The same view was taken by the Commissioner of Income-tax (Appeals) in 'his appellate order dated 30-8-1985 and we confirm his order on this point. 20. The assessee had entered into an agreement with the Government of Andhra Pradesh for the supply of hardwood. The agreements relating to the financial years 1980-81 and 1981-82 are at pages 45 and 50 of the paper book respectively. Condition No. 13 of this agreement provides that the assessee will have to pay royalty at the rate of Rs. 30 per stack of hardwood. As per the agreement of the parties, the rates of the hardwood ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the revised rates of royalty on the hardwood did not accrue during the relevant assessment year 1982-83. Against this, the learned counsel for the assessee supported the order of the Commissioner of Income-tax (Appeals) and maintained that the same does not call for any interference. 22. We have considered the rival submissions. Since the facts and circumstances of the present case are identical to the facts and circumstances of the case concerning the accrual of liability relating to the revised rates of royalty on bamboos, for the detailed reasons recorded in paras 3 to 19 of this order, we hold that the liability to pay the enhanced amount of royalty on hardwood amounting to Rs. 89,07,955 accrued during the accounting year relevant to the assessment year 1982-83, and therefore, the same qualifies for deduction in computing the assessable income of the assessee for that year. The same view was taken by the Commissioner of Income-tax (Appeals) in his appellate order dated 30-8-1985 and we confirm his order on this point also. 23. To sum up, the answers to the questions posed are as follows: (i) The liability for payment of royalty is contractual ; (ii) The underta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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