TMI Blog2006 (1) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... r passed under section 143(3) and its subsequent rectification under section 154, the income of the year was determined at Rs. 2,78,03,100. In this assessment, the Assessing Officer rejected the books of account on the premise that the assessee had shown bogus production and sale of fertilizers in order to avail the benefit of subsidy, being a grant allowed by the Government of India for this purpose. The Assessing Officer recasted the manufacturing, trading P L account and in which the entire subsidy of Rs. 4,27,68,409 [Rs. 3,82,53,695 received during the year under consideration and Rs. 45,14,715 pertaining to the previous year] was considered as income of the assessee. The assessment order was upheld in the first appeal. However, the Tribunal vide its order dated 7-5-1999 restored the question of subsidy to the file of the Assessing Officer with the direction to examine the fact that if the production was not genuine and the assessee had to remit the subsidy amount to the Government, could it be subjected to tax. The Tribunal further directed that if the production was held to be bogus it should also be ascertained whether the assessee had remitted the subsidy pertaining to bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant. The Assessing Officer did not accept the assessee's contentions mainly for the following reasons: (i) The question, whether a receipt of money is taxable or not or whether deduction from that receipt is permissible or not, has to be decided according to the principles of law and not in accordance with the accountancy practice [B.S.C. Footwear Ltd v. Ridgway (Inspector of Taxes) [1970] 77 ITR 857 (CA)] and Tuticorn Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 1721 (SC). Further the decision at U.P. State Industrial Corpn.'s case was found to be inapplicable to the appellant's case. (ii) The decision of the Hon'ble Supreme Court given in the case of Kedarnath lute Mfg. Co. would also not apply as the facts of the case were different from that of the appellant. Even otherwise, once a receipt had been declared as income it could not be held that it did not accrue if in a subsequent year a dispute arose regarding the production. (iii) The subsidy given to recoup the cost of production was a revenue receipt in the hands of the appellant [Sahney Steel Press Works Ltd. v. CIT [1997] 228 ITR 2532 (SC) and other cases]. As per the facts the subsidy amount was cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, not in the nature of income because the liability to repay crystallized when CBI enquiry was conducted. On a specific question raised from the Bench, it was stated that the proceedings before the CBI started in 1994 have not yet been decided and further the amount of subsidy has still not been refunded. However, it was emphasized that the accrual of income of subsidy got deferred and the very liability to repay the amount, wrongly collected earlier from the Government, had arisen by virtue of the CBI enquiry. He relied on certain decisions and Accounting Standards of Institute of Chartered Accountants of India to contend that the amount of subsidy cannot be put to tax. On a further query from the Bench, it was conceded by the ld. A.R. that in the immediately preceding assessment year, namely, 1990-91 for which such production was also held to be bogus, the taxability of the amount of subsidy having been offered for taxation, was not assailed before the appellate forums for not taxing it. However, it was maintained that the assessee's right to claim deduction for this amount should not be adversely g viewed simply on this ground, more specifically when it is duly in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment discussed this aspect and eventually restored the matter to the file of the Assessing Officer with the following directions: "There are so many conditions for granting subsidy and if the conditions are not fulfilled, then the subsidy has to be refunded back to the Government. There is a specific condition that if it is found that the production is not genuine then in that case the assessee has to remit back the subsidy amount to the Government. Therefore, we are of the considered opinion that the matter should be restored to the file of the Assessing Officer to examine the case from this angle. There is no doubt that the production was held to be ingenuine and bogus. In these circumstances, whether the assessee has remitted subsidy back to the Government or not or whether it is taxable in the hand of the assessee or not. For this purpose the matter is restored to the file of the Assessing Officer. The Assessing Officer is further directed to give opportunity to the assessee to explain his side." The assessee in the first ground is questioning the jurisdiction of the Assessing Officer in considering the matter afresh by over - looking the directions given by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee not only lodged its claim in respect of bogus production/sales, but also received the amount after due acceptance by the Government and was also reflected in its books of account. Hence income for subsidy accrued when it filed its claim and on its subsequent receipt the transaction came to an end i.e., the income was realized after having accrued. At the time when the claim of subsidy was made by the assessee, there was no dispute regarding the assessee's right to receive it. The same was eventually passed and the assessee recognized the income in its books of account. However, the subsequent development, being the detection of bogus production jeopardized the assessee's right to such subsidy. Whereas the assessee is claiming before us that the finality to the original subsidy claim has been unsettled with the further developments E and hence, it cannot be recognized as income, the stand point of the department is that the income has, in fact, been accrued and realized. We observe that once an amount in the nature of income [not advance] is received after accrual, it would remain income even if the dispute for its repayment arises subsequently. The rationale behind this propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generate and supply electricity to the Godhra area. The assessee-company was the successor of the LSC company and the State Government fixed the charges for supply of electricity with effect from 1-2-1952. After the amendment of the Electricity [Supply] Act, 1948 in 1956 the assessee-company increased the charges. This unilateral increase in the rates led to the institution of suits by consumers, which were decided in favour of the consumers by the trial court, but the High Court held that the assessee-company was entitled to enhance the charges unilaterally subject to the specified conditions. As the subject-matter was in dispute, the assessee-company was not able to realize the enhanced charges from the consumers. The suit was decreed in favour of the consumers by the Civil Judge. While the said suit was pending before the trial court, the Gujarat Electricity Board purchased the undertaking of the assessee-company. For the prior period the assessee-company was assessed on the basis of accounts maintained according to the Mercantile System and the Income-tax Officer included this amount in the total income of the assessee on the ground that the suit filed against the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, being production and sales. Even though a part of the sales and production was held to be bogus but the claim of subsidy in connection with such production/sales cannot be construed as non-germane to the business operations. It is palpable that the receipts, which are referable to the business operations of the assessee, cannot be regarded as non-trading receipts. The subsequent development of detection of bogus production/sales cannot mar the character of receipt in the hands of the assessee. The Hon'ble Kerala High Court in the case of Father Epharam v. CIT [1989] 176 ITR 78 considered the case of a priest, monastery receiving remittances from abroad. It was held that such receipts were traceable to vocation of assessee as priest and the amount remaining with him was assessable as income. It is austere that the assessee cannot be allowed to make conflicting claims before different authorities, viz., he cannot claim before the I.T. department that the subsidy may not be taxed because the related referable production was not made and at the same time submit before the District and Sessions Court and Court of Judicial Magistrate that it had a right of subsidy and it should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounting practice and the taxability is to be examined on the basis of the provisions of the Act. It has been further held in this case that "it has to be seen whether at the point of accrual the amount is of a Revenue nature, if so, the amount will have to be taxed." We further find that the Amritsar Bench of the Tribunal in the case of Dy. CIT v. Sterling Steels Wire Ltd. [2004] 91 ITD 564 has held to the same effect that the accountancy practice would not necessarily be relevant insofar as taxability is concerned. This order of the Amritsar Bench has been affirmed by the Hon'ble High Court in the case of Sterling Steels Wires Ltd. v. Dy. CIT [2004] 271 ITR 260 (Punj. Har.). The case relied upon by the ld. A.R. in U.P. State Industrial Development Corpn.'s case in support of the proposition that the principles of commercial accounting should be applied in ascertaining the profits and gains, is distinguishable for more than one reasons. Primarily that was a case in which the question of deducting underwriting commission from the cost of unsubscribed shares was involved wherein it was held that the underwriting commission in respect of shares held by the assessee would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of such subsidy as well. It was contended that the assessee was maintaining its books of account on Mercantile System and therefore, liability to pay such amount be recognized and the deduction be allowed. It is self-evident that in such a system of accounting, the amount becomes deductible when liability to pay arises. The actual payment is not a relevant consideration to decide the fact as to whether the liability to pay has arisen or not. If the liability arises in the year then the deduction is to be allowed even if such liability has to be quantified and discharged at a later date, but where the liability is dependent upon a contingency, it cannot be ranked as a debt till such contingency happens. Only when such contingency happens and the amount becomes the ascertained debt, that it qualifies for deduction. Where the incurring of liability is not certain, it is said to be contingent liability and hence, cannot be allowed as deduction. In the instant case, we find that the claim of the assessee is dependent upon the contingency, which may or may not happen in the future as the assessee is disputing the matter in the civil court that it had right over subsidy and it should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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