TMI Blog1992 (2) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... these are being disposed of by a common judgment. During the relevant previous years, namely, calendar years 1966 and 1967, the assessee was engaged in the business of manufacture and sale of cement. The sale price and distribution of cement have been subject to varied terms of control by the Government. In order to appreciate the controversy revolving around question No. 1, it is necessary to give the background of the nature and regulation pertaining to the sale and distribution of cement at various points of time, because, we feel, the same has an important bearing on the issue involved. For this purpose, we can do no better than to quote from the judgment of this court in L. P. A. No. 17 of 1970 (R. D. Aggarwala v. Union of India), wherein the validity of the Cement Control Order, 1967, issued by the Central Government in exercise of its powers under the Industries (Development and Regulation) Act, 1951, was upheld : "From 1926 to July, 1942, the market price of cement was free. During the said period, the indigenous industry is stated to have been struggling for its existence against foreign competition, and its then seven constituent units formed themselves into an assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices was fixed for naked cement, and packing charge was notified separately every quarter and collected from consumers. By a resolution dated October 20, 1960, the Government of India, being of the opinion that a comprehensive review of the cement industry taking into account all aspects of the industry such as production, prices, distribution, development, etc., was necessary, requested the Tariff Commission to conduct a fresh inquiry, submitted its report on August 26, 1961 ... The final fair ex works selling prices of naked cement for 19 units in the industry were given in paragraph 14.2 of the report. The said prices varied from Rs. 67.50 to Rs. 103.00 per tonne. The Government considered the report, and passed a resolution on October 31, 1961 ... In that resolution, the Government, while agreeing in general with the approach of the Tariff Commission in its report, did not feel the increase, in full, recommended by the Commission to be necessary, and fixed the uniform ex works price of naked cement at Rs. 69.50 per tonne for the industry . The Government allowed an extra price for certain units. The other ancillary recommendations made by the Tariff Commission were just noted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Government consumers, State Governments, and other sponsoring authorities, and that each authority/consumer would, therefore have to contact the Cement Manufacturers' Association for guidance: (c) that, however, to enable a smooth change over from a long period of control to a period of decontrol, and to ensure that prices do not shoot up immediately after decontrol the Cement Manufacturers' Association agreed to form their own Central Organisation called the 'Cement Manufacturers' Sales Co-Ordinating Organisation' with headquarters in Bombay to take over the functions of the State Trading Corporation of India Limited so far as they relate to cement distribution ; and (d) a quantity equivalent to 50% of the total production of cement ... by each unit would be reserved for supply to Government indentors under the rate contract as per allotment indicated by the Department of Industry. By a letter dated December 16, 1966, the President of the Cement Manufacturers' Association replied to the Government of India appreciating and expressing gratitude for the Government's decision to implement the policy of decontrol, and informing the Government that under legal advice the Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cement in general and in regard to allocation and distribution of cement in particular. (b) To control, promote and regulate the equitable distribution of cement at a fair price and with that object, inter alia, to fix the destination price and the manufacturers' retention price ; to determine the packing charges realisable by members to fix the marketing expenses of each member ; to supervise the distribution arrangement and to frame such scheme or schemes for the said object as may be necessary or expedient. (c) To control, promote and regulate the distribution of cement to Government and other consumers throughout India by the members of the Organisation and with that object, inter alia, to maintain and operate from time to time the distribution and adjustment accounts and such other accounts as may be proper and expedient. (d) To frame schemes and by-laws from time to time for:-.... (ii) fixing, levying, compelling payment of and recovery of fines, fee, penalties and subscriptions in connection with any of the objects of the Organisation ..." On the same date, viz., February 16, 1966, the articles of association were also drawn up. This was also signed by the above 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so determined. 6. Each of the members agrees to accept and maintain the differential retention prices so fixed by the Organisation for each of them from time to time and for that purpose irrevocably empowers the Organisation to fix retention prices for each of them. 7. Each member agrees that such of them who have been compelled by Government action to use oil instead of coal or have accordingly plants under installation without coal firing facilities as on 1st January, 1966, shall continue to be reimbursed the additional cost for using oil and authorise the Organisation to determine the quantum of the said reimbursement until discontinuance of the use of oil by the member. The members concerned undertake to explore the possibilities and take necessary steps to discontinue the use of oil and use coal instead as early as practicable and approach the Central Government both directly and through the Organisation for giving such facilities as may be required therefor. 8. The Organisation is empowered by each member to issue directions and instructions to the members from time to time pursuant to the powers vested in the Organisation by the memorandum and articles of association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the balance, if any, to the Organisation within thirty days after expiry of the month to which the supplies relate. If such balance is not actually determined, payment shall nevertheless be made on the basis of an estimate which shall be as accurate as possible and the final adjustment shall be made subsequently as soon as the balance has been actually determined but in any event not later than forty-five days after the end of the month to which the supplies relate. 19. The remittances by each member, as set out in clause 18, shall be accompanied by a statement showing the free on rail destination price realised and the deductions made by it under the various heads mentioned in the said clause. In case the free on rail destination price is not sufficient to meet the above deductions, a statement showing the relative deficit shall be committed to the Organisation, who shall reimburse the member the amount due to it by the thirty-fifth day after the end of the month to which the supplies relate . . . 21. The Organisation shall fix one uniform free on rail destination price at rail head for the whole of India in respect of supplies to the public and one uniform free on rail de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consequences of the defaulting member . . . 36. If any member commits a breach of any of the provisions of this scheme or any default is made by a member in complying with any instruction and/or directive issued by the Organisation, the defaulting member, beside any other penalties shall be liable to pay to the Organisation for every such breach as the Organisation so decides to fine not exceeding rupees one lakh as may be determined by the Organisation at its absolute discretion." On June 20, 1966, there was a general meeting of the company, admittedly attended by the assessee as well, when till the acts of the Organisation including the scheme right from January 1, 1966, were approved, confirmed, ratified and adopted. There was a similar scheme drawn up for the calendar year 1967 which was also similarly approved by a general meeting of the company. From the above, it is clear that the whole idea of the scheme was that all the cement manufactured in the country had to be sold at a fixed price which might be called the "destination price". However, though the ultimate consumer paid the fixed "destination price" in respect of the cement purchased by him, the amount so fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of association and the scheme drawn up by the CACO, it had apparently certain reservations in mind. Starting with this initial reluctance, the assessee failed to make the payments of this freight surplus to the CACO every month as envisaged under the Scheme. The CACO objected to this and there was some controversy between the assessee and the CACO. However, in August, 1966, the assessee remitted to the CACO the freight surplus received by it during the months of January to May, 1966. Subsequent to the above incident, the assessee continued to send remittances in respect of the other surpluses pertaining to the months of June, July, August and September, 1966. In December, 1966, the assessee again raised an issue and disputed the right of the CACO to get the surplus from it. The CACO, however, did not accept the assessee's plea. Also about this time, was drawn up a scheme for 1967, to which again the assessee was a signatory. Notwithstanding these, the assessee failed to pay the remittances due to the CACO under the Scheme. For the previous year ending on December 31, 1966, and relevant to the assessment year 1967-68, out of the total sum of Rs. 18,58,690, it paid only a sum of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The amount was payable in monthly instalments of Rs. 50,000 each between November, 1974, and October, 1975, Rs. 1 lakh each between November, 1975 and May, 1977, and Rs. 1,50,000 in June, 1977, with interest at 6% on default. It was stated that the parties had agreed to the terms of consent on June 21, 1974. When the income-tax assessment for the assessment year 1967-68 was taken up, the Income-tax Officer was of the opinion that the surplus railway freight received by the assessee and retained by it formed part of the assessee's income assessable to income-tax. He, therefore, brought the entire receipts to tax. He also declined to allow the assessee the benefit of the deduction claimed in respect of the amounts credited to the "Claims Suspense Account". He, however, allowed as deduction, the actual amount reimbursed by the assessee to the CACO under the aforesaid arrangement during the relevant previous year. A similar treatment was accorded by the Income-tax Officer for the assessment year 1968-69 as well. The Appellate Assistant Commissioner also took the same view, in appeal and the matter had to be carried in further appeal to the Incometax Appellate Tribunal by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by it during the relevant previous year. That liability did not cease to be a liability because the assessee had taken the proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assesses did not prevail. The court further held that 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 the books of account be decisive or conclusive in the matter. Thus, in so far as the statutory liabilities are concerned, the issue appears to be settled that, if the 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 deduction in the year in which the liability arises notwithstanding the fact that lie is taking steps to dispute his liability. However, presently, we are concerned with a case where a provision is made for discharge of a liability in future not under a statute but tinder an agreement to which some dispute is also raised by the assessee. Before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was entitled to the deduction of the estimated gratuity payable tinder an agreement. The Supreme Court, relying on its earlier decision in the case of Shree Sajjan Mills Ltd. [1985] 156 ITR 585, held that the liability having arisen under an agreement accrued in the relevant year of accounts and that claim would be admissible, provided the provision for gratuity was based on "a legal and scientific basis". The real test, therefore, is that, if the amount eventually payable could be properly ascertained and its value commercially determined by an actuarial valuation which may be fastened on an assessee, in any year of accounting, that could be considered as deductible from its gross profits of the year in which such a liability is incurred. Thus, the question to be considered in this case is whether the assessee had incurred enforceable legal liability under the aforesaid arrangement with the CACO and it was capable of being commercially valued in the relevant previous year by an actuarial valuation. We have, therefore, to examine the arrangement scheme under which the assessee was obliged to pass on the freight advantage to the CACO, since the solution of the case would depend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country, if necessary, by transporting cement over long distances from surplus areas to deficit areas. Therefore, your claim that you are entitled to the freight advantage is not correct. The CACO is a 'no profit no loss' Organisation. The surpluses, if any, in the freight pool should be utilised by them only with the concurrence of Government. Your action in having withheld the freight advantage from October, 1966, has resulted in a loss to the CACO. They can neither afford this loss nor can afford to increase the free on rail price. Under the system of decontrol at present working and as agreed to by Government, it is the Government's firm opinion that you should return to the CACO whatever sums have been appropriated by you and it is Government's earnest desire that you should continue as a member of the CACO and ensure its smooth working." In the light of the aforesaid letter and the assessee's continued association with the CACO as its member, there is no doubt that the assessee and the CACO were bound with the terms of the scheme in question. Furthermore, the assessee acted under the scheme and in fact charged only destination price for the cement supplied by it as fixed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) Ltd. [1980] 124 ITR 74 is not applicable on the facts of this case. In that case, while holding that the assessee's liability on account of infringement commission could not be allowed in the year when it was demanded by its principals, the court had observed that the amount so claimed was negotiable and till the assessee admitted its liability at a particular rate, it was not an ascertainable liability which, we feel, is a significant distinguishing feature in the present case. We are, therefore, in agreement with the conclusion of the Tribunal that the assessee is entitled to a deduction of the amount of freight advantage payable by it to the CACO in respect of the previous years in question. So far as the second question is concerned, learned counsel for the Revenue has very fairly conceded that the answer to this question stands concluded against the Revenue by a Bench decision of this court in Dalmia Dadri Cement Ltd. v. CIT [1980] 126 ITR 851. In this view of the matter, we do not propose to go into greater details of the claim made by the assessee on account of its liability for the payment of gratuity to its employees and record our agreement with the view taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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