TMI Blog1996 (3) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... lity for supply the natural gas on the old rate and it increased its price to Rs. 2,877 per 1000 cubic metre. The assessee approached the Hon'ble Gujarat High Court. The Hon'ble High Court gave an interim order directing the ONGC to supply the natural gas at Rs. 1,050 per 1000 cubic metres which was finally decided on 21st Dec., 1989, in pursuance to the judgment of Hon'ble Supreme Court and whereby the High Court fixed the rate at Rs. 1,400 per 1000 cubic metres. In pursuance of the said order dt. 21st Dec., 1989, of the Hon'ble High Court the assessee-company was to pay the price difference i.e., Rs. 350 (Rs. 1400—Rs. 1050) per 1000 cubic metre for the period from 15th Sept., 1986, to 31st March, 1989, which amounted to Rs. 1,19,02,499 (rounded off to Rs. 1,19,02,500). The AO further noted that the assessee debited the aforesaid amount of Rs. 1,19,02,500 in its books of account taking that the liability was crystallised during the period relevant for the assessment year under consideration. The AO further noted that since the arrear was heavy and as such on approach of the assessee the Hon'ble High Court also allowed the assessee to pay the said arrear on instalments of Rs. 4 lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tile system of accounting the liability should have been claimed in the respective assessment year and for correct computation of profit he relied on various judgments of different High Courts as follows: 1. Jaina Talkies vs. CIT (1979) 11 CTR (All) 238 : (1980) 122 ITR 970 (All) 2. Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) 3. Shrikant Textiles vs. CIT (1971) 81 ITR 222 (Bom) 4. CIT vs. Guranditta Mal Shanti Prakash Zira (1986) 54 CTR (P H) 254 : (1987) 164 ITR 774 (P H) 5. CIT vs. Tata Chemicals Ltd. (1986) Taxation 82 (3) 236 (Bom) 6. CIT vs. Investigation Security Service (India) Pvt. Ltd. (1990) 182 ITR 358 (AP) 7. L.J. Patel Co. vs. CIT (1974) 97 ITR 132 (Ker) 8. Pope the King Match Factory vs. CIT (1963) 50 ITR 495 (Mad) 9. CIT vs. Venguard Insurance Co. Ltd. (1974) 97 ITR 546 (Bom) 10. Mysore Tobacco Co. Ltd. vs. CIT (1979) 9 CTR (Kar) 307 : (1978) 115 ITR 698 (Kar) 11. CIT vs. Brijmohandas Laxmandas (1979) 11 CTR (All) 243 : (1979) 117 ITR 121 (All) 12. Addl. CIT vs. M.P. Sugar Mills P. Ltd. (1984) 38 CTR (All) 112 : (1984) 148 ITR 203 (All) 13. CIT vs. Shri Sarvaraya Sugars Ltd. (1987) 163 ITR 429 (AP). 2.3. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o him, the matter in controversy was not considered properly and in right perspective. Explicating the matter and while referring to page 646 of the paper book and chronological list of the events he said that in or about 1978-79 Gujarat Industrial Development Corporation formed an industrial estate at Kadi with a view to develop the industry in backward area and accordingly invited entrepreneurs to start factories. An arrangement was made with the league of the ONGC for supply of the natural gas to the unit which were to come up in that industrial estate. Gujarat Industrial Development Corporation (GIDC) entered into contract with the assessee-company to have the natural gas supplied from ONGC for a period of 5 years from 14th Sept., 1981, at graded rate from Rs. 770 to Rs. 963 per 1000 cubic metres plus other charges like royalty and service charges, etc. The said agreement remained in force upto 14th Sept., 1986, and there was a provision for renewal after giving 9 months' notice by either side. The learned counsel said that on 13th Dec., 1985, the assessee wrote to GIDC to extend the contract. The GIDC however, by its letter dt. 5th May, 1986, decided not to renew the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intaining his submissions, the learned counsel said that no doubt the assessee-company was maintaining mercantile system of accounting and the amount in question pertained to earlier years right from 15th Sept., 1986, to 30th Nov., 1989, on account of difference of enhanced price but the same being under dispute and finally settled during the accounting year relevant to the assessment year the assessee was entitled for deduction of the same in this assessment year. The learned counsel emphasised that since enhancement in the price of the natural gas by the ONGC was in dispute and not yet settled, the same was contingent dependent upon the decision of the Gujarat High Court as well as the Hon'ble Supreme Court. The same could not be said to have accrued during the preceding years. The learned counsel reiterating submitted that the price of the gas was in a graded scale from Rs. 770 to Rs. 963 per 1000 cubic metres but the ONGC hiked the price to Rs. 2,878 per 1000 cubic metres which was very high and the same went in litigation before Hon'ble High Court and Supreme Court and so under such circumstances when the entire controversy as to fixation of the price being in liquid form the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following mercantile system of accounting and an expenditure to the tune of Rs. 18,533 relating to the period from 1st April, 1957, to 31st March, 1958, was under dispute which was finally settled in the calendar year 1959. The learned counsel said that in that case the Tribunal had accepted the claim of the Revenue that expenditure pertained to earlier period than the accounting year under consideration could not be allowed in the asst. yr. 1960- 61. The learned counsel said that the Hon'ble High Court held that the matter having been settled in calendar year 1959 for which assessment year was 1960-61 the claim was to be allowed in this year. The learned counsel of the assessee referred to another judgment of Hon'ble Allahabad High Court in the case of CIT vs. Banwarilal Madanmohan 1977 CTR (All) 21 : (1977) 110 ITR 868 (All). He said that in that case also the assessee was maintaining accounts on mercantile system and the matter of the sales-tax liability was disputed. The learned counsel said that just like in the present case in that case also additional sales-tax was raised but the same was disputed. It was added by the learned counsel that the Hon'ble High Court held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lembic Glass Industries Ltd. the Revenue had taken a contrary stand. In that case the CIT(A) had reversed the order of the AO and directed him to allow deduction in the year in which the Supreme Court decided the disputed matter. The CIT particularly observed that the liability was not that of a statutory liability under any provision of law but a contractual liability and so such liability was settled by the decision of the Supreme Court and was allowable in the accounting year in question in which it was settled. The Tribunal confirmed the said order of the learned CIT(A). The learned counsel of the assessee reiterated that in that case the Revenue had taken a reverse stand. Referring to the case of Gujarat State Fertiliser Co. Ltd., the learned counsel said that in that case also the CIT(A) has accepted the assessee's claim for deduction in the accounting year in which the matter was settled by the Court. The learned CIT(A) in that case relied on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 (SC). The learned counsel said that the Tribunal sustained that order. He further said that in that case Reference Application of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded to all similar cases. The learned counsel of the assessee said that the present assessee's case was like that of Gujarat State Fertiliser Co. Ltd., Baroda. In that case, all along the Revenue's stand was that contingent liability should be allowed when it was settled or crystallised or when the contingency was over. The learned counsel said that even for the asst. yr. 1983-84 when the decision by the Tribunal went against the said assessee meaning thereby that assessee was to get deduction on accrual basis to some extent even in that case ultimately the Revenue came forward and resolved the matter through an agreement dt. 23rd Dec., 1993, compiled at pages 4 to 11 of the third set of paper book. As per cl. 4 of the agreement the Revenue allowed the deduction of the entire additional liability in respect of the enhanced cost price in one lump sum and consequent upon that the Revenue withdrew its reference application No. 4/Ahd/1993 in which the matter in controversy was question for reference in a different shape. The Tribunal by its order dt. 24th March, 1994, in that view of the matter, rejected the said reference application allowing withdrawal. The learned counsel of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the position of the total income if full liability of the ONGC towards the gas price differential charges was allowed as a deduction in asst. yr. 1990-91 in that case are also the total taxable income comes to Rs. 3,22,000 which was not of much avail as contended for the Revenue. The learned counsel emphasised that keeping in view the collection of revenue there was hardly any difference. Of course the learned counsel also referred to the relevant assessment as well as appellate orders for the asst. yrs. 1987-88 to 1989-90 in support of the working placed at Annexures A, B and C of the paper book. The learned counsel reiterated that even considering from various angles the Revenue was not going to lose on account of the tax. Recounting his submissions, the learned counsel said that since the differential gas charges was not in dispute and not yet crystallised or settled the same could not be claimed as a deduction on accrual basis though the assessee was maintaining mercantile system of accounting. He added that even otherwise also keeping in view that the Revenue itself was not consistent in its stand it did not have a good case. The Revenue in identical matter of cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny provision for the payment of the same and so under such circumstances of the case, now it cannot claim for deduction of the aforesaid amount of Rs. 1,19,02,500 on the ground that the said liability accrued only during the previous year relevant to the assessment year under consideration. The learned Departmental Representative submitted that liability pertained to the period from 15th Sept., 1986, to 31st March, 1989, and since the assessee was maintaining mercantile system of accounting the liability towards the payment of the enhanced gas price accrued during the aforesaid years. The learned Departmental Representative said only because there was a dispute the liability could not be said to have been deferred or postponed. The learned Departmental Representative further said that the aforesaid liability also could not be said to be a contingent liability. The learned Departmental Representative said that though the assessee-company disputed the enhanced price of the gas by ONGC which was finally settled by order of the Hon'ble Gujarat High Court as on 21st Dec., 1989, even then since the liability which was enforceable was to be allowed in the year to which it related because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o held 1,333 shares in the said company. The AO brought the said amount for taxation in asst. yr. 1943-44. The matter was disputed and ultimately the Hon'ble Supreme Court held that the AO was not free to tax the same in the asst. yr. 1943-44 because by dint of order passed under s. 23A of the Indian IT Act, 1922, on 18th Nov., 1941, the dividend of Rs. 3,32,691 should be deemed to have been distributed among the shareholders as on the date of the general meeting. The learned Departmental Representative by citing this authority exerted to impress upon that even the disputed liability or expenditure was liable to be allowed as deduction in the year in which it accrued. Yet further the learned Departmental Representative having referred to another decision of Hon'ble Supreme Court in the case of CIT vs. T.N.K. Govindarajulu Chetty (1987) 61 CTR (SC) 335 : (1987) 165 ITR 231 (SC) submitted that even in the matter of the receipt of interest along with the compensation for acquisition of the property by the Government the interest was held to have accrued in the year during which the acquisition was done and payment was made because in that case the assessee was following the mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this appeal, the factual aspect are not disputed that the assessee-company in pursuance to an agreement with GIDC used to get natural gas from ONGC for its industry at Kadi Industrial Estate. The said agreement was for a period of 5 years w.e.f. 14th Sept., 1981, to 13th Sept., 1986. According to that agreement ONGC was to realise the price of the gas at a graded rate from Rs. 770 to Rs. 963 per 1000 cubic metres plus other charges like royalty, service charges, etc. The said agreement expired and the assessee approached the GIDC for renewal of the agreement but GIDC declined and directed the assessee-company to approach ONGC directly. The ONGC was willing to supply gas directly at a price of Rs. 2,878 per 1000 cubic metres. The assessee-company disputed the same in the Hon'ble Gujarat High Court having filed a Special Civil Application No. 4658/1986, dt. 5th Sept., 1986. The Hon'ble High Court disposed of that Special Civil Application by order dt. 8th Sept., 1986, and gave direction to ONGC to continue the supply of the gas at the rate of Rs. 1,050 per 1000 cubic metres. However, ONGC challenged that order having filed a LPA No. 298. However, on the basis of the order of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not the entire liability at one time on the basis that the same accrued only in the accounting year relevant to the asst. yr. 1990-91. Of course, according to the assessee since the very enhancement of the price of the gas has been a matter of dispute which even went upto the Hon'ble Supreme Court it had remained uncertain during the accounting years 1986-87, 1987-88 and 1988-89 and so in that view of the matter there has been no question of debiting the liability. What amount is to be debited or if at all any provision is to be made on what basis the same was to be done as it has been very much uncertain. According to the assessee, the liability has been ascertained and crystallized only by dint of the judgment of Hon'ble Gujarat High Court, dt. 21st Sept., 1989, and in consequence to which ONGC has raised the bill the liability has accrued in the year under consideration and so that has rightly been claimed in this year and to that effect a clear-cut note was made in the annual report of the directors as well as in the audited books of accounts and which can be seen at page 49-Q of the paper book No. 1. However, it is to be noted that out of the total price difference the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liability is to be allowed as a deduction when it has been finally determined. It was a case in which the family business was converted into a firm. The family maintained mercantile system of accounting. There was a dispute as to the sales-tax liability which has been in excess of the amount for which provision was made. The Hon'ble High Court has held as follows: ".....It might be that, so far as sales-tax liability is concerned, that is not a contingent lability but inasmuch as the HUF had been following the mercantile system of accounting and making provision for the tax only on estimate basis, it was in the year in which it was quantified finally that the actual liability for sales-tax was finally determined. The excess amount over that for which provision had been made thus undoubtedly accrued in the year in which it was finally quantified. This quantification took place in the financial year relevant to the asst. yr. 1962-63." 2.12. The Hon'ble Calcutta High Court in the case of CIT vs. Roberts McLean Co. Ltd. took an identical view. In that case also the assessee was maintaining mercantile system of accounting and there arose certain difference between the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, no decree was passed on the award by the Court, and as such no liability in praesenti was created against the assessee."In yet another case being Jaina Talkies vs. CIT, the Hon'ble Allahabad High Court considered the dispute relating to the provident fund contribution for the yeas 1962 to 1964 with reference to the mercantile system of accounting and its deductibility as expenditure. In this case the assessee was maintaining mercantile system of accounting with financial year as accounting year. The assessee was to pay provident fund contribution for the years 1962 to 1964 but the assessee disputed the said liability. The matter was finally decided by the High Court on 26th Oct., 1970, and even the writ petition was dismissed on 4th Feb., 1970. The assessee made the payment during the financial year 1970-71 and claimed deduction in 1972-73. The Hon'ble Court did not allow the claim in 1972-73 rather observed that the matter would have been different if the deduction would have been claimed during the period in which the final decision of the disputed matter was taken by the High Court. 2.14. The Hon'ble Allahabad High Court in the case of CIT vs. Oriental Motor Car Co. (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sence of entries in his books of account be decisive or conclusive in the matter. On the other hand, if the liability is based on some contractual obligation, it arises only when it is ascertained. Unless the liability has become an ascertained sum of money, it no doubt exists but proceedings have yet to be taken to determine the exact amount. A vague liability to make a payment cannot be entered in the accounts." 2.16. Recently the Hon'ble Gujarat High Court in the case of Saurashtra Cement Chemical Industries Ltd. vs. CIT (1994) 122 CTR (Guj) 329 : (1995) 213 ITR 523 (Guj) while considering the expenditure relating to the earlier years on account of payment of fee to expert held that the expenditure could not be disallowed merely because they related to earlier years. What the Hon'ble High Court laid down is that after proper investigation and crystallisation only any disallowance if at all ought to have been done. While deciding the said point the Hon'ble High Court observed: "...Having considered the material on record we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain and something or some proceedings were yet to be carried out to determine the exact amount. In books of accounts any vague liability cannot be entered into and claimed as a deduction. The liability being in existence but that was not certain and crystallised the same cannot be said to have accrued only because the assessee has been following the mercantile system of accounting. In the latest judgment of Hon'ble Gujarat High Court in the case of Saurashtra Cement Chemical Industries Ltd. vs. CIT it has been observed very clearly that merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said tht the liability is determined and crystallised in the year in question on the basis of maintaining accounts on mercantile system. So, from the various authorities and the principles as laid down therein it is manifest that unless the liability is ascertained and crystallised that cannot be said to have accrued and there existed any enforceable liability. In the present case the liability of Rs. 1,07,02,500 has accrued and become enforceable liability only on 21st Dec., 1989, when the Hon'ble Guj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be spread over in asst. yrs. 1955-56 and 1956-57. In that case the amount of interest was not uncertain or disputed as in the case of the present assessee. So regard being had to the entire facts and circumstances of the case and the various authorities laying down the principles of law, we are of the view that the claim of the assessee is correct. The liability being disputed which has even travelled upto the Hon'ble Supreme Court and has been finally decided by Hon'ble Gujarat High Court on 21st Dec., 1989, and became crystallised and determined on that particular day which falls within the previous year relevant to the year under consideration, i.e., asst. yr. 1990-91. The assessee having followed mercantile system of accounting, the liability in question is said to have accrued in the previous year relevant to the assessment year as said above, and so in that view of the matter, the assessee is entitled to have the deduction of the same in the assessment year under appeal. 2.19. Even otherwise also, there are other aspects on which the assessee's claim for deduction of the aforesaid amount of Rs. 1,07,02,500 in this assessment year cannot be denied. From the material a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see rightly placed the grievance of the present assessee against the Revenue because in identical matter at one hand the Revenue allowed some of the assessees to have deduction of the entire liability in the year in which the liability has been settled but in the case of the present assessee the Revenue is denying the same. In our considered view, the assessee of the present case is also entitled to have a similar treatment as is given to other assessees in identical matters and this proposition very much gets support from the decision of the Hon'ble Supreme Court in the case of India Cements Ltd. vs. Collector of Central Excise on which the learned counsel of the assessee has relied upon. In that case the Hon'ble Supreme Court was of the view that the extension of the benefit of the administrative decision is to be given to all assessees who fall in same category. For, it is to be noted that in that case a particular decision was taken by the Excise Department as to the leviability of excise duty. A view was taken by the Department in favour of one of the assessees in another case. As said above, the Hon'ble Supreme Court has held that the same view is to be extended to all simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and depreciation and investment allowance which were unabsorbed (Annex. H) . . . . (1) 2,61,31,013 17,06,697 20,78,332 2,20,23,984 . 17,06,697 . . . . 20,78,332 . . . . 2,20,23,984 17,06,697 20,78,332 2,20,23,984 (2) 2,58,09,013 Nil Nil Nil Net taxable income after set off of carried forward investment allowance,, business loss and unabsorbed depreciation . . . . (3) = (1)—(2) 3,22,000 . . It is reiterated that owing to nil income in those three assessment years there was no tax. Similarly, a following working has been given as to what will be the effect if the entire liability on account of the price difference is allowed in the asst. yr. 1990-91 as per the claim of the assessee: The position of total income if full liability of ONGC gas price differential charges is allowed to be deducted in asst. yr. 1990-91 Amount . Rs. Total income as per order giving effect to CIT(A)'s order passed by Dy. CIT, Spl. Range-8 (Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DC and accordingly it claimed deduction for the expenses. The AO further noted that the assessee had disputed the said liability and had approached the GIDC for waiver of the aforesaid amount. The GIDC has agreed to waive the interest only upto Rs. 10,000. According to the learned AO the matter was still under dispute and since assessee did not make any payment of the disputed liability on account of the interest he disallowed the claim for deduction of aforesaid amount of Rs. 4,88,611. The assessee disputed the same before the CIT(A). The learned CIT(A) confirmed the same. He observed that interest liability was for the earlier years. The assessee was aware that if the instalment of the tenancy revenue was not paid it would be liable to pay interest. Knowing full well the assessee neither made any provision in earlier years nor claimed for deduction and now the liability was still disputed claim for deduction could not be allowed. Against that order of the learned CIT(A) now the assessee is in appeal. 3.2. Shri J.P. Shah, the learned counsel of the assessee, strongly objected to the order of the learned CIT(A). He submitted that authorities below particularly the CIT(A) failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (NG) the assessee was to pay lease rent amount as per the agreed instalment and if it did not fulfil the same it was liable to pay penal interest. The learned Departmental Representative added that the liability in question on account of penal interest was for default in making the payment of instalment. The learned Departmental Representative added that the assessee did not make any provision in books of accounts towards expenses to be incurred for penal interest though it was maintaining its account on mercantile basis and so under such circumstances now it cannot claim the deduction in this assessment year. He also took support on this disputed point from his earlier submissions and case law which were pressed into service at the time of submissions for the first disputed point. 3.4. After careful consideration of submissions from both sides and the material available in appeal record, particularly keeping in view the papers compiled at pages 50 to 52 of the paper book we find that the payable penal interest finally crystallised in the previous year relevant to the assessment year under appeal itself. The letter dt. 5th Feb., 1990, from the GIDC coupled with the statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on the order of the learned CIT(A). He emphasised that personal use of the company's car by the directors could not be totally ruled out. He said that only a reasonable disallowance of Rs. 15,000 was sustained. According to him, the order of the learned CIT(A) was justified and the same required no interference. 5.4. After careful consideration of submissions of both sides and the material made available in the appeal record, we do not think that the addition sustained by the learned CIT(A) is justified. It appears that the assessee had filed the entire detail of the expenses and nothing has been brought in the appeal record to point out that if a particular expenditure is towards the personal purpose of the directors. There is no justification for sustaining the aforesaid amount of Rs. 15,000. We reverse the order of the learned CIT(A) on this point. 6. The next disputed point relates to confirmation of disallowance of Rs. 15,050 relating to payment of club membership and Rs. 18,940 on account of guest house expenses. 6.1. The payment to membership in club has been disallowed by the AO and sustained by the learned CIT(A) on the ground that the expenditure has no nexus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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