ORDER
Per S. Kannan, Accountant Member – These two appeals, one by the assessee and the other by the department, were heard together and are disposed of by a common order for the sake of convenience.
2. There is one issue that is common to both the appeals and that is centered on the admissibility of revenue deduction in respect of the provision made by the assessee in relation to the incremental sum which the assessee was obligated to pay owing to the upward revision of the High Tension (HT for short) power tariff effected by the Andhra Pradesh State Electricity Board (APSEB for short) on two consecutive occasions. We propose to deal first with this common issue.
3. The assessee-company manufactures and markets cotton and synthetic yarn. The assessee was carrying on the manufacturing operations in two factories – one at Kakinada and the other at Vizianagaram. It was drawing its HT power requirements from the APSEB. It is a matter of record that for the said purpose it had entered into agreements with the APSEB. By an agreement dated 20-8-1982, the APSEB contracted to supply and the assessee had contracted to lift 1500 KVA for the Kakinada Unit. By another agreement dated 15-7-1985 the contracted demand for the Vizianagaram Unit was 1200 KVA. It may here be highlighted that the said agreements were in the proforma prescribed by the APSEB.
4. By BPMs No. 671 (Commercial) of 10-6-1987 the APSEB revised the HT tariff upward w.e.f. 15-7-1987. This was the signal for the assessee to file writ petition bearing No. 19893 of 1987 before the Andhra Pradesh High Court challenging the upward revision. The assessee also filed Writ Petition, Miscellaneous Petition No. 26402 of 1987, seeking stay of collection of the incremental demand occasioned by the said upward revision of HT tariff, and by their order dated 30-12-1987 (in the said WPMP) the High Court, inter alia, ordered :
“………. that on condition the petitioner company herein pays 50% of the increased rate as per the revised tariff, the collection of electricity charges from the petitioner company herein at the increased rates as per the B.P.Ms. No. 671 (Commercial) dated 10-6-1987 of the 1st respondent herein viz., The Secretary, A.P.S.E.B., Vidyutsudha, Samajiguda, Hyderabad as brought into force from 15-7-1987 be and hereby is stayed pending further orders on this petition.”
5. The assessee before us had, before approaching the Court, paid in full power tariffs at the enhanced rates from 15-7-1987 (the date of the coming into force of the revised tariff) to 30-11-1987. Relying on the said circumstance the assessee moved W.P.M.P. No. 1441 of 1988 praying that APSEB be directed to adjust the incremental amounts actually paid by the assessee for the said period in the bill for December 1987 in the light of the partial stay granted by the High Court on 30-12-1987. This petition was disposed of by the High Court observing : “The petitioner is entitled for this only from the date of the passing of the order. If he has paid the amount previously, he is not entitled to claim that from 15-7-1987 till 30-12-1987 as he is entitled for the benefit of the interim order only from the date of passing of the order i.e., 30-12-1987”.
6. Pursuant to the said directions of the High Court the assessee, it is common ground, paid the unstayed portion of the incremental charges and recorded the payments in its books of account.
As for the 50% of the incremental charges stayed by the High Court, the assessee, it is common ground, did not make any provision in its books of account relating to the years of account ending on 31-3-1988 and 31-3-1989. It is also common ground that the assessee made a provision in respect of the said sums only in the year of account ending on 31-3-1990, being the previous year relevant to the assessment year 1990-91, which is now before us.
7. The fund-starved APSEB effected another upward revision in the HT tariff through B.P.Ms. No. 353 (Commercial) dated 15-4-1989, the revised tariff taking effect from 10-6-1989. Predictably, the assessee challenged the said upward revision also before the High Court. It would appear that for the said purpose the assessee did not file a separate writ petition, but had suitably amended the W.P. No. 19893 of 1987, which it had earlier filed challenging the 1987 revision of tariff. But this aspect of the matter need not detain us here. Suffice it to note that the assessee filed W.P.M.P. No. 11609 of 1989, seeking stay of collection of the incremental charges occasioned by the 1989 revision; and that by their order dated 5-7-1989 the High Court ordered :
“That on condition that the petitioner herein pays the difference to make 50% of the increased rate, the collection of electricity charges from the petitioner company herein at the increased rate as per B. P. Ms. No. 353 (Commercial) dated 15-4-1989 by the first respondent herein as brought into force from June 1989 be and hereby is stayed, pending further orders in this writ petition.”
8. The assessee paid the unstayed portion of the 1989 revision and recorded the payments in its books of account. As for the 50% incremental charges stayed by the High Court, it made necessary provision in its books of account relating to the year of account ending on 31-3-1990.
9. To make the picture complete; the High Court of Andhra pradesh by their order dated 2-4-1990 dismissed all the writ petitions and writ appeals relating to both the 1987 and the 1989 tariff revisions. And it is common ground that the assessee paid all the stayed portion of the incremental charges also on the lines directed by the APSEB, of course, after the said date.
10. We may now notice the vicissitudes of the said matter in relation to the assessees assessment for the assessment year 1990-91. As pointed out earlier, the assessee had made a provisions in respect of the unstayed portion of the demand arising out of the 1987 revision and relating to the period December 1987 to March 1989 not in the years of account ending on 31-3-1988 and 31-3-1989, but in the accounts relating to the year of account ending on 31-3-1990. We have also seen that in relation to the 1989 revision also the assessee had made a provision in respect of the unstayed portion of the demand in its accounts relating to the year of account ending on 31-3-1990. The details of the provision made are as follows :
Provision relating to the prior period :
Rs. 30,31,718
Provision relating to the current year :
Rs. 29,96,373
On the basis of the said provision, the assessee claimed revenue deduction in respect of the said sums in its assessment for the assessment year 1990-91 which is now before us.
11. The Assessing Officer negatived the assessees claim. In this regard, the following considerations weighed with him :
(a) The high tension power charges payable by the assessee were revised upwards by he APSEB on two occasions : (i) by B. P. Ms. No. 671 of 10-6-1987 w.e.f. 15-7-1987; and (ii) by B. P. Ms. No. 353 of 15-4-1989 w.e.f. 10-6-1989.
(b) The said upward revisions were the subject-matter of litigation between the APSEB on the one hand and the consumers like the assessee-company on the other. In relation to the 1987 revision, the Andhra Pradesh High Court had in the Writ Petition filed by the assessee stayed the collection of incremental electricity charges, subject to the condition that the assessee paid 50% of the enhanced tariff.
(c) The assessee paid 50% of the incremental charges as directed by the Court. As respects the unstayed portion, the assessee made necessary provisions for the additional charges payable by it for the period from December 1987 to March 1989 only during the year of account ending on 31-3-1990, being the previous year relevant to the assessment year 1990-91. The assessee ought to have made a provision in this regard in the respective years of account; but it failed to do so.
(d) Even as respects the unstayed portion of the demand arising out of the aforesaid two revisions and attributable to the period 1-4-1989 to 31-3-1990, the assessee could not have validly made a provision in its accounts relating to the accounting year ended on 31-3-1990, because he A.P. High Court decided the matter against the Writ Petitioners and in favour of APSEB only on 2-4-1990. That is to say, after the close of relevant previous year.
(e) One of the points made by the assessee was that it came to make a provision in relation to the additional charges attributable to the period from 1-4-1989 to 31-3-1990 in its accounts relating to the year of account ending on 31-3-1990, because by the time it closed its accounts for the said year of account, the decision of Andhra Pradesh High Court was available.
The Assessing Officer rejected the contention on the ground that there was no material to substantiate it. The obligation to pay HT power tariff in general and the incremental charges in particular was contractual in nature. Therefore, the liability to pay the incremental sums arose only on 2-4-1990 when the Andhra Pradesh High Court handed down its judgment rejecting all the Writ Petitions/Writ appeals. It should, therefore, follow that the assessee was not entitled to revenue deduction, on accrual basis, even as respects the incremental sum attributable to relevant previous year.
12. In view of the foregoing therefore, the Assessing Officer added an aggregate sum of Rs. 60,28,091 (Rs. 30,31,718 + Rs. 29,76,373).
13. The said issue was predictably one of the subject-matters of the appeal filed by the assessee before the CIT (Appeals). As respects the prior period expenditure of Rs. 30,31,718, the CIT(A) declined to interfere in the matter. Even so, finding that such expenditure aggregated Rs. 28,47,369 only, he restricted the addition to the said figure.
As for the provisions of Rs. 29,76,373 made by the assessee in its books of account in respect of the current years demand, the CIT(A) considered that the assessee was entitled to succeed. In this regard, he was impelled by the consideration, first, that the assessees claim was covered by the order of the Income-tax Appellate Tribunal, Hyderabad Bench-A in the case of Andhra Sugars Ltd. – see order IT Appeal No. 1232 (Hyd.) of 1991 dated 26-2-1993 relating to the assessment year 1987-88. In that order, the Tribunal had held that the liability in question was not a contractual liability as has been held by the Assessing Officer; but a statutory liability. And consequently the assessees claim was in consonance with the ratio laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co Ltd. v. CIT [1971]] 82 ITR 363.
Secondly, and inferentially, the CIT(A) held that the assessee was justified in making the provision in question even though the judgment of Andhra Pradesh High Court came to be handed down only on 2-4-1990.
In view of the foregoing, therefore, he deleted an amount of Rs. 29,76,373.
14. It is in these circumstances that both the assessee and the department are now before us. The assessee is aggrieved because the CIT(A) negatived the assessees claim for revenue deduction in respect of an amount of Rs. 28,47,369 being the prior period expenditure. On its part, the department objects to the deletion by the CIT(A) of the addition of Rs. 29,76,373.
15. Shri C. V. K. Prasad, the learned Counsel for the assessee, took us through the facts and the circumstances of the case and contended that the CIT(A) was not justified in negativing the assessees claim for revenue deduction in respect of the provision of Rs. 28,47,369 made by the assessee in its books of account relating to the year of account ended on 31-3-1990. By BPMs No. 671 of 10-6-1987, the APSEB had enhanced the power tariff. The enhancement was subject-matter of writ petition before the High Court. And by order dated 30-12-1987 in W.P. Misc. No 26402 of 1987 in W.P. No. 90893 of 1987, the High Court of Judicature at Hyderabad directed the writ petitioners to pay 50% of the enhanced charges and stayed the collection of the rest. The assessee accordingly paid 50% of the enhanced charges. As for the balance of 50%, as the enhancement itself was the subject-matter of litigation before the High Court, the assessee did not consider it necessary to make any provision therefore in its accounts relating to the years of account ending on 31-3-1988 and 31-3-1989. This fact was duly incorporated as item No. 8 of Schedule B-Notes on Balance-sheet as at and Profit and Loss A/c for the year ended 31-3-1988 annexed to and forming part thereof (Page 32 of the 32nd Annual Report of the assessee-company relating to the year of account ended on 31-3-1988). A note to the similar effect was given in the 33rd Annual Report of the assessee-company also, as item No. V of Schedule 1 – Notes on Balance-sheet as at and Profit and Loss A/c for the year ended on 31-3-1989 annexed to and forming part thereof (page 24 of the Annual Report).
True, the litigation concluded on 2-4-1990 when the Andhra Pradesh High Court dismissed the W.Ps/Writ Appeals. Even so, as has been held by the Income-tax Appellate Tribunal, Hyderabad Bench-A in the case of Andhra Sugars Ltd. (supra), the liability in question being not a contractual liability but a statutory liability, the assessee was entitled to make suitable provisions in respect of the stayed portion of the demand in its books of account for the period ending on 31-3-1990. According to Sri Prasad, the provisions thus made fully satisfies the ruling of the Supreme Court in the Kedarnath Jute Mfg. Co. Ltd.s case (supra).
In this regard, Shri Prasad further contended that according to Accounting Standard No. 4 issued by the Institute of Chartered Accountants of India, it is open to the companies to take into account significant events that have occurred albeit after the close of the relevant year of account, and to make suitable entries in respect thereof in their accounts as long as the accounts have not been closed. According to Shri Prasad, the Andhra Pradesh High Court judgment dated 2-4-1990 was a significant event, and the assessee was, therefore, justified in taking it into account, event though it came to be handed down after the close of the relevant year of account. Again, the assessee was justified in making the relevant provisions, because the accounts for the year 31-3-1990 had not been closed by the time the judgment came to be handed down. He, therefore, urged that the CIT (Appeals) was not justified in negativing the assessees claim.
Shri Prasad then contended that the assessee could have made a provision in respect of the stayed portion of the incremental demand in the earlier years of account. In that event, all that would have happened was that the earlier years losses would have gone up and would have been available for set off against the assessees profits relating to the previous year which is now before us. According to Shri Prasad, therefore, the issue is really academic. In this regard, he referred to and relied on the Calcutta case of CIT v. Marshell Sons & Co. (I) Ltd. [1994] 72 Taxman 124.
In view of the foregoing, contended Shri Prasad, the assessee is entitled to succeed.
16. On his part Shri K. Vasanth Kumar, the learned Departmental Representative, strongly supported the impugned order of the Assessing Officer on this issue relating to prior period expenditure.
He first contended that the case before us was one of contractual payment. Since assessee had disputed its liability to pay the incremental sum arising out of the contract in question, to the extent of the stayed portion of the incremental sum, the liability accrued or arose only on 2-4-1990 when the Andhra Pradesh High Court handed down its judgment, and not at any earlier point of time.
Secondly, and without prejudice to the foregoing, Shri Vasanth Kumar drew our attention to the fact that in the case of Andhra Sugars Ltd. (supra), the Income-tax Appellate Tribunal, Hyderabad Bench A had held that electricity charges are statutory liability and that, therefore, the liability to pay the charges accrued or arose the moment electricity was consumed. According to him, it should, therefore, follow that the assessee should have made provision in respect of the stayed portion of the incremental charges arising out of the 1987 revision in the respective years in which it had consumed electricity. Having failed to do so. It cannot now be heard to say that the liability in respect of the stayed portion of the additional demand arose only on the matter being finally decided by the High Court; and that too when the judgment of the High Court itself came to be handed down on 2-4-1990, that is to say, subsequent to the close of the year of account ended on 31-3-1990.
Thirdly, the Calcutta case referred to and relied upon by the learned counsel for the assessee, is distinguishable on facts and hence cannot avail the assessee. In this regard, Shri Vasantha Kumar relied on certain passages occurring on page 1517 of “Income-tax Law” by Chaturvedi & Pithisaria (4th Edn.).
He, therefore, urged that the assessees appeal was fit to be dismissed.
Turning next to the current years provision relating to the stayed portion of the incremental tariff attributable to both the 1987 and the 1989 revisions, Shri Vasantha Kumar contended that the CIT (Appeals) was not justified in allowing the assessees claim. According to him, when the assessee had disputed the additional levy, the assessee could have made a provision in respect of balance of 50% only in the previous year ending on 31-3-1991.
Again, relying upon a couple of cases decided by the Supreme Court in which it has been held that the existence of quid pro quo is the very essence of “fee”. Shri Vasanth Kumar contended that the electricity charges paid by the assessee are very much in the nature of a “fee” within the meaning of section 43B of the Act. Since “fee” was included in the said section w.e.f. 1-4-1989, there is no question of the assessee being allowed any revenue deduction, on provision basis, either in relation to the prior period expenditure or in relation to the current years liability. In any event, this matter was not examined by the lower authorities to ascertain whether there was complete quid pro quo in relation to the incremental sum payable by the assessee and the electricity consumed by the assessee. For a fact, in identical circumstances, in the case of Andhra Ferro Alloys (P.) Ltd., by its order in IT Appeal No. 1589 (Hyd.) of 1992 dated 7-12-1993 (Assessment year : 1989-90), the Income-tax Appellate Tribunal, Hyderabad Bench B had remitted this aspect of the matter to the Assessing Officer for verification and decision. He invited us to follow suit.
17. We have looked into the facts of the case and considered the rival submissions. The facts necessary for the resolution of the issue before us lie in a short compass. The assessee draws its HT power requirements from the APSEB. The APSEB hiked the power tariff on two occasions, namely, w.e.f. 15-7-1987 and w.e.f. 10-6-1989. The said hikes were the subject matter of litigation before the High Court. Pending final decision, the Andhra Pradesh High Court stayed the collection of 50% of the additional sums payable by the assessee as a result of the said two hikes. In respect of the 1987 hike, the assessee paid 50% of the incremental sum as directed by the High Court. It did not make any provision in respect of the stayed portion of the incremental sum in the relevant previous years. It made a provision in that regard only in its books of account relating to the year of account ending on 31-3-1990 and, on that basis, claimed revenue deduction.
In respect of the 1989 hike also, it paid 50% of the incremental sum as directed by the High Court. This time however as respects the stayed portion of the incremental sum, it made a provision and claimed on that basis revenue deduction in respect of the sum so provided.
In relation to both the provisions aforesaid, its claim for revenue deduction was based on consideration that the matter was finally decided by the High Court on 2-4-1990, when its accounts for the accounting year ended on 31-3-1990 had not been closed, and that therefore it was perfectly justified in making the provisions in the said accounts. In its turn, the said contention is based on further consideration that, as has been held by the Income-tax Appellate Tribunal in the case of Andhra Sugars Ltd. (supra), the liability to pay power charges is a statutory liability.
18. The said contentions were opposed by the learned Departmental Representative on the ground that the entire liability was contractual liability; and that, the assessee having disputed the liability before the Court of Law, the liability to pay the stayed portion of the incremental sum arose only on the date of the judgment of Andhra Pradesh High Court on 2-4-1990, and not earlier. Even if it is assumed that we have before us a case of statutory liability, the assessees case cannot improve, because, in that event, the provision must have been made by the assessee in the relevant previous years and not at one go in the previous year ending on 31-3-1990. Further, the electricity charges being “fee” properly so called the case is hit by section 43B of the Act.
19. Before examining the merits of the rival contentions, we may make an observation or two having a direct bearing on the issue involved in this case. In jurisprudence, there is a well-settled distinction between status on the one hand and contract on the other. In Daniel v. Daniel 4 CLR 563 Griffith, C.J. observed that status is “a condition attached by law to a person which confers or affects or limits a legal capacity of exercising some power that under other circumstances he could not or could exercise without restriction”. (see page 2612 of Strouds Judicial Dictionary Vol. 5, Fourth Edn.).
In Niboyet v. Niboyet [1987] 4 PD 1 it was observed that “the status of an individual, used as a legal term, means the legal position of the individual in or with regard to the rest of a community.” (see page 725 of Mitras Legal and Commercial Dictionary, Fourth Edn.).
In Duggamma v. Ganeshayya AIR 1965 Mys. 97 it was observed that the status of a person means the “personal legal condition, only so far as his personal rights and burdens are concerned, to the exclusion of his proprietary relation”.
In Salmond on Jurisprudence the position is summarised thus :
“The term status is used in a variety of senses. It is used to refer to a mans legal condition of any kind, whether personal or proprietary. A mans status in this sense includes his whole position in the law – the sum total of his rights, duties, liabilities or other legal relations, whether proprietary or personal, or any particular group of them separately considered. Thus we may speak of the status of a landowner, of a trustee, of an executor, of a solicitor and so on.
More commonly it is used to denote his personal legal condition in so far as concerns his personal rights and burdens, to the exclusion of his proprietary relations. A persons status, in this sense, is made up of smaller groups of personal rights and their correlative burdens, and each of these constituent groups is itself also called a status. Thus the same person may have at the same time the status of a free man, of a citizen, of a husband, of a father and son on. So we speak of the status of an alien, a lunatic, or an infant; but not of a landowner or trustee.
The term may be used to refer to personal capacities and incapacities as opposed to other elements of personal status. The law of status in this sense would include the rules as to the contractual capacities and incapacities of married women, but not the personal rights and duties existing between her and her husband.
Status is used by some writers to signify a mans personal legal conditions, so far only as it is imposed upon him by the law without his own consent, as opposed to the condition which he has acquired for himself by agreement. The position of a slave is a matter of status, the position of a free servant is a matter of contract. Marriage creates a status in this sense, for although it is entered into by way of consent, it cannot be dissolved in that way, and the legal condition create by it is determined by the law, and cannot be modified by the agreement of the parties. A business partnership, on the other hand, pertains to the law of contract and not to that of status.”
Status thus is a condition of membership of a group of which powers and duties are exclusively determined by law and not by agreement between the parties concerned.
20. A contract, on the other hand, is essentially a compact inter partes. It is an agreement made between two or more persons, which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other to do or to abstain from doing some act. The offer and acceptance may be either express or inferred by implication from the conduct of the parties. A contract is an agreement between competent parties upon a lawful consideration to do or to abstain from doing some act which is binding. Of course, the consent must be free, the consideration lawful and the object legal and not opposed to public policy.
21. The distinction between status and contract is brought into bold relief by many examples. We may notice a few of them :
(a) Hindu undivided family, or Hindu joint family as it is also called is a matter of status. This is so, even if the family carries on a family business. This position in law has been given statutory recognition, by section 5 of the Indian Partnership Act, 1932. After laying down that the relation of partnership arises from contract and not from status, it proceeds to declare that the members of a Hindu undivided family carrying on a family business as such are not partners in such business. The reason is not far to seek. While partnership is a matter of contract, a Hindu undivided family is a matter of status.
(b) The relationship between the State and its servants is another typical example Supreme Court in the case of Roshan Lal Tandon v. Union of Indian AIR 1967 SC 1889 at 1894 observed :
“It is true that the origin of Government service is contractual. There is an offer and acceptance in every case. But once appointed to his post or office, the Government servant acquires a status and his rights and obligations are no longer determined by the consent of both the parties but by statue or statutory rules which may be framed and altered unilaterally by the Government. In other words, the legal position of a Government servant is more one of status than of contract. The hallmark of status is the attachment to a legal relationship of rights and duties imposed by public law and not by mere agreement of the parties. The emoluments of the Government servant and his terms of service and governed by statutes or statutory rules which may be unilaterally altered by the Government without the consent of the employee. It is true that Article 311 imposes constitutional restrictions upon the power of removal granted to the President and the Governor under Article 310. But it is obvious that the relationship between the Government and its servants is not like an ordinary contract of service between a master and servant. The legal relationship is something entirely different, something in the nature of status. It is much more than purely contractual relationship voluntarily entered into between the parties. The duties and status are fixed by the law and in the enforcement of these duties, the society has interest.”
(c) Even in case where the employer is not the State, the modern tendency is to remove such contracts for the domain of contract and place them within the sphere of status. The matter is clearly stated by Salmond and Williams on Contracts as follows :
“A contract of service between employer and employees, while for the most part pertaining exclusively to the sphere of contract, pertains, also to that of status, so far as the law itself has seen fit to attach to this relation compulsory incidents, such as liability to pay compensation for accidents. The extent to which the law is content to leave matters within the domain of contract to be determined by the exercise of the autonomous authority of the parties themselves, or thinks fir to bring the matter within the sphere of status by authoritatively determining for itself the contents of the relationship, is a matter depending on considerations of public policy. In contracts, as those of service, the tendency in modern times, is to withdraw the matter more and more from the domain of contract into that of status” (Salmond and Williams on Contracts, 2nd Edition, p. 12).
(d) Finally, as will be readily seen from the excerpts from Salmond on Jurisprudence reproduced (supra), though a marriage is contractual in its origin, yet after the marriage takes place the relation is one of status.
22. The issue before us may now be examined in the light of the foregoing legal principles.
23. We have the APSEB a State instrumentality, a public utility, having the monopoly of generation and distribution of electricity. It was formed and functions under the Electricity (Supply) Act, 1948. Section 5 of the Act authorises the setting up of Electricity Boards. Section 49 contains provisions for the sale of electricity by the Board to persons other than licensees. Section 59 of the Act deals with the general principles for Boards finance. Section 78 of the Act enables the respective State Governments to issue necessary directions to the Electricity Boards, which the latter are bound to follow.
Under the scheme of the Act, power tariff is to be fixed in accordance with the provisions of section 49 read with sections 59 and 78 of the Act.
24. We also have the consumers of electricity. When a consumer, such as the assessee before us, requires, say, HT power, it approaches the APSEB for supply of power, stating its requirement of power. If APSEB is in a position to supply power, it enters into a proforma contract with the consumer. As regards the quantum of power to be supplied we have a compact simpliciter. This means that, in the event of its failure to supply the contracted quantity of power, the APSEB may render itself liable to liquidated damages and the like. Conversely, if the consumer fails to lift the contracted demand, it may render itself liable to similar consequences.
25. But as respects the rate(s) at which the power is to be supplied, the relationship between the APSEB and the consumer is not contractual. For, as already pointed out, the fixation of tariff is governed by sections 49, 59 and 78 of the Electricity (Supply) Act, 1948. This is the reason why the proforma HT agreements invariably incorporate the following conditions or terms :
“Obligation to comply with requirement of acts, and terms and conditions of supply
We further undertake to comply with all the requirements of the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948, the Rules thereunder, provisions of the tariffs, scale of Miscellaneous and General charges and the terms and conditions of supply prescribed by the Board from time to time and agree not to dispute the same.
Obligation of consumer to pay all charges levied by Board.
From the date of his agreement comes into force we shall be bound by and shall pay the Board maximum demand charges, energy charges, surcharges, meter rents and other charges, if any in accordance with the tariffs applicable and the term and conditions of supply prescribed by the Board from time to time for the particular class of consumers to which we belong.
Boards right to vary terms of agreement
We agree that the Board shall have the unilateral right to vary, from time to time, tariffs, scale of general and miscellaneous charges and terms and conditions of supply under this agreement by special or general proceedings.
In particular, the Board shall have the right to enhance the rates chargeable for supply of electricity according to exigencies”.
Thus, in relation to the rate(s) at which power supply will be available to it, the position of the consumer is not that of a party to a contract but one of status. This is because, so far as the power tariff is concerned, it is imposed on the consumer by law without the consent of the consumer. In other words, the liability of the consumer to pay power tariff is not contractual in nature, but is status-based. This is so, notwithstanding the fact that, basically, the APSEB sells HT power and the assessee buys it. Even so, what would have otherwise been a simple, straightforward contract-based commercial transaction is cut off, as a matter of State Policy, from its contractual moorings, and transported to the realm of status, especially with regard to the tariff which is by law imposed on the consumer of electricity without their consent.
It may here be mentioned that since the liability is imposed by virtue of the relevant provisions of the statue, viz the Electricity (Supply) Act, 1948, the liability may well be given the short-hand name of “statutory liability”. And this is what the Income-tax Appellate Tribunal, Hyderabad Bench – A has done in the case of Andhra Sugars Ltd. (supra).
26. The legal principles governing a claim for revenue deduction in respect of statutory imposts is well-settled. The accrual or arising of the liability to pay statutory imposts is coeval with the taxable event. Consequently, once the taxable event occurs, the statutory liability accrues or arises simultaneously. And an assessee following mercantile system of accounting is entitled to take into account, on accrual basis, the said liability even though the assessee might dispute the liability.
27. In the case of Pope The King Match Factory v. CIT [1963] 50 ITR 495 the Madras High Court observed :
“The liability to pay excise duty on the part of the assessee arose out of the levy of the duty and the demand made against him for payment of such duty. Any dissatifaction on his part regarding the quantum or propriety of the assessment and levy of the duty cannot minimise the liability or impair its effectiveness. He may raise a dispute over it and strain every nerve to avoid that liability. He may file appeals to the proper authorities questioning the imposition of the liability and praying for relief by way of cancellation of the duty. These are only constitutional modes in which a subject reacts to the levy of taxes and, indeed, there is nothing improper in them. A protest or opposition by a subject to the levy of tax or other duties payable to the Government cannot carry with it the implication that there is no proper levy legally recoverable till such protest or opposition ceases or is silenced.”
28. Approving the said decision of the Madras High Court, the Supreme Court, in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) pointed out :
“It is not possible to comprehend how the liability would cease to be one 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 with regard to the quantum of liability etc. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It can again not be disputed that the liability to payment of sales-tax had accrued during the year of assessment even though it had to be discharged at a future date.”
29. True, the said rulings came to be given in the context of statutory imposts proper, that is to say, imposts like sales-tax and excise duty. Even so, as we see it, the principle behind the said ruling are equally applicable to status-based and statutorily regulated charges such as electricity charges levied under the Electricity (Supply) Act, 1948. The following observations of the Bombay High Court in the case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 appearing on page 757 of the Report are apposite :
“It is true that in the above decision, the Supreme Court was considering the statutory liability for payment of sales tax, but the observations to be found at page 367 would seem to apply to all types of liabilities and not only to tax liability. It has been observed by the Supreme Court 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.”
30. We may now deal first with the stayed portion of the incremental amount payable by the assessee as a result of the 1989 hike. As pointed out earlier, the said hike was ordered by B.P.Ms. No. 353 of 15-4-1989 w.e.f. 10-6-1989; that is to say, the hike took place in the course of the previous year relevant to the assessment year which is now before us. We have already demonstrated the tariff payable by the assessee to the APSEB, is not a matter of contract but of status. In essence, it is a statutory levy. It should, therefore, follow that the assessee was justified in making a provision in respect of the stayed portion of the incremental amount attributable to the 1989 hike.
31. Yet Shri Vasanth Kumar, it may be recalled, argued that the HT power tariff itself is a “fee” within the meaning of section 43B(a). According to him, the Finance Act, 1988 substituted w.e.f. 1-4-1989 a new clause (a) for the old one and the new clause reads as under :
“(a) any sum payable by the assessee by way of tax, duty, cess or fees, by whatever name called, under any law for the time being in force.”
According to him, the said provision applied to the assessment year 1990-91, which is now before us and, therefore, the assessee would be entitled to revenue deduction in respect of the incremental sum only on payment basis.
32. We are unable to agree. True, the term “fee” was introduced in clause (a) of section 43B by the Finance Act, 1988 w.e.f. 1-4-1989. But in occurs in the said clause in the company of “tax”, “duty” and “cess”. Therefore, the true meaning of the term “fee” must be ascertained by applying the rule noscitur a sociis. The said rule to the effect that the meaning of a word is or may be known from the accompanying words, that is to say, words take their colour and content from the company they keep.
In the words of Holmes J. “a word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used.”
Now, the words “tax” and “duty” occur in the Union List, the State List and the Concurrent List included in the VII Schedule to the Constitution. The term “fee” also occurs in Entry 96 of the Union List, Entry 66 of the State List and Entry 47 of the Concurrent List. The said Entries give Parliament, the Legislature of a State, or both respectively the power to levy fees in any of the matters in the respective Lists, but not including fee taken in any court. Therefore, in the said context, the term “fee” must be understood the technical sense in which courts including the apex court have interpreted it.
33. Broadly stated, a tax is an imposition made for public purposes without reference to any service rendered by the State or any specific benefit to be conferred upon the taxpayers. The object of the Revenue is to raise “general revenue”.
A fee, on the contrary, is a payment levied by the State in respect of services performed by it for the benefit of the payers of the fee. Conceptually speaking, a fee is levied on a principle opposed to that of a tax. While a tax is levied for the common benefits conferred by the Government on the public, a fee is a payment made for some special benefit enjoyed by the payer, the payment being usually commensurate with the benefit enjoyed. Paraphrased differently, while there is no element of quid pro quo (between the taxpayer and the State) in the case of a tax, there is a necessary correlation between fee collected by the State and the services to be rendered by it. Again, when one talks of quid pro quo, one does not envisage an absolute, arithmetical relationship. What one has in mind is a broad relationship between the fees charged and the cost of the service rendered by the State to the payers of the fees taken as a class. Therefore, where it is whom that a sum levied as and by way of a fee is considerably higher than the expenses incurred by the State for rendering the service in question, it will have to be held that the levy is not a fee but tax. The said view was taken in the case of Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt AIR 1954 SC 282 and Sudhindra Thirtha Swamiar v. Commissioner for Hindu (Religious & Charitable Endowments AIR 1963 SC 966. The levy was held ultra vires in the former case because the levy was made to depend upon the capacity of the payer and not the quantum of the benefit received by the payer. Further, there was a total absence of any co-ordination between the amount levied and the expenses incurred by the Government. In the second case the levy was declared ultra vires, because it was levied solely for the purpose of creating a surplus in the funds in question.
34. The able analysis will indicates that for the purpose of Entries 96, 66 and 47 respectively of the Union List, the State List and the Concurrent List, the term “fee” has a special signification and that is that is connotes a levy which is the price or consideration for the services rendered by the State to the payers of the fees taken as a class, the sum levied being commensurate with the nature and extent of services rendered.
35. It may here be highlighted that the Prohibition Acts of almost all the States use terms such as vend fee, additional vend fees, licence fee or fixed fee and the like. Staring from the premise that State has the exclusive right or privilege of manufacture or sale of liquor, the apex court has consistently held that it is open to the Government to part with those rights for a consideration. In that regard, dealing with, for example, “licence fee” and “fixed fee” charged by the Government, the Supreme Court in the case of Har Shankar v. Dy. Excise & Taxation Commissioner AIR 1975 SC 1121 observed :
“the word fees is not used in the Act or the Rules in the technical sense of the expression. By licence fee or fixed fee is meant the price of consideration which the Government charges to the licensees for parting with its privileges and granting them to the licensees. As the State can carry on a trade or business, such a charge is the normal incident of a trading or business transaction.”
The said observations of the Supreme Court will bring into bold relief the fact that simply because there is quid pro quo and even total quid pro quo – one should not rush to the conclusion that the price charged by the Government or a State instrumentality while carrying on a trade or business is “fee” in the technical sense in which the term has been used in the Seventh Schedule to the Constitution.
36. What flows from the foregoing analysis is that, for the purposes of section 43B of the Income-tax Act, 1961, the term “fee” must be given the special signification referred to (supra). That special signification cannot be imputed to the price which the assessee herein has paid to the APSEB for the HT power requirements drawn by it from the said Board. True, the fixation of the price is status-based and statutorily regulated. True again there is total quid pro quo. Even so, the HT power charges paid by the assessee cannot be treated as a fee having the aforesaid special signification.
37. In view of the foregoing, therefore, we reject the contentions of the learned Departmental Representative on this point.
38. That leaves for consideration the assessees claim for revenue deduction, on provision basis, in respect of
(a) the prior period expenditure, and
(b) the current years liability
both relating to the 1987 hike. The entirety of the prior period expenditure under the head Power and fuel expenses relates to the stayed portion of the 1987 hike, in respect of which the assessee did not make any provision in the relevant years of account, but made a provision in the accounts for the year of account ending on 31-3-1990 being the previous year relevant to the assessment year 1990-91 which is now before us. Provision was also made in the said accounts in respect of the current years liability relating to the 1987 hike. The assessees case is that even though the High Court of Andhra Pradesh passed the relevant orders on 2-4-1990, yet it is entitled to take not of the said significant development and make suitable provision for the stayed portion of the 1987 hike in the light of the said decision of the High Court, particularly when the accounts of the assessee relating to the year of account ending on 31-3-1990 had not been closed. This claim of the assessee is opposed by the Department on the ground that the assessee, which has been maintaining books of account on mercantile basis, ought to have made adequate provision in the relevant years accounts and not in one go in the accounts relating to the year of account ending on 31-3-1990. It is also the departments case that, as the judgment came to be given only on 2-4-1990, the assessee could succeed in its claim only in the assessment for the assessment year 1991-92.
39. The resolution of this dispute brings us back to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). The basic question that arose for consideration in that case was whether the stand taken by the revenue was correct a that the assessee was not entitled to claim a deduction of the amount of sales-tax paid because it had denied the liability to pay the amount and had made no provision in its books with regard to that amount. In that regard the Supreme Court observed :
“The moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceedings, the liability for payment of tax is independent of the assessment …. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed.”
The Supreme Court went on further on observe :
“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.”
40. But, as was pointed out by the Madras High Court in the case of CIT v. Gemini Pictures Circuit (P.) Ltd. [1984] 146 ITR 540, the above passages reflect the “generallegal position”, the particular application of which will depend upon the facts and circumstances of the case.
41. Again, in the case of CIT v. East India Corpn. Ltd. [1986] 159 ITR 712 the Madras High Court observed that the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd.s case (supra) cannot be taken as laying down that a liability by way of sales-tax can be claimed as a deduction only in the year in which the sales take place. Ordinarily that may be the earliest period during which such a deduction can be made. But the question as to the year in which the liability should be allowed to be deducted cannot be decided on the basis of the said general proposition of law. There may be exceptions to the said rule. Thus, even though a liability statutorily arose in the year in which the sales were made, factually the liability never existed in law but crystallised as a real and enforceable liability in a subsequent year.
42. The above line has been taken by the High Courts in a number of cases.
Thus, in the Madras case of CIT v. V. Krishnan [1980] 121 ITR 859, after noticing the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), the High Court went on to observe :
“….. This decision would support the contention of the Revenue to this extent, namely that the liability arose in the year in which the sales took place. The Supreme Court had not gone into the question of its deductibility in the year of payment. There may be cases where the assessee is not in a position even to estimate his liability because whether the transaction is liable to sales tax at all or not may itself be in dispute. In certain other cases, the question in dispute may relate to multi-point. There may even be cases where the sales tax department would raise estimated assessments and the assessee is obliged to pay sales tax in which case the assessee may not know about the existence or quantum of liability. In all these cases, it may not be possible even for a person maintaining his accounts on the mercantile basis to provide for the liability in the year to which it could be related taking into account the transactions of sale. In such cases, the assessees claim for deduction would arise for consideration either in the year in which the assessee accepts the liability or in the year in which the amount is paid.”
In the Calcutta case of CIT v. Orient Supply Syndicate [1982] 134 ITR 12, the question that arose for consideration was whether the assessee was entitled to revenue deduction in a sum of Rs. 29,008 (under the head “PF contributions”) in the assessment for the assessment year 1964-65 even though the said amount represented liability relating to earlier years of account and not of the relevant previous year. Relying on the Supreme Court case of Kedarnath Jute Mfg. Co. Ltd. (supra) the Department contended that the assessee was not entitled to succeed. The Calcutta High Court, however, found that though there was a statutory liability under the Employees Provident Funds Act to make contributions, such liability was never enforced under the said Act in the earlier years and that it was only during the relevant previous year that the Regional Provident Fund Commissioner called upon the assessee to make statutory contributions for the entire period from November 1957. Since the demand for the statutory contribution was made by the authorities for the first time during the relevant previous year, the court held, the entire amount paid in that year was an allowable deduction. The liability relating to the earlier years became real and enforceable only during the relevant previous year.
“Therefore, from a commercial point of view, for a commercial man, in the reality of situation, to claim deduction in the year in question was not unjustified.”
The High Court went on to observ : “We would, however, say that it is not in all cases correct to say that a statutory liability discharged in a particular year becomes eligible for deduction in the year in question in the mercantile system of accounting. It depends on the facts and circumstances of the case and on the statutory provisions.”
43. The concept of “real and enforceable liability” was applied by the Calcutta High Court in the case of (a) Shalimar Chemical Works (P.) Ltd. v. CIT [1987] 167 ITR 13 and (b) CIT v. Padmavati Raje Cotton Mills Ltd. [1993] 203 ITR 375.
44. In the case of CIT v. T. S. Srinivas Iyer [1984] 146 ITR 526 Madras High Court was concerned with the question of revenue deductibility of urban land tax relating to the period 1963-64 to 1969-70 in the assessment for the assessment year 1970-71. The assessees claim was rejected on the ground that it related to the prior years. On its part, the ITAT, relying on the Supreme Court case of Kedarnath Jute Mfg. Co. Ltd. (supra), held that in principle the assessee was entitled to the deduction claimed by it. It, however, went to give certain other directions in this regard. The matter reached the High Court, which found that the case before it was one where the liability for urban land at was as good as non-existent till the Supreme Court expressed themselves on the validity of the Urban Land Tax Act, 1966. Earlier the Madras High Court had struck down as unconstitutional an enabling provision under which urban land tax authorities had the power and authority to fix the market value of land for the purpose of levy of the tax. In the case of Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co. Ltd. [1970] 75 ITR 603 the Supreme Court upheld the validity of the measure. The Supreme Courts decision was rendered sometime in 1969. All the while, right from 1963 till the Supreme Courts decision, urban land tax assessments were not being made against most of the owners of lands. When once the Supreme Court upheld the Act, it became for the first time possible for the assessing authorities to enforce on all the taxpayers the liability which had accumulated from 1963 – the year which marked the commencement of the Act.
The situation changed after the Supreme Court rendered their decision. “There was no liability before the Supreme Courts judgment came, but the moment the judgment was delivered the entire liability became a very real liability and just at the moment when the liability had to be reckoned with, it comprehended not merely the tax liability for the particular year concerned, but also all the accumulated tax liability right from July 1, 1963. We are therefore, satisfied that the assessee could have made provision for liability only after the Supreme Courts decision.”
The assessee family had closed its accounts on July 7, 1969. But it had failed to make any provision towards urban land tax liability. Adverting to this aspect of the matter, the Madras High Court observed :
“If the assessee had made such a provision in its accounts either immediately following the Supreme Courts judgment or on the final closing of the family accounts on July 7, 1969, the assessee would have been entitled to the deduction on the basis of the mercantile method of accounting followed by the assessee regularly for its business. However, the assessee did not, in point of fact, make any such provision in its accounts. This book-keeping omission, however, is not material for the claim of deduction. The fact that the assessee had not made any provision in its accounts would not militate against the allowance being granted. The principle would seem to be that it was enough if the system of accounting usually followed by the assessee was such as to allow a provision being made in this regard. The Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, had clearly held that even if an actual provision had not been made, the deduction has to be given as if the accounts contained such a provision. All that is required is a mercantile system of account which allows for accrued liabilities of a kind which accrue before actual payment.”
45. The Delhi case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 may be noticed next. The assessee was a dealer in knitted wool. There was some doubt as to whether sales-tax was payable or not on knitted wool. It was only on February 25, 1964 that the sales-tax authorities issued a demand notice determining the sales-tax of the assessee for the period 1953-54 to 1958-59. The assessee claimed revenue deduction in respect of the said payment in the assessment for the assessment year 1964-65 on the ground that the demand was raised during the relevant previous year. For a fact, it was only after the receipt of the demand notice that entire were made in the books of account of the assessee and a claim for revenue deduction made on that basis. The Assessing Officer disallowed the assessees claim. The first appellate authority allowed the assessees claim. Thereupon, the Department appealed to the I.T.A.T. The Accountant Member was of the view that the liability arose during the relevant previous year and that, therefore, the assessees claim was rightly allowed by the first appellate authority. The Judicial Member held to the contrary, relying on the Supreme Court case of Kedarnath Jute Mfg. Co. Ltd. (supra). The third Member agreed with the Accountant Member. Therefore, the matter reached the High Court as and by way of reference at the instance of the Department.
After referring to the Supreme Court case of Kedarnath Jute Mfg. Co. Ltd. (supra) the High Court observed :
“This is an authority for the proposition that even without an entry in the accounts, the claim can be raised in the relevant assessment year. But, what happens if the liability is not determined till much later ? In the represent case, the demand was raised in February 1964, but related to the period 1953-54 to 1958-59. Obviously, the assessee could not claim the deduction on the basis that it arose at a much earlier date. Perforce, the claim could only be raised after it had been determined as the assessment for all those years would be over long ago.
We are of the view that a liability which is settled before the assessment is over can be appropriated to the relevant year in accordance with the Supreme Courts judgment but if the liability is raised, say, ten years later as appears to be the case here, then it cannot be appropriated to that year and has to be claimed at a later date or not at all.”
** ** **
“We agree with the majority decision of the Tribunal that in such a case the entry could be made only when the demand was raised and not earlier and the principles settled by the Supreme Court in Kedarnath Jute Mfg. Co.s case (1971) 82 ITR 363, would also not be applicable because the demand was raised in 1964, whereas the assessment years were 1953-54 to 1958-59. So, there was no occasion or possibility of filing a revised return.”
According to the High Court, the decision in Kedarnath Jute Mfg. Co. Ltd.s case (supra) “is limited to those cases in which the demand is raised by the sales-tax department before the assessment has actually been completed as no revised return can be filed after the assessment is over.”
46. In the Madras case of East India Corpn. Ltd. (supra) also a similar situation arose. There the issue was whether in the assessment for the assessment year 1973-74 the assessee-company can validly claim revenue deduction in respect of central sales-tax liability on the sales that had taken place during the accounting year 1957-58. There the Assistant Commercial Taxes Officer did not charge central sales-tax on cotton sold by the assessee to mills inside the State of Madras. According to the Board of Revenue, central sales-tax was eligible on such sales inasmuch as the sales fell under section 3(b) of the Central Sales-tax Act, 1956. The Board, therefore, passed an order in revision. When the matter reached the High Court, it set aside the impugned order of the Board of Revenue, relying upon the decision of the Supreme Court in the case of State of Mysore v. Yaddalam Lakshminarasimhiah Setty & Sons [1965] 16 STC 223. The State preferred an appeal to the Supreme Court.
During the pendency of appeal before the Supreme Court, the Central Sales-tax (Amendment) Ordinance, 1969 dated June 9, 1969 was issued. This amendment was later replaced by the Central Sales-tax (Amendment) Act, 1969. The effect of the said amendment (which was retrospective in nature) was that tax on inter-State sale of goods become payable notwithstanding the fact that no tax could have been levied under the sales-tax law of the appropriate State as the sale took place inside such State at the point. It was also provided that the turnover for the purpose of assessment of tax under the Central Sales-tax Act was to be determined in accordance with the provisions of the Act and the Rules made under the State law.
As already pointed out, the State of Madras had preferred an appeal to the Supreme Court against the High Court order setting aside the order in revision passed by the Board of Revenue. Taking note of the aforesaid amendment to the Central Sales-tax Act, the Supreme Court set aside the order of the High Court and held that in view of the amendment the assessment to tax would have to be made in the light of the amended provision. The Supreme Court ordered accordingly, giving liberty to the assessee to raise all conventions as to the liability to be assessed to tax in respect of the transactions in question before the Assessing Officer.
Thereupon, the Joint CTO determined the liability of the assessee at Rs. 1,53,080 and after giving credit for an amount of Rs. 12,764 being the tax already paid, raised a demand of Rs. 1,40,316. This order came to be made on August 31, 1972, that is, in the year of account 1972 being the previous year relevant to the assessment year 1973-74.
On the basis of the said demand, in its income-tax assessment for the assessment year 1973-74 the assess-company claimed revenue deduction in respect of the said sum of Rs. 1,40,316. The Assessing Officer negatived the assessees claim, but the first appellate authority allowed it. The Tribunal declined to interfere in the matter because the demand notice issued by the sales-tax authorities not only quantified the sales-tax payable by the assessee but also decided the exigibility issue against the assessee.
Thereupon, the matter reached the Madras High Court as and by way of reference at the instance of the Department. On an examination of the facts and circumstances of the case and on a consideration of the reported cases including the Supreme Court case of Kedarnath Jute Mfg. Co. Ltd. (supra), the Madras High Court held that the liability to pay the amount in question arose for the first time on August 31, 1972; and that, therefore, the claim by the assessee for revenue deduction in respect of the said sum in the assessment for the assessment year 1973-74 was justified.
47. The principles emerging from the foregoing analysis may be abstracted as follows :
(i) The decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) is the authority for the general proposition that the accrual or arising of the liability to pay a statutory impost is coeval with the taxable event and that the assessee, who follows the mercantile system of accounting, is entitled to deduct from the profits and gains of the business such liability which has accrued during the period for which the profits and gains were being computed. In this regard, the existence or absence of entries in the books of account is not decisive or conclusive of the matter.
(ii) The particular application of the said general legal position will depend upon the facts and circumstances of the case.
(iii) There may be cases where even a liability under the statute is as good as non-existent to start with, owing to the vires of the statute itself being the subject-matter of litigation. In such cases, the liability gets crystallised, or, to use the phrase used by the Calcutta High Court, “becomes a real and enforceable liability” only when the Supreme Court declares the statute valid.
(iv) There may be cases where the exigibility issue itself might be the subject matter of litigation. In such cases the liability becomes a “real and enforceable liability” only when the appropriate court of law decided the exigibility issue in favour of the authorities concerned.
(v) There may also be cases in which a statutory liability is not enforced by the authorities concerned; and where the enforcement of the liability follows closely on the heels of “discovery” (see cases arising under the Employees Provident Funds Act, Employees State Insurance Act and the like).
(vi) In all the aforesaid instances the assessee would be entitled to make a claim for revenue deduction on accrual basis in the year in which the liability became real and enforceable. In other words, even though, ordinarily, the accrual or arising of the liability to pay a statutory impost is coeval with the happening of the taxable event, yet, there may be cases in which the liability to pay the impost arises or accrues in a subsequent year owing to the fact of the liability becoming real and enforceable in that subsequent year. In such cases, the liability does not accrue twice, once in the year in which the taxable event took place and for the second time in the year in which the statutory liability became real and enforceable. In such cases the liability itself accrues or arises in the subsequent year when it becomes real and enforceable.
48. We may no examine the assessees claim for revenue deduction, on provision basis, in respect of the entirety of the stayed portion of the 1987 hike in the assessment for the assessment year 1990-91, which is now before us. We have already held that the principles that are applicable to statutory imposts are equally applicable to the status-based, statutorily regulated power tariffs. We have also held that the provisions of section 43B are not applicable to power tariffs, because they cannot be regarded as “fee” within the meaning of that section.
49. The short question that we have to ask and answer in the light of the foregoing analysis is this : Can it be said that the liability to pay the stayed portion of the 1987 hike in tariffs arose during the previous year relevant to the assessment year 1990-91 ? The answer to this question will depend upon the answer to the further question : Did any event occur during the relevant previous year on the basis of which it could be said that the liability relating to the unstayed portion of the 1987 hike in power tariff became “real and enforceable” during the relevant previous year ?
The answer to the second question is clearly that no event took place during the relevant previous year, which would even remotely suggest that the liability relating to the stayed portion of the 1987 hike became real and enforceable during the said year. It should, therefore, follows that the assessees claim in that regard is not justified.
50. It was only on 2-4-1990 that the matter was decided against the assessee, and it was only thereafter that the APSEB called upon the assessee to pay the unstayed portion of the 1987 hike. As we see it, therefore, the liability in question became real and enforceable only on 2-4-1990 and that, therefore, the assessee can make the claim only in the assessment for the assessment year 1991-92.
51. Yet, it is contended on behalf of the assessee that the High Court order dated 2-4-1990 was a significant event which the assessee could take into account and make a provision in respect of the liability in question in its books of account relating to the year of account ending on 31-3-1990, especially when by the time when the judgment was handed down the said accounts had not been closed and reliance in this regard is placed on certain Accounting Standards issued by the Institute of Chartered Accountants.
52. We are unable to agree. On authority we have shown that in some cases the liability could be regarded as having accrued or arisen in the year in which it had become real and enforceable. Applying this yardstick, we have no hesitation is saying that the liability in question became read and enforceable only when the High Court handed down their judgment on 2-4-1990 after the close of the previous year relevant to the assessment year 1990-91, which is now before us. The position in law being what it is, we hold that the particular Accounting Standard relied upon by the assessee cannot avail it. We are not saying that the said Accounting Standard is not valid. We only say that it cannot be pressed into service by the assessee in this case.
Nor are we impressed by the argument that if the assessee is entitled to a particular deduction, it does not matter whether it is allowed in the assessment for the assessment year 1990-91 or in the assessment for the assessment year 1991-92. It is well-settled that each assessment is a distinct and separate entity. And in the assessment for a particular assessment year the assessees claim for revenue deduction will be judged only with reference to the fact-situation relating to that year.
53. In view of the foregoing, therefore, we hold first that the CIT(A) was justified in allowing the assessees claim relating to the 1989 hike. Secondly, we hold that the CIT(A) was justified in negativing the assessees claim as respects prior period adjustment which relates to the stayed portion of the 1987 hike. Thirdly, we hold that the CIT(A) was not justified in allowing the assessees claim in relation the the current years liability attributable to the 1987 hike.
54. Departmental appeal (Other issues) :
Issue No. 1 – Consignment expenses :
In the course of its business the assessee had appointed consignment agents at different places under separate written agreements to sell the goods manufactured by it within the territory allotted to each of them. The essence of the agreement was that these agents would be selling the goods in question on behalf of the assessee.
In the course of the assessment proceedings the Assessing Officer found that the assessee had incurred an aggregate expenditure of Rs. 75,26,707 in relation to the consignment/sale transactions. He further found that such aggregate expenditure was inclusive of the following amounts paid by the assessee towards bank commission and interest :
Bank commission
Interest
1. Kakinada Unit
Rs. 9,32,283
Rs. 6,73,021
2. Vizianagram Unit
Rs. 5,51,740
Rs. 4,92,064
Rs. 14,84,023
Rs. 11,65,085
On being called upon by the Assessing Officer to explain the circumstances in which the said expenditure came to be incurred by it, the assessee explained that the normal practice was to draw hundis on the consignment agents and get the hundis discounted with the assessees bank. The moment the goods were despatched, the hundi along with related lorry receipts and consignment note was sent to the bank and the agents end to enable him to take delivery of the goods. On their part the agents remitted the request sum to the bank and took delivery of the goods in question. In this process, the banks used to charge not only commission but also interest for the delay, if any, in the clearance of the goods. According to the assessee, the expenditure on the said two counts, namely, bank commission and interest charges, came to be incurred by it under the ordinary course of its business and was, therefore, revenue deductible.
55. The Assessing Officer negatived the assessees claim for revenue deduction in respect of the interest charges (Rs. 11,65,085), relying only on the circumstance that under the almost identical agreements which the assessee had entered not with the commission agents, the latter were responsible to any interest charges occasioned by the delayed clearance of goods.
56. The said issue was one of the subject-matters of the apples filed by the assessee before the first appellate authority who allowed the assessees claim observing as follows :
“Perusal of the terms of agreements shows that the obligations of the depot-keepers have been defined herein and for discharging those obligations they are given remuneration. For reciting, clearing, storing and selling of the products of the appellant the depot-keepers are given remuneration. The expenditure to be incurred by the depot-keepers are specified in the agreement and payment of interest to the bankers (on hundi) is not one such expenditure. The hundi mentioned in the agreement, clearly is explained to be security towards the goods entrusted and the value of the hundi is not supposed to be more than 80% of the value of the goods. Therefore, by retiring the hindi the depot-keepers provide security for the goods entrusted to them. For the advantage drawn by the appellant by taking loan from the bank on hundi, it has to pay the interest.
42. As already stated, the agreement with the depot-keepers does not provide for the interest to be borne by the depot-keepers. On the contrary, the agreement with the depot-keepers do envisage that the depot-keepers will incur expenditure on behalf of the appellant and that the account of such expenditure is to be periodically submitted to the appellant. Excepting for the expenses specifically provided to be borne by the consignees all other expenses have to be on the consigners account. That is particularly so because retirement of hundi by the consignee is merely and alternate mode of provision of security. That security is provided by the consignee at the time of taking delivery of the goods and is subsequently adjusted in the periodic statements of accounts. For the sums enjoyed by the appellant against the hundies negotiated by it with the banks, the consignees would not have any liability for payment of interest; particularly when there is no provision therefor in the consignment agreements.
43. The appellant having, negotiated the hundies” during the course of, and for the purposes of, its business and interest having been paid by it for the sums raised through the hundies, such interest constitutes bona fide business expenditure in the hands of the appellant. I would therefore dealt the addition amounting of Rs. 11,65,085.”
57. On hearing both the sides, we consider that the CIT(A) cannot be faulted for the line taken by him. He has given a clear finding, with which we agree, that the expenditure in question very much related to the assessees business. Even if, it is held that the agreements in question had fastened the liability on the consignment agents to stared with, the amount the assessee, for business consideration, bore the liability, we will have a case of an implied amendment to the relevant term of the contract. There is nothing outlandish in this. We, therefore, decline to interfere in the matter an dismiss the related grounds.
Issue No. 2 – Investment allowance on computer :
58. During the relevant pervious year the appellant installed in its office premises a computer and claimed investment allowance thereon, on the ground that the computer was used for “facilitating manufacturing operations”. But the Assessing Officer held that, the computer having been installed in the office premises, its main use was in the area of office work an not in the area of industrial production.
On his part, the CIT(A) allowed the assessees claim going on the basis of a certificate issued by the Manager in-charge of the computer to the effect that the computer was used to process data relating to raw material and production, besides pay-roll and allied matters. He was also impelled by the consideration that “from the nature of the software, it appears that the computer is used to aid production bedsides being used for accounting purpose”.
The assessee is now before us objecting to the said decision of the CIT(A).
59. We have looked into the facts of the case. We have considered the revival submissions.
The assessee justified its claim for investment allowance on the following lines :
“(1) The computer used to maintain records pertaining to raw material, production and efficient of workers, basing on which monthly payrolls are prepared. As such it is submitted that the operations for which at the computer is used are part of manufacturing operations. Hence, the machinery used for any type of manufacturing operation, is entitled for investment allowance.
(2) The computer machinery works very efficiently in a dust proof and temperature controlled atmosphere. So that WIPRO Computer was installed in the office premises where such atmosphere could be created in the existing circumstances.
(3) Hence it is submitted that WIPRO Computer being part of the plant and machinery is eligible for investment allowance.”
60. Now, one of the tests to ascertain whether a particular article or thing is “plant” for the purpose of investment allowance is to see whether the article or thing is really a took of the assessees trade, or is merely the setting in which the assessees trade is being carried on, or even whether the article or thing was just a labor-saving device.
If a particular article of thing is the tool of the assessees trade and if you remove the tool, the trade comes to a grinding halt. If the article or thing is not plaint within the said meaning, then it is not entitled to investment allowance because it fails the functional test.
In the case before us the computer in question was nothing but a labour-saving device. The accounting and other such operating which before the computer was installed were being done manually (of course this is prior to the short period when the assessee had purchased computer time), came to be done with the aid of the computer after it was purchased. But there is not iota of evidence to show that the manufacturing processes themselves were computerised, in which event the assessee will of course be entitled to investment allowance on the computer. The computer may be highly sophisticated. It may save time and labour for the assessee. But these factors alone are not sufficient to convert the computer into a plant so as to be entitled to investment allowance. As pointed out earlier, the position would of course be different if the production process had themselves computerised; but his, however, was not the case with the assessee before us.
61. In view of the foregoing, therefore, we hold that the CIT(A) was not justified in allowing the assessees claim for investment allowance on the computer in question. We, therefore, set aside the impugned order of the CIT(A) on this issue and restore that of the Assessing Officer.
Accordingly, the related grounds are allowed.
62. In the result, the departmental appeal is partly allowed.
63. Assessees appeal (Other issues) :
Issue No. 1 – Debit balance written off (Rs. 23,70,538)
The material facts are that the assessee used to enter into contracts for purchase of cotton. One such contract was entered into by the assessee with one Srisambasiva Cotton (P.) Ltd. (SSC for short). Initially the contract was to be operative during the calendar year 1985. Subsequently, it was renewed with the stipulation that 2100 bales would be supplied by the said SSC to the assessee by 31-3-1986. However, SSC supplied 6564 bales by 31-3-1986. The said supplies, though made under the said contact, were made partly by SSC and partly by a few others at the instance of SSC. But such over-supply created problems for the assessee, which, in their turn, impelled the assessee to refuse to make payments in relation to the excess stock supplied. Predictably this led to SSCs filing suits for recovery of dues from the assessee. (Those who had supplied cotton to the assessee at the instance of SSC also filed similar suits). However, by a memorandum of agreement signed on 3-8-1986 by the assessee on the one hand and SSC and its agents on the other, the latter party agreed to pay a commission at the rate of 5% to the assessee on all the cotton purchased by it from SSC and its agents. Clearly, the said commission was designed to induce the assessee to pay up the dues. The assessee defaulted. Further litigation ensued. Finally, the matter was settled out of court through a Memorandum of Compromise dated 5-9-1988, the salient features of which were :
(a) SSC and the assessee were to withdraw the cases filed against each other;
(b) The Memorandum of Agreement dated 3-8-1986 was to be cancelled and ignored;
(c) SSC was to keep the assessee full indemnified against any claim against it by the agents/associates of SSC;
(d) The assessee was to pay sum of Rs. 25 lakhs to SSC in accordance with the following schedule of payments :
(i) A sum of Rs. 6.2 lakhs already paid by the assessee through a DD dated 23-8-1988 was acknowledged by SSC as the first instalment of payment.
(ii) A further sum of Rs. 6.2 lakhs was to be paid on or before 30-9-1988.
(iii) The balance of Rs. 12,50,000 was to be paid on or before 31-12-1988, subject to the rider first that SSC withdrew all the cases instituted by it against the assessee, and secondly that SSC furnished confirmation from its agents/associates that the assessee did not own them any money.
6.4. Pursuant to the said MOC, the assessee, it would appear, paid the said SSC and its agents/associates and aggregate sum of Rs. 23,24,675, the balance of Rs. 1,75,329 remaining unpaid. The assessee initially debated the persons accounts of the payees. Later on, it wrote off the debit balances to the P&L A/c.
65. The assessees claim before the Assessing Officer was that it was entitled to revenue deduction in respect of the said sum owing to the fact that the said sum came to be paid as and by way of compensation in lieu of specific performance of the contract and for purposes of safeguarding its business interests.
66. The Assessing Officer negatived the assessees claim. In this regard he was impelled by the consideration first that “several areas (of the transaction) have remained unanswered and hazy”. Thus :
“(a) It is not known why the assessee-company accepted 6564 bales by 31-3-1986, when it required only 2100 bales, as per contract as on that date and why such excess was not returned ?
(b) Why on basis of the over-supply the contract was not terminated at that point ?
(c) If there was condition for payment of SSCL, then how is that suppliers, supplying at the instance of that party, demanded payment ?
(d) How can the assessee-company say that the MOA dated 3-8-1986 signed by its Managing Director to pay 5% commission on all purchases of Raw material was unauthorised by the company itself. How can it be believed that the M.D. was not acting in the best interest of the assessee-company ?”
Secondly, the liability to pay the sum of Rs. 25 lakhs in accordance with the MOC dated 5-9-1988 arose during the year of account ending on 31-3-1989, being the previous year relevant to the assessment year 1989-90. Thirdly, on payment basis also the assessee should have made the claim in the assessment for the assessment year 1989-90. “There was no necessity of showing debit balance advances against those nine parties as the payment had no character of any advance in it. Those nine parties were not debtors of assessee as per any stretch of imagination”. Fourthly, the assessee had not brought in any income in assessment year 1990-91 out of supplies of cotton made to it in calendar year 1986.
In view of the foregoing, therefore, he disallowed as sum of Rs. 23,70,538 (based on the details furnished to him by the assessee).
67. The CIT(A) declined to interfere in the matter.
68. Shri Prasad, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that the assessee was entitled to succeed. According to him, the transaction before us was one that was entered into by the parties concerned at arms length. Secondly, the fact that the Memorandum of Compromise darted 5-9-1988 quantified the sum payable by the assessee are Rs. 25 lakhs cannot per sealed to the conclusion that the assessees liability to pay the said sum accrued on the said date. The reason is that the said Memorandum itself contemplated the payment of the said aggregate sum of Rs. 25 lakhs in three instalments. The payment of the said instalments was conditional in one way or the other. The first instalment was conditional on the other parties agreeing to subscribe to the said Memorandum of Compromise. The third and final installment was also conditional upon the other parties withdrawing all the suits filed by them against the assessee. The intervening second installment also was conditional in the sense that the assessee could justifiably withhold the payment of the said installment if it found that the other parties to the compromise were not serious about discharging their part of the agreement. It was only when the obligation cast upon and agreed to bay the other parties pursuant to the said compromise was discharged or performed by them that the assessee become liable to pay the second and third instalments. And, according to Shri Prasad, the suits were withdrawn by the other parties fully only on April, 1989 and it was, therefore, that between 25-4-1989 and 27-4-1989 the assessee made an aggregate payment of Rs. 16,98,676 forming part of the second and third instalments aggregating Rs. 18,75,000.
In this regard Shri Prasad highlighted the fact that by 31-3-1990 the assessee still owed an aggregate sum of Rs. 1,75,324, but no claim had been made in respect of the said sum because it was not paid during the previous year ending on 31-3-1990.
According to Shri Prasad, the assessees claim was fully in consonance with the terms and conditions of the MOC of 5-9-1988. He, therefore, urged that the lower authorities were not justified in rejecting the assessees claim.
69. On his part, the learned Departmental Representative contended that the assessees appeal on this issue was fit to be dismissed. He first contended that, properly viewed, this is a case where the entire liability to pay the sum of Rs. 25 lakhs arose on 5-9-1988 being the date of the MOC. Secondly, the payment of the second installment was not in any fashion conditional. According to the MOC the second installment of Rs. 6,25,000 was payable by the assessee on or before 30-9-1988. Giving this facts-situation the assessees contention that the payment of the second installment was somehow conditional was fit to be rejected.
Even as respects the third instalments, the assessees case is no better. True, the last instalments was payable on or before 31-12-1988 subject to the fulfillment of certain obligations by SSC and its associates. But that does not mean that liability to any the entire sum of Rs. 25 lakhs did not arise on the date of MOC, namely 5-9-1988. The lower authorities were, therefore, justified in holding that no part of the liability relating to the sum of Rs. 23,70,538 actually accrued or arose during the previous year relevant to the assessment year 1990-91 which is now before us.
70. We have looked into the facts of the case. We have considered the rival submissions. The issue is : when did the liability to pay the sum of Rs. 25 lakhs arise ? Did it arise all at once on 5-9-1988, being the date of the MOC ? Or did it arise on subsequent dates ?
71. The details of the payments made by the assessee under the MOC dated 5-9-1988 may be extracted as follows :
Name of the payee
Date
Amount
(i) Sri Sambasiva Cotton (P.) Ltd.
23-8-1988
Rs. 6,25,000
(ii) Sri Sambasiva Cotton (P.) Ltd. and others
between 18-4-1989 and 27-4-1989
Rs. 16,98,676
Rs. 23,23,676
Note : (i) The payment at Sl. No. (i) above represents the first installment paid by the assessee. The sum was paid through DD No. 86/DD/653457 of 23-7-1988 purchased from Indian Bank, C-in-C Road, Madras and payable at Guntur. The draft was handed over by the assessee to SSC on the date of excision of the MOC namely 5-9-1988.
(ii) The balance of Rs. 1,76,324 (Rs. 25 lakhs minus Rs. 23,23,676) remained unpaid as on 31-3-1990. And the assessee had not claimed any revenue deduction in respect of the said sum.
72. As we seat, the case before us is essentially one of breach of contract. The law in this regard is well-settled. “A party in breach of contract does not incur eo instant a pecuniary liability : nor does the injured party became entitled to claim a debt”. To elucidate, a mere claim that there had been a breach of contract will not do. It will have to be proved that the breach did in fact occur. This again, per se will not suffice. It will have to be proved that the party complaining of the breach was put to a pecuniary loss as a result of the breach of the contract. Even here, if the pecuniary loss suffers is negligible, the courts are more likely to refuse to entertain claims of damages, by applying the doctrine of de minimis. Where a suit for damage is entertained by the court of law, the right to receive damages and the corresponding liability to pay damages accrue or arise only when the matter is finally decided by the highest court of the land, assuming, of course, that the parties to dispute take the matter up to that level.
73. There is, however, a significant exception to the above rule. And that is a situation in which the party in breach accepts, without demur, without dispute, the clam of the injured party for pecuniary compensation for the damages caused to him by the breach. Acceptance, thus, is the key.
In some cases, the acceptance may be late in coming. Even then the accrual of the liability to pay the damage is coeval with the acceptance of the liability. For example, when the claim for damages is not initially accepted and the matter reached the court, the acceptance by both the parties of the judgment and decision of a lower court, will signal the accrual of the right to receive and the concomitant liability to pay the compensation decreed by the court. Again, such an accrual may be signaled by (a) the acceptance by both the parties of an arbitrators award, or (b) the parties to the dispute entering into a memorandum of compromise under the aegis of the court, or even outside the court.
74. In other words, as respect a contract inter partes, the right to receive and the corresponding liability to pay damages accrues or arises when the claim is accepted by the parties to the dispute, or when the matter is finally adjudicated upon.
75. If acceptance is the key, when did the assessee give its acceptance ? Clearly, on 5-9-1988 when the MOC was signed by the parties to the dispute. It should, therefore, follow that the moment the assessee signed the MOC on 5-9-1988 it became liable to pay to the global sum of Rs. 25 lakhs.
But the assessees case is that the liability accrued not on 5-9-1988 but in April 1989 (which falls in the previous year relevant to the assessment year 1990-91, which is now before us). According to the assessee, this was so because the payment of all the three instalments were subject to and conditional upon SSC and its associates performing their part of the contract. We may now examine the validity of the said contention taking the three instalments one at a time.
76. The first instalments, it is common ground, was paid by the assessee on 5-9-1988. For this purpose the assessee had obtained on 23-8-1988 a DD. Simultaneously, the assessee has also debited the account of SSC with a like sum.
Now, when the assessee actually made the payment during the previous year ending on 31-3-1989 relevant to the assessment year 1989-90, we fail to see how the assessee could make a claim for revenue deduction in the assessment for the assessment year 1990-91, and that too on accrual basis. The assessee ought to have debited the first installment of Rs. 6,25,000 to The P&L A/c relating to the year of account ending on 31-3-1989. Clearly the assessee failed to do so. What is more, the assessee now seeks to make a claim in the assessment for the assessment year 1990-91 by making adjustment entices in its amounts relating to the year of amount ending on 31-3-1990. The assessee cannot be permitted to do so. We, therefore, hold that the lower authorities were justified in negativing the assessees claim for revenue deduction in relation to the said first installment.
77. As for the second instalment of Rs. 6,25,000, the MOC does not contain anything to suggest even remotely that the payment of the second instalment was in any fashion conditional. The terms of the MOC in this regard are clear, namely that the second instalment was payable on or before 30-9-1988. Therefore, even going on the basis of the assessees contention (which we have not accepted) that the liability to pay the entire sum of Rs. 25 lakhs did not arise on 5-9-1988 but only subsequently, we find that the payment of the second instalment not being conditional, the liability to the extent of Rs. 6,25,000 arose by 30-9-1988 at the latest, and not on any subsequent date as contended by the assessee. Yet, the assessee contends that the liability to pay the second instalment arose only during the previous year ending on 31-3-1990. This contention is baseless. We therefore, reject it.
78. This brings us on to the third instalment. Clause 3(c) of the MOC reads as under :
“(c) The balance of Rs. 12,50,000 (Rupees Twelve Lakhs and fifty thousand only) on or before 31-12-1988 subject to the parties of the FIRST PART fulfilling the obligations under clauses 1, 5 and 6;”
Clauses 1 and 5 deal with withdrawal by the parties of the first part of all pending litigation. Clause 6 obligates them to give the assessee a no-claim certificate in relation to the supplies which have given rise to the dispute which ultimately resulted in the said MOC.
79. Now, the assessees case is that it was only in April 1989 that the pending matters were withdrawn by the parties of the first part; and that therefore, the assessee rightly paid the aggregate sum of Rs. 16,98,678 to the said parties in the month of April 1989 (inclusive of the second instalment of Rs. 6,25,000). Consequently, the assessee was justified in making a claim for revenue deduction in respect thereof.
80. Now, clause 3(c) of the MOC stipulates that the third instalment of Rs. 12,50,000 was payable by the assessee on or before 31-12-1988, subject, however, to the fulfillment of their obligations by SSC and its associates. This means that, as respects the assessee, it was under an obligation to pay the said sum on (but not earlier than) 31-12-1988, but had the option of discharging it at any earlier time selected by it. Similarly, the other parties to the compromise were under an obligation to perform their part of the agreement on (but not earlier than) 31-12-1988, but had the opinion of discharging it at any earlier time selected by them.
81. As we see it, read as a shown, clause 3(c) of the MOC makes it clear that the chronology of the conditions contemplated therein would be that the other parties to the compromise will have to perform their obligation first, and it is only thereafter that the assessee becomes obligated to pay the sum of Rs. 12,50,000. If the former event does not take place by 31-12-1988, the latter event (which is contingent on the compromise of the former) cannot also take place. In other words, when the assessee found that the other parties to the compromise did not perform their part of the obligations, the assessee would have been justified in refusing to pay the last instalment of Rs. 12,50,000.
82. But this does not demand that the liability to pay the entire sum of Rs. 25 lakhs had not accrued on the date of the MOC, namely 5-9-1988.
83. In view of the foregoing, therefore, we decline to interfere in the matter.
Issue No. 2 – Disallowance of interest (Rs. 13,722) :
84. As points doubt earlier, during the relevant previous year the assessee had installed a WIPRO computer. Earlier, it was, so to speak, purchasing computer time from Date Corporation, Madras. For this purpose the assessee had on 10-1-1987 paid interest-free advance of Rs. 2 lakhs to the said party. The assessee had paid rentals to the said party up to 31-3-1989. But the assessee did not get back the interest-free advance of Rs. 2 lakhs on 31-3-1989. It got back the money only on March 28 and 30 of 1991.
85. The Assessing Officer found that the said M/s. Data Corporation was closely attitude with the assessee-company in the sense that Krishna Mohan, the managing director of the assessee-company herein, was also the managing-partner of the said Madras concern. Secondly, the assessees argument that the said Madras party had returned the advance only after the assessee had handed over to the said Madras concern the computer in question was highly unconvincing. Holding, therefore, that the two-year delay in the receipt of the interest-free advance of Rs. 2 lakhs was not properly explained, the Assessing Officer disallowed the interest thereon calculated at the rate of 19% per annum. On doing so, the Assessing Officer clearly proceeded on the basis that the sum of Rs. 2 lakhs came out of the interest-bearing funds borrowed by the assessee. Accordingly, he disallowed a sum of Rs. 38,000.
86. The said disallowance was one of the subject-matter of the appeal filed by the assessee before the CIT (Appeals), who held that, on principle, a disallowance was called for. In this regard he held that there could not be any dispute that the deposit was initially made for business purposes. Yet, after the assessee stopped hiring the computer belonging to the Madras firm, there was no justification from business point of view either for the continued retention of the compute or the delay in getting back the interest-free advance of Rs. 2 lakhs.
Thereafter, the CIT (Appeals) proceeded to consider whether the disallowance of Rs. 38,000 was reasonable. On an examination of the facts presented before him by the assessee, the CIT (Appeals) held that it would be reasonable to limit the disallowance to Rs. 13,772. In this regard he observed :
“A part of the business capital having not been utilised by the appellant for its business purposes the interest paid by it on borrowed capital cannot be deducted in it entirety. But it would be unreasonable to assume that the deposit of Rs. 2 lakhs was made only from out of borrowed capital and not from out of shareholders capital and accumulated reserve. It would therefore be desirable to take into consideration the average business capital of all type. That average had to be weighted average. Disallowance from out of the interest payment has to be made in the same proportion which the said sum of Rs. 2 lakhs bears to the average business capital.”
87. It is these circumstances that the assessee is not before us.
88. On hearing both the sides, we consider it reasonable to allow the assessees appeal on this issue. When the CIT (Appeals) went on to sustain the additions of Rs. 13,772, he clearly proceeded on the footing that the assessees own capital funds were available for making the interest-free advance. Having taken such a line, he should have proceeded further to examine the matter to see whether the initial interest-free advance of Rs. 2 lakhs itself came out of assessees own funds. The idea of weighted average is alright in theory. But theory cannot take the place of facts. The facts of the matter is that the Assessing Officer had not given any finding on the question whether the sum of Rs. 2 lakhs came entirely from the borrowed funds of the assessee. In the circumstances, therefore, we held that no disallowance is called for in this case.
89. We accordingly allow the assessees appeal on this issue and direct the Assessing Officer to recompute the assessees income by leaving out of reckoning the sum of Rs. 43,772 sustained by the CIT (Appeals).
90. In the result, the assessees appeal is partly allowed.