JUDGMENT
DR. B. P. S. J.-By this reference under section 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following questions of law to this court for opinion at the instance of the Revenue :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 5,56,366 credited by the assessee to the ‘enhanced levy sugar price account’ in the books of account for the previous relevant year of the assessment year 1979-80, was not income which had accrued in that year and was not therefore chargeable to income-tax for the assessment year 1979-80 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest of Rs. 69,529 and Rs. 1,30,097 on the excess amount received on delivery of levy sugar in pursuance of the interim order of the High Court dated May 17, 1975, constituted deductible liability in the computation of profits and gains of the business of the assessee for the assessment years 1978-79 and 1979-80, respectively ?”
This reference pertains to the assessment years 1978-79 and 1979-80, the relevant accounting years being the years ended on September 30, 1977, and September, 30,1978, respectively. The material facts giving rise to question No. 1 are as follows :
The assessee is a company engaged in the business of manufacture and sale of sugar. In the previously year relevant to the assessment year 1979-80, the assessee collected certain amounts in excess of levy price of sugar fixed by the Government of India by notification under the Sugar (Price) Determination Order, 1973. The collection was made in the following circumstances. The assessee challenged the notification and fixation of price by the Central Government thereunder before the Allahabad High Court by filing a writ petition. In the said writ petition, the High Court passed an interim order allowing the petition to charge Rs. 175.45 per quintal of D-20 grade sugar as against Rs. 155.30 fixed by the Government and to retain the amount so collected as deposit on furnishing a bank guarantee in respect thereof. It was also mentioned in that order that in the event of the dismissal of the writ petition, the assessee would be required to pay interest at the rate of 12 per cent. Per annum on the said amount. During the previous year relevant to the assessment year 1979-80, the assessee collected a sum for Rs. 5,56,366 pursuant to the above order of the High Court and credited the same to the enhanced levy sugar price account in its books of account. The assessee did not include the said amount in its income. In the course of its assessment for the assessment year 1979-80, the assessee contended before the Income Tax Officer that the amount in question having been collected by the assessee pursuant to the interim order of the High Court subject to several conditions did not constitute its income until finalisation of the dispute by the High Court. The Income Tax Officer did not accept this contention and included the amount of Rs. 5,56,366 in the income of the assessee. The assessee appealed to the Commissioner (Appeals), who accepted the contention of the assessee and directed the Income Tax Officer not to include the said amount in the income of the assessee. The above order of the Commissioner (Appeals) was upheld by the Income Tax Appellate Tribunal (“the Tribunal”). At the instance of the Revenue, the Tribunal has referred question No. 1.
We have heard learned counsel for the parties. The conteoversy in question No. 1 stands concluded by the decision of this court rendered today in Income-tax Reference No. 93 of 1987CIT v. Seksaria Biswan Sugar Factory Pvt. Ltd. (1992) 239 ITR 393 and the earlier decision in CIT v. Seksaria Biswan Sugar Factory Pvt. Ltd. (1992) 195 ITR 778, wherein it has been held that the amounts collected by the assessee at the enhanced rate could not be assessed as the income of the assessee (as income accrused to the assessee) until the finalisation of the dispute pending before the court in favour of the assessee. In CIT v. Sharda Sugar Industries Ltd. (1999) 239 ITR 393, the legal position has been summed up this (page 398) :
“The law is thus well-settled that where the right to receive payment is in dispute, no income will arise or accrue. In the present case, admittedly, the amounts in question were collected and retained by the assessee as depoists pending the final decision of the writ petition by the Allahabad High Court pursuant to the interim order of that court and that too subject to furnishing a bank guarantee in respect thereof. There was a serious dispute about the right of the assessee to receive the amount collected by the assessee. In other words, the right to receive the amount was inchoate or contingent. The extra amount did not accrue to the assessee until the finalisation of the dispute pending in the court in favour of the assessee. The assessee was accountable for the excess collection and obliged to refund the same if so directed by the court. Such amounts collected by the assessee are not assessable as the income of the assessee.”
Following the above decisions, question No. 1 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
The controversy in question No. 2 pertains to deductibility of the interest from the differential amount received by the assessee on levy sugar in two assessment years, viz., 1978-79 and 1979-80, which became repayable together with interest at the rate of 12 per cent. Per annum in the years under consideration. As stated earlier, the assessee collected certain amounts in excess of levy sugar prices fixed by the Central Government and retained the same as deposit pursuant to the interim order of the Allahabad High Court dated May 17, 1974, on condition that in the event of dismissal of the writ petition, such amounts shall be refunded along with interest at the rate of 12 per cent. Per annum. The assessee was also required to furnish a bank guarantee. The assessee deposited the amounts collected by it pursuant to the order of the High Court in fixed deposits and was receiving interest thereon at the rate of six per cent. per annum. Later, the writ petition was dismissed by the High Court and the assessee was directed to refund the amount collected by it along with interest at the rate of 12 per cent. per annum. The assessee-company claimed that on account of dismissal of the writ petition it was required to pay interest at the rate of 12 per cent. per annum on the said amount whereas it was receiving interest thereon at the rate of six per cent. per annu. The difference was declaimed by the assessee as deduction in the computation of its income for the assessment years 1978-79 and 1979-80. The Income Tax Officer disallowed the deduction on the ground of pendency of appeal before the Supreme Court against the order of the Allahabad High Court. The assessee appealed to the Commissioner (Appeals) who allowed the deduction. The order of the Commissioner (Appeals) was confirmed by the Tribunal. Hence, this reference of question No. 2 to this court at the instance of the Revenue.
We have carefully perused the order of the Tribunal in the light of the facts of the case. Admittedly, the claim for deduction in this case was made by the assessee only after the dismissal of the writ petition by the Allahabad High Court with a direction to refund the amount along with interest at the rate of 12 per cent. per annum. The question that arises for consideration is whether even after the dismissal of the writ petition by the High Court the liability continued to be a contingent liability.
We have carefully considered this controversy. The income-tax law makes a distincition between actual liability in praesenti and a liability defuturo which, for the time being, is only contingent. The former is deductible but not the latter. The controversy to be decided in this case, therefore, is whether the present liability accrued against the assessee in the assessment years under consideration. This has to be decided by taking into account all the facts and circumstances of the case. If the liability is an actual liability in praesenti in the year under consideration, it is deductible. If it is a contingent liability, it cannot be the subject-matter of deduction even under the mercantile system of accounting. There is no dispute in the present case that in the years under consideration the liability to pay interest was an actual liability. It was no more contingent. There is no dipuste on this count. The only ground on which the claim of the assessee for deduction was denied by the Income Tax Officer was that the assessee was disputing the liability by filing an appeal to the Supreme Court. This view of the Income Tax Officer did not find favour with the Commissioner (Appeals) and the Tribunal. The law in this regard is well-settled by the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363, that if there is actual liability in praesenti, deduction cannot be denied on the ground that the assessee is disputing the liability. As a result, in the case of an assessee maintaining the mercantile system of accounting, the amount payable by the assessee would be deductible as an accrued liability even though the assessee objects to it and seeks to get the order of the concerned authority reversed, subject, however, to any statutory provision to the contrary (viz., section 43B of the Income-tax, 1961, as inserted by the Finance Act, 1983, with effect from April 1, 1984, which provides that certain liabilities can be deducted only on actual payment).
In the present case, after the order of the Allahabad High Court dismissing the writ petition with direction to the assessee to pay the amount with interest at the rate of 12 per cent. per annum, the liability on account of interest became an actual liability in praesenti. It was no more a liability defuturo. The assessee was maintaining the mercantile system of accounting. In such a situation, deduction cannot be denied to the assessee on the ground that the assessee was disputing the liability in appeal before the Supreme Court. The assessee is entitled to get a deduction on account of interest in the years in which the liability ceased to be liability defuturo. It was no more a contingent liability. That being so, the assessee was entitled for deduction of the amount of interest in the years under consideration. The Tribunal was justified in allowing the deduction on account thereof. In view of the above, we answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Revenue.
This reference stands disposed of accordingly with no order as to costs.