T.A. Bukte, Judicial Member
1. The Revenue has filed both these appeals against the separate orders of the CIT (Appeals), Cochin, dated 24-7-1995 for the assessment year 1992-93 and dated 31-9-1996 for the assessment year 1993-94.
2. The two issues involved in respect of the assessment year 1992-93 are regarding the deletion of the shortage cover of Rs. 5,09,56,178 and deletion of the disallowance of the payment to provident fund amounting to Rs. 7,69,632. Three issues are involved in respect of the assessment year 1993-94 viz., deleting the addition of Rs. 13,40,36,950 made on account of shortage cover, Rs. 7,60,047 disallowed under section 43B of the Income-tax Act, 1961 and deduction under section 80HHC of the I.T. Act. As both these appeals were heard together, they are disposed of by a consolidated order for the sake of convenience.
3. We have heard the learned departmental representative, Sri Shaji P. Jacob and the learned counsel for the assessee, Shri M. K. Kesavan. Their arguments are taken into consideration. We have also gone through the annual reports for the years 1991-92, 1992-93, 1993-94 and 1994-95. We have also looked into the relevant contents in the papers pointed out by both sides.
4. The relevant facts pertaining to the dispute of shortage cover are that the assessee-company entered into an agreement with the Tamil Nadu Electricity Board for a period of three years from 1-11-1991 to 31-10-1994 to transport coal from Madras Harbour to Ennore and Mettur Thermal Stations and also in Tuticorin Port to Tuticorin Thermal Station. Clause (5) of the contract stipulates the mode of arriving at the shortages. The shortage of coal occurs during the transit from harbour to thermal stations. The Tamil Nadu Electricity Board as well as the assessee-company had agreed to quantify the shortages of coal on the day of completion of the contract. In short, the parties to the agreement were to quantify the shortage of coal taking place during the transit after the completion of the contract on 31-10-1994. The completion of the contract is relevant for the assessment year 1995-96.
5. The shortage has to be determined with reference to the quantity of coal received as per the bill of lading and the quantity of coal received at the time of dumping it at the thermal stations. In short, the shortage of coal would occur between the points of loading the same into trucks at the ports, carrying it to the destination and unloading it at the thermal power stations. The notional shortage cover as stipulated in the contract is 1.5%. That means the coal dumped at the thermal power stations would be 98.5% of the coal loaded at the ports. There is no doubt, the assessee-company received the entire handling charges for transporting coal from the ports to the different thermal power stations. The notional receipt of the quantity of coal at 98.5% would be of the bill of lading.
6. The assessee-company received coal for transportation at the rate of Rs. 600 per metric ton, Rs. 200 is the cost of coal and Rs. 400 is the freight and handling charges. The handling charges received by the assessee per ton is made up of the various outgoings such as –
(i) port dues;
(ii) railway freight charges;
(iii) stevedoring charges; and
(iv) various other charges mentioned in Schedule I in respect of Madras Port and in Schedule III in respect of Tuticorin Port.
7. The assessee-company in its returns of income for the assessment years 1992-93 and 1993-94, under appeals, disclosed receipts by way of handling and transport charges during the years and claimed a sum Rs. 5,09,56,178 relating to the assessment year 1992-93 and Rs. 13,40,36,950 relating to the assessment year 1993-94 as not includible in the computation of its income being the contingency of shortage cover. These figures included the shortage cover of Rs. 29 per ton based on the assumed cost of Rs. 600 per metric ton of coal. Rs. 29 is the shortage cover for the quantity of coal mentioned in the bill of lading and transported during the previous years relevant to the two assessment years under appeal.
8. The Assessing Officer rejected the assessee’s claim to exclude the shortage cover from the computation of its total income. He has also rejected the assessee’s contention that the said amount was received with a liability or encumbrance embedded thereon to be discharged on the termination or at the end of the contract, i.e., on 31-10-1994, relevant to the assessment year 1995-96.
9. In short, the question which has arisen for our consideration is whether the receipt of Rs. 29 per ton being the shortage cover is taxable in the hands of the assessee-company for the assessment years under appeals. It is necessary to consider the actual receipt and actual liability in this respect. The parties to the agreement have contemplated determination of the shortage cover only at the end of the term of the contract which is for three years from 1-11-1991 to 31-10-1994. It is not in dispute that the assessee-company follows mercantile system of accounting and in accordance with the said system of accounting, in the ordinary course, the assessee-company is expected to account the entire amount accrued to it in the relevant accounting period. But, under the extra-ordinary circumstances, as contemplated by both parties to the agreement, the shortage of coal and its price at the rate of Rs. 29 per ton has been taken as a liability. Because of this understanding, it would be correct on the part of the assessee-company, not to account the liability at the rate of Rs. 29 per ton on the notional shortage of 1.5% of total coal loaded at the ports for being transported to the different thermal power stations.
10. There is substance in the contention of the assessee-company that the point of time at which the assessee’s liability towards shortages is to be determined, is the point of time when the contract is completed.
In reality the assessee-company adopted the contract completed method (project completed method) to arrive at the correct profit. The assessee-company received Rs. 29 per ton as shortage cover along with other outgoings for the purpose of fulfilling the terms and conditions of the contract. It cannot be said that the assessee-company did not receive this sum of Rs. 29 per ton in a fiduciary capacity. This sum has been received but attached with an encumbrance or liability to be determined on the completion of the contract on 31-10-1994. The claim of Rs. 5,09,56,175 relating to the assessment year 1992-93 is because of non-determination of the shortage with reference to the quantum shown in the bill of lading and the actual quantity of coal dumpted at the thermal power stations. This claim is also worked out on the basis of 95% of the quantity shown in the bills of lading handled during the years. This claim is not a determined loss either on actual or notional basis. The actual determination of loss could be done on completion of the contract on 31-10-1994 and it is only on 31-10-1994 that the liability of the assessee-company to the Tamil Nadu Electricity Board to make good the shortage from out of the discharge cover of Rs. 29 per metric ton can be determined. The sum so received by the assessee-company as shortage cover remains in the hands of the assessee with a liability or encumbrance. The assessee-company holds that amount as a trustee. Therefore, the amount of shortage cover need not be included in the computation of total income of the assessee.
11. The assessee-company has ascertained the net result of the shortages and claimed it assessable only in the assessment year 1995-96. In short, whether the net result of shortages has to be assessed in every assessment year or after completion of the contract in the last assessment year is the question for consideration. There is no question of non-assessability of the shortage cover. The question is as to when it is to be assessed in the hands of the assessee.
12. The learned departmental representative, Sri Shaji P. Jacob submitted that the assessee-company has followed mercantile system of accounting and hence all receipts have to be accounted for in accordance with this system of accounting. He submitted that the billed amount is fully received by the assessee-company. Therefore, the amount which is fully received by the assessee has to be accounted. The terms and conditions of the agreement are between the parties to the agreement and the department has nothing to do with those terms and conditions agreed upon between the parties. He further submitted that the assessee’s contention to determine the profits on the basis of contract completed method is not correct. It is the further contention of the learned departmental representative that the assessee cannot claim to follow contract completed method. According to the learned departmental representative every year the liability accrues but not quantified. The department has not imposed cash system of accounting. He submitted that it would not be correct to determine the income at the time of finality of the agreement. The assessee is required to account the income every year. He has drawn our attention to paragraphs 9 and 10 of the assessment order for the assessment year 1992-93 and submitted that there is no question of accrual of Rs. 29 per metric ton, which has already been received by the assessee. Therefore, he submitted that the CIT (Appeals) has gone wrong in deleting the shortage cover received by the assessee at the rate of Rs. 29 per metric ton for the two assessment years in question.
13. As against the arguments of the learned departmental representative mentioned above, learned counsel for the assessee-company, Sri M. K. Kesavan submitted that the shortage cover cannot be computed every year. It can be computed only at the end of the contract. He has relied on the terms and conditions of the agreement between the Tamil Nadu Electricity Board and the assessee-company in this respect. According to him, the shortage cover can be computed at the time of finality of the agreement. He has also pointed out that the sub-contractor has been fully paid at the end of the contract period. The entire receipt cannot be accounted for because of the uncertainty of the income. He submitted that the entire amount received by the assessee-company cannot become its income. The receipt is in advance and the assessee-company has a right to profit at the end of the project. The right to profit has not come into existence immediately after the receipt of the billed amount. The entire amount received by the assessee-company cannot become its real income. The receipt has to be governed by the terms and conditions of the agreement. It is not possible for the assessee-company to ascertain its income in every assessment year because of its existing liability.
14. Sri Kesavan contended that to account the entire receipts is not possible because of the uncertainty of computation of shortage. According to him, the liability has not yet accrued because the contract period is not over. He submitted that the liability is a contingent liability and there is a bona fide reasonable apprehension on the part of the assessee-company that certain portion of the receipts may not be of the nature of its income.
15. The further submission of Sri Kesavan is that there is a remedy for the department under section 41(1) of the Income-tax Act, 1961, to bring back the profit to tax, but the assessee does not have any such remedy to claim after the payment is made. In the process of loading and unloading of coal from different ports to the destinations, such as the thermal power stations, shortage or loss is bound to occur. He submitted that the Tamil Nadu Electricity Board made full payments in advance because of providing working capital. The assessee made a turnover of over Rs. 100 crores.
The assessee has to ascertain its profits according to commercial principles. He has pointed out that how and under what circumstances the different liabilities arise to the assessee. He also pointed out that there is a commercial liability and a contractual liability. According to him, there is also a contingent liability and a legal liability. He submitted that it would not be correct to say that the commercial and contractual liability has not arisen in the type of business carried on by the assessee-company. He further pointed out certain facts from page 36 of the paper book in this respect. He has also submitted that Rs. 29 per metric ton for shortage cover would be of approximately 5% of Rs. 600 per metric ton. He has also pointed out that if the unaccrued liability is not be considered in every assessment year, in that event, it would amount to taxing the receipts and not the income. If the liability is determined at the end of the contract, then, only income would be taxed in the hands of the assessee.
16. While turning to the case law, Sri Kesavan relied on the decision of the Supreme Court in the case of CIT v. Karam Chand Thapar  222 ITR 112/88 Taxman 40. He has pointed to last but one para on page 132 of the said decision regarding the conduct of the assessee-company. In that case, the Supreme Court considered the conduct of the assessee-company, which reads as follows :-
“The conduct of the assessee also goes to show that the assessee himself did not treat the amount as trust money. The amount was not shown as a liability nor was it kept in a suspense account. It was taken as miscellaneous receipt to the profit and loss account. He mingled the money with his other profits of business and treated the money as his own. There is nothing in the facts of the case to suggest that the money received by the assessee from the colliery companies actually belonged to the consignees and was not the assessee’s own money.”
Sri Kesavan tried to explain that in the instant appeals, the assessee-company acted as per the terms and conditions of the agreement. The assessee did not determine the shortage cover every year. The assessee considered it as a liability which can be determined at the end of the contract. Therefore, the conduct of the assessee-company was to hold Rs. 29 per metric ton in trust till the contract is completed. Therefore, Sri Kesavan urged that the entire receipt in every assessment year cannot be accounted. While contending that notional profits cannot be accounted, the learned counsel relied on the decision of the Madras High Court in the case of Indian Overseas Bank v. CIT  183 ITR 200. In that case, the Madras High Court considered that levy of income-tax is on income holding as follows :-
“Held, that the amounts in question were only estimated anticipated income arrived at on the basis of the rates of exchange which prevailed, presumably on the last day of the accounting year, without an actual settlement of the forward contracts in foreign currencies having been brought about and, in that sense, the amounts in question represented merely notional profits and could not be subjected to tax.”
While urging that there is no right to profit of the assessee-company, Sri Kesavan, the learned counsel for the assessee relied on the decision of the Supreme Court in the case of CIT v. Ashokbhai Chimanbhai  56 ITR 42. The Supreme Court in that case held that “in the case of a partnership, where the accounts are to be made at stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the partnership deed gives rise to that right has arisen.” According to Sri Kesavan, the assessee’s right in this case to profit did not arise until the contract is completed and, therefore, the contingent income cannot be brought to tax in its hands.
17. On the point of accrual of liability, the learned counsel for the assessee relied on the decision of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT  225 ITR 746/91 Taxman 351. The Supreme Court considered the principle of real income. In that case, the electricity company enhanced the rate of power supplied per unit. The enhanced rate was shown as receipts in its accounts, but amounts not realised due to litigation and subsequent take over of the undertaking by the Government. The Supreme Court held that the amount due on such enhancement had not accrued and was not assessable because it was not a real income under the Income-tax Act, 1961. Sri Kesavan submitted that unless the liability is determined at the end of the contract the shortage cover cannot become the income of the assessee-company. He has also relied on the decision of the Kerala High Court in the case of CIT v. Muthootu Mini Chitty Fund  227 ITR 197. The Kerala High Court in that case held that “the relations between the parties would be governed by the terms and conditions of the agreement. The agreement specifically provided that 5 per cent of the discount or bonus was set apart for expenses and 25 per cent of the balance would go to the trust. It was only the remaining amount that came up for distribution among the subscribers of the series. The terms and conditions made it clear that the subscribers were voluntary participants in the series in question. Therefore, the sum paid to the trust from the discount was not, in any way, the income of the assessee, because, from the inception, it was set apart for the trust.” In the above case, the Kerala High Court has relied on the decision of the Supreme Court in CIT v. Bijli Cotton Mills (P.) Ltd.  116 ITR 60. Sri Kesavan relied on the decision of the Gujarat High Court in the case of Welding Rods Mfg. Co. v. CIT  225 ITR 525/93 Taxman 324. In that case, the assessee-company obtained, loan or welding rods from its sister concern to be returned on demand because the assessee was manufacturing welding rods. The assessee was also following mercantile system of accounting and made provision for additional liability on account of rise in price of wire rods. The Gujarat High Court held that the provision made is an allowable deduction though the amount was not actually spent.
18. The learned counsel for the assessee further relied on the decision of the Kerala High Court in the case of CIT v. Delicious Cashew Co.  226 ITR 793/ 89 Taxman 242 on the point of bona fide apprehension on the part of the assessee. In that case, the Kerala High Court has held as follows :-
“Held, that even if there was bona fide reasonable apprehension on the part of the assessee that an amount would become payable, it would be liable to be allowed as business expenditure. The moment a dealer made purchases or sales which were subject to purchase tax on sales tax, the obligation to pay the tax arose. Therefore, though the assessee had not established that there was a legal liability for purchase tax and had also claimed before the sales tax authorities total exemption from purchase tax, the Tribunal was justified in allowing the claim for deduction of purchase tax.”
Sri Kesavan further submitted that there was a reasonable bona fide apprehension on the part of the assessee that the liability would be determined at the end of the contract and therefore the assessee-company correctly did not account for Rs. 29 per metric ton during the assessment years under appeal.
19. After examining the facts, the terms and conditions of the agreement between the assessee-company and the Tamil Nadu Electricity Board, particularly clause (5) of the said agreement, the fact that inspite of following mercantile system of accounting, the assessee-company’s conduct was in adopting the contract completed method in respect of the unascertained liability to be ascertained only at the end of the contract, the arguments advanced on the different aspects of the dispute and the supporting case law, we are inclined to hold that there was a reasonable bona fide apprehension on the part of the assessee, and therefore, the assessee’s deviation from the mercantile system of accounting in respect of shortage cover in loading and unloading coal from different ports to the different thermal power stations is correct and justified. The assessee succeeds on this point for both the years.
20. The second common issue in both the appeals is regarding the deletion of the disallowance of belated payment to provident fund amounting to Rs. 7,69,632 relating to the assessment year 1992-93 and Rs. 7,60,047 relating to the assessment year 1993-94. The only grievance of the department is that the assessee is not entitled to the deduction on the ground that the payment has not been made on the due date as defined in the Explanation to clause (va) of sub-section (1) of section 36 of the I.T. Act. The CIT (A) has followed the Tribunal’s decision in ITA, Nos. 194 (Coch.)/92 and 361 (Coch.)/94 dated 31-8-1994 in the assessee’s own case on the identical issue. The department’s contention is that reference application under section 256(2) of the Act is pending. The department may make another reference on this point. Since the CIT (Appeals) has followed the decision of the Tribunal in the assessee’s own case we are inclined to sustain his finding on this point for the two assessment years under appeal also. The revenue accordingly fails on the common issue of deletion of the disallowance under section 43B.
21. There is yet another ground in the appeal ITA. No. 643 (Coch.)/96 relating to the assessment year 1993-94, regarding the direction of the CIT (Appeals) to allow eligible deduction under section 80HHC of the Act. The only grievance of the department is that the assessee-company claimed deduction under this section in the prescribed form only on 20-7-1996, i.e. after completion of the assessment. Therefore, according to the department, the CIT (Appeals) was not justified in directing to allow the deduction under section 80HHC. The CIT (Appeals) by his letter dated 5-7-1996 directed the Assessing Officer to furnish his report regarding eligibility or otherwise of the assessee’s claim for deduction under section 80HHC. The Assessing Officer by his report dated 2-9-1996 stated that the assessee is eligible for the deduction under section 80HHC. Therefore, the CIT (Appeals) directed the Assessing Officer to allow the deduction in question. We do not find any infirmity in the order of the CIT (Appeals) in directing to allow the deduction under section 80HHC. The revenue accordingly fails on this ground as well.
22. In the result, both the appeals are dismissed.