On the application of the assessee for the assessment years 1981-82 and 1984-85, the following questions are referred by the Tribunal for our opinion:
Assessment year 1981-82:
“1. Whether, on the facts and in the circumstances of the case and on a proper construction of the agreement between the assessee-company and the M.P. Electricity Board, the Tribunal was right in holding that the liability in respect of additional fuel surcharge arose only when the assessee received the bill from the M.P. Electricity Board ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee was not entitled to deduction of liability for additional fuel surcharge amounting to Rs. 25,48,047 in the assessment year 1981-82 ?”
Assessment year 1984-85:
“1. Whether, on the facts and in the circumstances of the case and on a proper construction of the agreement between the assessee-company and the M.P. State Electricity Board, the Tribunal was right in holding that the liability in respect of additional fuel surcharge arose only when the assessee received the bills from the M.P. State Electricity Board ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee was not entitled to deduction of liability for additional fuel surcharge amounting to Rs. 6,81,770 (Rs. 25,48,045 minus Rs. 18,86,226) in the assessment year 1984-85 ?”
2. Since connected questions are raised in these questions referred by the Tribunal, the short controversy in these questions is whether the liability in respect of additional fuel surcharge arose in the assessment year 1981-82 or 1984-85. We dispose of both the applications by this common order.
3. The assessee is a public limited company. It carried on business as a manufacturer of jute goods and caustic soda, chlorine, etc., at Hazinagar, Naihati, West Bengal and at Amlai, Shabadol in M.P., respectively. The relevant assessment year is 1981-82 in which the assessee has consumed the electricity and he received a notice of demand for additional fuel surcharge in September, 1983. For that, the relevant assessment year is 1984-85. The question is whether additional fuel surcharge liability should be allowed in the year when the assessee consumed electricity or it should be allowed in the year when bill for additional fuel surcharge liability is received, that is, on 10-11- 1983, relevant to the assessment year 1984-85.
4. The facts are not in dispute that the assessee maintained accounts on mercantile system. In the original return, the assessee did not claim deduction in respect of the amount of Rs. 25,48,047 on account of additional fuel surcharge on power consumption in the assessment year 1981-82, but he claimed the same before the Inspecting Assistant Commissioner in a proceeding under section 144-B of the Income Tax Act, 1961. The Inspecting Assistant Commissioner has noticed that the assessee has made an ad- hoc provision of Rs. 3,71,980 that was disallowed by the Income Tax Officer in the draft assessment, on the ground that the assessee had not received the bill in the previous year relevant to the assessment year 1981- 82. As the bill was received on 10- 11- 1983, the liability accrued only in the assessment year 1984-85. Even the bill which was received in November, 1983, was for 9 months and the bill containing an amount of Rs. 18,86,267 was for 3 months. The assessee has estimated the liability for additional fuel surcharge at Rs. 6,61,778 and, thus, total liability comes to Rs. 25,48,047. The claim of the assessee was not allowed by the Inspecting Assistant Commissioner as the amount of liability was not ascertained and quantified.
5. In appeal before the Commissioner (Appeals), the claim of the assessee was allowed following the decision of this court in the case of CIT v. Swadeshi Mining & Mfg. Co. Ltd. (1978) 112 ITR 276 (Cal) and the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd v. CIT (1971) 82 ITR 363 (SC).
6. In appeal before the Tribunal, the Tribunal has reversed the view taken by the Commissioner (Appeals). According to the Tribunal, the liability accrued only after the assessee received the bill in September, 1983 and further, the additional fuel surcharge liability was adjusted in the account after the close of the relevant accounting year, that is, after additional fuel surcharge liability was quantified by the Board.
7. The learned counsel for the assessee, Mr. Khaitan, submits that the liability on account of additional fuel surcharge accrued the moment the assessee consumed electricity. The liability of additional fuel surcharge goes by consumption of electricity and only quantification of liability can be done later. That does not affect the fact of accrual of liability and the liability should be allowed in the year in which the liability accrued. It is not a contingent liability. When the assessee consumes the electricity, only quantification is left. The liability accrued when the assessee consumes electricity in the previous year relevant to the assessment year 1981-82. He placed reliance on the various decisions which make distinction between the accrual liability and contingent liability.
8. The learned counsel for the revenue, Mr. Prasad, submits that it is a contingent liability and contingent liability can be allowed only on the happening of event. In this case, when the liability is uncertain and yet to be ascertained, that is a contingent liability and that becomes the liability only when the liability is quantified. In 1983, that has been quantified. Therefore, the liability can be allowed only in the assessment year 1984-85.
9. To consider whether the liability in question is a liability accrued this year or is a contingent liability, we deem it proper to cite some observations of the various High Courts, including the Apex Court, wherein the issue was considered regarding accrual of the liability.
10. In Kedarnath Jute Mfg. Co. Ltd.’s case (supra), the assessee was following the mercantile system of accounting. The assessee denied the liability to pay the amount of sales-tax. The issue before Their Lordships was in which year the liability should be allowed. In that case, their Lordships observed as under:
“…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. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776, being the amount of sales-tax which it was liable under the law to pay during the relevant accounting year. It may be added that the liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. The appeal is, consequently, allowed and the judgment of the High Court is set aside…” (p. 367)
Their Lordships held that the assessee which followed the mercantile system of accounting was entitled to deduct from the profits and gains of its business liability to sales-tax which arose on sales made by it during the relevant previous year.
11. In the case of CIT v. Shri Sarvaraya Sugars Ltd (1987) 163 ITR 429(AP), the issue before the Andhra Pradesh High Court is that under the scheme drawn up by the Government, sugar manufacturers have to part with portion of extra consideration received on the sale of sugar to the cane-growers. A resolution was passed by the Board of Ddirectors to this effect. The actual quantification of liability was done on 12-2-1973, that is, after the assessment year 1973-74. Whether the liability can be allowed in the assessment year 1973-74, the Andhra Pradesh High Court has taken the view that mere postponement of the quantification did not postpone accrual of liability.
12. In the case of Swadeshi Mining & Mfg. Co. Ltd. (supra), the company was a sugar mill producing sugar and selling and exporting sugar. The assessee was under an obligation to pay additional price payable by the company for purchase of sugar-cane from the growers of sugar-cane fixed under clause 3A(1) of the Sugar Cane (Control) Order, 1955. The relevant assessment year was 1961-62. Provision was made by the assessee for payment of Rs. 1,40,000 as additional price under the Control Order. The assessee was following the mercantile system. The price was not fixed within the accounting year.
13. The issue before this court was whether the additional liability on account of additional price payable by the assessee under the Control Order should be allowed in the assessment year 1961-62. This court held that additional price formed part of the price of the sugar-cane purchased by the company in the accounting year and the company had already incurred the liability to pay additional price and, hence, it could not be said that this liability of the company was inchoate or contingent in the accounting year. Therefore, the liability should be allowed in the assessment year 1961-62.
14. In the case of Madras Industrial Investment Corpn. Ltd. v. CIT (1997) 225 ITR 802 (SC), their Lordships held that the appellant company had, in its turn, correctly claimed a deduction only in respect of the proportionate part of the discount of Rs. 12,500 over the relevant accounting period in question. This was also in conformity with the accounting practice of showing the discount in the ‘discount of debentures account’ which was written off over the period of the debentures and the balance amount could not be allowed as a deduction in the assessment year 1968-69.
15. The learned counsel for the revenue, Mr. R.C. Prasad, placed reliance on the decision of this Court in the case of Shalimar Chemical Works (P.) Ltd. v. CIT (1987) 167 ITR 13 (Cal). The issue before this Court was when there was a dispute of liability, when it should be allowed. This court held that the liability became real and enforceable in the relevant subsequent year though the demand was recoverable to the earlier years and the liability accrued when the assessee was asked by the court to discharge its liability. At page 21 this court has observed that it was not possible for the assessee to submit a revised return in respect of the earlier years and the assessee can claim a deduction of the said liability in the later year or not at all. In view of this fact, this court held that the liability should be allowed when it is determined by the court finally.
16. In Standard Tea Exports v. CIT(1992) 198 ITR 573 (Ker), the decision relied upon by the learned counsel for the revenue, Mr. R.C. Prasad was that when the liability was contingent, it should not be allowed in the assessment year 1981-82. In the case of Standard Tea Exports (supra), there was an admitted fact and also found by the Commissioner (Appeals) that the amount of Rs. 3,40,000 sought to be deducted by the assessee was contingent liability of year other than the year of account. When the admitted fact was there that it was a contingent liability, that case has no application to the facts of the case at hand, unless we hold that the liability in question is a contingent liability.
17. To see whether it is a contingent liability, we would like to refer to some provisions of the agreement which was entered into between the Board and the assessee. Clause 19 of the agreement provides that consumer shall pay to the Board every month charges for electrical energy supplied to the consumer during the preceding month at the Board’s tariff applicable to class of service and in force from time-to-time. Sub-clause (b) of clause 20 of the agreement provides that the tariff is subject to the fuel adjustment. The existence of the fuel adjustment clause which shall be levied only on units consumed shall be in addition to any minimum charge prescribed under the tariff in clause 19 or in minimum or special guarantee referred to in clause 21.
18. Clause 25(a) further provides that the Board will as far as possible within 15 days after the expiration of each calendar month deliver to the consumer a bill of charges stating the number of units supplied to the consumer by the Board in accordance with the reading of the said meters and the amounts payable. The fuel costs, adjustment charges as applicable under the tariff, will be calculated and incorporated as a part of the bill on the basis of provisional average fuel costs as may be fixed by the Board from time-to-time. These charges are subject to final adjustment on the basis of average fuel costs for the period of account as certified by the Chief Accounts Officer.
19. The final adjustment on account of various things energy charges will be made as soon as possible after the close of the period of account but adjustment as maybe provisionally found by the Board from time-to-time will be incorporated as a part of the monthly bill and shall be payable by the consumer.
20. From the reading of the aforesaid clause of the agreement it left no doubt that the additional fuel charges, which are subject to the final adjustment after calculating the costs of the fuel by the Board will form part of the bill issued monthly, by the Board to the assessee and should depend upon the units consumed by the assessee during the month. Therefore, the liability is accrued under the agreement when the electricity units are consumed by the assessee in the previous year relevant to the assessment year 1981-82, only quantification is yet to be made. Even postponement of the payment, does not affect the accrual of liability in cases where the assessee follows the mercantile system of accounting. Admittedly, the assessee is following the mercantile system. The final quantification for adjustment of the bill which the assessee is liable to pay is received by the assessee in 1983 but the assessee consumed the electricity units in assessment year 1981-82, for which the bill has been received and under the agreement the assessee is liable to pay the additional fuel surcharge on the basis of the units consumed. Mere postponement of payment of the additional amount does not mean that no liability accrued to the assessee in the assessment year 1981-82.
21. Considering the provisions of the agreement referred to above and the fact that the Board is constituted under the statute, it is the statutory liability that should be allowed as statutory liability when the assessee consumes the electricity units.
22. In the result, we are of the view that the additional fuel charge liability should be allowed in the year when the assessee consumed the electricity units, i.e., in 1981-82. Accordingly, we answer question No. 1 and 2 in the negative, i.e., in favour of the assessee and against the revenue.
23. As we have considered the additional fuel surcharge amounting to Rs. 25, 48,047 and allowed in the assessment year 1981-82, the same amount cannot be allowed twice. Therefore, it cannot be allowed in the assessment year 1984-85, on the ground that the bill was received in November, 1983 or no bill was received in three months.
24. Therefore, we answer the question referred in the assessment year 1984-85 in the negative that the Tribunal was not right in holding that the liability in respect of additional fuel surcharge arose only when the assessee received the bills from the Madhya Pradesh State Electricity Board. The assessee is entitled for deduction of the liability for additional fuel surcharge in the year when the assessee consumed the units.
25. Both the applications stand disposed of.