Commissioner of Income Tax vs Ratlam Strawboard (P.) Ltd.

P.D. Mulye, J.—The income tax Appellate Tribunal, Indore Bench, has made this reference under s. 256(1) of the I.T. Act, 1961, for its opinion on the following questions of law:

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the liability for the damages payable to the DGS & D arose during the accounting year relevant to the assessment year 1977-78, and was, therefore, deductible in the assessment for 1977-78?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing that liability to excise duty in a sum of Rs. 44,312 should be allowed in computing the income for 1977-78?

The facts of the case, as per the statement of the case received, may be stated, in brief, thus : The assessee, M/s. Ratlam Straw Board Private Ltd., is a private limited company, deriving income from the manufacture and sale of strawboards. It had business contracts with the Director General of Supplies and Disposals for supplies within the stipulated time. The assessee failed to supply the agreed quantity of strawboard and, accordingly, the Directorate concerned demanded damages of Rs. 4,91,653. The assessee disputed that claim. The matter was, therefore, referred to an arbitrator who on March 18, 1978, gave an award for Rs. 3,00,000 against the assessee. The assessee being dissatisfied with the award took up the matter before the Delhi High Court.

According to the Commissioner of income tax (Appeals), no liability actually had accrued in the year of account though the Director-General of Supplies and Disposals had quantified the same during the year under appeal. The CIT(A) was of the opinion that an unilateral unaccepted claim did not automatically lead to the creation of a liability. According to him, the liability is created only when the other party acquires the right to receive such damages as a result of an agreement between the parties, award of arbitrator, decree from a court, etc. He found that none of these events had taken place. Therefore, the claim of the assessee for deduction of this amount in the assessment year 1977-78 was rejected.

The assessee went up in, appeal before the Tribunal which allowed the same. The Revenue, therefore, submitted an application before the Tribunal for making a reference to this court which has referred the questions mentioned above to this court for its opinion.

The learned counsel for the Revenue submitted that the Tribunal has committed an error in holding that the liability for the damages payable to the Director-General of Supplies and Disposals arose during the accounting year relevant to the assessment year 1977-78, and was, therefore, deductible for 1977-78. He submitted that the assessee has been maintaining accounts on the mercantile system and, consequently, in view of the Supreme Court decisions in The Commissioner of Income Tax, Madras Vs. A. Gajapathy Naidu, and Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara Vs. Swadeshi Cotton and Flour Mills Private Ltd., as also the decision in TRIKAMLAL Vs. COMMISSIONER OF Income Tax, M.P., the answer to question No. 1 has to be decided in favour of the Revenue. The learned counsel for the respondent-assessee in fairness submitted that in view of these decisions, question No. 1 has to be answered in favour of the Revenue.

The second question relates to the liability to excise duty in the sum of Rs. 44, 312. The Commissioner of income tax (Appeals) found that the assessee-company is not entitled to full relief in respect of the addition made by the assessing authority because a wrong debit of Rs. 44,312 has been made to the sales account on account of the liability for additional excise duty which was never really levied in the year of account. He, therefore, found that the company is free to claim a deduction for this liability for the year when the Assistant Collector issues a formal demand notice. However, the Tribunal came to the conclusion that the additional liability to the extent of Rs. 44,312 should be allowed during the year under appeal. On this question No. 2, the learned counsel for the Revenue placed reliance on the decisions in The Kanpur Tannery Ltd., Kanpur Vs. The Commissioner of Income Tax, U.P. and V.P., Lucknow, and NEW VICTORIA MILLS CO. LTD Vs. COMMISSIONER OF Income Tax, U. P.,

On the other hand, the learned counsel for the assessee relying on the decisions in Haji Lal Mohd. Biri Works Vs. Commissioner of Income Tax, ; Commissioner of Income Tax Vs. K.A. Karim and Sons and Others, ; Commissioner of Income Tax Vs. United India Woollen Mills, ; Commissioner of Income Tax Vs. J.K. Synthetics Ltd., ; J.K. Synthetics Ltd. Vs. O.S. Bajpai, Income Tax Officer, Central and Another, and Commissioner of Income Tax Vs. Century Enka Ltd., submitted, that the finding of the Tribunal on this point being correct, the answer to this question should be given in favour of the assessee.

After hearing the learned counsel on this question as also the case law cited, we are of the opinion that this question has to be answered in favour of the assessee and against the Revenue as the learned counsel for, the Revenue was unable to persuaders to come to a conclusion that the finding of the Tribunal on this point is wrong or contrary to law as the decisions on which he placed reliance do not aptly apply to the facts of the present case. Therefore, in our opinion, question No. 2 has to be answered in favour of the assessee and against the Revenue. In the result, our answer to question No. 1 is in favour of the Revenue and against the assessee. Similarly, our answer to question No. 2 is in favour of the assessee and against the Revenue. The reference is disposed of accordingly with no order as to costs.